Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORm 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2020
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-34780
FORWARD INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
New York
(State or other jurisdiction of
incorporation or organization)
13-1950672
(I.R.S. Employer Identification No.)
700 Veterans memorial Highway, Suite 100, Hauppauge, NY 11788
(Address of principal executive offices, including zip code)
(631) 547-3041
(Registrant’s telephone number, including area code)
Title of each class
Common Stock, par value $0.01
Securities registered pursuant to Section 12(b) of the Act:
Trading Symbol(s)
FORD
Name of each exchange on which registered
The Nasdaq Stock Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rue 405 of Regulation
S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act).
☐ Large accelerated filer
☒ Non-accelerated filer
☐ Emerging growth company
☐ Accelerated filer
☒ Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit
report. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of March 31, 2020, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $7,400,000 based on
the closing price ($1.11) as reported on the Nasdaq Stock Market.
As of November 30, 2020, 9,886,351 shares of the registrant’s common stock were outstanding.
Documents Incorporated by Reference
Portions of the registrant's Proxy Statement for the 2021 Annual Meeting of Shareholders are incorporated herein by reference in Part III of this Annual Report on
Form 10-K to the extent stated herein. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the registrant's fiscal
year ended September 30, 2020.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Forward Industries, Inc.
Table of Contents
PART I
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART III
Item 15.
Exhibits and Financial Statement Schedules
Signatures
PART IV
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ITEm 1. BUSINESS
General
PART I
Forward Industries, Inc. (“Forward”, “we”, “our” or the “Company”), through its wholly-owned subsidiaries, Forward Industries (IN), Inc., (“Forward US”),
Forward Industries (Switzerland) GmbH, (“Forward Switzerland”), Forward Industries UK Limited, (“Forward UK”), Intelligent Product Solutions, Inc., (“IPS”),
and Kablooe, Inc., (“Kablooe”), is a fully integrated design, development and manufacturing solution provider for top tier medical and technology customers
worldwide. The Company has expanded its ability to design and develop solutions for our existing multinational client base and expand beyond the diabetic
product line into a variety of industries with a full spectrum of hardware and software product design and engineering services. In addition to our existing design
and distribution of carry and protective solutions, primarily for handheld electronic devices, the Company is now a one-stop shop for design, development and
manufacturing solutions serving a wide range of clients in the industrial, commercial and consumer industries. The Company’s previous principal customer market
has been original equipment manufacturers, or “OEMs” (or the contract manufacturing firms of these OEM customers), that either package our products as
accessories “in box” together with their branded product offerings or sell them through their retail distribution channels. The Company’s OEM products include
carrying cases and other accessories for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic products (such as
sporting and recreational products, bar code scanners, smartphones, GPS location devices, tablets and firearms). The Company’s OEM customers are located in: (i)
the Asia-Pacific region, which we refer to as the “APAC Region”; (ii) Europe, the Middle East, and Africa, which we refer to as the “EMEA Region”; and (iii) the
geographic area encompassing North America, Central America and South America, which we refer to as the “Americas”. The Company does not manufacture any
of its OEM products and sources substantially all of its OEM products from independent suppliers in China, through Forward Industries Asia-Pacific Corporation,
a British Virgin Islands corporation (“Forward China”).
As a result of the expansion of the design development capabilities through its wholly-owned subsidiaries, IPS and Kablooe, the Company is now able to
introduce proprietary products to the market from concepts brought to it from a number of different sources, both inside and outside the Company.
By virtue of our strategic collaboration and distribution agreements, we have secured a portfolio of smart enabled products which we have begun distributing
to retail outlets in the United States. The rollout of these products has been delayed by COVID-19 as discussed below. As a result of this collaboration and other
product initiatives, we invested in and began to build out a retail distribution network responsible for getting products into big box retailers for retail consumption.
This build out is a continuation of our strategy to be a one-stop shop for product development, manufacture and distribution and represents a significant
achievement in completing the strategic process of taking a product from concept to the consumer.
Through the manufacturer representative agreements we currently have in place, we expect to gain sales coverage to retailers such as Best Buy, Target,
Walmart, Costco, Amazon, CVS, Walgreens, Staples, Office Depot and many others. The manufacturer representative model allows us to engage and support a
large sales team and cover a larger territory with a variable cost model as these representatives work on commission only.
