UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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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
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
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 |
|
(The Nasdaq Capital Market) |
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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.
Indicate by check mark whether the registrant has submitted electronically
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preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Smaller reporting company | ||
| Emerging growth 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. ☐
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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: shares as of July 31, 2021.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
| 1 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, | September 30, | |||||||
| 2021 | 2020 | |||||||
| Assets | (Unaudited) | |||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Operating lease right of use assets, net | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and shareholders' equity | ||||||||
| Current liabilities: | ||||||||
| Line of credit | $ | $ | ||||||
| Current portion of note payable to Forward China | ||||||||
| Accounts payable | ||||||||
| Due to Forward China | ||||||||
| Deferred income | ||||||||
| Current portion of notes payable | ||||||||
| Current portion of finance lease liability | ||||||||
| Current portion of earnout consideration | ||||||||
| Current portion of operating lease liability | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Other liabilities: | ||||||||
| Note payable to Forward China, less current portion | ||||||||
| Notes payable, less current portion | ||||||||
| Operating lease liability, less current portion | ||||||||
| Finance lease liability, less current portion | ||||||||
| Earnout consideration, less current portion | ||||||||
| Total other liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Shareholders' equity: | ||||||||
| Common stock, par value $ per share; shares authorized; and shares issued and outstanding at June 30, 2021 and September 30, 2020, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total shareholders' equity | ||||||||
| Total liabilities and shareholders' equity | $ | $ | ||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| 2 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended June 30, | For the Nine Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues, net | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Sales and marketing expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Goodwill impairment | ||||||||||||||||
| Income/(loss) from operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Gain on forgiveness of note payable | ( | ) | ||||||||||||||
| Fair value adjustment of earnout consideration | ( | ) | ( | ) | ||||||||||||
| Fair value adjustment of deferred cash consideration | ||||||||||||||||
| Interest income | ( | ) | ( | ) | ||||||||||||
| Interest expense | ||||||||||||||||
| Other expense, net | ||||||||||||||||
| Income/(loss) before income taxes | ( | ) | ( | ) | ||||||||||||
| Provision for/(benefit from) income taxes | ||||||||||||||||
| Net income/(loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Earnings/(loss) per share: | ||||||||||||||||
| Basic | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Diluted | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| 3 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
| For the Three and Nine Months Ended June 30, 2021 | ||||||||||||||||||||
| Additional | ||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Share-based compensation | – | |||||||||||||||||||
| Stock options exercised | ||||||||||||||||||||
| Net income | – | |||||||||||||||||||
| Balance at December 31, 2020 | ( | ) | ||||||||||||||||||
| Share-based compensation | – | |||||||||||||||||||
| Stock options exercised | ||||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||
| Balance at March 31, 2021 | ( | ) | ||||||||||||||||||
| Share-based compensation | – | |||||||||||||||||||
| Stock options exercised | ||||||||||||||||||||
| Net income | – | |||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| For the Three and Nine Months Ended June 30, 2020 | ||||||||||||||||||||
| Additional | ||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance at September 30, 2019 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Share-based compensation | – | |||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||
| Balance at December 31, 2019 | ( | ) | ||||||||||||||||||
| Share-based compensation | – | |||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||
| Balance at March 31, 2020 | ( | ) | ||||||||||||||||||
| Share-based compensation | – | |||||||||||||||||||
| Stock options exercised | ||||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| 4 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the Nine Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Operating Activities: | ||||||||
| Net income/(loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income/(loss) to net cash used in operating activities: | ||||||||
| Share-based compensation | ||||||||
| Depreciation and amortization | ||||||||
| Bad debt expense/(recovery) | ( | ) | ||||||
| Gain on forgiveness of note payable | ( | ) | ||||||
| Change in fair value of earn-out consideration | ( | ) | ( | ) | ||||
| Change in fair value of deferred cash consideration | ||||||||
| Goodwill impairment | ||||||||
| Impairment of investment | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Other assets | ||||||||
| Accounts payable and due to Forward China | ( | ) | ||||||
| Deferred income | ( | ) | ||||||
| Net changes in operating lease liabilities | ||||||||
| Accrued expenses and other current liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Investing Activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing Activities: | ||||||||
| Proceeds from line of credit borrowings | ||||||||
| Repayment of line of credit borrowings | ( | ) | ( | ) | ||||
| Repayment of notes payable | ( | ) | ( | ) | ||||
| Proceeds from note payable | ||||||||
| Proceeds from stock options exercised | ||||||||
| Repayments of finance leases | ( | ) | ( | ) | ||||
| Payment of deferred cash consideration | ( | ) | ||||||
| Net cash (used in)/provided by financing activities | ( | ) | ||||||
| Net decrease in cash | ( | ) | ( | ) | ||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for taxes | $ | $ | ||||||
| Supplemental Disclosures of Non-Cash Information: | ||||||||
| Lease assets exchanged for lease liabilities | $ | $ | ||||||
| Lease assets recorded upon adoption of ASC 842 | $ | $ | ||||||
| Lease liabilities recorded upon adoption of ASC 842 | $ | $ | ||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| 5 |
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 OVERVIEW
Business
Forward Industries, Inc. (“Forward”, “we” or the “Company”) 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 and development capabilities through our wholly-owned subsidiaries, 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.
Impact of COVID-19
The outbreak of the COVID-19 virus continues to impact our results of operations. While the most significant impact was realized in Fiscal 2020, the virus continued to impact our results of operations in Fiscal 2021. The business shutdowns resulting from the pandemic disrupted our supply chain and the manufacture or shipment of our products and delayed the rollout of our retail products. Additionally, demand for our design and development services was reduced or delayed as a result of the pandemic as certain customers reduced discretionary spending. While revenues for the three and nine months ended June 30, 2021 increased as compared to the three and nine months ended June 30, 2020, they were lower than anticipated due in part to the impact of COVID-19 and the resulting economic conditions. The impact of lower than anticipated revenue was further complicated by a significant increase in freight costs due to the global shipping container shortage caused in part by the pandemic. These challenges were partially offset by a reduction in certain selling and travel related expenses.
Many government restrictions have been relaxed and the economy has continued to open in more jurisdictions. However, the emergence of new and transmittable variants of COVID-19 could lead to a possible resurgence of the virus, particularly in populations with low vaccination rates and has resulted in new restrictions in certain geographies and among certain businesses. 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 II, Item 1A — Risk Factors” for a description of the material risks that the Company currently faces in connection with COVID-19.
Until the pandemic is fully controlled, we expect business conditions to remain challenging. In response to these challenges, we will continue to focus on those factors that we can control: closely managing and controlling our expenses; aligning our design and development schedules with demand in a proactive manner as there are changes in market conditions to minimize our cash operating costs; pursuing further improvements in the productivity and effectiveness of our development, selling and administrative activities and, where appropriate, taking advantage of opportunities to enhance our business growth and strategy. To help mitigate the impact of these challenging business conditions, we implemented cost-cutting initiatives and reduced executive pay and Board of Directors compensation for the three months ended June 30, 2021. See “Liquidity and Capital Resources” section of Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further description of these cost-cutting measures.
NOTE 2 ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of Forward Industries, Inc. and all of its subsidiaries: Forward Industries (IN), Inc. (“Forward US”), Forward Industries (Switzerland) GmbH (“Forward Switzerland”), Forward Industries UK Limited (“Forward UK”), Intelligent Product Solutions, Inc. (“IPS”) and Kablooe, Inc. (“Kablooe”). The terms “Forward”, “we” or the “Company” as used throughout this document are used to indicate Forward Industries, Inc. and all of its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
| 6 |
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The acquisition of Kablooe took place in August 2020 and its results of operations have been included in our condensed consolidated financial statements since the acquisition date. Accordingly, our results of operations for the three and nine months ended June 30, 2021 include Kablooe’s results of operations, while our results of operations for the three and nine months ended June 30, 2020 do not. Key terms of the acquisition are contained in our Form 10-K filed with the Securities and Exchange Commission on December 17, 2020.
