Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2020
☐
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
FORWARD INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
| New York |
13-1950672 |
| (State or other jurisdiction of |
(I.R.S. Employer Identification No.) |
| incorporation or organization) |
|
700 Veterans Memorial Highway, Suite
100, Hauppauge, NY 11788
(Address of principal executive offices, including zip code)
(631) 547-3041
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
| Common Stock, par value $0.01 |
FORD |
The Nasdaq Stock Market |
Securities registered pursuant to Section
12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. ☐
Yes ☒ No
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Act. ☐
Yes ☒ No
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. ☒ Yes
☐ No
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rue 405 of Regulation S-T during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒
Yes ☐ No
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule
12b-2 of the Exchange Act).
|
☐
Large accelerated filer
☒ Non-accelerated
filer
☐
Emerging growth company |
☐ Accelerated
filer
☒ Smaller
reporting company |
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared
or issued its audit report. ¨
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐
Yes ☒ No
As
of March 31, 2020, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant
was approximately $7,400,000 based on the closing price ($1.11) as reported on the Nasdaq Stock Market.
As of November 30, 2020, 9,886,351 shares
of the registrant’s common stock were outstanding.
Documents Incorporated by Reference
Portions of the registrant's Proxy Statement
for the 2021 Annual Meeting of Shareholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K
to the extent stated herein. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of
the registrant's fiscal year ended September 30, 2020.
Forward Industries, Inc.
Table of Contents
PART I
ITEM 1. BUSINESS
General
Forward Industries,
Inc. (“Forward”, “we”, “our” or the “Company”), through its wholly-owned subsidiaries,
Forward Industries (IN), Inc., (“Forward US”), Forward Industries (Switzerland) GmbH, (“Forward Switzerland”),
Forward Industries UK Limited, (“Forward UK”), Intelligent Product Solutions, Inc., (“IPS”), and Kablooe,
Inc., (“Kablooe”), is a fully integrated design, development and manufacturing solution provider for top tier medical
and technology customers worldwide. The Company has expanded its ability to design and develop solutions for our existing multinational
client base and expand beyond the diabetic product line into a variety of industries with a full spectrum of hardware and software
product design and engineering services. In addition to our existing design and distribution of carry and protective solutions,
primarily for handheld electronic devices, the Company is now a one-stop shop for design, development and manufacturing solutions
serving a wide range of clients in the industrial, commercial and consumer industries. The Company’s previous principal customer
market has been original equipment manufacturers, or “OEMs” (or the contract manufacturing firms of these OEM customers),
that either package our products as accessories “in box” together with their branded product offerings or sell them
through their retail distribution channels. The Company’s OEM products include carrying cases and other accessories for medical
monitoring and diagnostic kits and a variety of other portable electronic and non-electronic products (such as sporting and recreational
products, bar code scanners, smartphones, GPS location devices, tablets and firearms). The Company’s OEM customers are located
in: (i) the Asia-Pacific region, which we refer to as the “APAC Region”; (ii) Europe, the Middle East, and Africa,
which we refer to as the “EMEA Region”; and (iii) the geographic area encompassing North America, Central America and
South America, which we refer to as the “Americas”. The Company does not manufacture any of its OEM products and sources
substantially all of its OEM products from independent suppliers in China, through Forward Industries Asia-Pacific Corporation,
a British Virgin Islands corporation (“Forward China”).
As a result of the
expansion of the design development capabilities through its wholly-owned subsidiaries, IPS and Kablooe, the Company is now able
to introduce proprietary products to the market from concepts brought to it from a number of different sources, both inside and
outside the Company.
By virtue of
our strategic collaboration and distribution agreements, we have secured a portfolio of smart enabled products which we have begun
distributing to retail outlets in the United States. The rollout of these products has been delayed by COVID-19 as discussed below.
As a result of this collaboration and other product initiatives, we invested in and began to build out a retail distribution network
responsible for getting products into big box retailers for retail consumption. This build out is a continuation of our strategy
to be a one-stop shop for product development, manufacture and distribution and represents a significant achievement in completing
the strategic process of taking a product from concept to the consumer.
Through the manufacturer
representative agreements we currently have in place, we expect to gain sales coverage to retailers such as Best Buy, Target, Walmart,
Costco, Amazon, CVS, Walgreens, Staples, Office Depot and many others. The manufacturer representative model allows us to engage
and support a large sales team and cover a larger territory with a variable cost model as these representatives work on commission
only.
The outbreak of the
COVID-19 virus in China and its subsequent spread throughout the world has impacted our Fiscal 2020 results of operations.
In efforts to contain the virus, authorities have implemented travel restrictions, quarantines, business limitations and shutdowns.
Since the majority of our workforce is based in New York, these restrictions have required substantially all our employees to work
from home for much of Fiscal 2020. During the third quarter of Fiscal 2020, productivity of our direct labor employees was
reduced, which caused a decline in revenue and gross profit. As some of these restrictions were relaxed in the fourth quarter of
Fiscal 2020, employees started to return to the office with minimal operational challenges. Business shutdowns resulting from the
pandemic disrupted our supply chain and the manufacture or shipment of our products and have delayed the rollout of our smart enabled
retail products to big box retail stores, causing our distribution segment revenues in Fiscal 2020 to be less than anticipated.
Additionally, our design segment reported lower revenues as demand for its design and development services were reduced or delayed.
The impact from lower revenue was partially offset by a reduction in certain selling and travel related expenses resulting from
government mandated stay-at-home orders and travel restrictions as well as revenues derived from sales and sourcing of personal
protective equipment. The pandemic had temporarily impacted our liquidity in Fiscal 2020, as collections of accounts receivable
were somewhat delayed at certain times.
The economy
started to open in certain jurisdictions where the virus was considered under control. However, there continue to be
areas with increased rates of infection that could cause government officials to enact more restrictions on how businesses
operate. The future 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 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. Refer to “Part I, Item 1A — Risk Factors” in this report for a description of the
material risks that the Company currently faces in connection with COVID-19.
Until there is a
vaccine and treatment that is widely distributed, 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 profitability strategy.
Corporate History
Forward was incorporated
in 1961 as a manufacturer and distributer of advertising specialty and promotional products. In 1989, we acquired Forward US, a
manufacturer of soft-sided carrying cases. The carrying case business became our predominant business, and in September 1997, we
sold the assets relating to the production of advertising specialty and promotional products, ceasing to operate in that segment.
In May 2001, we formed
Forward Switzerland to facilitate distribution of aftermarket products under our licenses for cell phone cases with a major North
American multinational and to further develop our OEM European business presence. After the expiration of the last of these licenses
in March 2009, staff at Forward Switzerland was significantly reduced and in recent years has primarily served our OEM customers
in Europe.
In
January 2018, Forward acquired IPS which resulted in IPS being a wholly-owned subsidiary of Forward.
In
August 2020, Forward acquired the assets of Kablooe Design, a medical and consumer design and development company. The Company
believes that the design and engineering service capabilities of Kablooe will complement the IPS business and further diversify
the industries and customers with which the Company does business.
In
this report, the Company uses the term “distribution” to refer to what has historically been described as the “OEM”
business. However, we may refer to our customers as “OEM” customers, using a standard industry term. In addition, we
use the term “design” or “design and development” to describe the acquired IPS and Kablooe businesses,
to be consistent with the operating segment definitions (see Note 16 to the audited consolidated financial statements herein).
Customers
The Company’s
distribution customers are located in: (i) the APAC Region; (ii) the EMEA Region; and (iii) the Americas.
IPS and Kablooe provide
product development services for Fortune 500 companies, established mid-level companies, and start-ups. The wide range of industries
served includes industrial electronics, medical and dental equipment, food/beverage, U.S. Department of Defense, certain luxury
brands, and oil/gas.
Products
The Company’s
distribution products include carrying cases and other accessories for medical monitoring and diagnostic kits and a variety of
other portable electronic and non-electronic products (such as sporting and recreational products, bar code scanners, smartphones,
GPS location devices, tablets, and firearms). Beginning in Fiscal 2020, the Company’s distribution products also include
smart-enabled products such as speakers and lamps.
The Company does not
manufacture any of its distribution products and sources substantially all of its distribution products from independent suppliers
in China, through Forward China, a related party (see Note 14 to the consolidated financial statements).
Diabetic Products
We sell carrying cases
for blood glucose diagnostic kits (“Diabetic Products”) directly to OEM customers, or their contract manufacturers.
These electronic monitoring kits are made for use by diabetics. We typically sell these cases at prices ranging from approximately
$0.60 to $7.00 per unit. Unit volumes are sold predominantly at the lower end of this price range. We also sell higher end units
ranging from approximately $18.50 to $39.00 per unit, but this represents less than 2% of net revenues. The distribution customer
(or its contract manufacturer) packages our carry cases “in box” as a custom accessory for the customer’s blood
glucose testing and monitoring kits, or to a much lesser extent, sells them through their retail distribution channels. These kits
typically include a small, electronic blood glucose monitor, testing strips, lancets for drawing a drop of blood and our carrying
case, customized with the manufacturer’s logo and designed to fit and secure the glucose monitor, testing strips, and lancets
in separate straps, pouches, and holders. As the kits and technology change, our carrying case designs change to accommodate the
changes in size, shape and layout of the electronic monitoring device, strips and lancet. For Fiscal 2020, our Diabetic Products
customers accounted for 83% of our total net revenues in the distribution business, compared to 89% in Fiscal 2019.
Other Products
We also sell carrying
and protective solutions to distribution customers for a diverse array of other portable electronic and other products (“Other
Products”), including sporting and recreational products, bar code scanners, smartphones, GPS and location devices, tablets,
and firearms, on a made-to-order basis that are customized to fit the products sold by our distribution customers. Our selling
prices for these products also vary across a broad range, depending on the size and nature of the product for which we design and
sell the carry solution. In Fiscal 2020, we added smart-enabled products to our distribution business. Our smart-enabled products
include speakers and lamps that provide lighting and sound with connectivity to other devices via Bluetooth. Our selling prices
for these products, including related accessories, ranges from $35 to $135 per unit. For Fiscal 2020, our other products accounted
for 17% of our total net revenues in the distribution business, compared to 11% in Fiscal 2019.
Our design segment
provides a complete range of design, engineering and development services with respect to a diverse array of consumer and industrial
electronics products. These include but are not limited to medical products, smart displays, beverage vending, enterprise and mobile
software applications, lighting, security and detections systems, cameras, wearables and vehicle controls. Solutions in these and
other areas are designed and developed in-house, beginning at product concept, extending through design, engineering and prototype,
and final design for manufacturing and Computer-Aided Design (“CAD”) files. As a combined company, we are able to provide
manufacturing sourcing and final product support and delivery services for initial short-run, low volume products.
Product Development
In the OEM division
of our distribution business, we typically receive requests to submit product designs in connection with a customer’s introduction
and rollout to market of a new product. IPS collaborates with clients to determine functionality, size and other basic specifications
and requirements for products. Our design and production resources develop more detailed product specifications and design options
for our customers’ evaluation. We provide documentation of each phase to the client and gain approval of a working prototype.
Working with our suppliers and the customer, samples are modified and refined. Once approved for commercial introduction and order
by our customer, we work with our suppliers to ensure conformity of commercial production to the definitive product samples and
specifications. Manufacture and delivery of products in production quantities are coordinated with the customer’s manufacturing
and shipment schedules so that our products are available to be packaged with the customer’s additional product components
prior to shipment and sale, or to make the product available to the customer for direct sale through its retail distribution channels.
Services
Services offered for
each engagement vary from full development utilizing a wide range of in-house design and engineering functions, to targeted design
and engineering support for clients with in-house development teams. Our in-house capabilities include the following:
| |
• |
User Experience/User Interface (UX/UI) Design and Development |
| |
• |
IoT System Architecture |
Distribution
Channels of Distribution
We primarily ship
our OEM products directly to our customers (or their contract manufacturers), who package our accessory products “in box”
with their branded products. Some of our customers also purchase certain of our products and offer them for sale as stand-alone
accessories to complement their product offerings.
In Fiscal 2019,
we secured a portfolio of smart-enabled products which we began distributing through retail outlets in the U.S. in Fiscal
2020. We continue to invest in and build out a distribution network for retail products as we expect this part of our
business to grow in the future. The retail distribution network is responsible for placing products with major retailers for
consumption both in store and online.
Distribution Hubs for Customers
We have arrangements
with various customer’s distribution hubs. These arrangements obligate us to supply our products to our customers’
distribution hubs where their products are manufactured, kitted, and/or warehoused pending sale, and where our products are packaged
“in box” with the distribution customers’ products. The product quantities we are required to supply to each
distribution hub are based on the distribution customer’s purchase orders and forecasts. We do not recognize revenue for
product shipped to a customers’ hub until we have been notified by our customer that our product has been withdrawn or used
by the distribution hub. Hub arrangements have had the general effect of providing financing for our customers’ inventory
purchases by extending the time between our placement of orders to our suppliers in order to ship and supply the hubs and the time
that we are able to recognize revenue. The corollary effect is an increase in our inventory levels.
We also have arrangements
with various third-party fulfillment centers for products distributed through retail outlets in the U.S. We do not recognize revenue
for products shipped to a fulfillment center until the product has been shipped to the end-user customer.
Product Supply
Manufacturing
The manufacture of
custom carrying cases and other carry and protective solutions generally consists of die cutting fabrics and heat sealing, gluing,
sewing, and decorating (affixing logos to) the cut-outs by means of silk screening, hot-stamping, embroidering or embossing. The
principal materials used in the manufacture of our products are vinyl, nylon, leather, metal and plastic parts (for clips, buckles,
loops, hinges and other hardware), foam padding and cardboard, all of which are obtained from suppliers based on our specifications.
We do not believe that any of the component materials or parts used in the manufacture of our products are supply constrained.
We believe that there are adequate available alternative sources of supply for all of the materials used to manufacture, package,
and ship our products.
Dependence on Sourcing Agent
The Company has a
Buying Agency and Supply Agreement (the “Supply Agreement”) with Forward China (the “Agent”). The Supply
Agreement provides that the Agent acts as the Company’s exclusive buying agent. The Agent also arranges for sourcing, manufacture
and exportation of such products. The Company purchases products at the Agent’s cost and pays a service fee to the Agent.
The service fee is calculated at $100,000 monthly plus 4% of “Adjusted Gross Profit”, which is defined as the selling
price less the cost from the Agent. The Supply Agreement has been extended to October 22, 2023. Terence Wise, the Company’s
Chairman, Chief Executive Officer and largest shareholder, is a principal of the Agent. See “Item 1A. – Risk Factors”
regarding our dependence on the Agent.
Suppliers
We procure substantially
all products for our distribution business from independent suppliers in China through the Agent. Depending on the product, we
may require several different suppliers to furnish component parts or pieces.
We place orders with
the Agent for particular products. We do not have minimum supply requirement agreements with our suppliers to guarantee a supply
of finished product, nor have we made purchase commitments to purchase minimum amounts from any of our suppliers. However, from
time to time, we may order products from our suppliers in advance of receiving a customer purchase order, or in quantities in excess
of those forecasted to us by our customer, for which they are contractually obligated to us, in order to meet our customers’
anticipated delivery demands. Beginning September 1, 2013, we began making purchases directly from Forward China. During Fiscal
2020 and Fiscal 2019, all of our purchases for our distribution business were made directly through Forward China.
There are very few
suppliers for the design and development part of the business as it is a service-based business. We do, however, purchase supplies
and equipment to develop prototypes or “mock-ups” for design and development projects. Design business suppliers are
predominantly based in the United States.
Quality Assurance
Forward’s quality
assurance manager oversees the process to ensure that our distribution products manufactured by our Chinese suppliers meet our
quality assurance standards. He independently verifies and supervises the inspection of products provided by independent contractors
in China. In July 2015, Forward China received its ISO 9001:2008 quality certification, which was renewed in July 2018 and is valid
until July 2021.
Our design business
follows general industry standard practices for review and corrective actions related to its design services. There are no independent
quality assurance standards in place for its design and engineering work. Customer specifications and scope of services are laid
out in the project contracts and the Company works closely with the customer to identify and correct any quality issues that arise.
Competition
Distribution Business
The OEM division of
our distribution business is highly competitive in terms of product pricing, design, delivery terms, and customer service. In the
production of our distribution products, we compete with numerous United States and foreign producers and distributors. Some of
our competitors are substantially larger than we are and have greater financial and other resources. We believe that we sustain
our competitive position through maintenance of an effective product design capability, rapid response time to customer requests
for proposals and product shipment, reliable product delivery and product quality, and competitive pricing. We believe that our
ability to compete based on product quality assurance considerations is enhanced by Forward China’s local presence, quality
control, shipment capabilities and expertise in sourcing.
Design and Engineering Business
The depth and breadth
of the services offered, and industries served by our design segment are unique. Our management team is aware that there are very
few competitive firms that have the full set of capabilities that our design segment has under one roof. There are however, numerous
design and engineering companies that compete with us in specific industries and/or with specific targeted skills or competitive
advantages.
Human Capital/Employees
The
Company’s key human capital management objectives are to attract, retain and develop the highest quality talent. To support
these objectives, the Company’s human resources programs are designed to develop talent to prepare them for critical roles
and leadership positions for the future; reward and support employees through competitive pay and benefits; enhance the Company’s
culture through efforts aimed at making the workplace more engaging and inclusive; acquire talent and facilitate internal talent
mobility to create a high-performing, and diverse workforce. None of our employees are covered by a collective bargaining agreement.
The
Company employed approximately 85 people as of November 30, 2020. We hire consultants on an as-needed basis in our design segment.
Regulation and Environmental Protection
Our sourcing business
is subject to various regulations in various jurisdictions, including the United States and member states of the European Community,
that restrict the use or importation of products manufactured with compounds deemed to be hazardous. We work with our suppliers
to ensure compliance with such regulations. In addition, from time to time, one or more customers may require testing of our products
to ensure compliance with applicable consumer safety rules and regulations or the customer’s safety or packaging protocols.
Because we do not manufacture the products that we sell and distribute, compliance with federal, state and local laws and regulations
pertaining to the discharge of materials into the environment, or otherwise relating to the protection of the environment, has
not had, and is not anticipated to have, any direct material effect upon our capital expenditures, earnings, or competitive position.
However, compliance with such laws and regulations on the part of our suppliers may result in increased costs of supply to us,
particularly if domestic environmental regulations in China becomes more prevalent.
We have not been engaged
in any environmental litigation or incurred any material costs related to compliance with environmental or other regulations. From
time to time, we incur chemical and/or safety laboratory testing expenses in order to address customer requests regarding our product
materials or method of manufacture or regarding their packaging methods and standards.
There are no specific
regulatory or environmental requirements imposed upon the design segment of our business. As a paid service provider, end customers
are assisted in securing regulatory certifications including UL (Underwriters Laboratories – a U.S. based safety certification
organization), FCC (Federal Communications Commission – U.S. governmental certification department for electronic goods),
CE (Conformité Européenne – a European certification for health, safety and environmental protection standards)
and others depending on needs, product types and locations of end customers’ product markets.
As our retail business increases, we anticipate
that we will be required to obtain certain certifications for products on an as required basis.
ITEM 1A. RISK FACTORS
Investing in our
common stock involves a high degree of risk. You should carefully consider the following Risk Factors before deciding whether
to purchase or sell stock in the Company. Additional risks and uncertainties not presently known to us, or that we currently
deem immaterial, may also impair our business operations or our financial condition. If any of the events discussed in the
Risk Factors below occur, our business, consolidated financial condition, results of operations or prospects could be
materially and adversely affected. In such case, the value and marketability of the common stock could decline.
Risks Relating to Our Business, Liquidity and Operations
Our results of operations have been
negatively impacted by the coronavirus pandemic.
The COVID-19 pandemic
has spread across the globe and continues to negatively impact worldwide economic activity and has impacted our
Company in a number of ways. COVID-19 has increased the risk that the Company or its employees, suppliers, customers
and other commercial partners may be prevented from conducting business for an indefinite period of time, including due to the
spread of the disease or shutdowns requested or mandated by governmental authorities. Specifically, COVID-19 has increased the
risk of customers’ inability to pay for our design services and has the potential to continue to impact collections on the
distribution side of the business. The Company has transitioned some of its employees to working remotely, which subjects
the 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 incur significant declines in customer orders, increased aging of accounts
receivable or other negative consequences due to COVID-19, the extent of which remains highly uncertain, it will have a material
adverse effect on our business, financial condition and results of operations.
During Fiscal 2020, we generated an
operating loss and negative cash flow from operations, we cannot assure you that we will regain profitability in the future.