The outbreak of the COVID-19 virus in China and its subsequent spread throughout the world has impacted our Fiscal 2020 results of operations. In efforts to
contain the virus, authorities have implemented travel restrictions, quarantines, business limitations and shutdowns. Since the majority of our workforce is based
in New York, these restrictions have required substantially all our employees to work from home for much of Fiscal 2020. During the third quarter of Fiscal 2020,
productivity of our direct labor employees was reduced, which caused a decline in revenue and gross profit. As some of these restrictions were relaxed in the fourth
quarter of Fiscal 2020, employees started to return to the office with minimal operational challenges. Business shutdowns resulting from the pandemic disrupted
our supply chain and the manufacture or shipment of our products and have delayed the rollout of our smart enabled retail products to big box retail stores, causing
our distribution segment revenues in Fiscal 2020 to be less than anticipated. Additionally, our design segment reported lower revenues as demand for its design
and development services were reduced or delayed. The impact from lower revenue was partially offset by a reduction in certain selling and travel related
expenses resulting from government mandated stay-at-home orders and travel restrictions as well as revenues derived from sales and sourcing of personal
protective equipment. The pandemic had temporarily impacted our liquidity in Fiscal 2020, as collections of accounts receivable were somewhat delayed at certain
times.
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The economy started to open in certain jurisdictions where the virus was considered under control. However, there continue to be areas with increased rates of
infection that could cause government officials to enact more restrictions on how businesses operate. The future impacts of the pandemic and any resulting
economic impact are largely unknown and could be significant. It is possible that the pandemic, the measures taken by the governments of countries affected and
the resulting economic impact may negatively impact our results of operations, cash flows and financial position in future periods as well as that of our customers,
including their ability to pay for our services and choosing to allocate their budgets to new or existing projects which may or may not require our services. The
long-term financial impact on our business cannot be reasonably estimated at this time. As a result, the effects of COVID-19 may not be fully reflected in our
financial results until future periods. Refer to “Part I, Item 1A — Risk Factors” in this report for a description of the material risks that the Company currently
faces in connection with COVID-19.
Until there is a vaccine and treatment that is widely distributed, we expect business conditions to remain challenging. In response to these challenges, we will
continue to focus on those factors that we can control: closely managing and controlling our expenses; aligning our design and development schedules with
demand in a proactive manner as there are changes in market conditions to minimize our cash operating costs; pursuing further improvements in the productivity
and effectiveness of our development, selling and administrative activities and, where appropriate, taking advantage of opportunities to enhance our business
growth and profitability strategy.
Corporate History
Forward was incorporated in 1961 as a manufacturer and distributer of advertising specialty and promotional products. In 1989, we acquired Forward US, a
manufacturer of soft-sided carrying cases. The carrying case business became our predominant business, and in September 1997, we sold the assets relating to the
production of advertising specialty and promotional products, ceasing to operate in that segment.
In May 2001, we formed Forward Switzerland to facilitate distribution of aftermarket products under our licenses for cell phone cases with a major North
American multinational and to further develop our OEM European business presence. After the expiration of the last of these licenses in March 2009, staff at
Forward Switzerland was significantly reduced and in recent years has primarily served our OEM customers in Europe.
In January 2018, Forward acquired IPS which resulted in IPS being a wholly-owned subsidiary of Forward.
In August 2020, Forward acquired the assets of Kablooe Design, a medical and consumer design and development company. The Company believes that the
design and engineering service capabilities of Kablooe will complement the IPS business and further diversify the industries and customers with which the
Company does business.
In this report, the Company uses the term “distribution” to refer to what has historically been described as the “OEM” business. However, we may refer to our
customers as “OEM” customers, using a standard industry term. In addition, we use the term “design” or “design and development” to describe the acquired IPS
and Kablooe businesses, to be consistent with the operating segment definitions (see Note 16 to the audited consolidated financial statements herein).
Customers
The Company’s distribution customers are located in: (i) the APAC Region; (ii) the EMEA Region; and (iii) the Americas.