In the opinion of management, the accompanying condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q reflect all normal recurring adjustments necessary to present fairly the financial position and results of operations and cash flows for the interim periods presented herein, but are not necessarily indicative of the results of operations for the year ending September 30, 2021. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2020, and with the disclosures and risk factors presented therein. The September 30, 2020 condensed consolidated balance sheet has been derived from the audited consolidated financial statements.
For the nine months ended
June 30, 2021, the Company generated net income of $608,000,
which includes $
Accounting Estimates
The preparation of the Company’s condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.
Throughout this document, certain dollar amounts and percentages have been rounded to their approximate values.
Revenue Recognition
Distribution Segment
The Company generally recognizes
revenue in its distribution segment when: (i) finished goods are shipped to our 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 title to the goods has transferred. When
the Company receives consideration before achieving the criteria previously mentioned, it records a contract liability, which is classified
as a component of deferred income in the accompanying condensed consolidated balance sheets. The distribution segment had contract liabilities
of $
Design Segment
The Company applies the “cost to cost” and “right to invoice” methods of revenue recognition to the contracts with customers in the design segment. The design segment typically engages in two types of contracts: (i) time and material and (ii) fixed price. The Company recognizes revenue over time on its time and material contracts utilizing a “right to invoice” method. Revenues from fixed price contracts that require performance of services that are not related to the production of tangible assets are recognized by using cost inputs to measure progress toward the completion of its performance obligations, or the “cost to cost” method. Revenues from fixed price contracts that contain specific deliverables are recognized when the performance obligation has been satisfied or the transfer of goods to the customer has been completed and accepted.
| 7 |
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED 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 condensed consolidated balance sheets. The design segment had contract assets of $
Accounts Receivable
Accounts receivable consist
of unsecured trade accounts with customers. The Company maintains an allowance for doubtful accounts, which is recorded as a reduction
to accounts receivable on the condensed consolidated financial statements. Collectability of accounts receivable is estimated by evaluating
the number of days accounts are outstanding, customer payment history, recent payment trends and perceived creditworthiness, adjusted
as necessary based on specific customer situations. At June 30, 2021, September 30, 2020 and September 30, 2019, the Company had allowances
for doubtful accounts of $
Goodwill
Goodwill represents the future economic benefits of assets acquired in a business combination that are not individually identified or separately recognized. The Company’s goodwill resulted from its acquisitions of IPS in January 2018 and Kablooe in August 2020.
The Company reviews goodwill for impairment at least annually, or more often if triggering events occur. The Company has two reporting units with goodwill (IPS and Kablooe) and we perform our annual goodwill impairment test on September 30, the end of the fiscal year, or upon the occurrence of a triggering event. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company would not need to perform a quantitative impairment test for the reporting unit. If the Company cannot support such a conclusion or does not elect to perform the qualitative assessment, then the Company will perform the quantitative impairment test by comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying value, no impairment charge is recognized. If the fair value of the reporting unit is less than its carrying value, an impairment charge will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value. A significant amount of judgment is required in performing goodwill impairment tests including estimating the fair value of a reporting unit. See Note 3.
Intangible Assets
Intangible assets include trademarks and customer relationships, which resulted from the acquisitions of IPS in January 2018 and Kablooe in August 2020 and are recorded based on their estimated fair value determined in conjunction with the purchase price allocations. These intangible assets are amortized over their estimated useful lives, which are periodically evaluated for reasonableness.
Our intangible assets are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
In assessing the recoverability of our intangible assets, we must make estimates and assumptions regarding future cash flows and other
factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether
an impairment charge is recognized and the magnitude of any such charge. Fair value estimates are made at a specific point in time, based
on relevant information. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore
cannot be determined with precision. Changes in assumptions could significantly affect the estimates. If these estimates or material related
assumptions change in the future, we may be required to record impairment charges related to our intangible assets. Management evaluated
and concluded that there were
| 8 |
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 June 30, 2021, there was no change to our assessment that a full valuation allowance was required against all net deferred tax assets as it is not probable that such deferred tax assets will be realized. Accordingly, any deferred tax provision or benefit was offset by an equal and opposite change to the valuation allowance. No current book income tax provision was recorded against book net income due to the existence of significant net operating loss carryforwards.
In December 2020, the Company’s application for forgiveness of its loan received as part of the Payroll Protection Program (“PPP loan”) pursuant to the U.S. Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was approved. The aggregate loan principal amount forgiven was $1,357,000. The total amount forgiven will not be recognized as taxable income pursuant to the CARES Act. Pursuant to the Consolidated Appropriations Act, 2021, which was enacted by Congress and signed into law by the President on December 27, 2020, all expenses utilizing funds from PPP loans will be deductible against taxable income.
Fair Value Measurements
We perform fair value measurements in accordance with the guidance provided by Accounting Standards Codification (“ASC”) 820, “Fair Value Measurement.” ASC 820 defines fair value as the price that would be received from selling an asset or paid to 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. |
Leases
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 finance lease assets are a component of property and equipment on the condensed consolidated balance sheets. The current and long-term portions of operating and finance lease liabilities are shown separately as such on the condensed consolidated balance sheets.
| 9 |
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 estimates of fair value are 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.
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, “Fair Value Measurement - Disclosure Framework (Topic 820)” to improve the disclosure requirements on fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company adopted this guidance in the first quarter of Fiscal 2021 with no material impact to its condensed consolidated financial statements.
In November 2019, the FASB issued ASU 2019-08, “Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606)” to provide guidance for share-based payment awards granted to a customer in conjunction with selling goods or services accounted for under Topic 606. The pronouncement is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company adopted this guidance in the first quarter of Fiscal 2021 with no material impact to its condensed consolidated financial statements.
In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” ASU 2019-11 is an accounting pronouncement that provides clarity to and amends earlier guidance on this topic and would be effective concurrently with the adoption of such earlier guidance. This pronouncement is effective for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years. The Company is currently evaluating the effects of this pronouncement on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)” addressing customers’ accounting for implementation costs incurred in a cloud computing arrangement that is a service contract, which requires customers to apply internal-use software guidance to determine the implementation costs that are able to be capitalized. Capitalized implementation costs are required to be amortized over the term of the arrangement, beginning when the cloud computing arrangement is ready for its intended use. The effective date of the new guidance for public companies is for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company adopted this guidance in the first quarter of Fiscal 2021 with no material impact to its condensed consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This guidance removes certain exceptions to the general principles in Topic 740 and provides consistent application of U.S. GAAP by clarifying and amending existing guidance. The effective date of the new guidance for public companies is for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effects of the pronouncement on its condensed consolidated financial statements.