In Fiscal 2020, we
generated an operating loss of $1,982,000 and had net cash used in operating activities of $263,000. Although we generated net
income in Fiscal 2018 and 2017, we incurred significant losses from operations in Fiscal 2019 and Fiscal 2020. We can provide no
assurance that we will not continue to experience operating losses. In addition to our $1,300,000 commercial line of credit (the
“Line of Credit”) of which $1,000,000 has been utilized as of the date of this report, Forward China holds a $1,600,000
note which is due December 31, 2021. Forward China, which is owned by our Chief Executive Officer and Chairman of the Board, has
agreed to extend this note numerous times to assist the Company with its liquidity resources. We cannot provide you with any assurance
that he will continue to grant us extensions on this note. If we cannot generate sufficient revenues to operate profitably, we
may be forced to cease, limit or suspend operations, or we may be required to raise capital to maintain or grow our operations.
There is no assurance that we will be able to raise such capital and if so on terms that are not onerous and dilutive to the Company
and its shareholders.
While we believe that
our existing cash resources are sufficient to support our growth strategy, there can be no assurances that our growth strategy
will be successful or that we will earn a return on these investments.
Our distribution business remains highly
concentrated in our Diabetic Products Line. If our Diabetic Products Line were to suffer the loss of a principal customer or a
material decline in revenues from any such large customer, our business would be materially and adversely affected.
Revenues from diabetic
products to distribution customers accounted for 83% of our distribution net revenues in Fiscal 2020. As a result, our financial
condition and results of operations are subject to higher risk from the loss of a major diabetic products customer or changes in
their business practices. For example, in 2018 a new diabetes monitoring product was brought to the market which does not use a
carrying case. If our customers use new solutions in their diabetes product lines that do not use carrying cases, our business
would be materially and adversely affected.
The loss of any of, or a material reduction
in orders from, our largest customers, would materially and adversely affect our results of operations and financial condition.
Our distribution business
is and has been characterized by a high degree of customer concentration. Our four largest distribution customers accounted for
79% and 87% of distribution net revenues in Fiscal 2020 and Fiscal 2019, respectively. Additionally, three of our largest design
and development customers accounted for 46% of design and development net revenues in both Fiscal 2020 and Fiscal 2019. Although
we continue our efforts to diversify our business, we cannot provide any assurance that we will be successful. The loss of any
of these customers would have a material adverse effect on our financial condition, liquidity and results of operations.
If any one or more of our distribution
customers elect to reduce or discontinue inclusion of cases “in box”, our results of operations and financial condition
would be materially and adversely affected.
The predominant percentage
of our revenues is derived from sales of case accessories to our OEM customers who package our cases “in box” with
their electronics. During recent years, there have been numerous federal legislative and administrative actions that have affected
government programs, including adjustments that have reduced or increased payments to healthcare providers and patients. Any measures
to restrict healthcare spending could result in decreased sales of our products. If one or more of our distribution customers reduce
or discontinue the practice of including carry case accessories “in box” or if our customers experience reduced demand
for their products as a result of political changes, we may incur a significant decline in our revenues and our results of operations
and financial condition would be materially and adversely affected.
Rising threats of international tariffs,
including tariffs applied to goods between the U.S. and China, may materially and adversely affect our business.
Rising threats of
international tariffs, including tariffs applied to goods traded between the U.S. and China, could materially and adversely affect
our business and results of operations. Since the beginning of 2018, there has been increasing rhetoric, in some cases coupled
with legislative or executive action, from several U.S. and foreign leaders regarding the possibility of instituting tariffs on
the foreign imports of certain materials and products. More specifically, throughout 2020 and 2019, the U.S. and China imposed
tariffs or announced proposed tariffs to be applied in the future to certain of each other’s exports. As of the date of this
report, the Company had not been directly affected by the tariffs implemented by President Trump on the medical technology industry.
However, we do not know what the new administration will implement when President-Elect Biden takes office. If any such tariffs
or any restrictions are imposed on products that we import to our customers, we would be required to raise our prices which may
result in the loss of customers and harm our business. Additionally, some of our non-diabetic distribution customers and customers
in the design and development business have been affected by these tariffs, specifically those who manufacture electronic products.
This may cause these customers to reduce the amount of discretionary spending they use on outsource product design and engineering
services supplied by our design segment.
Changes in political
conditions in China and changes in the state of China-U.S. relations, including the current trade tensions, are difficult to predict
and could adversely affect the operations or financial condition of the Company. In addition, because of our involvement in the
Chinese market, any deterioration in political or trade relations might cause a public perception in the U.S. or elsewhere that
might cause our business to become less attractive. Such an impact could adversely affect our revenues and cash flows.
We continue to encounter pressure from
our largest distribution customers to maintain or even decrease prices, or to supply lower priced carry solutions, and expect such
pressure to persist. The effects of such price constraints on our business may be exacerbated by inflationary pressures that affect
our costs of supply.
During Fiscal 2020,
we continued to experience significant pricing pressure from our largest distribution customers to reduce the prices we charge
them. When we are unable to extract comparable concessions from our suppliers on prices they charge us, our product sales margins
erode. In addition, competitors may reduce their average selling prices faster than we are able to reduce costs, which can also
accelerate the rate of decline of our selling prices.
In addition to margin
compression from customers in general, we are encountering increased pricing from our Chinese suppliers who are reacting to inflationary
increases in materials and labor costs incurred by them. In addition, prices that our Chinese vendors charge to us may reflect
appreciation of the Chinese currency against the U.S. dollar, which can be passed through to us in the form of higher U.S. dollar
prices. This in turn will tend to reduce gross profit if we are unable to raise our prices. Any decrease in demand for our products,
coupled with pressure from the market and our customers to decrease our prices, would materially adversely affect our business,
financial condition, and results of operations.
Increasingly, our distribution customers
are requesting that we enter into supply agreements with them that have restrictive terms and conditions. These agreements typically
include provisions that increase our financial exposure, which could result in significant costs to us.
Increasingly, our
distribution customers are requesting that we enter into supply agreements with them. These agreements typically do not include
volume commitments but do include provisions that generally serve to increase our exposure for product liability and limited sales
returns, which could result in higher costs to us as a result of such claims. In addition, these agreements typically contain provisions
that seek to limit our operational and pricing flexibility and extend payment terms, which could materially adversely affect our
cash flow, business, financial condition, and results of operations.
Our distribution business depends on
a single exclusive buying agent who, in turn, depends on a limited number of key suppliers.
Our Chairman, Chief
Executive Officer and largest shareholder is the owner of Forward China, our exclusive sourcing agent in the Asia Pacific region.
We have entered into a Buying Agency and Supply Agreement with Forward China whereby Forward China will act as the Company’s
exclusive agent to arrange for sourcing, manufacturing and exporting the Company’s distribution products. Historically, Forward
China has relied on a limited number of suppliers to supply the component parts and pieces necessary for the production of our
carry and protective solutions products. As a result, our ability to effectively push back against rising material costs may diminish,
although historically Forward China has absorbed these costs. In addition, any inability to obtain supplies from a single or limited
number of suppliers may result in difficulty obtaining the supplies necessary for our business and may restrict our ability to
produce our carry and protective solutions products. Where practical, we intend to establish alternative sources through Forward
China to mitigate the risk that the failure of any single supplier will adversely affect our business. Nevertheless, either a prolonged
inability to obtain certain components or the failure of one of our suppliers to do so could impair our ability to ship products
and generate revenues, which could adversely affect our operating results and damage our customer relationships.
In addition, we depend
significantly on Forward China as our exclusive buying agent for substantially all of our component parts. As a result, we have
limited visibility as to our supplier base, making it difficult to forecast future events and to plan our operations. In addition,
if Forward China fails to satisfactorily perform its obligations, including payment obligations, to our suppliers or its duties
to us as our exclusive buying agent as a result of financial or other difficulties or for any other reason, or if our relationship
with Forward China was to suffer or we are unable to extend our agreement with Forward China which expires in October 2023, we
could suffer irreparable harm resulting in substantial harm to the distribution business.
Our distribution business has benefited
from customers deciding to outsource their carry and protective solutions assembly needs to us. If our distribution customers choose
to provide these services in-house or select other providers, our distribution business could suffer.
Our future distribution
revenue growth partially depends on new outsourcing opportunities from our distribution customers. Current and prospective customers
continuously evaluate our performance against other providers. They also evaluate the potential benefits of manufacturing their
products themselves. To the extent that outsourcing opportunities are not available either due to these customers deciding to produce
these products themselves or to use other providers, our financial results and future growth could be materially adversely affected.
If we are unable to provide our customers
with high-quality products, and service, or if we are unable to deliver our products and/or service to our distribution customers
in a timely manner, our business, financial condition, and results of operations may be materially adversely affected.
In order to maintain
our existing customer base and obtain business from new customers, we must demonstrate our ability to produce our products and
services at the level of quality, responsiveness, timeliness, and cost that our customers require. If our products or services
are provided at what customers believe are of a substandard quality, if they are not delivered on time, if we are not responsive
to our customers’ demands or cannot meet their needs, our reputation as a reliable supplier of our products and a sophisticated
product designer and developer would likely be damaged. If we are unable to meet anticipated product and service standards, we
may be unable to obtain new or keep our existing distribution customers, and this would have a material adverse effect on our business,
financial condition, and results of operations.
If we fail to maintain an effective
system of internal controls over financial reporting, we may not be able to accurately report our financial results. As a result,
current and potential stockholders could lose confidence in our financial reporting, which could harm our business and the trading
price of our stock.
Effective internal
controls over financial reporting are necessary for us to provide reliable financial reports. If we cannot maintain effective controls
and reliable financial reports, our business and operating results could be harmed. We continue to work on improvements to our
internal controls over financial reporting. Any failure to implement and maintain internal controls over our financial reporting
or difficulties encountered in the implementation of improvements in our controls, could cause us to fail to meet our reporting
obligations. Any failure to improve our internal controls over financial reporting or to address identified weaknesses in the future,
if they were to occur, could also cause investors to lose confidence in our reported financial information, which could have a
negative impact on the trading price of our stock.
Our results of operations are subject
to the risks of fluctuations in the values of foreign currencies relative to the U.S. Dollar.
Our results of operations
are expressed in U.S. dollars. When the U.S. dollar appreciates or depreciates in value against a currency in which all or a significant
portion of revenues or other accounts receivable are denominated, such as the Euro, our results of operations can be adversely
affected or benefited, respectively. The degree of impact is proportional to the amount of foreign currency expense or revenue,
as the case may be, and the fluctuations in exchange rates over the period in which the effect is measured on our financial statements.
In addition, such currency fluctuations may affect the comparability of our results of operations between financial periods.
Future revenues are difficult to predict
and are likely to show significant variability as a consequence of customer concentration.
Because our revenues
are highly concentrated in a few large customers, and because the volumes of these customers’ order flows to us can fluctuate
markedly in a short period of time, our quarterly revenues, and consequently our results of operations, may be highly variable
and subject to significant changes over a relatively short period of time. Our largest distribution customers may keep consumer
products with which our carry solutions are packaged “in-box” in active promotion for many months, or for a very short
period of time, depending on various factors, including sales trends for the product, product development cycles, new product introductions,
and our customers' competitors' product offerings. As demand for the consumer product relating to the in-box program matures and
decreases, we may be forced to accept significant price and/or volume reductions in customer orders for our carry solutions, which
will adversely affect revenues. Additionally, our large design and development customers may have their budgets limited from many
factors including economic declines (resulting from a pandemic or any other reason) causing discretionary budgets to decline or
may from-time-to-time choose to do their development work in-house. All of these factors tend to lead to a high degree of variability
in our quarterly revenue levels. Significant, rapid shifts in our operating results may occur if and when one or more of these
customers increases or decreases the size(s) of, or eliminates, their orders or engagement from us by amounts that are material
to our business.
Our gross margins, and therefore our
profitability, vary considerably by customer and by product, and if the revenue contribution from one or more distribution customers
or products changes materially, relative to total revenues, our gross profit percentage may fluctuate.
Our gross profit margins
on the distribution products we sell can vary widely depending on the product type, customer, and order size. Because of the broad
variability in price ranges and product types, we anticipate that gross margins, and accordingly their impact on operating income
or loss, may fluctuate depending on the relative revenue contribution from each customer or product. If our gross margins decrease,
our results of operations will be adversely affected.
Product manufacture is often outsourced
by our distribution customers to contract manufacturing firms in China and in these cases it is the contract manufacturer to which
we must look for payment.
Contract manufacturing
firms are performing manufacturing, assembly, and product packaging functions, including the bundling of our product accessories
with the distribution customer's product. As a consequence of this business practice, we often sell our carry solutions products
directly to the contract manufacturing firm. This is particularly significant in the case of diabetic product sales to certain
customers. In these cases, we invoice the contract manufacturing firm and not the distribution customer. Therefore, it is the contract
manufacturing firm to which we must look for payment in such cases and not our distribution customer. If we fail to receive payment
from the contract manufacturer, our ability to be paid for products already delivered would be limited. In such event, our results
of operations will be adversely affected.
Our dependence on foreign manufacturers
creates quality control and other risks to our business. From time to time we may experience certain quality control, on-time delivery,
cost, or other issues that may jeopardize customer relationships.
Our reliance on foreign
suppliers, manufacturers and other contractors involves significant risks, including risk of product quality issues and reduced
control over quality assurance, manufacturing yields and costs, pricing, timely delivery schedules, the potential lack of adequate
manufacturing capacity and availability of product, the lack of capital and potential misappropriation of our designs. In any such
event, our reputation and our business will be harmed.
Our shipments of distribution products
may become subject to delays or cancellation due to work stoppages or slowdowns, piracy, damage to port facilities, and congestion
due to inadequacy of port terminal equipment and other causes.
To the extent that
there are disruptions or delays in loading container cargo in ports of origin or off-loading cargo at ports of destination as a
result of labor disputes, work-rules related slowdowns, tariff or World Trade Organization-related disputes, piracy, physical damage
to port terminal facilities or equipment caused by severe weather or terrorist incidents, congestion in port terminal facilities,
inadequate equipment to load, dock and offload container vessels or energy-related tie-ups or otherwise, or for other reasons,
product shipments to our customers will be delayed. In any such case, our customer may cancel or change the terms of its purchase
order, resulting in a cancellation or delay of payments to us. A closure or partial closure of port facilities or other causes
of delays in the loading, importation, offloading or movement of our products to the shipping destination agreed to with our customer
could result in increased expenses, as we try to avoid such delays, delayed shipments or cancelled orders, or all of the above.
Depending on the severity of such consequences, this may have an adverse effect on our financial condition and results of operations.
Issues with our products may lead to
product liability, personal injury or property damage claims, recalls, withdrawals, replacements of products, or regulatory actions
by governmental authorities that could divert resources, affect business operations, decrease sales, increase costs, and put us
at a competitive disadvantage, any of which could have a significant adverse effect on our financial condition.
We may experience
issues with products that we source that may lead to product liability, personal injury or property damage claims, recalls, withdrawals,
replacements of products, or regulatory actions by governmental authorities. Any of these activities could result in increased
governmental scrutiny, harm to our reputation, reduced demand by consumers for products, decreased willingness by retailer customers
to purchase our products, absence or increased cost of insurance, or additional safety and testing requirements. Such results could
divert development and management resources, adversely affect our business operations, decrease sales, increase legal fees and
other costs, and put us at a competitive disadvantage compared to other companies not affected by similar issues with products,
any of which could have a significant adverse effect on our financial condition and results of operations. Although the Company
does not intend on providing warranties on the products it distributes directly, we can provide no assurances that customers will
not seek damages if any of the foregoing events took place. The Company does not carry product liability insurance. Although we
have not had significant claims for damages or losses from the products we distribute, any uninsured claim, if successful and of
significant magnitude, could have a material adverse effect on our business, prospects, results of operations or financial condition.
The carrying solutions distribution
business is highly competitive and does not pose significant barriers to entry.
There are many competitors
in the sale of carry solutions products to our customers including OEMs, and competition is intense. Since little or no significant
proprietary technology is involved in the design, production or distribution of the types of products we sell, others may enter
the business with relative ease and compete against us. Such competition may result in the diminution of our market share or the
loss of one or more major customers, thereby adversely affecting our net revenues, results of operations, and financial condition.
Many of our competitors are larger, better capitalized and more diversified than we are and may be better able to withstand a downturn
in the general economy or in the product areas in which we specialize. Potential customers may prefer the pricing terms offered
by competitors. These competitors may also have less sales concentration than we do and be better able to withstand the loss of
a key customer or diminution in its orders. If we are not effectively able to compete, our results of operations will be adversely
affected.
If we fail to retain our key personnel,
we may not be able to achieve our anticipated level of growth and our business could suffer.
Our future depends,
in part, on our ability to attract and retain key sales personnel and the continued contribution of our executive officers including
Terence Wise, our Chief Executive Officer, who would be difficult to replace. Our design and development business employs and contracts
highly sophisticated engineers to provide our customers with a full-service product, design and development team with vast technological
knowledge and capabilities. The loss of the services of any of our key personnel and the process to replace any key personnel would
involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.
If a third party asserts that we are
infringing on its intellectual property, whether successful or not, it could subject us to costly and time-consuming litigation
or require us to obtain expensive licenses, and our business may be adversely affected.
Third party lawsuits alleging our infringement
of patents, trade secrets or other intellectual property rights could cause us to do one or more of the following:
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stop using technology that contains the allegedly infringing intellectual property; |
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incur significant legal expenses; |
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cause our management to divert substantial time to our defenses; |
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pay substantial damages to the party whose intellectual property rights we may be found to be infringing; |
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indemnify customers; or |
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attempt to obtain a license to the relevant intellectual property from third parties, which may not be available to us on reasonable terms or at all. |
Third party lawsuits
alleging our infringement of patents, trade secrets or other intellectual property rights could have a material adverse effect
on our business, results of operations and financial condition.
If we experience system interruptions,
it may cause us to lose customers and may harm our business.
Our inability to maintain
and improve our information technology systems and infrastructure may result in system interruptions. System interruptions and
slow delivery times, unreliable service levels, prolonged or frequent service outages, or insufficient capacity may prevent us
from efficiently providing services to our customers on our website, which could result in our losing customers and revenue.
We lease space for
our data center for power, security, connectivity and other services. We also rely on third party providers for bandwidth. We do
not control these vendors and it would take significant time and effort to replace them. We have experienced, and may experience
in the future, website disruptions, outages and other performance problems due to a variety of factors, including infrastructure
changes, human or software errors and capacity constraints.
Our systems are vulnerable
to damage or interruption from terrorist attacks, floods, fires, power loss, telecommunications failures, hurricanes, computer
viruses, computer denial of service attacks or other attempts to harm our systems. Any such damage or interruption would adversely
affect our results of operations.
Because our networks and IT systems
may be vulnerable to unauthorized persons hacking our systems, it could disrupt our operations and result in the theft of our proprietary
information.
A party who is able
to breach the security measures on our networks could misappropriate either our or our customers’ proprietary information,
or cause interruptions or malfunctions in our operations. Hacking of companies’ infrastructure is a growing problem. Although
we believe our systems and engineering team have the capability of protecting the Company from any such hacking, we can provide
you with no such assurance. If we grow and obtain more visibility, we may be more vulnerable to hacking. We may be required to
expend significant capital and other resources to protect against such threats or to alleviate problems caused by breaches in security,
which could have a material adverse effect on our financial performance and operating results.
Our design business uses software that
is highly technical, and undetected errors, if any, could adversely affect our business.
Our design business
may use software that is highly technical and complex. Our software has contained, and may now or in the future contain, undetected
errors, bugs, flaws, corrupted data or vulnerabilities. Some errors in our software code may only be discovered after the code
has been released. Any errors, bugs, flaws or corrupted data could result in damage to our reputation, loss of users, or loss of
revenue, any of which could adversely affect our business and financial results.
We maintain cash balances in our bank
accounts that exceed the FDIC insurance limitation.
We maintain our cash
assets at commercial banks in the U.S. in amounts in excess of the Federal Deposit Insurance Corporation insurance limit of $250,000
and in Europe in amounts that may exceed any applicable deposit insurance limits. In the event of a failure at a commercial bank
where we maintain our deposits or uninsured losses on money market or other cash equivalents in which we maintain cash balances,
we may incur a loss to the extent such loss exceeds the insurance limitation, which could have a material adverse effect upon our
financial conditions and our results of operations.
Our Chairman and Chief Executive Officer
is a significant shareholder, which makes it possible for him to have significant influence over the outcome of all matters submitted
to our shareholders for approval and which influence may be alleged to conflict with our interests and the interests of our other
shareholders.
Terence Wise, our
Chairman and Chief Executive Officer, is a significant shareholder who beneficially owns approximately 17% of the outstanding
shares of our common stock as of September 30, 2020. Mr. Wise has substantial influence over the outcome of all matters submitted
to our shareholders for approval, including the election of our directors and other corporate actions. This influence may be alleged
to conflict with our interests and the interests of our other shareholders. In addition, such influence by Mr. Wise could have
the effect of discouraging potential business partners or create actual or perceived governance instabilities that could adversely
affect the price of our common stock.
Risks Related to Our Common Stock
Due to factors beyond our control, our
stock price may be volatile.