IPS and Kablooe provide product development services for Fortune 500 companies, established mid-level companies, and start-ups. The wide range of
industries served includes industrial electronics, medical and dental equipment, food/beverage, U.S. Department of Defense, certain luxury brands, and oil/gas.
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Products
The Company’s distribution products include carrying cases and other accessories for medical monitoring and diagnostic kits and a variety of other portable
electronic and non-electronic products (such as sporting and recreational products, bar code scanners, smartphones, GPS location devices, tablets, and firearms).
Beginning in Fiscal 2020, the Company’s distribution products also include smart-enabled products such as speakers and lamps.
The Company does not manufacture any of its distribution products and sources substantially all of its distribution products from independent suppliers in
China, through Forward China, a related party (see Note 14 to the consolidated financial statements).
Diabetic Products
We sell carrying cases for blood glucose diagnostic kits (“Diabetic Products”) directly to OEM customers, or their contract manufacturers. These electronic
monitoring kits are made for use by diabetics. We typically sell these cases at prices ranging from approximately $0.60 to $7.00 per unit. Unit volumes are sold
predominantly at the lower end of this price range. We also sell higher end units ranging from approximately $18.50 to $39.00 per unit, but this represents less than
2% of net revenues. The distribution customer (or its contract manufacturer) packages our carry cases “in box” as a custom accessory for the customer’s blood
glucose testing and monitoring kits, or to a much lesser extent, sells them through their retail distribution channels. These kits typically include a small, electronic
blood glucose monitor, testing strips, lancets for drawing a drop of blood and our carrying case, customized with the manufacturer’s logo and designed to fit and
secure the glucose monitor, testing strips, and lancets in separate straps, pouches, and holders. As the kits and technology change, our carrying case designs change
to accommodate the changes in size, shape and layout of the electronic monitoring device, strips and lancet. For Fiscal 2020, our Diabetic Products customers
accounted for 83% of our total net revenues in the distribution business, compared to 89% in Fiscal 2019.
Other Products
We also sell carrying and protective solutions to distribution customers for a diverse array of other portable electronic and other products (“Other Products”),
including sporting and recreational products, bar code scanners, smartphones, GPS and location devices, tablets, and firearms, on a made-to-order basis that are
customized to fit the products sold by our distribution customers. Our selling prices for these products also vary across a broad range, depending on the size and
nature of the product for which we design and sell the carry solution. In Fiscal 2020, we added smart-enabled products to our distribution business. Our smart-
enabled products include speakers and lamps that provide lighting and sound with connectivity to other devices via Bluetooth. Our selling prices for these products,
including related accessories, ranges from $35 to $135 per unit. For Fiscal 2020, our other products accounted for 17% of our total net revenues in the distribution
business, compared to 11% in Fiscal 2019.
Our design segment provides a complete range of design, engineering and development services with respect to a diverse array of consumer and industrial
electronics products. These include but are not limited to medical products, smart displays, beverage vending, enterprise and mobile software applications, lighting,
security and detections systems, cameras, wearables and vehicle controls. Solutions in these and other areas are designed and developed in-house, beginning at
product concept, extending through design, engineering and prototype, and final design for manufacturing and Computer-Aided Design (“CAD”) files. As a
combined company, we are able to provide manufacturing sourcing and final product support and delivery services for initial short-run, low volume products.
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Product Development
In the OEM division of our distribution business, we typically receive requests to submit product designs in connection with a customer’s introduction and
rollout to market of a new product. IPS collaborates with clients to determine functionality, size and other basic specifications and requirements for products. Our
design and production resources develop more detailed product specifications and design options for our customers’ evaluation. We provide documentation of each
phase to the client and gain approval of a working prototype. Working with our suppliers and the customer, samples are modified and refined. Once approved for
commercial introduction and order by our customer, we work with our suppliers to ensure conformity of commercial production to the definitive product samples
and specifications. Manufacture and delivery of products in production quantities are coordinated with the customer’s manufacturing and shipment schedules so
that our products are available to be packaged with the customer’s additional product components prior to shipment and sale, or to make the product available to
the customer for direct sale through its retail distribution channels.