| 10 |
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 INTANGIBLE ASSETS AND GOODWILL
The Company’s intangible
assets are all held under the design segment of our business. Amortization expense related to intangible assets was $
The Company’s intangible assets consist of the following:
| June 30, 2021 | September 30, 2020 | |||||||||||||||||||||
| Trademarks | Customer Relationships | Total Intangible Assets | Trademarks | Customer Relationships | Total Intangible Assets | |||||||||||||||||
| Gross carrying amount | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Less accumulated amortization | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | |||||||||||
| Net carrying amount | $ | $ | $ | $ | $ | $ | ||||||||||||||||
At June 30, 2021, estimated amortization expense for the Company’s intangible assets for each of the next five years and thereafter is as follows:
| Remainder of Fiscal 2021 | $ | |||
| Fiscal 2022 | ||||
| Fiscal 2023 | ||||
| Fiscal 2024 | ||||
| Fiscal 2025 | ||||
| Thereafter | ||||
| Total | $ |
In March 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 earnout consideration discussed in Note 4 and revised revenue and operational projections for IPS
for the remainder of the 2020 fiscal year and future periods. Based on these factors, the Company concluded that it was more likely than
not that the fair value of the IPS reporting unit had declined below its carrying amount. The Company then calculated the fair value of
this reporting unit using Level 3 inputs, which is a combination of asset-based, income and market approaches. The estimates and assumptions
utilized in the estimated fair value calculation 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. The Company concluded the IPS reporting
unit’s fair value was below its carrying value by $
| 11 |
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 FAIR VALUE MEASUREMENTS
The
earnout consideration of $
In connection with the acquisition
of IPS in January 2018, the Company agreed to pay deferred cash consideration and contingent earnout consideration to the selling shareholders
of IPS and these liabilities were measured at fair value each reporting period. In March 2020, the fair value of the earnout consideration
was reduced from $350,000 to $0 due to the low likelihood of IPS reaching the underlying earnings target. At September 30, 2020, the Company
had
The following table presents the placement in the fair value hierarchy and summarizes the changes in fair value of the earnout liability for the three and nine months ended June 30, 2021:
| Fair value measurement at reporting date using | ||||||||||||||||
| Quoted prices in active markets for identical assets | Significant other observable inputs | Significant unobservable inputs | ||||||||||||||
| Balance | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Earnout consideration at September 30, 2020 | $ | $ | $ | $ | ||||||||||||
| Decrease in fair value of Kablooe earnout consideration | ( | ) | ( | ) | ||||||||||||
| Earnout consideration at December 31, 2020 | ||||||||||||||||
| Change in fair value of Kablooe earnout consideration | ||||||||||||||||
| Earnout consideration at March 31, 2021 | ||||||||||||||||
| Increase in fair value of Kablooe earnout consideration | ||||||||||||||||
| Earnout consideration at June 30, 2021 | $ | $ | $ | $ | ||||||||||||
During Fiscal 2019, the Company
received common stock from a customer as compensation for services provided, which was recorded as a cost-method investment with an estimated
fair value of $327,000. This initial fair value was based on a private placement round of common stock issued to third-party private investors
of the customer at a time close to the valuation date. Management determined that the inputs used to value the investment were observable,
either directly or indirectly, and therefore classified as a level 2 valuation measurement. In March 2020, due to the performance of the
business in which the Company was invested, it concluded the investment was impaired and recorded an impairment charge of $
| 12 |
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 SEGMENT INFORMATION
The Company has two reportable segments: distribution and design. The distribution segment sources and distributes carrying cases and other accessories for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic devices. It also distributes a variety of other products, including smart-enabled furniture, through its retail distribution network. The design segment provides a full spectrum of hardware and software product design and engineering services. We measure the performance of our operating segments based upon revenue and operating income or loss. Operating income/(loss) and net income/(loss) are shown in the table below:
For the Three Months Ended June 30, | For the Nine Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues, net | ||||||||||||||||
| Distribution | $ | $ | $ | $ | ||||||||||||
| Design | ||||||||||||||||
| Total revenues, net | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Distribution | $ | $ | $ | $ | ||||||||||||
| Design | ||||||||||||||||
| Total cost of sales | $ | $ | $ | $ | ||||||||||||
| Income/(loss) from operations | ||||||||||||||||
| Distribution | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Design | ( | ) | ||||||||||||||
| Total income/(loss) from operations | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Other expense/(income), net | ||||||||||||||||
| Distribution | $ | $ | $ | $ | ( | ) | ||||||||||
| Design | ( | ) | ( | ) | ||||||||||||
| Total other expense/(income), net | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| Net income/(loss) | ||||||||||||||||
| Distribution | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Design | ( | ) | ||||||||||||||
| Total net income/(loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
The following table presents total assets by operating segment:
June 30, 2021 | September 30, 2020 | |||||||
| Distribution | $ | $ | ||||||
| Design | ||||||||
| Total | $ | $ | ||||||
| 13 |
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2021 Equity Incentive Plan
In February 2021, shareholders of the Company approved the 2021 Equity Incentive Plan (the “2021 Plan”), which is administered by the Compensation Committee of the Board of Directors and authorizes shares of common stock for grants of various types of equity awards to officers, directors, employees and consultants. Upon approval of the 2021 Plan, no additional awards were granted under the 2011 Long Term Incentive Plan (the “2011 Plan”), which expired according to its terms in March 2021. Shares authorized under the 2021 Plan include 1,000,000 new shares and 291,000 shares that remained available under the 2011 Plan. Awards which are forfeited or expire are eligible for regrant under the 2021 Plan. The exercise prices of stock options granted may not be less than the fair market value of the common stock as quoted on the Nasdaq stock market on the grant date and the expiration date of option awards may not exceed 10 years.
Stock Options
No options were granted during the three or nine months ended June 30, 2021.
In
February 2020, the Company granted options to non-employee directors to purchase an aggregate of shares of its common stock at
an exercise price of $ per shares. The options vested one year from the date of grant, expire five years from the date of grant and
had an aggregate grant date fair value of $
During
the nine months ended June 30, 2021 and 2020, the Company issued and shares, respectively, of its common stock pursuant
to the exercise of stock options for aggregate cash proceeds of $
The Company recognized compensation expense for stock option awards of $ and $ during the three months ended June 30, 2021 and 2020, respectively, and $ and $ during the nine months ended June 30, 2021 and 2020, respectively, in its condensed consolidated statements of operations.
At June 30, 2021, there was $ of total unrecognized compensation cost related to nonvested stock option awards that is expected to be recognized over a weighted average period of years.
| 14 |
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basic earnings/(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 earnings/(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. A reconciliation of basic and diluted earnings/(loss) per share is as follows:
For the Three Months Ended June 30, | For the Nine Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net income/(loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Denominator: | ||||||||||||||||
| Weighted average common shares outstanding | ||||||||||||||||
| Dilutive common share equivalents | ||||||||||||||||
| Weighted average diluted shares outstanding | ||||||||||||||||
| Earnings/(loss) per share | ||||||||||||||||
| Basic | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Diluted | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
The following securities were excluded from the calculation of diluted earnings/(loss) per share in each period because their inclusion would have been anti-dilutive:
For the Three Months Ended June 30, | For the Nine Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Options | ||||||||||||||||
| Warrants | ||||||||||||||||
| Total potentially dilutive shares | | |||||||||||||||
| 15 |
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 CONCENTRATIONS
Concentration of Revenues and Accounts Receivable
For the three and nine months ended June 30, 2021 and 2020, the Company had customers whose individual percentage of their respective segment’s revenues and accounts receivable was 10% or greater. The concentrations of revenues and accounts receivable for each reportable segment are as follows:
Distribution Segment Revenues Concentration
For the Three Months Ended June 30, | For the Nine Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Customer A | ||||||||||||||||
| Customer B | ||||||||||||||||
| Customer C | ||||||||||||||||
| Customer D | ||||||||||||||||
| Customer E | ||||||||||||||||
| Totals | ||||||||||||||||
Design Segment Revenues Concentration
For the Three Months Ended June 30, | For the Nine Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Customer 1 | ||||||||||||||||
| Customer 2 | ||||||||||||||||
| Customer 3 | ||||||||||||||||
| Customer 4 | ||||||||||||||||
| Customer 9 | ||||||||||||||||
| Total | ||||||||||||||||
Distribution Segment Accounts Receivable Concentration
June 30, 2021 | September 30, 2020 | |||||||
| Customer A | ||||||||
| Customer B | ||||||||
| Customer C | ||||||||
| Customer D | ||||||||
| Customer E | ||||||||
| Totals | ||||||||
| 16 |
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Design Segment Accounts Receivable Concentration
June 30, 2021 | September 30, 2020 | |||||||
| Customer 1 | ||||||||
| Customer 3 | ||||||||
| Customer 5 | ||||||||
| Customer 6 | ||||||||
| Customer 7 | ||||||||
| Customer 8 | ||||||||
| Totals | ||||||||
NOTE 9 RELATED PARTY TRANSACTIONS
Buying Agency and Supply Agreement
The Company has a Buying
Agency and Supply Agreement (the “Supply Agreement”) with Forward Industries Asia-Pacific Corporation (“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 $
The Company has a separate
agreement with Forward China to address the potential impact of customers sourcing directly from Forward China. In the event a customer
bypasses the services of the Company and does business directly with Forward China, Forward China will pay a commission of 50% of the
net revenue, less direct costs, generated from the products or services sold. The Company recognized $
The Company had prepayments
to Forward China for inventory purchases of $
Promissory Note
On January 18, 2018, the
Company issued a $
| 17 |
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Related Party Sales
A member of the Company’s
Audit, Governance and Compensation Committees of its Board of Directors is also a member of the Board of Directors of a company to whom
the Company’s distribution division sold products. The Company recognized revenue of $
The Company’s design
division provided services to a customer whose former Chief Operating and Financial Officer and equity owner is an immediate family member
of a director on the Company’s Board of Directors. The director is a member of the Board’s Audit, Governance and Compensation
Committees. The Company sold design services to this customer of $
Related Party Activity
In October 2020, the Company
began selling smart-enabled furniture, which is sourced by Forward China and sold in the U.S. under the Koble brand name. The Koble brand
is owned by The Justwise Group Ltd., a company owned by Terrence Wise, Chief Executive Officer and Chairman of the Company. The Company
recognized revenues from the sale of Koble products of $
NOTE 10 LEGAL PROCEEDINGS
On August 21, 2020, IPS was named a third-party defendant in a patent dispute claim currently pending in the U.S. District Court for the Eastern District of New York. The complaint, which contains no specific amount of claimed monetary damages, asserts that certain intellectual property was misappropriated by IPS and one of its former employees. IPS denies the allegations, believes the action is without merit and intends to vigorously defend it. The Company filed a motion to dismiss the complaint on December 14, 2020. The court has not yet ruled on the Company’s motion.