Any of the following
factors could affect the market price of our common stock:
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Our failure to increase revenue in each succeeding quarter and achieve and thereafter maintain profitability; |
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Our failure to meet our revenue and earnings guidance or our failure to meet financial analysts’ performance expectations; |
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The loss of Forward China as our agent; |
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The loss of customers or our failure to attract more customers; |
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The sale of a large amount of common stock by our shareholders; |
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Our announcement of a pending or completed acquisition or our failure to complete a proposed acquisition; |
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An adverse court ruling or regulatory action; |
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Changes in market valuations of similar companies; |
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Short selling activities; |
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Our announcement of any financing or a change in the direction of our business; |
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Announcements by us, or our competitors, of significant contracts, acquisitions, commercial relationships, joint ventures or capital commitments. |
In the past, following
periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted.
A securities class action suit against us could result in substantial costs and divert our management’s time and attention,
which would otherwise be used to benefit our business.
Because our common stock is not actively
traded, purchasers of our stock may incur difficulty in selling their shares at or above the price they paid for them, or at all.
Our average daily
trading volume on The Nasdaq Capital Market (“Nasdaq”) has been approximately 120,000 shares of common stock for the
six trading days prior to November 30, 2020. An active market for our common stock may never develop, or if it does, it may not
be sustained. Accordingly, investors may experience difficulty in selling their shares of common stock at or above the price they
paid for them, or at all.
Failure to meet the continued listing
requirements of Nasdaq, could result in delisting of our common stock, which in its turn would negatively affect the price of our
common stock and limit investors’ ability to trade in our common stock.
Our common stock trades
on Nasdaq. Nasdaq rules impose certain continued listing requirements, including the minimum $1 bid price, corporate governance
standards and number of public stockholders. At November 30, 2020, our closing bid price was $1.83. If we fail to meet these continued
listing requirements, Nasdaq may take steps to delist our common stock. If our common stock is delisted from The Nasdaq Capital
Market, we could face significant material adverse consequences, including:
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a limited availability of market quotations for our common stock; |
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reduced liquidity with respect to our common stock; |
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a determination that our shares of common stock are a “penny stock” which will require broker-dealers trading in our common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock; |
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a limited amount of news and analyst coverage for our company; and |
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a limited ability to issue additional securities or obtain additional financing in the future. |
If we become subject to a regulatory
investigation, it could cause us to incur substantial costs or require us to change our business practices in a manner materially
adverse to our business.
From time to time,
we may receive inquiries from regulators regarding our compliance with laws and other matters. Recently, we incurred significant
expenses responding to an SEC investigation into potential insider trading by certain insiders of the Company. Although that investigation
has concluded, responding to, or defending other such actions would cause us to continue to incur substantial expenses and divert
our management’s attention.
Violation of existing
or future regulatory orders or consent decrees could subject us to substantial monetary fines and other penalties that could negatively
affect our financial condition and results of operations. In addition, it is possible that future orders issued by, or enforcement
actions initiated by, regulatory authorities could cause us to incur substantial costs or require us to change our business practices
in a manner materially adverse to our business.
We do not expect to pay dividends in
the future, which means that investors may not be able to realize the value of their shares except through a sale.
We do not anticipate
that we will declare or pay a cash dividend. We expect to retain future earnings, if any, for our business and do not anticipate
paying dividends on common stock at any time in the foreseeable future. Because we do not anticipate paying dividends in the future,
the only opportunity for our shareholders to realize the creation of value in our common stock will likely be through a sale of
those shares.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2. PROPERTIES
The Company leases
all of its properties where its business is operated. We believe that these properties are adequate for the purposes for which
they are used. All leases are with unaffiliated third parties. We believe that the loss of any lease would not have a material
adverse effect on our operations, as we believe that we could identify and lease comparable facilities upon approximately equivalent
terms. The following properties which are material to the Company’s business are described below:
We lease 14,000 square
feet in Hauppauge, New York for our executive offices and IPS, which we rent under a lease agreement scheduled to expire in 2027.
The lease has annual escalations; rent payments were $29,000 per month during Fiscal 2020.
We lease 46,000 square
feet in Coon Rapids, Minnesota for Kablooe, which we rent under a lease agreement schedule to expire in June 2021. Rent payments
were $9,200 per month during Fiscal 2020.
ITEM 3. LEGAL PROCEEDINGS
On August 21, 2020,
IPS was named a third-party defendant in a patent dispute claim currently pending in the U.S. District Court for the Eastern District
of New York. The complaint, which contains no specific amount of monetary damages, asserts that certain intellectual property was
misappropriated by IPS and one of its former employees. IPS denies the allegations, believes the action is without merit
and intends to vigorously defend it. The Company received permission from the District Court to file a motion to dismiss
the complaint and filed such motion on December 14, 2020.
From time to time,
the Company may become a party to other legal actions or proceedings in the ordinary course of its business. As of September 30,
2020, there were no such actions or proceedings, either individually or in the aggregate, that, if decided adversely to the Company’s
interests, the Company believes would be material to its business.
ITEM 4.
MINE SAFETY DISCLOSURES.
Not Applicable.
PART II
ITEM 5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Common Stock
The principal market
for our common stock is Nasdaq. Our common stock is traded under the symbol “FORD”.
On November 30, 2020,
the closing price for our common stock was $1.83.
Holders of common stock.
At November 30, 2020,
there were approximately 75 holders of record of our common stock. Because many of our shares of common stock are held by brokers
and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these
record holders.
Dividends
We have not paid any
cash dividends on our common stock since 1987 and do not plan to pay cash dividends in the foreseeable future. The payment of dividends
in the future, if any, will depend upon our results of operations, as well as our short-term and long-term cash availability, net
working capital, working capital needs, and other factors, as determined by our Board of Directors. Currently, except as may be
provided by applicable laws, there are no contractual or other restrictions on our ability to pay dividends if we were to decide
to declare and pay them.
Recent Sales of Unregistered Securities
None.
ITEM 6. SELECTED
FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion
and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in
this report on Form 10-K. All dollar amounts and percentages presented herein have been rounded to approximate values. In addition
to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties,
and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result
of certain factors, including but not limited to those set forth under “Risk Factors.”
Cautionary statement regarding Forward-Looking Statement
This report includes
“forward-looking statements”, as such term is used within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements include, among other things, statements regarding:
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Expectations regarding having our products in retail outlets; |
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Expectations regarding the timing and success of integrating Kablooe in the Company’s historical business; |
as well as other statements regarding our
future operations, financial condition and prospects, and business strategies. Forward-looking statements generally can be identified
by words such as "anticipates," "believes," "estimates," "expects," "intends,"
"plans," "predicts," "projects," "will be," "will continue," "will likely
result," and similar expressions. These forward-looking statements are based on current expectations and assumptions that
are subject to risks and uncertainties, which could cause our actual results to differ materially and adversely from those reflected
in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to,
those discussed in this Annual Report on Form 10-K, and in particular, the risks discussed under the caption "Risk Factors"
in Item 1A of this report and those discussed in other documents we file with the SEC. We undertake no obligation to revise or
publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks
and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
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.
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 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 there is a
vaccine and treatment that is widely distributed, 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 profitability strategy.
Additionally,
see Part I., Item 1A. Risk Factors - The adverse impact of COVID-19 on our businesses will continue for an unknown length of time
and may continue to impact our results of operations.
Variability of Revenues and Results of Operation
Because a high percentage
of our revenues is highly concentrated in a few large customers, and because the volumes of these customers’ order flows
to us are highly variable, with short lead times, our quarterly revenues, and consequently our results of operations, are susceptible
to significant variability over a relatively short period of time.
Critical Accounting Policies and Estimates
We have identified
the accounting policies and significant estimation processes below as critical to our business operations and the understanding
of our results of operations. The discussion below is not intended to be comprehensive. In many cases, the accounting treatment
of a particular transaction is specifically dictated by U.S. GAAP, with no need for management’s judgment. In other cases,
management is required to exercise judgment in the application of accounting principles with respect to particular transactions.
The impact and any associated risks related to these policies on our business operations are discussed throughout this “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect reported and expected
financial results. For a detailed discussion of the applications of these and other accounting policies, see “Item 8. Financial
Statements and Supplementary Data” in this Annual Report. Our preparation of our Consolidated Financial Statements requires
us to make estimates and assumptions that are believed to be reasonable under the circumstances. There can be no assurance that
actual results will not differ from those estimates and such differences could be significant.
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 shipment 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 the title of 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 consolidated balance sheets. Contract liabilities at September 30, 2020 and 2019 were $75,000 and
$0, respectively, for the distribution segment.
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
contracts. The Company recognizes revenue over time on its time and material contracts utilizing a “right to invoice”
method. Revenues from fixed price contracts that require performance of services that are not related to the production of tangible
assets are recognized by using cost inputs to measure progress toward the completion of its performance obligations or the “cost
to cost” method. Revenues from contracts that contain specific deliverables are recognized when the performance obligation
has been satisfied or the transfer of goods to the customer has been completed and accepted.
Recognized revenues
that will not be billed until a later date, or contract assets, are recorded as an asset and classified as a component of accounts
receivable in the accompanying consolidated balance sheets. Contract assets at September 30, 2020 and 2019 were $649,000 and $611,000,
respectively. Contracts where collections to date have exceeded recognized revenues, or contract liabilities, are recorded as a
liability and classified as a component of deferred income in the accompanying consolidated balance sheets. Contract liabilities
at September 30, 2020 and 2019 were $410,000 and $220,000, respectively.
Business Combinations
The Company allocates
the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their
estimated fair values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities
is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, the Company makes significant
estimates and assumptions, especially with respect to intangible assets.
Critical estimates
in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships and
developed technology, discount rates and terminal values. Our estimate of fair value is based upon assumptions believed to be reasonable,
but actual results may differ from estimates.
Other estimates associated
with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities
assumed.
Segment Reporting
The Company has two
reportable segments: distribution and design. The distribution segment consists of two reporting units (Forward US and Forward
Switzerland, that collectively comprise one operating segment) that source and distribute carrying cases and other accessories
for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic devices. The design segment
consists of two operating segments (IPS and Kablooe, which have been aggregated into one reportable segment) that provide a full
spectrum of hardware and software product design and engineering services.
Organizing our business
through these operating segments allows us to align our resources and manage our operations. Our chief operating decision maker
regularly reviews operating segment revenue and profitability when assessing financial results of operating segments and allocating
resources.
We measure the performance
of our operating segments based upon operating segment revenue and operating income or loss. Segment operating income or loss includes
revenues earned and expenses incurred directly by the operating segment, including cost of sales and selling, marketing, and general
and administrative expenses (see Note 16 for more discussion on operating segments).
Goodwill and Intangible Assets
The Company reviews
goodwill for impairment at least annually, or more often if triggering events occur. The Company has two reporting units with goodwill
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 the impairment test for the reporting unit. If
the Company cannot support such a conclusion or does not elect to perform the qualitative assessment, then the Company will compare
the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds
its carrying value, no impairment charge is recognized. If the fair value of the reporting unit is less than its carrying value,
an impairment charge will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value.
A significant amount of judgment is required in performing goodwill impairment tests including estimating the fair value of a reporting
unit and the implied fair value of goodwill. During Fiscal 2020, the Company recorded an impairment charge related to goodwill
(See Note 4).
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 does not expect the adoption of this guidance
to have a material impact on its consolidated financial statements.
In November 2019,
the FASB issued ASU 2019-08, “Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic
606)” to provide guidance for share-based payment awards granted to a customer in conjunction with selling goods or services
accounted for under Topic 606. The pronouncement is effective for fiscal years beginning after December 15, 2019 and interim periods
within those fiscal years. The Company does not expect the adoption of this guidance to have a material impact on its consolidated
financial statements.
In November 2019,
the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.”
ASU 2019-11 is an accounting pronouncement that provides clarity to and amends earlier guidance on this topic and would be effective
concurrently with the adoption of such earlier guidance. This pronouncement is effective for the Company for fiscal years beginning
after December 15, 2022 and interim periods within those fiscal years. The Company is currently evaluating the effects of this
pronouncement on its consolidated financial statements.
In
August 2018, the FASB issued ASU 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic
350-40)” addressing customers’ accounting for implementation costs incurred
in a cloud computing arrangement that is a service contract, which requires customers to apply internal-use software guidance
to determine the implementation costs that are able to be capitalized. Capitalized implementation costs are required to be
amortized over the term of the arrangement, beginning when the cloud computing arrangement is ready for its intended
use. The effective date of the new guidance for public companies is for fiscal years beginning after December 15,
2019 and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the
adoption of this guidance to have a material impact on its consolidated financial statements.
In December
2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This
guidance removes certain exceptions to the general principles in Topic 740 and provides consistent application of
U.S. GAAP by clarifying and amending existing guidance. The effective date of the new guidance for public companies is for
fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. Early adoption is
permitted. The Company is currently evaluating the timing of adoption and impact of the updated guidance on its consolidated
financial statements.
RESULTS OF OPERATIONS FOR FISCAL 2020
COMPARED TO FISCAL 2019
Net Loss
Distribution Segment
Distribution segment
net loss was $1,321,000 in Fiscal 2020 compared to $1,811,000 in Fiscal 2019. The decrease in net loss in Fiscal 2020 was due to
an increase in other income related to fair value adjustments (non-cash income), a decrease in general and administrative expenses,
partially offset by lower revenue and gross profit.
Design Segment
Net loss for the design
segment was $364,000 in Fiscal 2020 as compared to $1,793,000 in Fiscal 2019. The decrease in net loss in Fiscal 2020 resulted
from higher gross profit, lower general and administrative expenses, partially offset by the impairment of goodwill (non-cash expense).
Main components of
net loss for the distribution and design segments are reflected in the table below:
| | |
Main
Components of Net Income | |
| | |
(amounts in thousands) | |
| | |
Fiscal
2020 | | |
Fiscal
2019 | | |
Increase
(Decrease) | |
| | |
Consolidated | | |
Distribution | | |
Design | | |
Consolidated | | |
Distribution | | |
Design | | |
Consolidated | |
| Net revenues | |
$ | 34,478 | | |
$ | 20,752 | | |
$ | 13,726 | | |
$ | 37,409 | | |
$ | 21,988 | | |
$ | 15,421 | | |
$ | (2,931 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Gross profit | |
$ | 6,639 | | |
$ | 2,775 | | |
$ | 3,864 | | |
$ | 6,581 | | |
$ | 3,375 | | |
$ | 3,206 | | |
$ | 58 | |
| Sales and marketing expenses | |
| 1,951 | | |
| 1,495 | | |
| 456 | | |
| 1,965 | | |
| 1,441 | | |
| 524 | | |
| (14 | ) |
| General and administrative
expenses | |
| 5,655 | | |
| 2,884 | | |
| 2,771 | | |
| 7,713 | | |
| 3,311 | | |
| 4,402 | | |
| (2,058 | ) |
| Goodwill impairment | |
| 1,015 | | |
| – | | |
| 1,015 | | |
| – | | |
| – | | |
| – | | |
| 1,015 | |
| Operating loss | |
| (1,982 | ) | |
| (1,604 | ) | |
| (378 | ) | |
| (3,097 | ) | |
| (1,377 | ) | |
| (1,720 | ) | |
| 1,115 | |
| Other (income)/expense, net | |
| (216 | ) | |
| (202 | ) | |
| (14 | ) | |
| 511 | | |
| 438 | | |
| 73 | | |
| (727 | ) |
| Income
tax provision/(benefit) | |
| 9 | | |
| 9 | | |
| – | | |
| (4 | ) | |
| (4 | ) | |
| – | | |
| 13 | |
| Net loss | |
$ | (1,775 | ) | |
$ | (1,411 | ) | |
$ | (364 | ) | |
$ | (3,604 | ) | |
$ | (1,811 | ) | |
$ | (1,793 | ) | |
$ | 1,829 | |
Consolidated basic and diluted income loss
per share was $0.19 and $0.38 for Fiscal 2020 Fiscal 2019, respectively.
Net Revenues
We generate revenue
through two reportable segments: distribution and design. We believe that our total revenue will increase in the future as we grow
our retail business and integrate the Kablooe business. We continue to work on integrating the sales forces for both the distribution
and design segments of our business to explore synergistic opportunities.
The chart below indicates
the revenues by operating segment for Fiscal 2020 and Fiscal 2019:
| | |
(amounts in thousands) | |
| | |
Fiscal 2020 | | |
Fiscal 2019 | | |
Increase (Decrease) | |
| Distribution | |
$ | 20,752 | | |
$ | 21,988 | | |
$ | (1,236 | ) |
| Design | |
| 13,726 | | |
| 15,421 | | |
| (1,695 | ) |
| Total | |
$ | 34,478 | | |
$ | 37,409 | | |
$ | (2,931 | ) |
Distribution Segment
Net revenues in the
distribution segment declined $1,236,000, or 5.6%, to $20,752,000 in Fiscal 2020 from $21,988,000 in Fiscal 2019 due to reduced
revenues in the sale of diabetic products partially offset by an increase in other product revenue. Revenues from diabetic products
declined $2,314,000 and revenues from other products increased $1,078,000. We believe this decrease in diabetic product sales and
increase in other product sales is a trend that will continue.
The following tables
set forth revenues by channel, product line and geographic location of our distribution segment customers for the periods indicated:
| | |
Net Revenues for Fiscal 2020 | |
| | |
(amounts in thousands) | |
| | |
Americas | | |
APAC | | |
EMEA | | |
Total | |
| Diabetic products | |
$ | 4,896 | | |
$ | 5,572 | | |
$ | 6,769 | | |
$ | 17,237 | |
| Other products | |
| 2,439 | | |
| 760 | | |
| 316 | | |
| 3,515 | |
| Total net revenues | |
$ | 7,335 | | |
$ | 6,332 | | |
$ | 7,085 | | |
$ | 20,752 | |
| | |
Net Revenues for Fiscal 2019 | |
| | |
(amounts in thousands) | |
| | |
Americas | | |
APAC | | |
EMEA | | |
Total | |
| Diabetic products | |
$ | 5,187 | | |
$ | 6,645 | | |
$ | 7,719 | | |
$ | 19,551 | |
| Other products | |
| 1,126 | | |
| 1,151 | | |
| 160 | | |
| 2,437 | |
| Total net revenues | |
$ | 6,313 | | |
$ | 7,796 | | |
$ | 7,879 | | |
$ | 21,988 | |
Diabetic Product Revenues
Our distribution segment sources to the
order of, and sells carrying cases for, blood glucose diagnostic kits directly to OEMs (or their contract manufacturers). The OEM
customer or its contract manufacturer packages our carry cases “in box” as a custom accessory for the OEM’s blood
glucose testing and monitoring kits, or to a lesser extent, sell them through their retail distribution channels.
Revenues from diabetic
products declined $2,314,000, or 11.8%, to $17,237,000 in Fiscal 2020 from $19,551,000 in Fiscal 2019. The decline was primarily
due to lower revenues from two major diabetic customers (Diabetic Products Customers B and C). Revenue declines from other major
diabetic customers were less significant and were partially offset by an increase in revenue from all of our other diabetic products
customers. As mentioned above, management believes that revenues from diabetic customers will continue to decline.
The following table sets forth our distribution
segment net revenues by diabetic products customer for the periods indicated:
| | |
(amounts in thousands) | |
| | |
Fiscal 2020 | | |
Fiscal 2019 | | |
Increase (Decrease) | |
| Diabetic Products Customer A | |
$ | 6,145 | | |
$ | 6,513 | | |
$ | (368 | ) |
| Diabetic Products Customer B | |
| 3,448 | | |
| 4,128 | | |
| (680 | ) |
| Diabetic Products Customer C | |
| 4,912 | | |
| 6,114 | | |
| (1,202 | ) |
| Diabetic Products Customer D | |
| 1,924 | | |
| 2,265 | | |
| (341 | ) |
| All other Diabetic Products Customers | |
| 808 | | |
| 531 | | |
| 277 | |
| Total Diabetic Revenue | |
$ | 17,237 | | |
$ | 19,551 | | |
$ | (2,314 | ) |
Revenues from diabetic products represented
83% of net revenues for the distribution segment in Fiscal 2020 compared to 89% in Fiscal 2019.
Other Product Revenues
Our distribution segment
also sources and sells cases and protective solutions to OEMs for a diverse array of portable electronic and non-electronic products
(such as sporting and recreational products, bar code scanners, GPS devices, tablets and firearms) on a made-to-order basis that
are customized to fit the products sold by our OEM customers. In Fiscal 2020, other product revenues were also derived from the
sales and sourcing of personal protective equipment.
Revenues from other
products increased $1,078,000, or 44%, to $3,515,000 in Fiscal 2020 from $2,437,000 in Fiscal 2019. Revenues from the sale of personal
protective equipment increased $758,000 and sales from other products increased $320,000. We will continue to focus on our sales
and sales support teams in our attempt to expand and diversify our other products customer base.
Revenues of other
products represented 17% of our net revenues in Fiscal 2020 as compared to 11% in Fiscal 2019.