Services
Services offered for each engagement vary from full development utilizing a wide range of in-house design and engineering functions, to targeted design and
engineering support for clients with in-house development teams. Our in-house capabilities include the following:
•
Electrical Engineering
• Mechanical Engineering
•
•
•
•
•
•
Software Engineering
Industrial Design
User Experience/User Interface (UX/UI) Design and Development
Optical Engineering
Program Management
IoT System Architecture
• Marketing
Distribution
Channels of Distribution
We primarily ship our OEM products directly to our customers (or their contract manufacturers), who package our accessory products “in box” with their
branded products. Some of our customers also purchase certain of our products and offer them for sale as stand-alone accessories to complement their product
offerings.
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In Fiscal 2019, we secured a portfolio of smart-enabled products which we began distributing through retail outlets in the U.S. in Fiscal 2020. We continue to
invest in and build out a distribution network for retail products as we expect this part of our business to grow in the future. The retail distribution network is
responsible for placing products with major retailers for consumption both in store and online.
Distribution Hubs for Customers
We have arrangements with various customer’s distribution hubs. These arrangements obligate us to supply our products to our customers’ distribution hubs
where their products are manufactured, kitted, and/or warehoused pending sale, and where our products are packaged “in box” with the distribution customers’
products. The product quantities we are required to supply to each distribution hub are based on the distribution customer’s purchase orders and forecasts. We do
not recognize revenue for product shipped to a customers’ hub until we have been notified by our customer that our product has been withdrawn or used by the
distribution hub. Hub arrangements have had the general effect of providing financing for our customers’ inventory purchases by extending the time between our
placement of orders to our suppliers in order to ship and supply the hubs and the time that we are able to recognize revenue. The corollary effect is an increase in
our inventory levels.
We also have arrangements with various third-party fulfillment centers for products distributed through retail outlets in the U.S. We do not recognize revenue
for products shipped to a fulfillment center until the product has been shipped to the end-user customer.
Product Supply
Manufacturing
The manufacture of custom carrying cases and other carry and protective solutions generally consists of die cutting fabrics and heat sealing, gluing, sewing,
and decorating (affixing logos to) the cut-outs by means of silk screening, hot-stamping, embroidering or embossing. The principal materials used in the
manufacture of our products are vinyl, nylon, leather, metal and plastic parts (for clips, buckles, loops, hinges and other hardware), foam padding and cardboard,
all of which are obtained from suppliers based on our specifications. We do not believe that any of the component materials or parts used in the manufacture of our
products are supply constrained. We believe that there are adequate available alternative sources of supply for all of the materials used to manufacture, package,
and ship our products.
Dependence on Sourcing Agent
The Company has a Buying Agency and Supply Agreement (the “Supply Agreement”) with Forward China (the “Agent”). The Supply Agreement provides
that the Agent acts as the Company’s exclusive buying agent. The Agent also arranges for sourcing, manufacture and exportation of such products. The Company
purchases products at the Agent’s cost and pays a service fee to the Agent. The service fee is calculated at $100,000 monthly plus 4% of “Adjusted Gross Profit”,
which is defined as the selling price less the cost from the Agent. The Supply Agreement has been extended to October 22, 2023. Terence Wise, the Company’s
Chairman, Chief Executive Officer and largest shareholder, is a principal of the Agent. See “Item 1A. – Risk Factors” regarding our dependence on the Agent.
Suppliers
We procure substantially all products for our distribution business from independent suppliers in China through the Agent. Depending on the product, we may
require several different suppliers to furnish component parts or pieces.
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We place orders with the Agent for particular products. We do not have minimum supply requirement agreements with our suppliers to guarantee a supply of
finished product, nor have we made purchase commitments to purchase minimum amounts from any of our suppliers. However, from time to time, we may order
products from our suppliers in advance of receiving a customer purchase order, or in quantities in excess of those forecasted to us by our customer, for which they
are contractually obligated to us, in order to meet our customers’ anticipated delivery demands. Beginning September 1, 2013, we began making purchases directly
from Forward China. During Fiscal 2020 and Fiscal 2019, all of our purchases for our distribution business were made directly through Forward China.