From time to time, the Company may become a party to other legal actions or proceedings in the ordinary course of its business. At June 30, 2021, there were no such actions or proceedings, either individually or in the aggregate, that, if decided adversely to the Company’s interests, it believes would be material to its business.
NOTE 11 LINE OF CREDIT
The Company, specifically
IPS, has a $
| 18 |
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 DEBT
On
In connection with the acquisition
of Kablooe, the Company assumed a loan payable with a principal amount of $
NOTE 13 MOONI AGREEMENT
On January 29, 2019, the Company entered into a three-year Distribution Agreement (the “Agreement”) with Mooni International AB (“Mooni”) 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, paid $400,000 to Mooni, and (iii) was granted an option to purchase a controlling interest of Mooni at a valuation not to exceed $5 million which, if exercised, would have been effective on the 12-month anniversary of the effective date of the Agreement. This option was not exercised and therefore expired. 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 Company generated revenues
from this agreement of $
NOTE 14 LEASES
The Company’s operating
leases are primarily for corporate, sales and administrative office space. Total operating lease expense was $
The Company leases certain
computer equipment through various finance lease agreements expiring through July 2022. The net book value of assets under finance leases
was $
In March 2021, the Company signed a renewal to extend the term of its lease in Minnesota for an additional 60 months. Payments under this operating lease commence July 1, 2021 and escalate 2.75% per year. The monthly rent payment is $10,000 per month, which includes taxes and operating expenses as defined in the agreement.
| 19 |
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Additional information related to operating and finance leases at June 30, 2021 and September 30, 2020 is as follows:
| June 30, | September 30, | |||||||
| 2021 | 2020 | |||||||
| Weighted Average Remaining Lease Term (Yrs): | ||||||||
| Operating leases | ||||||||
| Finance leases | ||||||||
| Weighted Average Discount Rate: | ||||||||
| Operating leases | ||||||||
| Finance leases | ||||||||
At June 30, 2021, future minimum payments under non-cancellable operating and finance leases were as follows:
| Operating Leases | Finance Leases | |||||||
| Remainder of Fiscal 2021 | $ | $ | ||||||
| Fiscal 2022 | ||||||||
| Fiscal 2023 | ||||||||
| Fiscal 2024 | ||||||||
| Fiscal 2025 | ||||||||
| Thereafter | ||||||||
| Total future minimum lease payments | ||||||||
| Less imputed interest | ( | ) | ( | ) | ||||
| Present value of lease liabilities | $ | $ | ||||||
| 20 |
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements, and the notes thereto, and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020. The following discussion and analysis compares our consolidated results of operations for the three and nine months ended June 30, 2021 (the “2021 Quarter” and the “2021 Period”, respectively) with those for the three and nine months ended June 30, 2020 (the “2020 Quarter” and the “2020 Period”, respectively). All dollar amounts and percentages presented herein have been rounded to approximate values.
Cautionary Note Regarding Forward-Looking Statements
This report contains “forward-looking statements”, as such term is used within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, statements regarding:
| · | our liquidity, |
| · | expectations regarding the impact of the pandemic on our business, |
| · | expectations regarding the length of the pandemic’s business disruption, |
| · | expectations regarding revenues, |
| · | plans regarding the repayment of debt, and |
| · | beliefs regarding our capital resources |
as well as other statements regarding our future operations, financial condition and prospects and business strategies. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects,” “predicts,” “projects,” “will be” and “will continue” and similar expressions. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include the failure to receive material orders, our ability to successfully market and sell products that we develop, the effects of the COVID-19 outbreak, including levels of consumer, business and economic confidence generally, the duration of the COVID-19 outbreak and severity of such outbreak, the pace of recovery following the COVID-19 outbreak, the effect on our supply chain, our ability to implement cost containment; and the adverse effects of the COVID-19 outbreak on our business or the market price of our common stock, failure to diversify the industries in which we sell our products, potential imposed tariffs or other restrictions placed on imports by the U.S. government, and continued pricing pressure on our products. Further information on our risk factors is contained in our filings with the SEC, including our Form 10-K for the year ended September 30, 2020. Any forward-looking statement made by us speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
| 21 |
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 and 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 acquisition of Kablooe took place in August 2020 and its results of operations have been included in our condensed consolidated financial statements since the acquisition date. Accordingly, our results of operations for the 2021 Quarter and the 2021 Period include Kablooe’s results of operations, while our results of operations for the 2020 Quarter and the 2020 Period do not. Key terms of the acquisition are contained in our Form 10-K filed with the Securities and Exchange Commission on December 17, 2020.
The future impacts of the COVID-19 pandemic and any resulting economic impact are largely unknown and could be significant. It is possible that the COVID-19 pandemic, the measures taken by the governments of countries affected and the resulting economic impact may continue to negatively impact our results of operations, cash flows and financial position in future periods as well as that of our customers, including their ability to pay for our services and choosing to allocate their budgets to new or existing projects which may or may not require our services. The long-term financial impact on our business cannot be reasonably estimated at this time. As a result, the effects of COVID-19 may not be fully reflected in our financial results until future periods.
Until the pandemic is fully controlled, we expect business conditions to remain challenging. In response to these challenges, we will continue to focus on those factors that we can control: closely managing and controlling our expenses; aligning our design and development schedules with demand in a proactive manner as there are changes in market conditions to minimize our cash operating costs; pursuing further improvements in the productivity and effectiveness of our development, selling and administrative activities and, where appropriate, taking advantage of opportunities to enhance our business growth and strategy. To help mitigate the impact of these challenging business conditions, we implemented cost-cutting initiatives and reduced executive pay and Board of Directors compensation for the three months ended June 30, 2021. See “Liquidity and Capital Resources” section for further description of these cost-cutting measures.
Refer to “Part II, Item 1A — Risk Factors” for a description of the material risks that the Company currently faces in connection with COVID-19.
Variability of Revenues and Results of Operations
A significant portion of our revenue is concentrated with several large customers, some of which are the same and some of which change over time. Orders from some of these customers can be highly variable, with short lead times, which can cause our quarterly revenues, and consequently our results of operations, to vary over a relatively short period of time.
Critical Accounting Policies and Estimates
We discuss the material accounting policies that are critical in making the estimates and judgments in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, under the caption “Management’s Discussion and Analysis—Critical Accounting Policies and Estimates”. There has been no material change in critical accounting policies or estimates during the period covered by this report.
Recent Accounting Pronouncements
For information on recent accounting pronouncements and impacts, see Note 2 to the unaudited condensed consolidated financial statements.
| 22 |
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2021 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2020
Net Income/(Loss)
Distribution Segment
Distribution segment net loss was $181,000 in the 2021 Quarter compared to 246,000 in the 2020 Quarter. The decrease to the net loss was due to various factors, including a reduction in general and administrative expenses, partially offset by lower revenue and gross profit, as reflected in the table below.