Design Segment
Net revenues in
the design segment declined $1,695,000, or 11.0%, to $13,726,000 in Fiscal 2020 from $15,421,000 in Fiscal 2019. The decline
in revenues was due to the reduction or delay in demand for design and development projects, partially related to COVID-19.
Since its acquisition on August 17, 2020, Kablooe generated revenue of $172,000 in Fiscal 2020. The following table sets
forth our design segment net revenues by major customers for the periods indicated:
| | |
(amounts in thousands) | |
| | |
Fiscal 2020 | | |
Fiscal 2019 | | |
Increase (Decrease) | |
| Design Segment Customer 1 | |
$ | 2,585 | | |
$ | – | | |
$ | 2,585 | |
| Design Segment Customer 2 | |
| 1,781 | | |
| 1,476 | | |
| 305 | |
| Design Segment Customer 3 | |
| 1,958 | | |
| 2,985 | | |
| (1,027 | ) |
| Design Segment Customer 4 | |
| – | | |
| 2,616 | | |
| (2,616 | ) |
| Design Segment Customer 7 | |
| – | | |
| 1,080 | | |
| (1,080 | ) |
| All other Design Segment Customers | |
| 7,402 | | |
| 7,264 | | |
| 138 | |
| Total net revenues | |
$ | 13,726 | | |
$ | 15,421 | | |
$ | (1,695 | ) |
Gross Profit
Distribution Segment
Gross profit for the
distribution segment declined $600,000, or 17.8%, to $2,775,000 in Fiscal 2020 from $3,375,000 in Fiscal 2019. Gross margin declined
to 13.4% in Fiscal 2020, compared to 15.3% in Fiscal 2019.
These declines were
driven primarily by lower sales revenue and a shift to lower-margin cases and pricing pressures on diabetic products from customers.
The decline in gross margin from our diabetic products was partially offset by higher gross margins on the sale of personal protective
equipment in Fiscal 2020. We are working on expanding our product offering to include higher margin products as well as enhancing
our sales efforts to raise top side gross sales to raise total gross profit.
Design Segment
Gross profit for the
design segment increased $658,000, or 20.5%, to $3,864,000 in Fiscal 2020 from $3,206,000 in Fiscal 2019. Gross margin improved
from 20.8% Fiscal 2019 to 28.2% in Fiscal 2020. Gross margin in Fiscal 2019 was significantly lower than historical performance
due to project overruns for two significant customers in that year. Depreciation expense, which is allocated to cost of sales for
the design segment, was $98,000 and $139,000 for Fiscal 2020 and Fiscal 2019, respectively.
Sales and Marketing Expenses
Distribution Segment
Sales and marketing
expenses for the distribution segment increased $54,000, or 3.7%, to $1,495,000 in Fiscal 2020 from $1,441,000 in Fiscal 2019.
The increase was primarily due to additional amortization on the cost of the Mooni Agreement (see Note 19). Sales and marketing
expenses for the distribution segment increased to 7.2% of revenues in Fiscal 2020 from 6.6% in Fiscal 2019.
Design Segment
Sales and marketing
expenses for the design segment decreased $68,000, or 13.0%, to $456,000 in Fiscal 2020 from $524,000 in Fiscal 2019. The decrease
was primarily due to lower sales commissions and entertainment related expenses, partially offset by higher sales salaries. Sales
and marketing expenses for the design segment remained fairly consistent at 3.3% of revenues in Fiscal 2020 compared to 3.4% in
Fiscal 2019.
General and Administrative Expenses
Distribution Segment
General and administrative
expenses for the distribution segment declined $427,000, or 12.9%, to $2,884,000 in Fiscal 2020 from $3,311,000 in Fiscal 2019.
This decline was primarily due to a $511,000 reduction in legal fees related to responding to an SEC subpoena in Fiscal 2019 (which
includes an $80,000 insurance settlement received in Fiscal 2020), a decrease in bad debt expense of $69,000, partially offset
by higher professional fees of $100,000 (related to the Kablooe acquisition, valuation work and other matters), severance costs
of $157,000 and $65,000 related to internal software implementation projects. General and administrative expenses as a percentage
of revenue for the distribution segment decreased to 13.9% in Fiscal 2020 from 15.1% in Fiscal 2019.
Design Segment
General and administrative
expenses for the design segment decreased $1,631,000, or 37.1%, to $2,771,000 in Fiscal 2020 from $4,402,000 for Fiscal 2019. The
decrease is primarily related to a $2,075,000 reduction in bad debt expense, partially offset by the $327,000 investment impairment
discussed in Note 6. Amortization of intangible assets is allocated to general and administrative expenses in the design segment.
Amortization of intangible assets was $167,000 and $163,000 for Fiscal 2020 and Fiscal 2019, respectively.
Other (Income)/Expense
Distribution Segment
The distribution segment
reported other income of $202,000 in Fiscal 2020 as compared to other expense of $438,000 in Fiscal 2019. The variance is due to
fair value adjustments of $334,000 in Fiscal 2020 to reduce the deferred consideration liability associated with the IPS acquisition
as compared to fair value adjustments of $296,000 in Fiscal 2019 to increase this deferred consideration liability.
Design Segment
The design segment
reported other income of $14,000 in Fiscal 2020 as compared to other expense of $73,000 in Fiscal 2019. The change relates to interest
payments of $61,000 received on the note receivable written off in Fiscal 2019 (See Note 6). In addition, interest expense was
lower in Fiscal 2020 due to lower interest rates and a reduction in the average amount of debt outstanding.
Income Taxes
In Fiscal 2020, the
Company recorded a tax provision of $9,000, generated a loss before income taxes of $1,766,000 and had an effective tax rate of
0.5%. In Fiscal 2019, the Company recorded a tax benefit of $4,000, generated a loss before income taxes of $3,604,000 and had
an effective tax rate of 0.1%.
The Company maintains
significant net operating loss carryforwards and does not recognize a significant income tax provision/(benefit) as its deferred
tax provision is typically offset by maintaining a full valuation allowance on its net deferred tax assets. The Fiscal 2020 tax
provision is primarily comprised of income taxes assessed in states where net operating losses are not available.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source
of liquidity is our operations. The primary demand on our working capital has historically been (i) operating losses, (ii) repayment
of debt obligations, and (iii) any increases in accounts receivable and inventories arising in the ordinary course of business.
Historically, our sources of liquidity have been adequate to satisfy working capital requirements arising in the ordinary course
of business.
As of the filing date
of this report, we had $300,000 available under our $1,300,000 line of credit which matures May 31, 2021. Additionally, Forward
China holds a $1,600,000 promissory note which was extended to December 31, 2021 (see Note 14). Although this note has been extended
on multiple occasions to assist the Company with its liquidity position, we plan on funding the repayment at maturity using existing
cash balances and/or obtaining an additional credit facility 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.
As discussed in Note
18, on April 18, 2020, the Company entered into a loan in an aggregate principal amount of $1,357,000 under the Paycheck Protection
Program (the “PPP Loan”) pursuant to the recently enacted U.S. Coronavirus Aid, Relief, and Economic Security Act (the
“CARES Act”). In December 2020, the Small Business Administration approved our forgiveness request for this loan.
We anticipate that
our liquidity and financial resources for the next 12 months from the date of the filing of this report will be adequate to manage
our operating and financial requirements. If we have the opportunity to make a strategic acquisition (as we have in the past with
the acquisitions of IPS and Kablooe) or an investment in a product or partnership, we may require additional capital beyond our
current cash balance to fund the opportunity. If we seek to raise additional capital, there is no assurance that we will be able
to raise funds on terms that are acceptable to us or at all.
At September 30, 2020,
our working capital (current assets less current liabilities) was $3,396,000 compared to $3,542,000 at September 30, 2019. As of
November 30, 2020, we had $2,594,000 of cash on hand.
Although we do not
anticipate the need to purchase any additional material capital assets in order to carry out our business, it may be necessary
for us to purchase equipment and other capital assets in the future, depending on need.
Cash Flows
During Fiscal 2020
and Fiscal 2019, our sources and uses of cash were as follows:
Cash Flows from Operating Activities
During Fiscal 2020,
cash used in operating activities of $263,000 resulted from a net loss of $1,775,000, an increase in accounts receivable of $733,000,
non-cash fair value adjustments of $334,000, and bad debt recoveries of $78,000, partially offset by non-cash impairment charges
of $1,342,000, depreciation and amortization of $272,000, share-based compensation of $245,000 and the net change in other operating
assets and liabilities of $798,000.
During Fiscal 2019,
cash used in operating activities of $1,970,000 resulted from a net loss of $3,604,000, a reduction of accounts payable (including
due to Forward China) of $975,000, a net loss reconciling adjustment of $327,000 for the fair value of cost method investment for
services provided, an increase in prepaid expenses and other current assets of $193,000, an increase in other assets of $191,000
and an increase in inventory of $40,000, partially offset by the reduction of accounts receivable of $264,000, an increase in accrued
expenses and other current liabilities of $97,000, an increase in deferred income of $95,000, and the add-back of non-cash items
including bad debt expense of $2,065,000, depreciation and amortization of $312,000, share-based compensation expense of $216,000,
deferred rent amortization of $16,000 and a non-cash increase of $296,000 in fair value adjustments of the earn-out consideration
and deferred cash consideration.
Cash Flows from Investing Activities
In Fiscal 2020, cash
used for investing activities of $390,000 primarily resulted from the $353,000 cash consideration paid for the Kablooe acquisition
and purchases of property and equipment of $68,000.
In Fiscal 2019, cash
used for investing activities of $33,000 resulted from purchases of property and equipment.
Cash Flows from Financing Activities
In Fiscal 2020, cash
provided by financing activities of $485,000 consisted of $1,357,000 proceeds from the PPP Loan, borrowings of $900,000 under our
line of credit and $32,000 in proceeds from stock options exercised, partially offset by $1,200,000 in repayments on the line of
credit, $500,000 paid out on the deferred cash consideration and $104,000 in repayments on notes payable and capital leases.
In Fiscal 2019, cash
provided by financing activities of $726,000 consisted of $1,550,000 in borrowings on the line of credit, offset by $600,000 in
repayments on the line of credit and $225,000 in repayments on notes payable and capital leases.
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial
statements and notes thereto included in this Annual Report may be found beginning on page F-1 of this Annual Report on Form 10-K.
ITEM 9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND
PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management carried
out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness
of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange
Act”). Based on their evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our
disclosure controls and procedures were effective as of September 30, 2020.
Management’s Report on Internal Control Over Financial
Reporting
Our management is
responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act). Our management, under the supervision and with the participation of our Principal Executive Officer and Principal
Financial Officer, evaluated the effectiveness of our internal control over financial reporting as of the end of the period covered
by this report. In making this assessment, our management used the criteria set forth by the Committee of Sponsor Organizations
of the Treadway Commission (COSO) in Internal Control-Integrated Framework as issued in 2013. Based on that evaluation, our management
concluded that our internal control over financial reporting as of September 30, 2020 was effective based on that criteria.
Our internal control
over financial reporting is a process designed under the supervision of our Principal Executive Officer and Principal Financial
Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements
for external reporting purposes in accordance with U.S. GAAP. Internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with U.S. GAAP, and that receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with policies or procedures may deteriorate.
Changes in Internal Control
There were no changes
in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d)
of the Exchange Act during the fourth quarter of Fiscal 2020 that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE
The information required
by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed
with the SEC within 120 days of the fiscal year ended September 30, 2020. Our Board has adopted a Code of Business Conduct
and Ethics applicable to all officers, directors and employees, which is available on our website (https://forwardindustries.com/investors/governance/)
under "Corporate Governance." We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment
to, or waiver from, a provision of our Code of Conduct and by posting such information on the website address and location specified
above.
ITEM 11. EXECUTIVE COMPENSATION
The information required
by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed
with the SEC within 120 days of the fiscal year ended September 30, 2020.
ITEM 12. SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required
by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed
with the SEC within 120 days of the fiscal year ended September 30, 2020.
ITEM 13. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required
by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed
with the SEC within 120 days of the fiscal year ended September 30, 2020.
ITEM 14. PRINCIPAL ACCOUNTANT FEES
AND SERVICES
The information required
by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed
with the SEC within 120 days of the fiscal year ended September 30, 2020.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
| (a) |
Documents filed as part of the report. |
| |
|
| |
(1) |
Financial Statements. See Index to Consolidated Financial Statements, which appears on page F-1 hereof. The financial statements listed in the accompanying Index to Consolidated Financial Statements are filed herewith in response to this Item. |
| |
|
|
| |
(2) |
Financial Statements Schedules. All schedules are omitted because they are not applicable or because the required information is contained in the consolidated financial statements or notes included in this report. |
| |
|
|
| |
(3) |
Exhibits. See the Exhibit Index. |
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: December 17, 2020
| |
FORWARD INDUSTRIES, INC.
|
| |
By: /s/ Terence Wise
Terence Wise
Chief Executive Officer
(Principal Executive Officer) |
In accordance with the Securities Exchange
Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated:
| December 17, 2020 |
/s/ Terence Wise
Terence Wise
Principal Executive Officer and Director |
| |
|
| December 17, 2020 |
/s/ Anthony Camarda
Anthony Camarda
Principal Financial Officer and Chief Accounting Officer |
| |
|
| December 17, 2020 |
/s/ Howard Morgan
Howard Morgan
Director |
| |
|
|
December 17, 2020
|
/s/ Sangita Shah
Sangita Shah
Director |
| December 17, 2020 |
/s/ James Ziglar
James Ziglar
Director
|
EXHIBIT INDEX
| |
|
|
Incorporated by
Reference |
|
Exhibit
No. |
|
Exhibit Description |
Form |
Date |
Number |
Filed or
Furnished
Herewith |
| 2.1 |
|
Stock Purchase Agreement dated January 18, 2018 - Intelligent Product Solutions, Inc.+ |
8-K |
1/18/18 |
2.1 |
|
| 2.2 |
|
Asset Purchase Agreement by and among Forward Industries, Inc., Kablooe, Inc., Kablooe Design, Inc. and Tom KraMer dated August 17, 2020+ |
8-K |
8/17/20 |
2.1 |
|
| 3.1 |
|
Restated Certificate of Incorporation |
10-K |
12/8/10 |
3(i) |
|
| 3.2 |
|
Certificate of Amendment of the Certificate of Incorporation, April 26, 2013 |
8-K |
4/26/13 |
3.1 |
|
| 3.3 |
|
Certificate of Amendment of the Certificate of Incorporation, June 28, 2013 |
8-K |
7/3/13 |
3.1 |
|
| 3.4 |
|
Third Amended and Restated Bylaws, as of May 28, 2014 |
10-K |
12/10/14 |
3(ii) |
|
| 4.1 |
|
Description of securities registered under Section 12 of the Exchange Act of 1934 |
10-K |
12/27/19 |
4.1 |
|
| 4.2 |
|
Promissory Note dated January 18, 2018 – Forward Industries (Asia-Pacific) (as amended and restated) |
|
|
|
Filed |
| 10.1 |
|
2011 Long Term Incentive Plan, as amended |
10-Q |
2/14/19 |
4.3 |
|
| 10.2 |
|
Buying Agency and Supply Agreement - Forward Industries (Asia-Pacific) Corporation |
10-K |
12/16/15 |
10.7 |
|
| 10.2(a) |
|
Amendment No. 1 to Buying Agency and Supply Agreement - Forward Industries (Asia-Pacific) Corporation |
10-Q |
8/14/17 |
10.2 |
|
| 10.2(b) |
|
Amendment No. 2 to Buying Agency and Supply Agreement - Forward Industries (Asia-Pacific) Corporation |
8-K |
9/22/17 |
10.1 |
|
| 10.2(c) |
|
Amendment No. 3 to Buying Agency and Supply Agreement – Forward Industries (Asia-Pacific) Corporation |
10-Q |
5/15/19 |
10.1(c) |
|
| 10.2(d) |
|
Amendment No. 4 to Buying Agency and Supply Agreement – Forward Industries (Asia-Pacific) Corporation |
10-K |
12/27/19 |
10.3(d) |
|
| 10.2(e) |
|
Amendment No. 5 to Buying Agency and Supply Agreement – Forward Industries (Asia-Pacific) Corporation |
|
|
|
Filed |
| 10.3 |
|
Form of Employment Agreement dated January 18, 2018+* |
8-K |
1/18/18 |
10.1 |
|
| 10.4 |
|
Employment Agreement dated May 16, 2018 - Terence Wise* |
10-Q |
5/18/18 |
10.5 |
|
| 10.5 |
|
Employment Agreement between Forward Industries, Inc. and Anthony Camarda, dated June 26, 2020* |
8-K |
7/2/20 |
10.1 |
|
| 10.6 |
|
Paycheck Protection Program Term Note payable to TD Bank, N.A. dated April 18, 2020 |
8-K |
4/22/20 |
10.1 |
|
| 21.1 |
|
List of Subsidiaries |
|
|
|
Filed |
| 23.1 |
|
Consent of Independent Registered Public Accounting Firm |
|
|
|
Filed |
| 31.1 |
|
CEO Certifications (302) |
|
|
|
Filed |
| 31.2 |
|
CFO Certification (302) |
|
|
|
Filed |
| 32.1 |
|
CEO and CFO Certifications (906) |
|
|
|
Furnished |
| 101 |
.INS |
XBRL Instance Document |
|
|
|
Filed |
| 101 |
.SCH |
XBRL Taxonomy Extension Schema Document |
|
|
|
Filed |
| 101 |
.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
Filed |
| 101 |
.DEF |
XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
Filed |
| 101 |
.LAB |
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
Filed |
| 101 |
.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
Filed |
* Management compensatory agreement
or arrangement.
+ Certain schedules,
appendices and exhibits to this agreement have been omitted in accordance with Item 601 of Regulation S-K. A copy of any omitted
schedule and/or exhibit will be furnished supplementally to the Securities and Exchange Commission staff upon request.
Copies of this filing (including the
financial statements) and any of the exhibits referred to above will be furnished at no cost to our shareholders who make a written
request to Forward Industries, Inc.; 700 Veterans Memorial Hwy, Suite 100, Hauppauge, NY 11788; Attention: Corporate Secretary.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
The Board of
Directors and Shareholders of Forward Industries, Inc. and Subsidiaries
Opinion on the Financial
Statements
We have
audited the accompanying consolidated balance sheets of Forward Industries, Inc. and Subsidiaries (the “Company”) as
of September 30, 2020 and 2019, and the related consolidated statements of operations, shareholders’ equity and cash flows
for the years then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion,
the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September
30, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
Change in Accounting
Principle
As discussed
in Notes 2 and 13 to the consolidated financial statements, the Company has changed its method for accounting for leases as of
October 1, 2019 due to the adoption of Accounting Standards Codification Topic 842 Leases.
Basis for Opinion
These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted
our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an understanding of the internal control over financial reporting but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits
included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ CohnReznick
LLP
We have
served as the Company’s auditor since 2011.