There are very few suppliers for the design and development part of the business as it is a service-based business. We do, however, purchase supplies and
equipment to develop prototypes or “mock-ups” for design and development projects. Design business suppliers are predominantly based in the United States.
Quality Assurance
Forward’s quality assurance manager oversees the process to ensure that our distribution products manufactured by our Chinese suppliers meet our quality
assurance standards. He independently verifies and supervises the inspection of products provided by independent contractors in China. In July 2015, Forward
China received its ISO 9001:2008 quality certification, which was renewed in July 2018 and is valid until July 2021.
Our design business follows general industry standard practices for review and corrective actions related to its design services. There are no independent
quality assurance standards in place for its design and engineering work. Customer specifications and scope of services are laid out in the project contracts and the
Company works closely with the customer to identify and correct any quality issues that arise.
Competition
Distribution Business
The OEM division of our distribution business is highly competitive in terms of product pricing, design, delivery terms, and customer service. In the
production of our distribution products, we compete with numerous United States and foreign producers and distributors. Some of our competitors are substantially
larger than we are and have greater financial and other resources. We believe that we sustain our competitive position through maintenance of an effective product
design capability, rapid response time to customer requests for proposals and product shipment, reliable product delivery and product quality, and competitive
pricing. We believe that our ability to compete based on product quality assurance considerations is enhanced by Forward China’s local presence, quality control,
shipment capabilities and expertise in sourcing.
Design and Engineering Business
The depth and breadth of the services offered, and industries served by our design segment are unique. Our management team is aware that there are very few
competitive firms that have the full set of capabilities that our design segment has under one roof. There are however, numerous design and engineering companies
that compete with us in specific industries and/or with specific targeted skills or competitive advantages.
Human Capital/Employees
The Company’s key human capital management objectives are to attract, retain and develop the highest quality talent. To support these objectives, the
Company’s human resources programs are designed to develop talent to prepare them for critical roles and leadership positions for the future; reward and support
employees through competitive pay and benefits; enhance the Company’s culture through efforts aimed at making the workplace more engaging and inclusive;
acquire talent and facilitate internal talent mobility to create a high-performing, and diverse workforce. None of our employees are covered by a collective
bargaining agreement.
The Company employed approximately 85 people as of November 30, 2020. We hire consultants on an as-needed basis in our design segment.
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Regulation and Environmental Protection
Our sourcing business is subject to various regulations in various jurisdictions, including the United States and member states of the European Community,
that restrict the use or importation of products manufactured with compounds deemed to be hazardous. We work with our suppliers to ensure compliance with such
regulations. In addition, from time to time, one or more customers may require testing of our products to ensure compliance with applicable consumer safety rules
and regulations or the customer’s safety or packaging protocols. Because we do not manufacture the products that we sell and distribute, compliance with federal,
state and local laws and regulations pertaining to the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not
had, and is not anticipated to have, any direct material effect upon our capital expenditures, earnings, or competitive position. However, compliance with such laws
and regulations on the part of our suppliers may result in increased costs of supply to us, particularly if domestic environmental regulations in China becomes more
prevalent.
We have not been engaged in any environmental litigation or incurred any material costs related to compliance with environmental or other regulations. From
time to time, we incur chemical and/or safety laboratory testing expenses in order to address customer requests regarding our product materials or method of
manufacture or regarding their packaging methods and standards.
There are no specific regulatory or environmental requirements imposed upon the design segment of our business. As a paid service provider, end customers
are assisted in securing regulatory certifications including UL (Underwriters Laboratories – a U.S. based safety certification organization), FCC (Federal
Communications Commission – U.S. governmental certification department for electronic goods), CE (Conformité Européenne – a European certification for
health, safety and environmental protection standards) and others depending on needs, product types and locations of end customers’ product markets.
As our retail business increases, we anticipate that we will be required to obtain certain certifications for products on an as required basis.
ITEm 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the following Risk Factors before deciding whether to purchase
or sell stock in the Company. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business
operations or our financial condition. If any of the events discussed in the Risk Factors below occur, our business, consolidated financial condition, results of
operations or prospects could be materially and adversely affected. In such case, the value and marketability of the common stock could decline.