Design Segment
Design segment net income was $425,000 in the 2021 Quarter compared to $31,000 in the 2020 Quarter. The increase in net income was primarily due to higher revenue and gross profit, partially offset by higher general and administrative expenses, as reflected in the table below:
| Main Components of Net Income/(Loss) | ||||||||||||||||||||||||||||
| (amounts in thousands) | ||||||||||||||||||||||||||||
| 2021 Quarter | 2020 Quarter | Increase (Decrease) | ||||||||||||||||||||||||||
| Consolidated | Distribution | Design | Consolidated | Distribution | Design | Consolidated | ||||||||||||||||||||||
| Net revenues | $ | 9,965 | $ | 5,720 | $ | 4,245 | $ | 9,549 | $ | 6,389 | $ | 3,160 | $ | 416 | ||||||||||||||
| Gross profit | $ | 2,183 | $ | 781 | $ | 1,402 | $ | 1,775 | $ | 939 | $ | 836 | $ | 408 | ||||||||||||||
| Sales and marketing expenses | 621 | 521 | 100 | 464 | 364 | 100 | 157 | |||||||||||||||||||||
| General and administrative expenses | 1,294 | 385 | 909 | 1,486 | 786 | 700 | (192 | ) | ||||||||||||||||||||
| Operating income/(loss) | 268 | (125 | ) | 393 | (175 | ) | (211 | ) | 36 | 443 | ||||||||||||||||||
| Other expense/(income), net | 24 | 56 | (32 | ) | 40 | 35 | 5 | (16 | ) | |||||||||||||||||||
| Net income/(loss) | $ | 244 | $ | (181 | ) | $ | 425 | $ | (215 | ) | $ | (246 | ) | $ | 31 | $ | 459 | |||||||||||
Basic and diluted earnings/(loss) per share were $0.02 and $(0.02), respectively, for the 2021 Quarter and the 2020 Quarter.
Net Revenues
Distribution Segment
Net revenues in the distribution segment decreased $669,000, or 10.5%, to $5,720,000 in the 2021 Quarter from $6,389,000 in the 2020 Quarter, the result of a decrease in diabetic product line revenue, partially offset by an increase in other product revenue. Revenues from diabetic products decreased $1,374,000 and revenue from other products increased $705,000. In future periods, as we continue to focus on expanding and diversifying our other product offerings, we believe other product sales will represent a larger portion of our total distribution revenue. As consumer demand increases for diabetic testing products which require no carrying case, we expect diabetic product sales to represent a smaller portion of our distribution revenue.
| 23 |
The following tables set forth revenues by channel, product line and geographic location of our distribution segment customers for the periods indicated:
| Net Revenues for the 2021 Quarter | ||||||||||||||||
| (amounts in thousands) | ||||||||||||||||
| Americas | APAC | EMEA | Total | |||||||||||||
| Diabetic products | $ | 457 | $ | 1,502 | $ | 1,561 | $ | 3,520 | ||||||||
| Other products | 1,673 | 413 | 114 | 2,200 | ||||||||||||
| Total net revenues | $ | 2,130 | $ | 1,915 | $ | 1,675 | $ | 5,720 | ||||||||
| Net Revenues for the 2020 Quarter | ||||||||||||||||
| (amounts in thousands) | ||||||||||||||||
| Americas | APAC | EMEA | Total | |||||||||||||
| Diabetic products | $ | 1,317 | $ | 1,498 | $ | 2,079 | $ | 4,894 | ||||||||
| Other products | 1,191 | 259 | 45 | 1,495 | ||||||||||||
| Total net revenues | $ | 2,508 | $ | 1,757 | $ | 2,124 | $ | 6,389 | ||||||||
Diabetic Product Revenues
Our distribution segment manufactures to the order of, and sells carrying cases for, blood glucose diagnostic kits directly to original equipment manufacturers (“OEM”s) or their contract manufacturers. The OEM customer or its contract manufacturer packages our carrying cases “in box” as a custom accessory for the OEM’s blood glucose testing and monitoring kits, or to a lesser extent, sells them through their retail distribution channels.
Revenues from diabetic products decreased $1,374,000, or 28.1%, to $3,520,000 in the 2021 Quarter from $4,894,000 in the 2020 Quarter. This decrease was primarily due to lower revenues from one major diabetic products customer (Diabetic Products Customer A), coupled with smaller decreases from all other diabetic products customers. As mentioned above, management believes that revenues from diabetic products customers will continue to decline in future periods.
The following table sets forth our distribution segment net revenues by diabetic products customer for the periods indicated:
| Diabetic Revenues | ||||||||||||
| (amounts in thousands) | ||||||||||||
2021 Quarter | 2020 Quarter | Increase (Decrease) | ||||||||||
| Diabetic Products Customer A | $ | 641 | $ | 1,591 | $ | (950 | ) | |||||
| Diabetic Products Customer B | 991 | 1,010 | (19 | ) | ||||||||
| Diabetic Products Customer C | 1,369 | 1,396 | (27 | ) | ||||||||
| Diabetic Products Customer D | 499 | 576 | (77 | ) | ||||||||
| All other Diabetic Products Customers | 20 | 321 | (301 | ) | ||||||||
| Total Diabetic Revenue | $ | 3,520 | $ | 4,894 | $ | (1,374 | ) | |||||
Revenues from diabetic products represented 62% of our distribution segment’s net revenues in the 2021 Quarter compared to 77% in the 2020 Quarter.
| 24 |
Other Product Revenues
Other product revenues include cases and protective solutions sourced and sold to OEMs for a diverse array of portable electronic and non-electronic products (such as sporting and recreational products, bar code scanners, GPS location devices, tablets and firearms) on a made-to-order basis that are customized to fit the products sold by our OEM customers. Other product revenues also include sales of a variety of other products, such as smart-enabled furniture, sold through our retail distribution network.
Revenues from other products increased $705,000, or 47.2%, to $2,200,000 in the 2021 Quarter from $1,495,000 in the 2020 Quarter. The increase was driven by sales to one new customer, which comprised $868,000 of our total distribution revenue for the 2021 Quarter. Other factors contributing to the variance include an increase in sales of non-medical cases, partially offset by a decrease in sales of other products. We will continue to focus on our sales and sales support teams in our continued efforts to expand and diversify our other products customer base as well as take advantage of opportunities to source other products.
Revenues from other products represented 38% of our distribution segment’s net revenues in the 2021 Quarter compared to 23% in the 2020 Quarter.
Design Segment
Net revenues in the design segment increased $1,084,000, or 34.3%, to $4,244,000 in the 2021 Quarter from $3,160,000 in the 2020 Quarter, primarily driven by revenues generated by Kablooe, which was acquired in August 2020. The remaining increase was driven by revenue from new customers, an increase in revenue from existing customers, partially offset by a decline in revenue from certain other customers as projects were either completed or spending was reduced in response to COVID-19. The following table sets forth our design segment net revenues by major customers for the periods indicated:
| Design Revenues | ||||||||||||
| (amounts in thousands) | ||||||||||||
2021 Quarter | 2020 Quarter | Increase (Decrease) | ||||||||||
| Design Segment Customer 1 | $ | 136 | $ | 922 | $ | (786 | ) | |||||
| Design Segment Customer 2 | 462 | 454 | 8 | |||||||||
| Design Segment Customer 3 | 675 | 352 | 323 | |||||||||
| Design Segment Customer 4 | 427 | – | 427 | |||||||||
| Design Segment Customer 9 | 606 | – | 606 | |||||||||
| All other Design Segment Customers | 1,938 | 1,432 | 506 | |||||||||
| Total design segment revenues | $ | 4,244 | $ | 3,160 | $ | 1,084 | ||||||
Gross Profit
Distribution Segment
Gross profit for the distribution segment decreased $158,000, or 16.8%, to $781,000 in the 2021 Quarter as compared to $939,000 in the 2020 Quarter, and gross margin declined from 14.7% to 13.7% in the same period. The decrease in both gross profit and margin are driven by higher freight costs due to the global shipping container shortage caused in part by the pandemic. This decrease in profit margin was also impacted by the continued decline in gross margin on diabetic products due to a shift to lower margin cases and pricing pressures on diabetic products from customers. We continue to work on expanding our product offering to include higher margin products and enhancing our sales efforts to grow revenue and increase gross profit.