Jericho,
New York
December
17, 2020
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | |
September 30, | |
| | |
2020 | | |
2019 | |
| Assets | |
| | | |
| | |
| | |
| | | |
| | |
| Current assets: | |
| | | |
| | |
| Cash | |
$ | 2,924,627 | | |
$ | 3,092,813 | |
| Accounts receivable, net | |
| 7,602,316 | | |
| 6,695,120 | |
| Inventories | |
| 1,275,694 | | |
| 1,608,827 | |
| Prepaid expenses and other current assets | |
| 419,472 | | |
| 441,502 | |
| | |
| | | |
| | |
| Total current assets | |
| 12,222,109 | | |
| 11,838,262 | |
| | |
| | | |
| | |
| Property and equipment, net | |
| 215,323 | | |
| 243,002 | |
| Intangible assets, net | |
| 1,531,415 | | |
| 1,248,712 | |
| Goodwill | |
| 1,758,682 | | |
| 2,182,427 | |
| Investment | |
| – | | |
| 326,941 | |
| Operating lease right of use assets, net | |
| 3,512,042 | | |
| – | |
| Other assets | |
| 116,697 | | |
| 255,008 | |
| | |
| | | |
| | |
| Total assets | |
$ | 19,356,268 | | |
$ | 16,094,352 | |
| | |
| | | |
| | |
| Liabilities and shareholders' equity | |
| | | |
| | |
| | |
| | | |
| | |
| Current liabilities: | |
| | | |
| | |
| Line of credit | |
$ | 1,000,000 | | |
$ | 1,300,000 | |
| Note payable to Forward China | |
| 1,600,000 | | |
| 1,600,000 | |
| Accounts payable | |
| 197,022 | | |
| 315,444 | |
| Due to Forward China | |
| 3,622,401 | | |
| 3,236,693 | |
| Deferred income | |
| 485,078 | | |
| 219,831 | |
| Current portion of notes payable | |
| 983,395 | | |
| 54,799 | |
| Current portion of capital leases payable | |
| 18,411 | | |
| 39,941 | |
| Current portion of deferred consideration | |
| 45,000 | | |
| 834,000 | |
| Current portion of operating lease liability | |
| 259,658 | | |
| – | |
| Accrued expenses and other current liabilities | |
| 615,401 | | |
| 694,972 | |
| Total current liabilities | |
| 8,826,366 | | |
| 8,295,680 | |
| | |
| | | |
| | |
| Other liabilities: | |
| | | |
| | |
| Notes payable, less current portion | |
| 529,973 | | |
| – | |
| Operating lease liability, less current portion | |
| 3,359,088 | | |
| – | |
| Capital lease liability, less current portion | |
| 12,769 | | |
| 26,438 | |
| Deferred rent | |
| – | | |
| 60,935 | |
| Deferred consideration, less current portion | |
| 45,000 | | |
| – | |
| Total other liabilities | |
| 3,946,830 | | |
| 87,373 | |
| | |
| | | |
| | |
| Total liabilities | |
| 12,773,196 | | |
| 8,383,053 | |
| | |
| | | |
| | |
| Commitments and contingencies | |
| | | |
| | |
| | |
| | | |
| | |
| Shareholders' equity: | |
| | | |
| | |
| | |
| | | |
| | |
| Common stock, par value $0.01 per share; 40,000,000 shares authorized; 9,883,851 and 9,533,851 shares issued and outstanding at September 30, 2020 and 2019, respectively | |
| 98,838 | | |
| 95,338 | |
| Additional paid-in capital | |
| 19,579,684 | | |
| 18,936,130 | |
| Accumulated deficit | |
| (13,095,450 | ) | |
| (11,320,169 | ) |
| | |
| | | |
| | |
| Total shareholders' equity | |
| 6,583,072 | | |
| 7,711,299 | |
| | |
| | | |
| | |
| Total liabilities and shareholders' equity | |
$ | 19,356,268 | | |
$ | 16,094,352 | |
The accompanying
notes are an integral part of the consolidated financial statements.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| | |
For the Fiscal Years Ended September 30, | |
| | |
2020 | | |
2019 | |
| | |
| | |
| |
| Revenues, net | |
$ | 34,478,358 | | |
$ | 37,409,030 | |
| Cost of sales | |
| 27,839,851 | | |
| 30,828,148 | |
| Gross profit | |
| 6,638,507 | | |
| 6,580,882 | |
| | |
| | | |
| | |
| Sales and marketing | |
| 1,950,704 | | |
| 1,965,230 | |
| General and administrative | |
| 5,655,186 | | |
| 7,713,035 | |
| Goodwill impairment | |
| 1,015,000 | | |
| – | |
| | |
| | | |
| | |
| Loss from operations | |
| (1,982,383 | ) | |
| (3,097,383 | ) |
| | |
| | | |
| | |
| Fair value adjustment of earn-out consideration | |
| (350,000 | ) | |
| 260,000 | |
| Fair value adjustment of deferred cash consideration | |
| 16,000 | | |
| 36,000 | |
| Interest income | |
| (60,932 | ) | |
| – | |
| Interest expense | |
| 174,962 | | |
| 201,004 | |
| Other expense, net | |
| 3,701 | | |
| 13,805 | |
| Loss before income taxes | |
| (1,766,114 | ) | |
| (3,608,192 | ) |
| | |
| | | |
| | |
| Provision for (benefit from) income taxes | |
| 9,167 | | |
| (4,162 | ) |
| | |
| | | |
| | |
| Net loss | |
$ | (1,775,281 | ) | |
$ | (3,604,030 | ) |
| | |
| | | |
| | |
| Net loss per share: | |
| | | |
| | |
| Basic | |
$ | (0.19 | ) | |
$ | (0.38 | ) |
| Diluted | |
$ | (0.19 | ) | |
$ | (0.38 | ) |
| | |
| | | |
| | |
| Weighted average common shares outstanding: | |
| | | |
| | |
| Basic | |
| 9,583,441 | | |
| 9,532,034 | |
| Diluted | |
| 9,583,441 | | |
| 9,532,034 | |
The accompanying notes are an integral part of the consolidated financial statements.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
| | |
For the Fiscal Year Ended September 30, 2020 | |
| | |
| | |
| | |
Additional | | |
| | |
| |
| | |
Common Stock | | |
Paid-In | | |
Accumulated | | |
| |
| | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Total | |
| | |
| | |
| | |
| | |
| | |
| |
| Balance at September 30, 2019 | |
| 9,533,851 | | |
$ | 95,338 | | |
$ | 18,936,130 | | |
$ | (11,320,169 | ) | |
$ | 7,711,299 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Share-based compensation | |
| – | | |
| – | | |
| 245,154 | | |
| – | | |
| 245,154 | |
| Shares issued for Kablooe acquisition | |
| 300,000 | | |
| 3,000 | | |
| 366,900 | | |
| – | | |
| 369,900 | |
| Stock options exercised | |
| 50,000 | | |
| 500 | | |
| 31,500 | | |
| – | | |
| 32,000 | |
| Net loss | |
| – | | |
| – | | |
| – | | |
| (1,775,281 | ) | |
| (1,775,281 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance at September 30, 2020 | |
| 9,883,851 | | |
$ | 98,838 | | |
$ | 19,579,684 | | |
$ | (13,095,450 | ) | |
$ | 6,583,072 | |
| | |
For the Fiscal Year Ended September 30, 2019 | |
| | |
| | |
| | |
Additional | | |
| | |
| |
| | |
Common Stock | | |
Paid-In | | |
Accumulated | | |
| |
| | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Total | |
| | |
| | |
| | |
| | |
| | |
| |
| Balance at September 30, 2018 | |
| 9,533,851 | | |
$ | 95,338 | | |
$ | 18,720,396 | | |
$ | (7,716,139 | ) | |
$ | 11,099,595 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Share-based compensation | |
| – | | |
| – | | |
| 215,734 | | |
| – | | |
| 215,734 | |
| Net loss | |
| – | | |
| – | | |
| – | | |
| (3,604,030 | ) | |
| (3,604,030 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance at September 30, 2019 | |
| 9,533,851 | | |
$ | 95,338 | | |
$ | 18,936,130 | | |
$ | (11,320,169 | ) | |
$ | 7,711,299 | |
The accompanying notes are an integral part of the consolidated financial statements.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
| | |
For the Fiscal Years Ended September 30, | |
| | |
2020 | | |
2019 | |
| Operating Activities: | |
| | | |
| | |
| Net loss | |
$ | (1,775,281 | ) | |
$ | (3,604,030 | ) |
| Adjustments to reconcile net loss to net cash used in operating
activities: | |
| | | |
| | |
| Share-based compensation | |
| 245,154 | | |
| 215,734 | |
| Depreciation and amortization | |
| 271,973 | | |
| 311,581 | |
| Bad debt (recovery)/expense | |
| (78,278 | ) | |
| 2,065,592 | |
| Deferred rent | |
| – | | |
| 16,013 | |
| Change in fair value of earn-out consideration | |
| (350,000 | ) | |
| 260,000 | |
| Change in fair value of deferred cash consideration | |
| 16,000 | | |
| 36,000 | |
| Goodwill impairment | |
| 1,015,000 | | |
| – | |
| Fair value of cost method investment for services provided | |
| – | | |
| (326,941 | ) |
| Impairment of investment | |
| 326,941 | | |
| – | |
| Changes in operating assets and liabilities: | |
| | | |
| | |
| Accounts receivable | |
| (733,228 | ) | |
| 263,806 | |
| Inventories | |
| 333,133 | | |
| (39,913 | ) |
| Prepaid expenses and other current assets | |
| 30,542 | | |
| (193,068 | ) |
| Other assets | |
| 138,311 | | |
| (191,458 | ) |
| Accounts payable and due to Forward China | |
| 245,679 | | |
| (975,265 | ) |
| Deferred income | |
| 219,713 | | |
| 94,818 | |
| Operating lease liabilities | |
| 25,945 | | |
| – | |
| Accrued expenses and other current liabilities | |
| (194,550 | ) | |
| 97,402 | |
| Net cash used in operating activities | |
| (262,946 | ) | |
| (1,969,729 | ) |
| | |
| | | |
| | |
| Investing Activities: | |
| | | |
| | |
| Purchases of property and equipment | |
| (68,456 | ) | |
| (33,138 | ) |
| Cash used in acquisition of Kablooe, Inc. | |
| (352,628 | ) | |
| – | |
| Cash acquired in acquisition of Kablooe, Inc. | |
| 31,024 | | |
| – | |
| Net cash used in investing activities | |
| (390,060 | ) | |
| (33,138 | ) |
| | |
| | | |
| | |
| Financing Activities: | |
| | | |
| | |
| Proceeds from line of credit borrowings | |
| 900,000 | | |
| 1,550,000 | |
| Repayment of line of credit borrowings | |
| (1,200,000 | ) | |
| (600,000 | ) |
| Repayment of notes payable | |
| (68,551 | ) | |
| (169,648 | ) |
| Proceeds from PPP loan | |
| 1,356,570 | | |
| – | |
| Cash proceeds from stock options exercised | |
| 32,000 | | |
| – | |
| Repayments of capital leases | |
| (35,199 | ) | |
| (54,538 | ) |
| Payment of deferred cash consideration | |
| (500,000 | ) | |
| – | |
| Net cash provided by financing activities | |
| 484,820 | | |
| 725,814 | |
| | |
| | | |
| | |
| Net decrease in cash | |
| (168,186 | ) | |
| (1,277,053 | ) |
| Cash at beginning of year | |
| 3,092,813 | | |
| 4,369,866 | |
| Cash at end of year | |
$ | 2,924,627 | | |
$ | 3,092,813 | |
| | |
| | | |
| | |
| Supplemental Disclosures of Cash Flow Information: | |
| | | |
| | |
| Cash paid for interest | |
$ | 178,114 | | |
$ | 201,004 | |
| Cash paid for taxes | |
$ | 4,854 | | |
$ | – | |
| | |
| | | |
| | |
| Supplemental Disclosures of Non-Cash Information: | |
| | | |
| | |
| Lease assets recorded in accordance with
ASC 842 | |
$ | 3,825,632 | | |
$ | – | |
| Lease liabilities recorded in accordance with ASC 842 | |
$ | 3,906,391 | | |
$ | – | |
| Common stock issued in Kablooe acquisition | |
$ | 369,900 | | |
$ | – | |
| Fair value of Kablooe contingent earnout consideration | |
$ | 90,000 | | |
$ | – | |
The accompanying
notes are an integral part of the consolidated financial statements.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 OVERVIEW
Business
Forward Industries,
Inc. is a fully integrated design, development and manufacturing solution provider for top tier medical and technology customers
worldwide. Through its acquisitions of IPS and Kablooe, the Company has expanded its ability to design and develop solutions for
our existing multinational client base and expand beyond the diabetic product line into a variety of industries with a full spectrum
of hardware and software product design and engineering services. In addition to our existing design and distribution of
carry and protective solutions, primarily for handheld electronic devices, the Company is now a one-stop shop for design, development
and manufacturing solutions serving a wide range of clients in the industrial, commercial and consumer industries. The Company’s
previous principal customer market has been original equipment manufacturers, or “OEMs” (or the contract manufacturing
firms of these OEM customers), that either package our products as accessories “in box” together with their branded
product offerings or sell them through their retail distribution channels. The Company’s OEM products include carrying cases
and other accessories for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic
products (such as sporting and recreational products, bar code scanners, smartphones, GPS location devices, tablets and firearms).
The Company’s OEM customers are located in: (i) the Asia-Pacific region, which we refer to as the “APAC Region”;
(ii) Europe, the Middle East, and Africa, which we refer to as the “EMEA Region”; and (iii) the geographic area encompassing
North America, Central America and South America, which we refer to as the “Americas”. The Company does not manufacture
any of its OEM products and sources substantially all of its OEM products from independent suppliers in China, through Forward
Industries Asia-Pacific Corporation, a British Virgin Islands corporation (“Forward China”), See Note 14.
As a result of
the expansion of the design development capabilities through its wholly-owned subsidiaries, IPS and Kablooe, the Company is now able
to introduce proprietary products to the market from concepts brought to it from a number of different sources, both inside
and outside the Company.
Within this report,
certain dollar amounts and percentages have been rounded to their approximate values.
Impact of COVID-19
The outbreak of the
COVID-19 virus in China and its subsequent spread throughout the world has impacted our Fiscal 2020 results of operations. In efforts
to contain the virus, authorities have implemented travel restrictions, quarantines, business limitations and shutdowns. Since
the majority of our workforce is based in New York, these restrictions have required substantially all our employees to work from
home for much of Fiscal 2020. During the third quarter of Fiscal 2020, productivity of our direct labor employees was reduced,
which caused a decline in revenue and gross profit. As some of these restrictions were relaxed in the fourth quarter of Fiscal
2020, employees started to return to the office with minimal operational challenges. Business shutdowns resulting from the pandemic
disrupted our supply chain and the manufacture or shipment of our products and have delayed the rollout of our smart enabled retail
products to big box retail stores, causing our distribution segment revenues in Fiscal 2020 to be less than anticipated. Additionally,
our design segment reported lower revenues as demand for its design and development services were reduced or delayed. The impact
from lower revenue was partially offset by a reduction in certain selling and travel related expenses resulting from government
mandated stay-at-home orders and travel restrictions as well as revenues derived from sales and sourcing of personal protective
equipment. The pandemic had temporarily impacted our liquidity in Fiscal 2020, as collections of accounts receivable were somewhat
delayed at certain times.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The economy started
to open in certain jurisdictions where the virus was considered under control. However, there continue to be areas with increased
rates of infection that could cause government officials to enact more restrictions on how businesses operate. The future 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 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 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. Refer to “Part I, Item 1A — Risk Factors” in this Annual
Report for a description of the material risks that the Company currently faces in connection with COVID-19.
As a result of revenue
and earnings shortfalls in the second quarter of Fiscal 2020, due in part to COVID-19 and the related future uncertainty, the Company
revised revenue and operational projections for IPS for the later part of Fiscal 2020 and future periods. These events impacted
the carrying value of goodwill (see Note 4). Until there is a vaccine and treatment that is widely distributed, 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; and pursuing further improvements in the
productivity and effectiveness of our development, selling and administrative activities.
NOTE 2 ACCOUNTING
POLICIES
Use of Estimates
The preparation of
the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.
The worldwide spread
of COVID-19 has resulted in a global slowdown of economic activity which is likely to decrease demand for a broad variety of goods
and services, while also disrupting sales channels, marketing activities and general business operations for an unknown period
of time until the disease is contained. At this point, the extent to which COVID-19 may impact our financial condition or results
of operations is uncertain, and as of the date of issuance of these consolidated financial statements, we are not aware of any
specific event or circumstance that would require us to update our estimates, judgments or adjust the carrying value of our assets
or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the
consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences
may be material to our consolidated financial statements.
Basis of Presentation
The accompanying consolidated
financial statements include the accounts of Forward Industries, Inc. and its wholly-owned subsidiaries (Forward US, Forward Switzerland,
Forward UK, IPS and Kablooe). All significant intercompany transactions and balances have been eliminated in consolidation. Intercompany
sales of $49,000 and $221,000 from IPS to Forward US have been eliminated in consolidation for Fiscal 2020 and Fiscal 2019, respectively.
The Company incurred
a net loss of $1,775,000 for Fiscal 2020 and generated negative cash flow from operations of $263,000. We believe our existing
cash balance and working capital will be sufficient to meet our liquidity needs at least through December 2021.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment Reporting
The Company has two
reportable segments: distribution and design. The distribution segment consists of two reporting units (Forward US and Forward
Switzerland, that collectively comprise one operating segment) that source and distribute carrying cases and other accessories
for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic devices. The design segment
consists of two operating segments (IPS and Kablooe, which have been aggregated into one reportable segment) that provide a full
spectrum of hardware and software product design and engineering services.
Organizing our business
through these operating segments allows us to align our resources and manage our operations. Our chief operating decision maker
regularly reviews operating segment revenue and profitability when assessing financial results of operating segments and allocating
resources.
We measure the performance
of our operating segments based upon operating segment revenue and operating income or loss. Segment operating income or loss includes
revenues earned and expenses incurred directly by the operating segment, including cost of sales and selling, marketing, and general
and administrative expenses (see Note 16 for more discussion on operating segments).
Goodwill
The Company reviews
goodwill for impairment at least annually, or more often if triggering events occur. The Company has two reporting units with goodwill
(IPS 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 the impairment test for the reporting
unit. If the Company cannot support such a conclusion or does not elect to perform the qualitative assessment, then the Company
will compare the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting
unit exceeds its carrying value, no impairment charge is recognized. If the fair value of the reporting unit is less than its carrying
value, an impairment charge will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair
value. A significant amount of judgment is required in performing goodwill impairment tests including estimating the fair value
of a reporting unit and the implied fair value of goodwill. During Fiscal 2020, the Company recorded an impairment charge of $1,015,000
related to goodwill (See Note 4).
Intangible Assets
Intangible assets
include trademarks and customer relationships, which were acquired as part of the acquisitions of IPS in Fiscal 2018 and Kablooe
in Fiscal 2020 (see Note 3) and are recorded based on their estimated fair value determined in conjunction with the purchase price
allocation. These intangible assets are amortized over their estimated useful lives, which are periodically evaluated for reasonableness.
Our intangible assets
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. In assessing the recoverability of our intangible assets, we must make estimates and assumptions regarding future
cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions could have a
significant impact on whether an impairment charge is recognized and also the magnitude of any such charge. Fair value estimates
are made at a specific point in time, based on relevant information. These estimates are subjective in nature and involve uncertainties
and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly
affect the estimates. If these estimates or material related assumptions change in the future, we may be required to record impairment
charges related to its intangible assets. Management evaluated and concluded that there were no impairments of intangible assets
at September 30, 2020.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
The Company considers
all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. There were
no cash equivalents at September 30, 2020 and 2019. The Company maintains its cash in bank and financial institution deposits in
the United States (that at times may exceed federally insured limits of $250,000 per financial institution) and Switzerland. At
September 30, 2020 and 2019, there were deposits totaling $2,300,000 (which includes $770,000 in a foreign bank) and $2,800,000
(which includes $650,000 in a foreign bank), respectively, held in excess of federally insured limits. Historically, we have not
experienced any losses due to such cash concentrations.
Accounts Receivable
Accounts receivable
consist of unsecured trade accounts with customers or their contract manufacturers. The Company performs periodic credit evaluations
of its customers including an evaluation of days outstanding, payment history, recent payment trends, and perceived creditworthiness,
and believes that adequate allowances for any uncollectible receivables are maintained. Credit terms to customers generally range
from net thirty (30) days to net one hundred twenty (120) days. At September 30, 2020, the Company had allowances for doubtful
accounts of $249,000 and $347,000 related to the Company’s distribution segment and design segment accounts receivable, respectively.
At September 30, 2019, the Company had allowances for doubtful accounts of $159,000 and $2,033,000 relating to the Company’s
distribution segment and design segment accounts receivable, respectively. The decrease in allowance for doubtful accounts for
the design segment is primarily due to the conversion of the accounts receivable balance from a customer, and the associated allowance
for doubtful accounts, of $1,626,000, to a note receivable (see Note 6).
Inventories
Inventories consist
primarily of finished goods and are stated at the lower of cost (determined by the first-in, first-out method) or net realizable
value. Based on management’s estimates, an allowance is made to reduce excess, obsolete, or otherwise un-saleable inventories
to net realizable value. The allowance is established through charges to cost of goods sold in the Company’s consolidated
statements of operations. As reserved inventory is disposed of, the Company charges off the associated allowance. In determining
the adequacy of the allowance, management’s estimates are based upon several factors, including analyses of inventory levels,
historical loss trends, sales history and projections of future sales demand. The Company’s estimates of the allowance may
change from time to time based on management’s assessments, and such changes could be material. At September 30, 2020 and
2019, there was no allowance for obsolete inventory.
Property and Equipment
Property and equipment
consist of furniture, fixtures, equipment and leasehold improvements and are recorded at cost. Expenditures for major additions
and improvements are capitalized, and minor replacements, maintenance, and repairs are charged to expense as incurred. When property
and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated
useful lives of the related assets using the straight-line method. The estimated useful lives for furniture, fixtures and equipment
ranges from three to five years. Amortization of leasehold improvements is computed using the straight-line method over the shorter
of the remaining lease term or the estimated useful lives of the improvements.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Leases
The Company adopted
Accounting Standards Codification (“ASC”) 842, "Leases", effective October 1, 2019 using the modified retrospective
transition method and elected to apply the available practical expedients to enable the preparation of financial information on
adoption. The practical expedients applied under the new standard allow the Company to carry forward the historical lease classification
and not reassess its prior conclusions about lease identification or initial direct costs. In accordance with this guidance, lease
assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term, using
the Company’s incremental borrowing rate commensurate with the lease term, since the Company’s lessors do not provide
an implicit rate, nor is one readily available. The Company has certain leases that may include an option to renew and when it
is reasonably probable to exercise such option, the Company will include the renewal option terms in determining the lease asset
and lease liability. Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities
represent the Company’s obligation to make lease payments arising from the lease. Lease expense for lease payments is recognized
on a straight-line basis over the lease term. Operating lease assets are shown as right of use assets and financing lease assets
are a component of property and equipment on the consolidated balance sheets. The current and long-term portions of operating and
financing lease liabilities are shown separately as such on the consolidated balance sheets. Upon adoption of ASC 842, the Company
recognized right of use assets of $3,649,000 and corresponding lease liabilities of $3,729,000 pertaining to its operating leases
on its consolidated balance sheets.