Risks Relating to Our Business, Liquidity and Operations
Our results of operations have been negatively impacted by the coronavirus pandemic.
The COVID-19 pandemic has spread across the globe and continues to negatively impact worldwide economic activity and has impacted our Company in a
number of ways. COVID-19 has increased the risk that the Company or its employees, suppliers, customers and other commercial partners may be prevented from
conducting business for an indefinite period of time, including due to the spread of the disease or shutdowns requested or mandated by governmental authorities.
Specifically, COVID-19 has increased the risk of customers’ inability to pay for our design services and has the potential to continue to impact collections on the
distribution side of the business. The Company has transitioned some of its employees to working remotely, which subjects the Company to increased
cybersecurity risks and may reduce workplace efficiency. Business shutdowns have disrupted our supply chain and the manufacture or shipment of our products
and have delayed the rollout of our smart enabled retail products to big box retail stores.
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The full extent of COVID-19’s negative impact on our business remains uncertain and it is not possible at this time to estimate the full impact that COVID-19
will have on our business. Any of the issues discussed above could have a material adverse effect on our business if this continues for an extended period of time.
If we incur significant declines in customer orders, increased aging of accounts receivable or other negative consequences due to COVID-19, the extent of which
remains highly uncertain, it will have a material adverse effect on our business, financial condition and results of operations.
During Fiscal 2020, we generated an operating loss and negative cash flow from operations, we cannot assure you that we will regain profitability in the future.
In Fiscal 2020, we generated an operating loss of $1,982,000 and had net cash used in operating activities of $263,000. Although we generated net income in
Fiscal 2018 and 2017, we incurred significant losses from operations in Fiscal 2019 and Fiscal 2020. We can provide no assurance that we will not continue to
experience operating losses. In addition to our $1,300,000 commercial line of credit (the “Line of Credit”) of which $1,000,000 has been utilized as of the date of
this report, Forward China holds a $1,600,000 note which is due December 31, 2021. Forward China, which is owned by our Chief Executive Officer and
Chairman of the Board, has agreed to extend this note numerous times to assist the Company with its liquidity resources. We cannot provide you with any
assurance that he will continue to grant us extensions on this note. If we cannot generate sufficient revenues to operate profitably, we may be forced to cease, limit
or suspend operations, or we may be required to raise capital to maintain or grow our operations. There is no assurance that we will be able to raise such capital and
if so on terms that are not onerous and dilutive to the Company and its shareholders.
While we believe that our existing cash resources are sufficient to support our growth strategy, there can be no assurances that our growth strategy will be
successful or that we will earn a return on these investments.
Our distribution business remains highly concentrated in our Diabetic Products Line. If our Diabetic Products Line were to suffer the loss of a principal customer
or a material decline in revenues from any such large customer, our business would be materially and adversely affected.
Revenues from diabetic products to distribution customers accounted for 83% of our distribution net revenues in Fiscal 2020. As a result, our financial
condition and results of operations are subject to higher risk from the loss of a major diabetic products customer or changes in their business practices. For
example, in 2018 a new diabetes monitoring product was brought to the market which does not use a carrying case. If our customers use new solutions in their
diabetes product lines that do not use carrying cases, our business would be materially and adversely affected.
The loss of any of, or a material reduction in orders from, our largest customers, would materially and adversely affect our results of operations and financial
condition.
Our distribution business is and has been characterized by a high degree of customer concentration. Our four largest distribution customers accounted for 79%
and 87% of distribution net revenues in Fiscal 2020 and Fiscal 2019, respectively. Additionally, three of our largest design and development customers accounted
for 46% of design and development net revenues in both Fiscal 2020 and Fiscal 2019. Although we continue our efforts to diversify our business, we cannot
provide any assurance that we will be successful. The loss of any of these customers would have a material adverse effect on our financial condition, liquidity and
results of operations.
If any one or more of our distribution customers elect to reduce or discontinue inclusion of cases “in box”, our results of operations and financial condition would
be materially and adversely affected.