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Design Segment
Gross profit for the design segment increased $566,000, or 67.7%, to $1,402,000 in the 2021 Quarter from $836,000 in the 2020 Quarter. Gross margin improved from 26.5% to 33.0% in the same period. The acquisition of Kablooe in August 2020 represented almost half of the improvement in both gross profit and margin in the 2021 Quarter, with the remaining increase driven by an increase in revenue and better utilization rates in the IPS business. Depreciation expense, which is allocated to cost of sales for the design segment, was $22,000 and $21,000 for the 2021 Quarter and 2020 Quarter, respectively.
Sales and Marketing Expenses
Distribution Segment
Sales and marketing expenses for the distribution segment increased $157,000, or 43.1%, to $521,000 in the 2021 Quarter from $364,000 in the 2020 Quarter. The increase was primarily due to an increase in advertising expenses and sales commissions as we continue our efforts to expand and diversify our product offerings. Sales and marketing expenses for the distribution segment increased to 9.1% of revenues in the 2021 Quarter as compared to 5.7% of revenues in the 2020 Quarter.
Design Segment
Sales and marketing expenses for the design segment remained flat at $100,000 in the 2021 Quarter and the 2020 Quarter. The $12,000 of sales and marketing expenses generated by Kablooe, which was acquired in August 2020, were offset by lower payroll costs. Sales and marketing expenses for the design segment decreased to 2.4% of revenues in the 2021 Quarter from 3.2% of revenues in the 2020 Quarter.
General and Administrative Expenses
Distribution Segment
General and administrative expenses in the distribution segment decreased $401,000, or 51.0%, to $385,000 in the 2021 Quarter from $786,000 in the 2020 Quarter. The decrease primarily resulted from the salary reductions taken as part of our cost-cutting measures enacted in April 2021, the reduction in severance costs and a decrease in professional fees. General and administrative expenses for the distribution segment decreased to 6.7% of revenues in the 2021 Quarter as compared to 12.3% of revenues in the 2020 Quarter.
Design Segment
General and administrative expenses for the design segment increased $209,000, or 29.9%, to $909,000 in the 2021 Quarter from $700,000 in the 2020 Quarter. The increase is primarily driven by general and administrative costs of $255,000 generated by Kablooe, which was acquired in August 2020, partially offset by lower professional fees. General and administrative expenses for the design segment decreased to 21.4% of revenues in the 2021 Quarter as compared to 22.2% of revenues in the 2020 Quarter.
Other Income / (Expense)
Distribution Segment
The distribution segment reported other expense of $56,000 in the 2021 Quarter as compared to $35,000 in the 2020 Quarter. The increase in other expense relates to the increase in the fair value of the contingent earnout liability coupled with higher interest expense.
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Design Segment
The design segment reported other income of $32,000 in the 2021 Quarter as compared to other expense of $5,000 in the 2020 Quarter, primarily related to interest income on the note receivable from a customer which was fully reserved in Fiscal 2019 and lower interest expense resulting from the paydown of the line of credit in March 2021.
Income Taxes
For the 2021 Quarter, the Company generated net income of $244,000. The Company maintains significant net operating loss carryforwards and does not recognize income tax expense / (benefit) as its deferred tax provision is typically offset by a full valuation allowance on its net deferred tax asset.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 2021 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 2020
Net Income/(Loss)
Distribution Segment
Distribution segment net loss was $1,096,000 in the 2021 Period compared to $793,000 in the 2020 Period. The increase to the net loss was primarily due to an increase in sales and marketing expenses, the reduction in other income resulting from non-cash fair value adjustments to acquisition related earnout liabilities (see Note 4 of the condensed consolidated financial statements), partially offset by lower general and administrative expenses, as reflected in the table below.
Design Segment
Design segment net income was $1,704,000 in the 2021 Period compared to a net loss of $875,000 in the 2020 Period. The net income generated in the 2021 Period primarily resulted from the $1,357,000 forgiveness of note payable associated with the PPP loan. A reduction in impairment charges (see Notes 3 and 4 of the condensed consolidated financial statements) and higher gross profit were partially offset by higher general and administrative expenses, as reflected in the table below:
| Main Components of Net Income/(Loss) | ||||||||||||||||||||||||||||
| (amounts in thousands) | ||||||||||||||||||||||||||||
| 2021 Period | 2020 Period | Increase (Decrease) | ||||||||||||||||||||||||||
| Consolidated | Distribution | Design | Consolidated | Distribution | Design | Consolidated | ||||||||||||||||||||||
| Net revenues | $ | 28,077 | $ | 15,808 | $ | 12,269 | $ | 25,873 | $ | 15,709 | $ | 10,164 | $ | 2,204 | ||||||||||||||
| Gross profit | $ | 6,189 | $ | 2,078 | $ | 4,111 | $ | 4,948 | $ | 2,103 | $ | 2,845 | $ | 1,241 | ||||||||||||||
| Sales and marketing expenses | 1,802 | 1,488 | 314 | 1,479 | 1,106 | 373 | 323 | |||||||||||||||||||||
| General and administrative expenses | 5,102 | 1,586 | 3,516 | 4,325 | 2,029 | 2,296 | 777 | |||||||||||||||||||||
| Goodwill impairment | – | – | – | 1,015 | – | 1,015 | (1,015 | ) | ||||||||||||||||||||
| Operating (loss)/income | (715 | ) | (996 | ) | 281 | (1,871 | ) | (1,032 | ) | (839 | ) | 1,156 | ||||||||||||||||
| Other (income)/expense, net | (1,323 | ) | 100 | (1,423 | ) | (203 | ) | (239 | ) | 36 | (1,120 | ) | ||||||||||||||||
| Net income/(loss) | $ | 608 | $ | (1,096 | ) | $ | 1,704 | $ | (1,668 | ) | $ | (793 | ) | $ | (875 | ) | $ | 2,276 | ||||||||||
Basic and diluted earnings/(loss) per share were $0.06 and $(0.18), respectively, for the 2021 Period and the 2020 Period.
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Net Revenues
Distribution Segment
Net revenues in the distribution segment increased $99,000, or 0.6%, to $15,808,000 in the 2021 Period from $15,709,000 in the 2020 Period, primarily due to an increase in other product revenue. Revenues from other products increased $1,436,000, which was partially offset by a decline in revenue from diabetic products of $1,337,000. In future periods, we believe other product sales will continue to increase while diabetic product sales will continue to decline.
The following tables set forth revenues by channel, product line and geographic location of our distribution segment customers for the periods indicated:
| Net Revenues for the 2021 Period | ||||||||||||||||
| (amounts in thousands) | ||||||||||||||||
| Americas | APAC | EMEA | Total | |||||||||||||
| Diabetic products | $ | 3,009 | $ | 4,316 | $ | 4,500 | $ | 11,825 | ||||||||
| Other products | 2,989 | 834 | 160 | 3,983 | ||||||||||||
| Total net revenues | $ | 5,998 | $ | 5,150 | $ | 4,660 | $ | 15,808 | ||||||||
| Net Revenues for the 2020 Period | ||||||||||||||||
| (amounts in thousands) | ||||||||||||||||
| Americas | APAC | EMEA | Total | |||||||||||||
| Diabetic products | $ | 3,984 | $ | 3,958 | $ | 5,220 | $ | 13,162 | ||||||||
| Other products | 1,826 | 580 | 141 | 2,547 | ||||||||||||
| Total net revenues | $ | 5,810 | $ | 4,538 | $ | 5,361 | $ | 15,709 | ||||||||
Diabetic Product Revenues
Our distribution segment manufactures to the order of, and sells carrying cases for, blood glucose diagnostic kits directly to OEMs (or their contract manufacturers). The OEM customer or its contract manufacturer packages our carrying cases “in box” as a custom accessory for the OEM’s blood glucose testing and monitoring kits, or to a lesser extent, sells them through their retail distribution channels.
Revenues from diabetic products decreased $1,337,000, or 10.2%, to $11,825,000 in the 2021 Period from $13,162,000 in the 2020 Period. This decrease was primarily due to lower revenues from one major diabetic products customer (Diabetic Products Customer A), which was partially offset by a net increase in revenue from all other diabetic products customers, of which no changes were individually significant. As mentioned above, management believes that revenues from diabetic products customers will continue to decline in future periods.