Income Taxes
The Company recognizes
future tax benefits and liabilities measured at enacted rates attributable to temporary differences between financial statement
and income tax bases of assets and liabilities and to net tax operating loss carryforwards to the extent that realization of these
benefits is more likely than not. At September 30, 2020, there was no change to our assessment that a full valuation allowance
was required against all net deferred tax assets. Accordingly, any deferred tax provision or benefit was offset by an equal and
opposite change to the valuation allowance. Our income tax provision or benefit is generally not significant due to the existence
of significant net operating loss carryforwards.
Revenue Recognition
Distribution Segment
The Company adopted
ASC 606, “Revenue Recognition” effective October 1, 2018. In accordance with this guidance, 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 shipment 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 the title
of 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 consolidated balance sheets. Contract
liabilities at September 30, 2020 and 2019 were $75,000 and $0 for the distribution segment.
Design Segment
Under ASC 606, the
Company applies the “cost to cost” and “right to invoice” methods of revenue recognition to the contracts
with customers in the design segment. The design segment typically engages in two types of contracts: (i) time and material and
(ii) fixed price contracts. The Company recognizes revenue over time on its time and material contracts utilizing a “right
to invoice” method. Revenues from fixed price contracts that require performance of services that are not related to the
production of tangible assets are recognized by using cost inputs to measure progress toward the completion of its performance
obligations or the “cost to cost” method. Revenues from contracts that contain specific deliverables are recognized
when the performance obligation has been satisfied or the transfer of goods to the customer has been completed and accepted.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recognized revenues
that will not be billed until a later date, or contract assets, are recorded as an asset and classified as a component of accounts
receivable in the accompanying consolidated balance sheets. Contract assets at September 30, 2020 and 2019 were $649,000 and $611,000,
respectively. Contracts where collections to date have exceeded recognized revenues, or contract liabilities, are recorded as a
liability and classified as a component of deferred income in the accompanying consolidated balance sheets. Contract liabilities
at September 30, 2020 and 2019 were $410,000 and $220,000, respectively.
Shipping and Handling Fees
The Company includes
shipping and handling fees billed to customers in net revenues and the related transportation costs in cost of goods sold.
Foreign Currency Transactions
Foreign currency transactions
may generate receivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid. Fluctuations
in exchange rates between such foreign currency and the functional currency increase or decrease the expected amount of functional
currency cash flows upon settlement of the transaction. These increases or decreases in expected functional currency cash flows
are foreign currency transaction gains or losses that are included in other expense in the accompanying consolidated statements
of operations. The approximate net losses from foreign currency transactions were $3,000 and $14,000 for the fiscal years ended
September 30, 2020 and 2019, respectively. Such foreign currency transaction losses were primarily the result of Euro denominated
revenues from certain customers.
Fair Value Measurements
We perform fair value
measurements in accordance with the guidance provided by ASC 820, “Fair Value Measurement.” ASC 820 defines fair value
as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded
at their fair values, we consider the principal or most advantageous market in which we would transact and consider assumptions
that market participants would use when pricing the assets or liabilities, such as inherent risk, transfer restrictions, and risk
of nonperformance.
ASC 820 establishes
a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value. An asset's or liability's categorization within the fair value hierarchy is based upon the lowest level
of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure
fair value:
| |
· |
Level 1: quoted prices in active markets for identical assets or liabilities; |
| |
· |
Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or |
| |
· |
Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities. |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Share-Based Compensation Expense
The Company estimates
the fair value of employee and non-employee director share-based compensation on the date of grant using the Black-Scholes option
pricing model, which includes variables such as the expected volatility of the Company’s share price, the exercise behavior
of its grantees, interest rates, and dividend yields. These variables are projected based on the Company’s historical data,
experience, and other factors. The fair value of employee and non-employee director share-based compensation is recognized in the
consolidated statements of operations over the related service or vesting period of each grant. In the case of awards with multiple
vesting periods, the Company has elected to use the graded vesting attribution method, which recognizes compensation cost on a
straight-line basis over each separately vesting portion of the award as if the award was, in substance, multiple awards (see Note
9).
Business Combinations
The Company allocates
the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their
estimated fair values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities
is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, the Company makes significant
estimates and assumptions, especially with respect to intangible assets.
Critical estimates
in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships and
developed technology, discount rates and terminal values. Our estimate of fair value is based upon assumptions believed to be reasonable,
but actual results may differ from estimates.
Other estimates associated
with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities
assumed.
Reclassifications
Certain amounts in
the accompanying Fiscal 2019 financial statements have been reclassified to conform to the Fiscal 2020 presentation.
Recent Accounting Pronouncements
In August 2018, the
FASB issued ASU 2018-13 “Fair Value Measurement – Disclosure Framework (Topic 820)” to improve the disclosure
requirements on fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company does
not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In November 2019,
the FASB issued ASU 2019-08, “Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic
606)” to provide guidance for share-based payment awards granted to a customer in conjunction with selling goods or services
accounted for under Topic 606. The pronouncement is effective for fiscal years beginning after December 15, 2019 and interim periods
within those fiscal years. The Company does not expect the adoption of this guidance to have a material impact on its consolidated
financial statements.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 2019,
the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.”
ASU 2019-11 is an accounting pronouncement that provides clarity to and amends earlier guidance on this topic and would be effective
concurrently with the adoption of such earlier guidance. This pronouncement is effective for the Company for fiscal years beginning
after December 15, 2022 and interim periods within those fiscal years. The Company is currently evaluating the effects of this
pronouncement on its consolidated financial statements.
In
August 2018, the FASB issued ASU 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic
350-40)” addressing customers’ accounting for implementation costs incurred
in a cloud computing arrangement that is a service contract, which requires customers to apply internal-use software guidance
to determine the implementation costs that are able to be capitalized. Capitalized implementation costs are required to be
amortized over the term of the arrangement, beginning when the cloud computing arrangement is ready for its intended
use. The effective date of the new guidance for public companies is for fiscal years beginning after December 15,
2019 and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the
adoption of this guidance to have a material impact on its consolidated financial statements.
In December
2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This
guidance removes certain exceptions to the general principles in Topic 740 and provides consistent application of
U.S. GAAP by clarifying and amending existing guidance. The effective date of the new guidance for public companies is for
fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. Early adoption is
permitted. The Company is currently evaluating the timing of adoption and impact of the updated guidance on its consolidated
financial statements.
NOTE 3 ACQUISITION
On August 17, 2020, in order to further
diversify its customer base and the industries in which it sells its products, the Company and Kablooe, Inc. (a newly formed wholly-owned
subsidiary of the Company) entered into an Asset Purchase Agreement (the “Agreement”) with Kablooe Design, Inc. (“Kablooe
Design”) and its sole shareholder. Kablooe Design is an innovative medical and consumer design and development company whose
clients include leading brands in medical devices. In consideration for the acquisition of substantially all of the assets of Kablooe
Design, the Company: (i) paid $353,000 in cash; (ii) issued 300,000 shares of its common stock; (iii) agreed to pay up to an aggregate
$500,000 in contingent earnout payments based on Kablooe meeting certain earnings milestones (as defined in the Agreement) over
a five-year period; and (iv) agreed to make two additional $50,000 retention payments to Kablooe’s Chief Executive Officer
on the fourth and fifth anniversaries of the acquisition based on his continued employment with Kablooe and the achievement of
the earnings milestones (as defined in the Agreement). Additionally, in conjunction with this acquisition, the Company entered
into a five-year employment agreement with Kablooe’s Chief Executive Officer and agreed to pay him a salary of $250,000 per
year.
At the date of acquisition,
the consideration transferred consisted of cash, shares of Forward’s common stock, and contingent consideration based on
the earnings performance of Kablooe over a five-year period. The acquisition date fair value of consideration transferred consisted
of the following:
| Cash at closing (1) | |
$ | 353,000 | |
| Value of Forward's common stock (2) | |
| 370,000 | |
| Fair value of contingent earnout consideration (3) | |
| 90,000 | |
| | |
$ | 813,000 | |
| |
(1) |
Cash paid by Forward at closing. |
| |
(2) |
Forward issued 300,000 shares of its common stock valued at $1.23 per share, which represents the August 17, 2020 closing price of $1.37 per share, less an estimated 10% reduction in fair value related to restrictions that limit their marketability for a period of six months. |
| |
(3) |
Fair value of the contingent consideration is measured using the Black-Scholes option pricing method. Contingent consideration is to be paid in cash only upon Kablooe meeting certain earnings milestones over a five-year period. |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table
summarizes the estimated fair values of the assets acquired and liabilities assumed on the acquisition date:
| Cash | |
$ | 31,000 | |
| Accounts receivable | |
| 96,000 | |
| Customer relationships (8 yr life) | |
| 340,000 | |
| Trademark (15 yr life) | |
| 110,000 | |
| Property and equipment | |
| 9,000 | |
| Other assets | |
| 9,000 | |
| Total identifiable assets acquired | |
| 595,000 | |
| Accounts payable | |
| (22,000 | ) |
| Accrued liabilities | |
| (135,000 | ) |
| Deferred revenue | |
| (46,000 | ) |
| Debt | |
| (170,000 | ) |
| Total liabilities assumed | |
| (373,000 | ) |
| Net identifiable assets acquired | |
| 222,000 | |
| Goodwill | |
| 591,000 | |
| Net assets acquired | |
$ | 813,000 | |
In relation to our
acquisition of Kablooe, we incurred $78,000 of acquisition related costs in Fiscal 2020, including legal and valuation costs. These
costs were expensed as incurred and included as a component of general and administrative expenses on the consolidated statement
of operations. Kablooe’s results of operations have been included in the consolidated financial statements since the acquisition
date. Our consolidated statement of operations for Fiscal 2020 includes revenue of $172,000 for Kablooe.
NOTE 4 INTANGIBLE
ASSETS AND GOODWILL
Intangible Assets
The Company’s
intangible assets consist of the following:
| | |
September 30, 2020 | | |
September 30, 2019 | |
| | |
Trademark | | |
Customer Relationships | | |
Total Intangible Assets | | |
Trademark | | |
Customer Relationships | | |
Total Intangible Assets | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Gross carrying amount | |
$ | 585,000 | | |
$ | 1,390,000 | | |
$ | 1,975,000 | | |
$ | 475,000 | | |
$ | 1,050,000 | | |
$ | 1,525,000 | |
| Less accumulated amortization | |
| (86,000 | ) | |
| (358,000 | ) | |
| (444,000 | ) | |
| (54,000 | ) | |
| (222,000 | ) | |
| (276,000 | ) |
| Net carrying amount | |
$ | 499,000 | | |
$ | 1,032,000 | | |
$ | 1,531,000 | | |
$ | 421,000 | | |
$ | 828,000 | | |
$ | 1,249,000 | |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s
intangible assets were acquired as a result of the acquisitions of Kablooe and IPS in Fiscal 2020 and Fiscal 2018, respectively,
and are amortized over their expected useful lives. The useful lives are 15 years for the trademarks and 8 years for the customer
relationships. The intangible assets are held under the design segment of our business. During Fiscal 2020 and Fiscal 2019, the
Company recorded amortization expense related to intangible assets of $167,000 and $162,000, respectively, which is included in
general and administrative expenses in the Company’s consolidated statements of operations.
At September
30, 2020, estimated amortization expense for the Company’s intangible assets for each of the next five years and thereafter
is as follows:
| Years Ending September 30, | |
Amount | |
| 2021 | |
$ | 213,000 | |
| 2022 | |
| 213,000 | |
| 2023 | |
| 213,000 | |
| 2024 | |
| 213,000 | |
| 2025 | |
| 213,000 | |
| Thereafter | |
| 466,000 | |
| Total | |
$ | 1,531,000 | |
Goodwill
The
Company’s goodwill resulted from the acquisitions of Kablooe and IPS in Fiscal 2020 and Fiscal 2018, respectively. All of
the Company’s goodwill is held under the design segment of our business. Goodwill is not deductible for tax purposes.
During Fiscal 2020,
the Company experienced triggering events that prompted the testing of its goodwill for impairment. Those triggering events included
the reduction in fair value of the IPS contingent earn-out consideration discussed in Note 6 and revised revenue and operational
projections for IPS for the later part of Fiscal 2020 and future periods. Based on these factors, we concluded that it was more
likely than not that the fair value of the IPS reporting unit had declined below its carrying amount. The Company then calculated
the fair value of this reporting unit using Level 3 inputs, which is a combination of asset-based, income and market approaches.
These estimates and assumptions included discount rate, terminal growth rate, selection of peer group companies and control premium
applied as well as forecasts of revenue growth rates, gross margins, operating margins, and working capital requirements. Any changes
in the judgments, estimates, or assumptions used could produce significantly different results. We concluded the IPS reporting
unit’s fair value was below its carrying value by $1,015,000 and an impairment charge was recognized for this amount in Fiscal
2020. The Company performed the annual goodwill impairment test for Fiscal 2019 and determined there was no impairment.
Below is the rollforward
of goodwill for the design segment, the only reportable segment with goodwill:
| | |
Design Segment | | |
Consolidated | |
| Balance at September 30, 2019 | |
$ | 2,183,000 | | |
$ | 2,183,000 | |
| | |
| | | |
| | |
| Acquisition of Kablooe | |
| 591,000 | | |
| 591,000 | |
| IPS goodwill impairment | |
| (1,015,000 | ) | |
| (1,015,000 | ) |
| | |
| | | |
| | |
| Balance September 30, 2020 | |
$ | 1,759,000 | | |
$ | 1,759,000 | |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 PROPERTY
AND EQUIPMENT
Property and equipment and related accumulated
depreciation and amortization are summarized by reportable segment in the table below:
| | |
September
30, | |
| | |
2020 | | |
2019 | |
| | |
Consolidated | | |
Distribution | | |
Design | | |
Consolidated | | |
Distribution | | |
Design | |
| Computer software
and hardware | |
$ | 488,000 | | |
$ | 146,000 | | |
$ | 342,000 | | |
$ | 312,000 | | |
$ | 278,000 | | |
$ | 34,000 | |
| Furniture and fixtures | |
| 147,000 | | |
| 28,000 | | |
| 119,000 | | |
| 199,000 | | |
| 79,000 | | |
| 120,000 | |
| Equipment | |
| 61,000 | | |
| – | | |
| 61,000 | | |
| 308,000 | | |
| 4,000 | | |
| 304,000 | |
| Leasehold
improvements | |
| 2,000 | | |
| – | | |
| 2,000 | | |
| 42,000 | | |
| 42,000 | | |
| – | |
| Property and equipment, cost | |
| 698,000 | | |
| 174,000 | | |
| 524,000 | | |
| 861,000 | | |
| 403,000 | | |
| 458,000 | |
| Less:
accumulated depreciation and amortization | |
| (483,000 | ) | |
| (151,000 | ) | |
| (332,000 | ) | |
| (618,000 | ) | |
| (385,000 | ) | |
| (233,000 | ) |
| Property
and equipment, net | |
$ | 215,000 | | |
$ | 23,000 | | |
$ | 192,000 | | |
$ | 243,000 | | |
$ | 18,000 | | |
$ | 225,000 | |
Depreciation expense was $105,000 and $149,000
for Fiscal 2020 and Fiscal 2019, respectively.
NOTE 6 FAIR
VALUE MEASUREMENTS
The
deferred consideration of $90,000 at September 30, 2020 represents the fair value of the contingent earnout consideration related
to the acquisition of Kablooe. The current and non-current portions of this liability of $45,000 each are shown in the corresponding
categories on the consolidated balance sheet at September 30, 2020. The deferred consideration of $834,000 on our consolidated
balance sheet at September 30, 2019 was the $484,000 present value of the deferred cash consideration related to the acquisition
of IPS and the $350,000 estimated fair value of the contingent earnout consideration related to the acquisition of IPS. The IPS
earnout consideration was adjusted down to $0 in Fiscal 2020 due to the low likelihood of IPS reaching the earnings targets outlined
in the Stock Purchase Agreement.
The following table presents the placement
in the fair value hierarchy and summarizes the change in fair value of the earn-out consideration for Fiscal 2020 and Fiscal 2019:
| | |
| | |
Fair value measurement at reporting date using | |
| | |
| | |
Quoted prices in active markets for identical assets | | |
Significant other observable inputs | | |
Significant unobservable inputs | |
| | |
Balance | | |
(Level 1) | | |
(Level 2) | | |
(Level 3) | |
| | |
| | |
| | |
| | |
| |
| September 30, 2018 | |
$ | 538,000 | | |
$ | – | | |
$ | – | | |
$ | 538,000 | |
| | |
| | | |
| | | |
| | | |
| | |
| Increase in fair value of IPS deferred cash consideration | |
| 36,000 | | |
| – | | |
| – | | |
| 36,000 | |
| Increase in fair value of IPS earn-out consideration | |
| 260,000 | | |
| – | | |
| – | | |
| 260,000 | |
| September 30, 2019 | |
| 834,000 | | |
| – | | |
| – | | |
| 834,000 | |
| | |
| | | |
| | | |
| | | |
| | |
| Increase in fair value of IPS deferred cash consideration | |
| 16,000 | | |
| – | | |
| – | | |
| 16,000 | |
| Decrease in the fair value of IPS earnout consideration | |
| (350,000 | ) | |
| – | | |
| – | | |
| (350,000 | ) |
| Payout of IPS deferred cash consideration | |
| (500,000 | ) | |
| – | | |
| – | | |
| (500,000 | ) |
| Fair value of Kablooe contingent earnout consideration | |
| 90,000 | | |
| – | | |
| – | | |
| 90,000 | |
| September 30, 2020 | |
$ | 90,000 | | |
$ | – | | |
$ | – | | |
$ | 90,000 | |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
fair value of the Kablooe contingent earn-out consideration will be measured on a recurring basis at each reporting date. The following
inputs and assumptions were used in the Black-Scholes valuation model to estimate the fair value of the Kablooe earn-out consideration
at September 30, 2020:
| Volatility |
|
40% |
| Risk free interest rate |
|
1% |
| Expected term, in years |
0.5 - 4.5 |
| Dividend yield |
|
0% |
During
Fiscal 2019, the Company and a customer entered into an agreement, whereby the Company received common stock in the customer as
compensation for product design services provided by the Company. The shares represent less than a 2% ownership interest in the
customer. Pursuant to ASC 820, management estimated the initial fair value of the investment to be $327,000, based on a private
placement round of common stock issued to third party private investors of the customer at a time close to the valuation date.
Based on this valuation, the Company recognized revenue and a cost method investment for that amount in Fiscal 2019. Management
determined that the inputs used to value the investment are observable, either directly or indirectly, and therefore classified
as a Level 2 valuation. Pursuant to ASC 820, the transaction price of the cash financing round establishes the fair value of the
common stock issued as consideration unless one of the following conditions exists:
| |
a. |
The transaction is between related parties, |
| |
b. |
The transaction takes place under duress or the seller is forced to accept the price in the transaction, |
| |
c. |
The unit of account represented by the transaction price is different from the unit of account for the asset or liability measured at fair value, or |
| |
d. |
The market in which the transaction takes place is different from the principal market (or most advantageous market). |
On January 21, 2020,
the Company executed a non-negotiable promissory note with a principal amount of $1,626,000 with the same design segment customer
in which we are invested to recover accounts receivable which had been reserved as bad debt in Fiscal 2019. Beginning on April
1, 2020, monthly interest and principal payments, based on a one-year amortization schedule, were due and payable in arrears on
the first day of the month until March 1, 2021. Interest accrues at a rate of 8% per annum. Since no payments were received through
June 30, 2020, the note receivable is fully reserved on the Company’s consolidated balance sheets. In the fourth quarter
of Fiscal 2020, the Company received $134,000 from this customer, of which $61,000 was applied to past due interest and penalties
and recorded as interest income, and $73,000 was applied to principal and recorded as a recovery of bad debt expense as a reduction
of general and administrative expense.
During Fiscal 2020,
as a result of the customer’s default on the promissory note, the impact of COVID-19, and performance of the business in
which the Company is invested, including its inability to generate revenue, management concluded the investment was also impaired
and it recorded an impairment charge of $327,000 to fully reserve the investment on the Company’s consolidated balance sheet
at September 30, 2020. The impairment charge is included in the general and administrative expenses of the consolidated statement
of operations.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
following table presents the placement in the fair value hierarchy and summarizes the change in fair value of the cost method investment
during Fiscal 2020 and Fiscal 2019:
| | |
| | |
Fair value measurement at reporting date using | |
| | |
| | |
Quoted prices in active markets for identical assets | | |
Significant other observable inputs | | |
Significant unobservable inputs | |
| | |
Balance | | |
(Level 1) | | |
(Level 2) | | |
(Level 3) | |
| | |
| | |
| | |
| | |
| |
| September 30, 2019 | |
$ | 327,000 | | |
$ | – | | |
$ | 327,000 | | |
$ | – | |
| | |
| | | |
| | | |
| | | |
| | |
| Impairment of cost method investment | |
| (327,000 | ) | |
| – | | |
| (327,000 | ) | |
| – | |
| | |
| | | |
| | | |
| | | |
| | |
| September 30, 2020 | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | – | |
NOTE 7 ACCRUED
EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities
by operating segment at September 30, 2020 and 2019 are as follows:
| | |
September
30, | |
| | |
2020 | | |
2019 | |
| | |
Consolidated | | |
Distribution | | |
Design | | |
Consolidated | | |
Distribution | | |
Design | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Paid time off | |
$ | 296,000 | | |
$ | 36,000 | | |
$ | 260,000 | | |
$ | 170,000 | | |
$ | 40,000 | | |
$ | 130,000 | |
| Other payroll related costs | |
| 178,000 | | |
| 58,000 | | |
| 120,000 | | |
| 187,000 | | |
| 33,000 | | |
| 154,000 | |
| Legal fees | |
| 18,000 | | |
| – | | |
| 18,000 | | |
| 154,000 | | |
| 154,000 | | |
| – | |
| Other | |
| 123,000 | | |
| 14,000 | | |
| 109,000 | | |
| 184,000 | | |
| 31,000 | | |
| 153,000 | |
| Total | |
$ | 615,000 | | |
$ | 108,000 | | |
$ | 507,000 | | |
$ | 695,000 | | |
$ | 258,000 | | |
$ | 437,000 | |
NOTE 8 SHAREHOLDERS’
EQUITY
Anti-Takeover Provisions
Shareholder Rights Plan
On April 26, 2013,
the Board of Directors (the "Board") adopted a Shareholder Rights Plan, as set forth in the Rights Agreement between
the Company and American Stock Transfer & Trust Company, LLC, as Rights Agent. Pursuant to the Rights Agreement, the Board
declared a dividend distribution of one Right (a "Right") for each outstanding share of Company Common Stock, par value
$0.01 per share (the "Common Stock") to shareholders of record at the close of business on May 6, 2013, which date will
be the record date, and for each share of Common Stock issued (including shares distributed from treasury) by the Company thereafter
and prior to the Distribution Date (as described below and defined in the Rights Agreement). Each Right entitles the registered
holder, subject to the terms of the Rights Agreement, to purchase from the Company one one-thousandth of a share of Series A Participating
Preferred Stock, $0.01 par value per share (the "Series A Preferred Stock"), at an exercise price of $4.00 per one one-thousandth
of a share of Series A Preferred Stock, subject to adjustment.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Initially, no separate
Rights certificates will be distributed and instead the Rights will attach to all certificates representing shares of outstanding
Common Stock. Subject to certain exceptions specified in the Rights Agreement, the Rights will separate from the Common Stock and
become exercisable on the distribution date (the "Distribution Date"), which will occur on the earlier of (i) the 10th
business day (or such later date as may be determined by the Board) after the public announcement that an Acquiring Person (as
defined in the Rights Agreement) has acquired beneficial ownership of 20% or more of the Common Stock then outstanding; or (ii)
the 10th business day (or such later date as may be determined by the Board) after a person or group announces a tender or exchange
offer that would result in a person or group of affiliated and associated persons beneficially owning 20% or more of the Common
Stock then outstanding.
“Blank Check” Preferred Stock
The Company is authorized
to issue up to 4,000,000 shares of "blank check" preferred stock. The Board has the authority and discretion, without
shareholder approval, to issue preferred stock in one or more series for any consideration it deems appropriate, and to fix the
relative rights and preferences thereof including their redemption, dividend and conversion rights. Of these shares, 100,000 shares
have been authorized as the Series A Participating Preferred Stock. There were no shares of preferred stock outstanding at September
30, 2020 and 2019.
Warrants
At September 30, 2020,
the Company had 151,335 warrants outstanding and exercisable. The warrants have exercise prices ranging from $1.75 to $1.84 per
share and have a weighted average exercise price of $1.80 per share. At September 30, 2020, 76,335 of these warrants have a remaining
life of 3.3 years and 75,000 warrants have an expiration date 90 days after a registration statement registering common stock (other
than pursuant to an employee benefit plan) is declared effective by the Securities and Exchange Commission.
Other Activity
In Fiscal 2020, the
Company issued 300,000 shares of its common stock in connection with the Kablooe acquisition (see Note 3) and issued 50,000 shares
of its common stock pursuant to the exercise of stock options (see Note 9).
NOTE 9
SHARE-BASED COMPENSATION
2011 Long Term Incentive Plan
In March 2011, shareholders
of the Company approved the 2011 Long Term Incentive Plan (the "2011 Plan"), which originally authorized 850,000 shares
of common stock for grants of various types of equity awards to officers, directors, employees, consultants, and independent contractors.
On February 13, 2018, the shareholders of the Company approved an amendment to the 2011 Plan to increase the aggregate number of
shares of the Company's common stock authorized for issuance under the 2011 Plan by 1,000,000 shares of common stock, from 850,000
shares of common stock to 1,850,000 shares of common stock. Forfeited awards are eligible for re-grant under the 2011 Plan. The
exercise prices of stock options granted may not be less than the fair market value of the common stock as quoted at the close
on the Nasdaq Stock Market on the grant date. The Compensation Committee administers the 2011 Plan. Options generally expire five
to ten years after the date of grant. The total shares of common stock available for grants of equity awards under the 2011 Plan
was 291,000 as of September 30, 2020.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2007 Equity Incentive Plan
The 2007 Equity Incentive
Plan (the "2007 Plan"), which was approved by shareholders of the Company in May 2007, and, as amended in February 2010,
expired in accordance with its terms in May 2017. However, there remain 2,500 shares associated with unexercised options as of
September 30, 2020. The exercise price of stock options granted may not be less than the fair market value of the common stock
as quoted at the close on the Nasdaq Stock Market on the grant date. There are no unvested restricted stock awards related to the
2007 Plan. The Compensation Committee administers the 2007 Plan. Options generally expire ten years after the date of grant.
Stock Options
The fair value of
each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions in the
following table. The expected term represents the period over which the stock option awards are expected to be outstanding. The
Company utilizes the simplified method to develop an estimate of the expected term of “plain vanilla” option grants.
The expected volatility used is based on the historical price of the Company’s stock over the most recent period commensurate
with the expected term of the award. The risk-free interest rate used is based on the implied yield of U.S. Treasury zero-coupon
issues with a remaining term equivalent to the award’s expected term. The Company historically has not paid any dividends
on its common stock and had no intention to do so on the date the share-based awards were granted. The estimated annual forfeiture
rate is based on management’s expectations and will reduce expense ratably over the vesting period. The forfeiture rate will
be adjusted periodically based on the extent to which actual option forfeitures differ, or are expected to differ, from the previous
estimate, when it is material.
In applying the Black-Scholes
option pricing model to options granted, the Company used the following assumptions:
| |
|
Fiscal 2020 |
|
Fiscal 2019 |
| Expected term (years) |
|
2.5-3.0 |
|
2.50-2.75 |
| Expected volatility |
|
65%-79% |
|
82% |
| Risk free interest rate |
|
0.15%-1.39% |
|
2.53% |
| Expected dividends |
|
0% |
|
0% |
| Estimated annual forfeiture rate |
|
0%-10% |
|
0% |
In
Fiscal 2020, the Company made the following option grants:
| · | Options to non-employee directors to purchase an aggregate
of 248,019 shares of its common stock at an exercise price of $1.13 per share. The options were granted in February 2020, vest
one year from the date of grant, expire five years from the date of grant and had an aggregate grant date fair value of $145,000,
which is being recognized ratably over the vesting period. |
| · | Options to its Chief Executive Officer to purchase 180,395 shares of its common stock at an exercise
price of $1.40 per share. These options were granted in September 2020, vested immediately, expire five years from the date of
grant and had an aggregate grant date fair value of $100,000, which was fully recognized on the date of grant. |
| · | Options to an employee to purchase 27,329 shares of its common stock at an exercise price of $1.42
per share. These options were granted in August 2020, vest ratably over two years, expire five years from the date of grant and
had an aggregate grant date fair value of $20,000, which is being recognized ratably over the vesting period. |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In Fiscal 2019, the
Company made the following option grants:
| · | Options to non-employee directors to purchase an aggregate of 150,021 shares of its common stock
at an exercise price of $1.54 per share. The options were granted in February 2019, vested one year from the grant date, expire
five years from the date of grant and had an aggregate grant date fair value of $120,000, which is being amortized ratably over
the vesting period. |
| · | Options to non-employee directors to purchase an aggregate of 140,460 shares of common stock at
an exercise price of $1.54 per share. The options were granted in February 2019, vested immediately, expire five years from the
date of grant and had an aggregate grant date fair value of $108,000, which was fully recognized on the date of grant. |
The options
granted during Fiscal 2020 and Fiscal 2019 had a weighted average grant date value of $0.58 and $0.78 per share, respectively.
The Company recognized compensation expense for stock option awards of $245,000 and $212,000 during Fiscal 2020 and Fiscal 2019,
respectively, in its consolidated statements of operations.
During Fiscal 2020,
the Company issued 50,000 shares of its common stock pursuant to the exercise of stock options at an exercise price of $0.64 per
share for aggregate cash proceeds of $32,000. The intrinsic value of the options exercised was $33,000. No options were exercised
in Fiscal 2019.
At September
30, 2020, there was $75,000 of unrecognized compensation cost related to nonvested stock option awards that is expected to be recognized
over a weighted average period of 0.6 years.
The following table
summarizes stock option activity during Fiscal 2020:
| | |
| | |
Weighted | | |
Weighted | | |
| |
| | |
| | |
Average | | |
Average | | |
Aggregate | |
| | |
Number of | | |
Exercise | | |
Remaining | | |
Intrinsic | |
| | |
Options | | |
Price | | |
Life (Yrs.) | | |
Value | |
| Outstanding, September 30, 2019 | |
| 813,000 | | |
$ | 1.69 | | |
| | | |
| | |
| Granted | |
| 456,000 | | |
$ | 1.25 | | |
| | | |
| | |
| Exercised | |
| (50,000 | ) | |
$ | 0.64 | | |
| | | |
| | |
| Forfeited | |
| (16,000 | ) | |
$ | 2.97 | | |
| | | |
| | |
| Expired | |
| (65,000 | ) | |
$ | 2.64 | | |
| | | |
| | |
| Outstanding, September 30, 2020 | |
| 1,138,000 | | |
$ | 1.49 | | |
| 3.7 | | |
$ | 73,000 | |
| | |
| | | |
| | | |
| | | |
| | |
| Exercisable, September 30, 2020 | |
| 844,000 | | |
$ | 1.61 | | |
| 3.5 | | |
$ | 8,600 | |
Options outstanding
at September 30, 2020 and September 30, 2019 have an exercise price between $0.64 and $3.73 per share.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock Awards
The Company recognized
compensation expense of $0 and $3,000 during Fiscal 2020 and Fiscal 2019, respectively, for restricted stock awards in its consolidated
statements of operations. At September 30, 2020, there was no unrecognized compensation expense related to nonvested restricted
stock awards.
NOTE 10 INCOME TAXES
The following table
summarizes the Company’s consolidated provision/(benefit) for U.S. federal, state and foreign taxes on income:
| | |
Fiscal 2020 | | |
Fiscal 2019 | |
| Current: | |
| | | |
| | |
| Federal | |
$ | (4,000 | ) | |
$ | (4,000 | ) |
| State | |
| 13,000 | | |
| – | |
| Foreign | |
| – | | |
| – | |
| | |
| | | |
| | |
| Deferred: | |
| | | |
| | |
| Federal | |
| 414,000 | | |
| (713,000 | ) |
| State | |
| 82,000 | | |
| (127,000 | ) |
| Foreign | |
| 283,000 | | |
| (46,000 | ) |
| | |
| 788,000 | | |
| (890,000 | ) |
| Change in valuation allowance | |
| (779,000 | ) | |
| 886,000 | |
| Income tax provision/(benefit) | |
$ | 9,000 | | |
$ | (4,000 | ) |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The deferred tax provision/(benefit)
is the change in the deferred tax assets and liabilities representing the tax consequences of changes in the amounts of temporary
differences, net operating loss carryforwards and changes in tax rates during the fiscal year. The Company’s deferred tax
assets and liabilities are comprised of the following:
| | |
September 30, | |
| | |
2020 | | |
2019 | |
| Deferred tax assets | |
| | | |
| | |
| Net operating losses | |
$ | 1,812,000 | | |
$ | 2,311,000 | |
| Capital loss carryforwards | |
| – | | |
| 38,000 | |
| Share-based compensation | |
| 180,000 | | |
| 169,000 | |
| Alternative minimum and other tax credits | |
| 5,000 | | |
| 9,000 | |
| Excess tax over book basis in inventory | |
| 20,000 | | |
| 32,000 | |
| Reserves and other allowances | |
| 155,000 | | |
| 535,000 | |
| Deferred rent | |
| 13,000 | | |
| 19,000 | |
| Accrued compensation | |
| 70,000 | | |
| 9,000 | |
| Accrued expenses | |
| – | | |
| 151,000 | |
| Depreciation | |
| 31,000 | | |
| 27,000 | |
| Charitable contributions | |
| 3,000 | | |
| 1,000 | |
| Total deferred tax assets | |
| 2,289,000 | | |
| 3,301,000 | |
| | |
| | | |
| | |
| Deferred tax liabilities | |
| | | |
| | |
| Prepaid expenses | |
| (58,000 | ) | |
| (141,000 | ) |
| Intangible assets | |
| (245,000 | ) | |
| (298,000 | ) |
| 481 Election (IPS) | |
| (99,000 | ) | |
| (196,000 | ) |
| Total deferred tax liabilities | |
| (402,000 | ) | |
| (635,000 | ) |
| Valuation allowance | |
| (1,887,000 | ) | |
| (2,666,000 | ) |
| Net deferred tax assets | |
$ | – | | |
$ | – | |
For Fiscal 2020
and Fiscal 2019, the Company recorded a provision for income taxes which includes net expense of $9,000 in Fiscal 2020, and a benefit
of $4,000 in Fiscal 2019. The Fiscal 2020 net expense of $9,000 includes state income tax expenses of $13,000, partially offset
by a $4,000 refund of the remaining unused balance of alternative minimum tax (“AMT”) credits. The $4,000 tax benefit
recorded in Fiscal 2019 related to a partial refund of AMT tax. Under the Tax Cuts and Jobs Act of 2017, AMT was repealed. The
tax code in turn provided for a refund of the tax credits that existed on December 31, 2017 at a 50% rate in tax years 2018, 2019
and 2020, with any remaining credits being fully refundable in 2021. The CARES Act now allows corporations to immediately claim
unused AMT credits on their current year tax return. State income tax expense is the result of taxable income in states where net
operating loss carryforwards (“NOLs”) are not available.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2020,
the Company had available net NOLs for U.S. federal income tax purposes of $7,020,000. NOLs generated prior to 2018 expire beginning
in 2031 while NOLs generated after 2018 have an indefinite carryforward period. The NOLs result in a deferred tax asset with respect
to U.S. federal income taxes of $1,700,000. In addition, at September 30, 2020, the Company had available NOLs for foreign income
tax purposes of $610,000, resulting in a deferred tax asset of $114,000, expiring through 2024. The Company has capital loss carryovers
of $160,000, which expired in Fiscal 2020, as no capital gain has been recognized to utilize this deferred tax asset. Total net
deferred tax assets, before valuation allowance, were $1,887,000 and $2,666,000 at September 30, 2020 and 2019, respectively. Undistributed
earnings of the Company's foreign subsidiaries are considered permanently reinvested; therefore, in accordance with U.S. GAAP,
no provision for U.S. federal and state income taxes would result. In Fiscal 2020, Forward Switzerland and Forward U.K. had net
income for tax purposes of $116,000 and $13,000, respectively.
At September 30, 2020,
as part of its periodic evaluation of the necessity to maintain a valuation allowance against its deferred tax assets, and after
consideration of all factors, including, among others, projections of future taxable income, current year NOL utilization and the
extent of the Company's cumulative losses in recent years, the Company determined that, on a more likely than not basis, it would
not be able to use remaining deferred tax assets, except with respect to the U.S. federal income taxes in the event the Company
elects to effect repatriation of certain foreign source income of Forward Switzerland, which income is currently considered to
be permanently reinvested and for which no U.S. tax liability has been accrued. Accordingly, the Company has determined to maintain
a full valuation allowance against its net deferred tax assets. At September 30, 2020 and 2019, the valuation allowance was $1,887,000
and $2,666,000, respectively. In the future, the utilization of the Company's NOLs may be subject to certain change of control
limitations. If the Company determines that it will be able to use some or all of its deferred tax assets in a future reporting
period, the adjustment to reduce or eliminate the valuation allowance would reduce its income tax expense and increase after-tax
income.
The significant elements
contributing to the difference between the U.S. federal statutory tax rate and the Company’s effective tax rate are as follows:
| | |
Fiscal 2020 | | |
Fiscal 2019 | |
| U.S. federal statutory rate | |
| 21.0% | | |
| 21.0% | |
| State tax rate, net of federal benefit | |
| (1.9% | ) | |
| 2.8% | |
| Foreign rate differential | |
| (14.9% | ) | |
| 1.4% | |
| Other | |
| (10.6% | ) | |
| 1.9% | |
| Change in tax credits | |
| (0.2% | ) | |
| (0.1% | ) |
| Effect of state tax rate change | |
| 1.5% | | |
| – | |
| Capital loss - expiration | |
| (2.1% | ) | |
| – | |
| Change in valuation allowance | |
| 41.1% | | |
| (26.6% | ) |
| State income taxes | |
| (0.7% | ) | |
| – | |
| Federal AMT | |
| 0.2% | | |
| 0.1% | |
| Permanent differences | |
| (33.9% | ) | |
| (0.4% | ) |
| | |
| | | |
| | |
| Effective tax rate | |
| (0.5% | ) | |
| 0.1% | |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 2020,
the IRS issued Revenue Ruling 2020-27, providing its position regarding the deductibility for federal income tax purposes of otherwise
deductible expenses incurred when a taxpayer receives a PPP loan. This ruling states the taxpayer may not deduct those expenses
in the taxable year in which the expenses were paid or incurred if the taxpayer reasonably expects to receive forgiveness of the
covered loan. In accordance with this ruling, the Company has excluded these qualifying expenses from taxable income and recorded
this difference as a permanent item.
At September 30, 2020
and 2019, the Company has not accrued any interest or penalties related to uncertain tax positions. It is the Company's policy
to recognize interest and/or penalties, if any, related to income tax matters in income tax expense in the consolidated statements
of operations. For the periods presented in the accompanying consolidated statements of operations, no material income tax related
interest or penalties were assessed or recorded. All fiscal years prior to the fiscal year ended September 30, 2017 are closed
to federal and state examination.
NOTE 11 LOSS PER
SHARE
Basic loss per share
data for each period presented is computed using the weighted average number of shares of common stock outstanding during each
such period. Diluted loss per share data is computed using the weighted average number of common and dilutive common equivalent
shares outstanding during each period. Dilutive common-equivalent shares consist of shares that would be issued upon the exercise
of stock options and warrants, computed using the treasury stock method.
The following securities were excluded from the calculation
of diluted earnings per share because their inclusion would have been anti-dilutive:
| | |
Fiscal 2020 | | |
Fiscal 2019 | |
| Options | |
| 1,138,000 | | |
| 813,000 | |
| Warrants | |
| 151,000 | | |
| 151,000 | |
| Total potentially dilutive shares | |
| 1,289,000 | | |
| 964,000 | |
NOTE 12 COMMITMENTS
AND CONTINGENCIES
Guarantee Obligation
In February 2010,
Forward Switzerland and its European logistics provider (freight forwarding and customs agent) entered into a Representation Agreement
(the “Representation Agreement”) whereby, among other things, the European logistics provider agreed to act as Forward
Switzerland's fiscal representative in The Netherlands for the purpose of providing services in connection with any value added
tax matters. As part of this agreement, Forward Switzerland agreed to provide an undertaking (in the form of a bank letter of guarantee)
to the logistics provider with respect to any value added tax liability arising in The Netherlands that the logistics provider
is required to pay to Dutch tax authorities on its behalf.