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The following table sets forth our distribution segment net revenues by diabetic products customer for the periods indicated:
| Diabetic Revenues | ||||||||||||
| (amounts in thousands) | ||||||||||||
2021 Period | 2020 Period | Increase (Decrease) | ||||||||||
| Diabetic Products Customer A | $ | 3,490 | $ | 4,906 | $ | (1,416 | ) | |||||
| Diabetic Products Customer B | 2,761 | 2,586 | 175 | |||||||||
| Diabetic Products Customer C | 3,892 | 3,597 | 295 | |||||||||
| Diabetic Products Customer D | 1,451 | 1,345 | 106 | |||||||||
| All other Diabetic Products Customers | 231 | 728 | (497 | ) | ||||||||
| Total Diabetic Revenue | $ | 11,825 | $ | 13,162 | $ | (1,337 | ) | |||||
Revenues from diabetic products represented 75% of our distribution segment’s net revenues in the 2021 Period compared to 84% in the 2020 Period.
Other Product Revenues
Other product revenues include cases and protective solutions sourced and sold to OEMs for a diverse array of portable electronic and non-electronic products (such as sporting and recreational products, bar code scanners, GPS location devices, tablets and firearms) on a made-to-order basis that are customized to fit the products sold by our OEM customers. Other product revenues also include sales of a variety of other products, such as smart-enabled furniture, sold through our retail distribution network.
Revenues from other products increased $1,436,000, or 56.4%, to $3,983,000 in the 2021 Period from $2,547,000 in the 2020 Period. The increase was driven by sales to one new customer, which comprised $947,000 of our total distribution revenue for the 2021 Period. The increase in sales of non-medical cases and protective solutions, both driven by an increase in customers and higher sales volume, comprised the remainder of the increase. We will continue to focus on our sales and sales support teams in our continued efforts to expand and diversify our other products customer base as well as take advantage of opportunities to source other products.
Revenues from other products represented 25% of our distribution segment’s net revenues in the 2021 Period compared to 16% in the 2020 Period.
Design Segment
Net revenues in the design segment increased $2,105,000, or 20.7%, to $12,269,000 in the 2021 Period from $10,164,000 in the 2020 Period, primarily driven by revenues generated by Kablooe, which was acquired in August 2020. The remaining variance was driven by an increase in revenue from new business from both new and existing customers, partially offset by a decline in revenue from certain existing customers as projects were either completed or customer spending was reduced in response to COVID-19. The following table sets forth our design segment net revenues by major customers for the periods indicated:
| Design Revenues | ||||||||||||
| (amounts in thousands) | ||||||||||||
2021 Period | 2020 Period | Increase (Decrease) | ||||||||||
| Design Segment Customer 1 | $ | 825 | $ | 2,005 | $ | (1,180 | ) | |||||
| Design Segment Customer 2 | 1,326 | 1,351 | (25 | ) | ||||||||
| Design Segment Customer 3 | 1,430 | 1,649 | (219 | ) | ||||||||
| Design Segment Customer 4 | 1,798 | – | 1,798 | |||||||||
| All other Design Segment Customers | 6,890 | 5,159 | 1,731 | |||||||||
| Total design segment revenues | $ | 12,269 | $ | 10,164 | $ | 2,105 | ||||||
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Gross Profit
Distribution Segment
Gross profit for the distribution segment decreased $25,000, or 1.2%, to $2,078,000 in the 2021 Period as compared to $2,103,000 in the 2020 Period, and gross margin declined from 13.4% to 13.1% in the same period. The decrease in both gross profit and margin are driven by higher freight costs due to the global shipping container shortage caused in part by the pandemic and the continued decline in gross margin on diabetic products due to a shift to lower margin cases and pricing pressures on diabetic products from customers. We continue to work on expanding our product offering to include higher margin products and enhancing our sales efforts to grow revenue and increase gross profit.
Design Segment
Gross profit for the design segment increased $1,266,000, or 44.5%, to $4,111,000 in the 2021 Period from $2,845,000 in the 2020 Period. Gross margin improved from 28.0% to 33.5% in the same period. The acquisition of Kablooe accounted for the majority of the increase in both gross profit and margin in the 2021 Period. Higher revenue and better utilization rates contributed to the remainder of the increase. Depreciation expense, which is allocated to cost of sales for the design segment, was $83,000 and $75,000 for the 2021 Period and 2020 Period, respectively.
Sales and Marketing Expenses
Distribution Segment
Sales and marketing expenses for the distribution segment increased $382,000, or 34.5%, to $1,488 ,000 in the 2021 Period from $1,106,000 in the 2020 Period. The increase was primarily due to an increase in advertising costs and sales commissions as we continue our efforts to expand and diversify our product offerings. Sales and marketing expenses for the distribution segment increased to 9.4% of revenues in the 2021 Period as compared to 7.0% of revenues in the 2020 Period.
Design Segment
Sales and marketing expenses for the design segment decreased $59,000, or 15.8%, to $314,000 in the 2021 Period from $373,000 in the 2020 Period. The decrease in sales and marketing expenses is primarily due to lower payroll costs and was partially offset by $32,000 of marketing expenses generated by Kablooe, which was acquired in August 2020. Sales and marketing expenses for the design segment decreased to 2.6% of revenues in the 2021 Period from 3.7% of revenues in the 2020 Period.
General and Administrative Expenses
Distribution Segment
General and administrative expenses in the distribution segment decreased $443,000, or 21.8%, to $1,586,000 in the 2021 Period from $2,029,000 in the 2020 Period. The decrease was primarily driven by from the salary reductions taken as part of our cost-cutting measures enacted in April 2021, the reduction in severance costs and a decrease in professional fees. General and administrative expenses for the distribution segment decreased to 10.0% of revenues in the 2021 Period as compared to 12.9% of revenues in the 2020 Period.
Design Segment
General and administrative expenses for the design segment increased $1,220,000, or 53.1%, to $3,516,000 in the 2021 Period from $2,296,000 in the 2020 Period. The increase is primarily driven by general and administrative costs of $762,000 generated by Kablooe, which was acquired in August 2020, a $623,000 increase in bad debt expense and a $266,000 increase in payroll related costs, partially offset by a decrease in impairment charges (see Note 4 of the condensed consolidated financial statements) and lower professional fees. General and administrative expenses for the design segment increased to 28.7% of revenues in the 2021 Period as compared to 22.6% of revenues in the 2020 Period.
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Other Income / (Expense)
Distribution Segment
The distribution segment reported other expense of $100,000 in the 2021 Period as compared to other income of $239,000 in the 2020 Period. The variance is primarily due to the decrease in other income related to fair value adjustments associated with contingent earnout liabilities (see Note 4 of the condensed consolidated financial statements).
Design Segment
The design segment reported other income of $1,423,000 in the 2021 Period as compared to other expense of $36,000 in the 2020 Period. The primary component of other income in the 2021 Period was the $1,357,000 forgiveness of note payable related to the PPP loan. Other less significant factors contributing to the change were interest income on the note receivable from a customer which was fully reserved for in Fiscal 2019 and lower interest expense due to a reduction in the average amount of debt outstanding.
Income Taxes
For the 2021 Period, the Company generated net income of $608,000, primarily resulting from the $1,357,000 forgiveness of the PPP loan, which will not be recognized as taxable income per the CARES Act. The Company maintains significant net operating loss carryforwards and does not recognize income tax expense / (benefit) as its deferred tax provision is typically offset by a full valuation allowance on its net deferred tax asset.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity is our operations. The primary demands on our working capital have historically been (i) operating losses, (ii) repayment of debt obligations, and (iii) any increases in accounts receivable and inventories arising in the ordinary course of business. Historically, our sources of liquidity have been adequate to satisfy working capital requirements arising in the ordinary course of business. At June 30, 2021, our working capital was $5,571,000 compared to $3,396,000 at September 30, 2020. The improvement in working capital was primarily due to the extension of the note payable to Forward China. Our largest vendor is Forward China, a related entity, which is able to extend payment terms on outstanding liabilities when necessary (see Note 9 of the condensed consolidated financial statements). We can provide no assurances that any such extension will be given if requested.