In February 2010,
Forward Switzerland entered into a guarantee agreement with a Swiss bank relating to the repayment of any amount up to €75,000
(equal to approximately $88,000 at September 30, 2020) paid by such bank to the logistics provider in order to satisfy such undertaking
pursuant to the bank letter of guarantee. Forward Switzerland would be required to perform under the guarantee agreement only in
the event that (i) a value added tax liability is imposed on the Company's revenues in The Netherlands; (ii) the logistics provider
asserts that it has been called upon in its capacity as surety by the Dutch Receiver of Taxes to pay such taxes; (iii) Forward
Switzerland or the Company on its behalf fails or refuses to remit the amount of value added tax due to the logistics provider
upon its demand; and (iv) the logistics provider makes a drawing under the bank letter of guarantee. Under the Representation Agreement,
Forward Switzerland agreed that the letter of guarantee would remain available for drawing for three years following the date that
its relationship terminates with the logistics provider to satisfy any value added tax liability arising prior to expiration of
the Representation Agreement but asserted by The Netherlands after expiration.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The initial term of
the bank letter of guarantee expired February 28, 2011, but it renews automatically for one-year periods on February 28 of each
subsequent year unless Forward Switzerland provides the Swiss bank with written notice of termination at least 60 days prior to
the renewal date. It is the intent of Forward Switzerland and the logistics provider that the bank letter of guarantee amount be
adjusted annually. In consideration of the issuance of the letter of guarantee, Forward Switzerland has granted the Swiss bank
a security interest in all of its assets on deposit with, held by, or credited to Forward Switzerland’s accounts with, the
Swiss bank (approximately $770,000 at September 30, 2020). At September 30, 2020, the Company had not incurred a liability in connection
with this guarantee.
Legal Proceedings
On August 21, 2020,
IPS was named a third-party defendant in a patent dispute claim currently pending in the U.S. District Court for the Eastern District
of New York. The complaint, which contains no specific amount of monetary damages, asserts that certain intellectual property was
misappropriated by IPS and one of its former employees. IPS denies the allegations, believes the action is without merit
and intends to vigorously defend it. The Company received permission from the District Court to file a motion to dismiss
the complaint and filed such motion on December 14, 2020.
From time to time,
the Company may become a party to other legal actions or proceedings in the ordinary course of its business. At September 30, 2020,
there were no such actions or proceedings, either individually or in the aggregate, that, if decided adversely to its interests,
the Company believes would be material to its business.
NOTE 13 LEASES
On October 1, 2019, the Company adopted
the updated guidance on leases using the modified retrospective transition method. Results for Fiscal 2020 are presented under
the updated guidance, while Fiscal 2019 is reported in accordance with historical lease accounting guidance.
The Company’s
operating leases are primarily for corporate, sales and administrative office space. Total operating lease expense was $562,000
in Fiscal 2020 and total rent expense was $473,000 in Fiscal 2019. These expenses are recorded in general and administrative expenses
on the consolidated statements of operations.
The Company leases
certain computer equipment through finance lease agreements expiring through July 2024. Amortization expense related to assets
under finance leases was $42,000 for Fiscal 2020. Interest expense related to assets under finance leases was $3,000 for Fiscal
2020. The following is a summary of computer equipment held under capital leases:
| | |
September 30, | |
| | |
2020 | | |
2019 | |
| Cost | |
$ | 203,000 | | |
$ | 203,000 | |
| Accumulated depreciation | |
| (180,000 | ) | |
| (138,000 | ) |
| Net book value | |
$ | 23,000 | | |
$ | 65,000 | |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2020,
additional information related to operating and finance leases was as follows:
| Weighted Average Remaining Lease Term: |
| |
Operating Leases |
10.9 years |
| |
Finance Leases |
0.9 years |
| |
|
|
| Weighted Average Discount Rate: |
| |
Operating Leases |
5.7% |
| |
Finance Leases |
5.8% |
Future minimum payments under non-cancellable
operating and finance leases are as follows:
| Fiscal Years Ended September 30, | |
Operating Leases | | |
Finance Leases | |
| 2021 | |
$ | 458,000 | | |
$ | 24,000 | |
| 2022 | |
| 430,000 | | |
| 10,000 | |
| 2023 | |
| 426,000 | | |
| – | |
| 2024 | |
| 433,000 | | |
| – | |
| 2025 | |
| 395,000 | | |
| – | |
| Thereafter | |
| 2,805,000 | | |
| – | |
| Total future minimum lease payments | |
| 4,947,000 | | |
| 34,000 | |
| Less imputed interest | |
| (1,328,000 | ) | |
| (3,000 | ) |
| Total | |
$ | 3,619,000 | | |
$ | 31,000 | |
NOTE 14 RELATED
PARTY TRANSACTIONS
Buying Agency and Supply Agreement
The Company has a
Buying Agency and Supply Agreement (the “Supply Agreement”) with Forward China. The Supply Agreement provides that,
upon the terms and subject to the conditions set forth therein, Forward China will act as the Company’s exclusive buying
agent and supplier of Products (as defined in the Supply Agreement) in the Asia-Pacific region. The Company purchases products
at Forward China’s cost and also pays to Forward China a monthly service fee equal to the sum of (i) $100,000, and (ii) 4%
of “Adjusted Gross Profit”, which is defined as the selling price less the cost from Forward China. The Supply Agreement
expires October 22, 2023. Terence Wise, Chief Executive Officer and Chairman of the Company, is the owner of Forward China. In
addition, Jenny P. Yu, a Managing Director of Forward China, beneficially owns more than 5% of the Company’s common stock.
The Company recorded service fees to Forward China of $1,363,000 and $1,398,000 during Fiscal 2020 and Fiscal 2019, respectively,
which are included as a component of cost of sales when revenue is recognized on sales of the related products.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 14, 2018,
the Company entered into a formal agreement, confluent with the Supply Agreement noted above, to address the potential impact of
customers sourcing directly from Forward China. Although unlikely, customers may be introduced directly or indirectly by the Company
to Forward China. In the event a customer determines to bypass the services of the Company and do business directly with Forward
China, Forward China has agreed to pay a commission of 50% of the net revenue generated from the products or services sold to the
customer after deduction of direct costs. No commissions have been received per this agreement during Fiscal 2020 or Fiscal 2019.
At September 30, 2020,
the Company made $107,000 in prepayments to Forward China for inventory purchases, which is included in prepaid expenses and other
current assets on the consolidated balance sheet.
Promissory Note
On January 18, 2018,
the Company issued a $1,600,000 promissory note payable to Forward China in order to fund the acquisition of IPS. The promissory
note bears interest at a rate of 8% per annum and had an original maturity date of January 18, 2019. Monthly interest payments
commenced on February 18, 2018. The Company incurred and paid $128,000 in interest expense associated with this note in both Fiscal
2020 and Fiscal 2019. At September 30, 2020, after being extended, the maturity date of this note was December 30, 2020. The maturity
date of the note has been extended on several occasions to assist the Company with liquidity. In December 2020, the maturity date
of this note was extended to December 31, 2021.
Related Party Sales
During Fiscal 2019,
the Company’s design division provided services to a customer whose Chief Operating and Financial Officer and equity owner
is an immediate family member of a director on the Company’s Board of Directors and a member on the Board’s Audit and
Compensation committees. The Company sold design services to this customer of $44,000 and $150,000 in Fiscal 2020 and Fiscal 2019,
respectively. At September 30, 2020 and 2019, respectively, there was $0 and $9,000 in outstanding receivables from this customer.
NOTE 15 401(k)
PLAN
The Company maintains
a 401(k) benefit plan allowing eligible employees to make pre-tax contributions of a portion of their salary in amounts subject
to IRS limitations. The Company made matching contributions of $269,000 and $226,000 during Fiscal 2020 and Fiscal 2019, respectively,
which vested immediately and are reflected in the accompanying consolidated statements of operations as a components of cost of
sales and general and administrative expenses.
NOTE 16 SEGMENT
AND GEOGRAPHIC INFORMATION
The Company has two
reportable segments: distribution and design. See Note 1 for more information on the composition of our reportable segments. The
distribution segment sources and distributes carrying cases and other accessories for medical monitoring and diagnostic kits and
a variety of other portable electronic and non-electronic devices. This segment operates in the EMEA Region, the Americas and the
APAC Region. Geographic regions are defined by reference primarily to the location of the customer or its contract manufacturer.
The design segment provides a full spectrum of hardware and software product design and engineering services. This segment operates
predominantly in the Americas region.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment operating loss and net loss before
income taxes are shown in table below:
| | |
Fiscal 2020 | | |
Fiscal 2019 | |
| Revenues, net | |
| | | |
| | |
| Distribution | |
$ | 20,752,000 | | |
$ | 21,988,000 | |
| Design | |
| 13,726,000 | | |
| 15,421,000 | |
| Total revenues, net | |
$ | 34,478,000 | | |
$ | 37,409,000 | |
| | |
| | | |
| | |
| Cost of sales | |
| | | |
| | |
| Distribution | |
$ | 17,978,000 | | |
$ | 18,613,000 | |
| Design | |
| 9,862,000 | | |
| 12,215,000 | |
| Total cost of sales | |
$ | 27,840,000 | | |
$ | 30,828,000 | |
| | |
| | | |
| | |
| Loss from operations | |
| | | |
| | |
| Distribution | |
$ | (1,604,000 | ) | |
$ | (1,377,000 | ) |
| Design | |
| (378,000 | ) | |
| (1,720,000 | ) |
| Total loss from operations | |
$ | (1,982,000 | ) | |
$ | (3,097,000 | ) |
| | |
| | | |
| | |
| Other (income)/expense, net | |
| | | |
| | |
| Distribution | |
$ | (202,000 | ) | |
$ | 438,000 | |
| Design | |
| (14,000 | ) | |
| 73,000 | |
| Total other (income)/expense, net | |
$ | (216,000 | ) | |
$ | 511,000 | |
| | |
| | | |
| | |
| Loss before income taxes | |
| | | |
| | |
| Distribution | |
$ | (1,402,000 | ) | |
$ | (1,815,000 | ) |
| Design | |
| (364,000 | ) | |
| (1,793,000 | ) |
| Total loss before income taxes | |
$ | (1,766,000 | ) | |
$ | (3,608,000 | ) |
Segment assets are shown in the table below:
| | |
September 30, | |
| | |
2020 | | |
2019 | |
| Distribution | |
$ | 8,289,000 | | |
$ | 9,554,000 | |
| Design | |
| 11,067,000 | | |
| 6,540,000 | |
| Total | |
$ | 19,356,000 | | |
$ | 16,094,000 | |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenues from External Customers
Consolidated
The following table
sets forth our consolidated net revenues by geographic region for Fiscal 2020 and Fiscal 2019. All of the design segment customer
revenues are classified under the United States within the Americas region:
| | |
Fiscal 2020 | | |
Fiscal 2019 | |
| EMEA Region: | |
| | | |
| | |
| Germany | |
$ | 3,375,000 | | |
$ | 3,875,000 | |
| Poland | |
| 2,675,000 | | |
| 3,355,000 | |
| Great Britain | |
| 267,000 | | |
| – | |
| Switzerland | |
| – | | |
| 297,000 | |
| Austria | |
| 406,000 | | |
| 186,000 | |
| Other | |
| 362,000 | | |
| 166,000 | |
| Total EMEA Region | |
| 7,085,000 | | |
| 7,879,000 | |
| | |
| | | |
| | |
| Americas: | |
| | | |
| | |
| United States [1] | |
| 21,017,000 | | |
| 21,730,000 | |
| Other | |
| 44,000 | | |
| 4,000 | |
| Total Americas | |
| 21,061,000 | | |
| 21,734,000 | |
| | |
| | | |
| | |
| APAC Region: | |
| | | |
| | |
| Hong Kong | |
| 4,876,000 | | |
| 6,017,000 | |
| Malaysia | |
| 200,000 | | |
| 153,000 | |
| China | |
| 217,000 | | |
| 318,000 | |
| Singapore | |
| 228,000 | | |
| 564,000 | |
| Taiwan | |
| 162,000 | | |
| 164,000 | |
| Other | |
| 649,000 | | |
| 580,000 | |
| Total APAC Region | |
| 6,332,000 | | |
| 7,796,000 | |
| Total Net Revenues | |
$ | 34,478,000 | | |
$ | 37,409,000 | |
| [1] |
Includes $13,726,000 and $15,421,000 of revenue in Fiscal 2020 and Fiscal 2019,
respectively, attributed to the design segment whose customers reside in the United States. |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Major Customers and Concentrations by Geographic Region
In Fiscal 2020 and
Fiscal 2019, the Company had significant customers whose individual percentage of the Company’s total revenues was 10% or
greater. The risk of collecting accounts receivable from all customers is enhanced as a result of the economic impact of the COVID-19
pandemic. The concentrations of revenues and accounts receivable for each operating segment are detailed below.
Distribution Segment Revenues Concentration
The following customers
or their affiliates or contract manufacturers accounted for more than 10% of the distribution segment’s net revenues, by
geographic region, and in segment total for Fiscal 2020 and Fiscal 2019:
| | |
Fiscal 2020 | |
| | |
EMEA | | |
Americas | | |
APAC | | |
Total | |
| Customer A | |
| 46% | | |
| 39% | | |
| 1% | | |
| 29% | |
| Customer B | |
| 24% | | |
| 16% | | |
| 9% | | |
| 17% | |
| Customer C | |
| – | | |
| 1% | | |
| 76% | | |
| 24% | |
| Customer D | |
| 14% | | |
| 11% | | |
| 2% | | |
| 9% | |
| Totals | |
| 84% | | |
| 67% | | |
| 88% | | |
| 79% | |
| | |
Fiscal 2019 | |
| | |
EMEA | | |
Americas | | |
APAC | | |
Total | |
| Customer A | |
| 42% | | |
| 42% | | |
| – | | |
| 30% | |
| Customer B | |
| 29% | | |
| 22% | | |
| 6% | | |
| 19% | |
| Customer C | |
| – | | |
| 3% | | |
| 76% | | |
| 28% | |
| Customer D | |
| 13% | | |
| 15% | | |
| 3% | | |
| 10% | |
| Totals | |
| 84% | | |
| 82% | | |
| 85% | | |
| 87% | |
Design Segment Revenues Concentration
All of our design
segment customers operate in the United States. The following customers accounted for more than 10% of the design segment’s
net revenues for Fiscal 2020 and Fiscal 2019:
| | |
Fiscal 2020 | | |
Fiscal 2019 | |
| Customer 1 | |
| 19% | | |
| 1% | |
| Customer 2 | |
| 13% | | |
| 9% | |
| Customer 3 | |
| 14% | | |
| 19% | |
| Customer 4 | |
| – | | |
| 17% | |
| Total | |
| 46% | | |
| 46% | |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Distribution Segment Accounts Receivable Concentration
At September 30, 2020 and 2019, concentrations
of accounts receivable with significant customers representing 10% or more of distribution segment accounts receivable were as
follows:
| | |
September 30, | |
| | |
2020 | | |
2019 | |
| Customer A | |
| 23% | | |
| 29% | |
| Customer B | |
| 22% | | |
| 21% | |
| Customer C | |
| 20% | | |
| 16% | |
| Customer D | |
| 17% | | |
| 24% | |
| Totals | |
| 82% | | |
| 90% | |
Design Segment Accounts Receivable Concentration
At September 30,
2020 and 2019, concentrations of accounts receivable with significant customers representing 10% or greater of design segment
accounts receivable were as follows:
| | |
September 30, | |
| | |
2020 | | |
2019 | |
| Customer 1 | |
| 24% | | |
| 3% | |
| Customer 3 | |
| 5% | | |
| 19% | |
| Customer 4 | |
| – | | |
| 44% | |
| Customer 5 | |
| 14% | | |
| 5% | |
| Customer 6 | |
| 10% | | |
| 3% | |
| Totals | |
| 53% | | |
| 74% | |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-Lived Assets
Identifiable long-lived
assets, consisting predominantly of property, plant and equipment, by operating segment are presented net of accumulated depreciation
and amortization. All of the Company’s long-lived assets are geographically located in the Americas region. See table below:
| | |
September 30, | |
| | |
2020 | | |
2019 | |
| | |
Consolidated | | |
Distribution | | |
Design | | |
Consolidated | | |
Distribution | | |
Design | |
| Americas | |
$ | 215,000 | | |
$ | 23,000 | | |
$ | 192,000 | | |
$ | 243,000 | | |
$ | 18,000 | | |
$ | 225,000 | |
| APAC | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | |
| EMEA | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | |
| Total long-lived assets (net) | |
$ | 215,000 | | |
$ | 23,000 | | |
$ | 192,000 | | |
$ | 243,000 | | |
$ | 18,000 | | |
$ | 225,000 | |
Total Liabilities
The following table presents total liabilities
by operating segment for the years ended September 30, 2019 and 2018:
| | |
September 30, | |
| | |
2020 | | |
2019 | |
| | |
| | |
| |
| Distribution | |
$ | 5,780,000 | | |
$ | 6,061,000 | |
| Design | |
| 6,993,000 | | |
| 2,322,000 | |
| Total | |
$ | 12,773,000 | | |
$ | 8,383,000 | |
Supplier Concentration
The Company procures
all its supply of carrying solutions products for the distribution segment from independent suppliers in China through Forward
China. Depending on the product, Forward China may require several different suppliers to furnish component parts or pieces. The
Company purchased 100% of its OEM products from Forward China in Fiscal 2020 and 2019.
The Company procures
materials and supplies used to build prototypes and “mock-ups” for design service projects. Vendors are from the United
States.
NOTE 17 LINE
OF CREDIT
The Company, specifically
IPS, has a $1,300,000 revolving line of credit which was renewed at the discretion of the lender on August 5, 2020. The line of
credit has a maturity date of May 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 at September 30,
2020 and 2019 was 4.0% and 5.75%, respectively. As of September 30, 2020, the Company had $300,000 available under the line of
credit. The Company is subject to certain debt-service ratio requirements which are measured annually. At September 30, 2020 and
2019 the Company was in violation of the required debt-service ratio covenants but was granted a waiver of the violation from the
lender in both years.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 DEBT
On April 18, 2020,
the Company entered into a loan in an aggregate principal amount of $1,357,000 under the Paycheck Protection Program (the “PPP
Loan”) pursuant to the recently enacted U.S. Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).
The loan matures on April 18, 2022 and bears an interest rate of 1.00% per annum. The Company was originally scheduled to pay monthly
principal and interest payments on the outstanding principal balance of this loan beginning November 18, 2020 until maturity when
the entire principal balance remaining unpaid, along with all accrued and unpaid interest, was to be due and payable in full. This
loan is unsecured, and subject to forgiveness in accordance with the terms of the CARES Act. We have accounted for these proceeds
as a loan and the current and long-term portions of $827,000 and $530,000, respectively, are included in the corresponding categories
of notes payable on the consolidated balance sheets. In October 2020, the Company filed for forgiveness of this loan and in December,
the Small Business Administration approved our forgiveness request for this loan.
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 September 30, 2020 was $156,000.
On April 1, 2016,
IPS entered into a term loan with a lender in the amount of $325,000. The loan matured on April 1, 2020 and bore interest at a
rate of 4.215% per annum. Interest and principal of $7,378 were paid on a monthly basis through maturity. This loan was secured
by all of IPS’ assets and was guaranteed by the Company. The outstanding balance at September 30, 2020 and 2019 was $0 and
$52,000, respectively.
On December 11, 2017,
IPS entered into an installment payment financing arrangement with a lender in the amount of $23,000. IPS made monthly payments
of $1,035, which includes an implied interest rate of 9.5%, for 24 months. The last payment was made in December 2019. The loan
balance was $0 and $3,000 at September 30, 2020 and 2019, respectively.
Future minimum principal
payment requirements on our notes payable (including the PPP loan) are as follows:
| Fiscal 2021 | |
$ | 983,000 | |
| Fiscal 2022 | |
| 530,000 | |
| Total | |
$ | 1,513,000 | |
NOTE 19 MOONI
AGREEMENT
On January 29, 2019,
the Company entered into a three-year Distribution Agreement (the “Agreement”) with Mooni International AB and its
owner. In accordance with the Agreement, the Company: (i) was appointed as the exclusive distributor of Mooni's current and future
products (including future products developed or offered by Mooni and/or the owner) in North America, (ii) subject to certain repayment
requirements, the Company paid $400,000 to Mooni, and (iii) was granted an option to purchase a controlling interest of Mooni at
a valuation not to exceed $5 million which, if exercised, would be effective on the 12 month anniversary of the effective date
of the Agreement. This option was not exercised and therefore expired. The Company generated $263,000 of revenue from this agreement
in Fiscal 2020. Additionally, Forward China, a company owned by Terence Wise, the Company's Chairman and Chief Executive Officer,
was named the designated supplier under the Agreement. The current and long-term portions of the unamortized fee of $133,000 and
$45,000, respectively, at September 30, 2020 and $133,000 and $178,000, respectively, at September 30, 2019, are included in prepaid
and other current assets and other assets, respectively, in the accompanying consolidated balance sheets. Amortization of the cost
for Fiscal 2020 and Fiscal 2019 of $133,000 and $89,000, respectively, is included in sales and marketing expenses in the accompanying
consolidated statements of operations.