In an abundance of caution and to proactively conserve the Company’s cash flow, we implemented certain cost-cutting measures which became effective in April 2021. These cost-cutting measures included (i) our executive officers agreeing to a temporary pay cut and our Chief Executive Officer temporarily forgoing his base salary, (ii) a reduction in our head count and amounts paid to outside consultants and (iii) non-employee Board members agreeing to reduce their board fees. These cost-cutting measures ended in June 2021 and compensation was returned to pre-existing amounts in July 2021. The Company estimates that these pay cuts and other reductions resulted in approximately $200,000 of cash savings in the third quarter of Fiscal 2021. The Company will reevaluate any future need for these or similar cost-cutting measures as business conditions warrant. In light of these circumstances, the Compensation Committee of the Board of Directors deferred a recommendation for director equity compensation until such time as the Company’s performance improved. Therefore, in addition to cash savings, the resulting reduction in equity compensation lowered the Company’s non-cash expenses in the third quarter of Fiscal 2021 and will continue to lower the Company’s non-cash expenses in future periods until any new equity grants are awarded.
At July 31, 2021, we had approximately $1,015,000 cash on hand and $1,300,000 available under our line of credit which matures May 31, 2022. Additionally, Forward China holds a $1,600,000 promissory note which matures December 31, 2022. Although this note has been extended on multiple occasions to assist us with our liquidity position, we plan on funding the repayment at maturity using existing cash balances and/or obtaining an additional credit facility as deemed necessary. We can provide no assurance that Forward China will extend the note again if we request an extension nor that any such credit facility will be available on terms acceptable to us or at all.
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We anticipate that our liquidity and financial resources will be adequate to manage our operating and financial requirements until at least September 30, 2022. If we have the opportunity to make a strategic acquisition (as we have in the past with the acquisitions of IPS and Kablooe) or an investment in a product or partnership, we may require additional capital beyond our current cash balance to fund the opportunity. If we seek to raise additional capital, there is no assurance that we will be able to raise funds on terms that are acceptable to us or at all.
Although we do not anticipate the need to purchase additional material capital assets in order to carry out our business, it may be necessary for us to purchase equipment and other capital assets in the future, depending on need.
Cash Flows
During the nine months ended June 30, 2021 and 2020, our sources and uses of cash were as follows:
Operating Activities
During the 2021 Period, cash used in operating activities of $338,000 primarily resulted from an operating loss of $715,000, an increase in inventories of $631,000, an increase in accounts receivable of $595,000, and the net change in other operating assets and liabilities of $72,000, partially offset by an increase of $855,000 in accounts payable and amounts due to Forward China and non-cash expenses of $820,000 relating to depreciation, amortization, share-based compensation and bad debt expense.
During the 2020 Period, cash used in operating activities of $760,000 primarily resulted from an operating loss of $1,871,000, an increase in accounts receivable of $1,448,000, bad debt recoveries of $121,000, a decrease in accounts payable, amounts due to Forward China, accrued expenses and other liabilities of $105,000 and net changes in other operating assets and liabilities of $53,000, partially offset by a decline in inventories of $881,000, an increase in deferred income of $306,000, non-cash impairment charges of $1,342,000 and other non-cash expenses of $309,000 relating to depreciation, amortization, and share-based compensation.
Investing Activities
Cash used in investing activities in the 2021 Period and the 2020 Period of $61,000 and $56,000, respectively, resulted from purchases of property and equipment.
Financing Activities
In the 2021 Period, cash used in financing activities of $921,000 consisted of net repayments of the line of credit of $1,000,000 and repayments of notes payable and finance leases of $155,000, partially offset by proceeds from stock options exercised of $234,000.
In the 2020 Period, cash provided by financing activities of $808,000 consisted of $1,357,000 proceeds from the PPP loan and $32,000 of proceeds from stock options exercised, partially offset by $300,000 in net repayments on the line of credit, $200,000 paid in deferred cash consideration and $81,000 in repayments of notes payable and finance leases.
Related Party Transactions
For information on related party transactions and their financial impact, see Note 9 to the unaudited condensed consolidated financial statements contained herein.
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| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable.
| ITEM 4. | 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, required by Rule 13a-15 and Rule 15d-15 of the Securities Exchange Act of 1934 (the “Exchange Act”) of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act. Based on its evaluation, our management has concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations of the Effectiveness of Controls and Procedures. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations of any control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.
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PART II. OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS |
On August 21, 2020, IPS was named a third-party defendant in a patent dispute claim currently pending in the U.S. District Court for the Eastern District of New York. The complaint, which contains no specific amount of claimed monetary damages, asserts that certain intellectual property was misappropriated by IPS and one of its former employees. IPS denies the allegations, believes the action is without merit and intends to vigorously defend it. The Company filed a motion to dismiss the complaint on December 14, 2020. The court has not yet ruled on the Company’s motion.
From time to time, the Company may become a party to other legal actions or proceedings in the ordinary course of its business. At June 30, 2021, there were no such actions or proceedings, either individually or in the aggregate, that, if decided adversely to the Company’s interests, it believes would be material to its business.
| ITEM 1A. | RISK FACTORS |
The ongoing COVID-19 pandemic and measures intended to prevent its spread have had, and may continue to have, a material and adverse effect on our business and results of operations.
Global health concerns relating to the COVID-19 pandemic and related government actions taken to reduce the spread of the virus have been weighing on the macroeconomic environment, and the pandemic has significantly increased economic uncertainty and reduced economic activity. Small businesses, which represent a large portion of our design customers, have been impacted particularly hard. The pandemic has resulted in government authorities and businesses implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders, school closures, and business limitations and shutdowns. Such measures have contributed significantly to increased unemployment and negatively impacted consumer and business spending. Business shutdowns have disrupted our supply chain and the manufacture or shipment of our products and delayed the rollout of our retail distribution products.
The pandemic has caused us to modify our business practices to help minimize the risk of the virus to our employees, our customers, and the communities in which we participate, which could negatively impact our business. We continue to permit employees to work remotely, which subjects the Company to increased cybersecurity risks and may reduce workplace efficiency. As the availability of vaccines has increased and COVID-19 case rates have diminished, we have gradually begun a phased reopening of our offices. We continue to employ additional safety measures in our offices, including enhanced cleaning and sanitation, mask wearing, suspending international business travel for our employees and limiting domestic business travel, limiting external guests visiting our offices, and holding most meetings and events virtually. Local conditions may require us to move back under more restrictive guidelines, which could include mandatory remote work and additional safety measures. Given the continually evolving situation, there is no certainty that the measures we have taken will be sufficient to mitigate the risks posed by the virus.
The full extent to which the COVID-19 pandemic will continue to impact our business, results of operations, and financial condition remains uncertain and will depend on developments that remain uncertain and difficult to predict, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, the availability, distribution and efficacy of vaccines, and acceptance by the population to get the vaccine and how quickly and to what extent normal economic and operating conditions resume. Even after the COVID-19 pandemic has subsided, we may experience material and adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, bankruptcies or insolvencies of customers, and recession or economic downturn.
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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.
While we attempt to identify, manage, and mitigate risks and uncertainties associated with our business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. Item 1A - “Risk Factors” in the Form 10-K describes some of the risks and uncertainties associated with our business, which we strongly encourage you to review. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows, projected results, and future prospects. There have been no material changes in our risk factors from those disclosed in the Form 10-K.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
There were no unregistered sales of the Company’s equity securities during the 2021 Quarter that were not previously disclosed in a Current Report on Form 8-K.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not Applicable.
| ITEM 5. | OTHER INFORMATION |
None.
| ITEM 6. | EXHIBITS |
The exhibits listed in the accompanying “Index to Exhibits” are filed or incorporated by reference as part of this Form 10-Q.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
Dated: August 12, 2021
| FORWARD INDUSTRIES, INC. | |
By: /s/ Terence Wise Terence Wise Chief Executive Officer (Principal Executive Officer) | |
| By: /s/ Anthony Camarda | |
| Anthony Camarda | |
| Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
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EXHIBIT INDEX
| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | Cover Page Interactive Data File (formatted in IXBRL, and included in exhibit 101). |
+ 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.
* Management contract or compensatory plan or arrangement
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.
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