The predominant percentage of our revenues is derived from sales of case accessories to our OEM customers who package our cases “in box” with their
electronics. During recent years, there have been numerous federal legislative and administrative actions that have affected government programs, including
adjustments that have reduced or increased payments to healthcare providers and patients. Any measures to restrict healthcare spending could result in decreased
sales of our products. If one or more of our distribution customers reduce or discontinue the practice of including carry case accessories “in box” or if our
customers experience reduced demand for their products as a result of political changes, we may incur a significant decline in our revenues and our results of
operations and financial condition would be materially and adversely affected.
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Rising threats of international tariffs, including tariffs applied to goods between the U.S. and China, may materially and adversely affect our business.
Rising threats of international tariffs, including tariffs applied to goods traded between the U.S. and China, could materially and adversely affect our business
and results of operations. Since the beginning of 2018, there has been increasing rhetoric, in some cases coupled with legislative or executive action, from several
U.S. and foreign leaders regarding the possibility of instituting tariffs on the foreign imports of certain materials and products. More specifically, throughout 2020
and 2019, the U.S. and China imposed tariffs or announced proposed tariffs to be applied in the future to certain of each other’s exports. As of the date of this
report, the Company had not been directly affected by the tariffs implemented by President Trump on the medical technology industry. However, we do not know
what the new administration will implement when President-Elect Biden takes office. If any such tariffs or any restrictions are imposed on products that we import
to our customers, we would be required to raise our prices which may result in the loss of customers and harm our business. Additionally, some of our non-diabetic
distribution customers and customers in the design and development business have been affected by these tariffs, specifically those who manufacture electronic
products. This may cause these customers to reduce the amount of discretionary spending they use on outsource product design and engineering services supplied
by our design segment.
Changes in political conditions in China and changes in the state of China-U.S. relations, including the current trade tensions, are difficult to predict and could
adversely affect the operations or financial condition of the Company. In addition, because of our involvement in the Chinese market, any deterioration in political
or trade relations might cause a public perception in the U.S. or elsewhere that might cause our business to become less attractive. Such an impact could adversely
affect our revenues and cash flows.
We continue to encounter pressure from our largest distribution customers to maintain or even decrease prices, or to supply lower priced carry solutions, and
expect such pressure to persist. The effects of such price constraints on our business may be exacerbated by inflationary pressures that affect our costs of supply.
During Fiscal 2020, we continued to experience significant pricing pressure from our largest distribution customers to reduce the prices we charge them.
When we are unable to extract comparable concessions from our suppliers on prices they charge us, our product sales margins erode. In addition, competitors may
reduce their average selling prices faster than we are able to reduce costs, which can also accelerate the rate of decline of our selling prices.
In addition to margin compression from customers in general, we are encountering increased pricing from our Chinese suppliers who are reacting to
inflationary increases in materials and labor costs incurred by them. In addition, prices that our Chinese vendors charge to us may reflect appreciation of the
Chinese currency against the U.S. dollar, which can be passed through to us in the form of higher U.S. dollar prices. This in turn will tend to reduce gross profit if
we are unable to raise our prices. Any decrease in demand for our products, coupled with pressure from the market and our customers to decrease our prices, would
materially adversely affect our business, financial condition, and results of operations.
Increasingly, our distribution customers are requesting that we enter into supply agreements with them that have restrictive terms and conditions. These
agreements typically include provisions that increase our financial exposure, which could result in significant costs to us.
Increasingly, our distribution customers are requesting that we enter into supply agreements with them. These agreements typically do not include volume
commitments but do include provisions that generally serve to increase our exposure for product liability and limited sales returns, which could result in higher
costs to us as a result of such claims. In addition, these agreements typically contain provisions that seek to limit our operational and pricing flexibility and extend
payment terms, which could materially adversely affect our cash flow, business, financial condition, and results of operations.
11
Our distribution business depends on a single exclusive buying agent who, in turn, depends on a limited number of key suppliers.
Our Chairman, Chief Executive Officer and largest shareholder is the owner of Forward China, our exclusive sourcing agent in the Asia Pacific region. We
have entered into a Buying Agency and Supply Agreement with Forward China whereby Forward China will act as the Company’s exclusive agent to arrange for
sourcing, manufacturing and exporting the Company’s distribution products. Historically, Forward China has relied on a limited number of suppliers to supply the
component parts and pieces necessary for the production of our carry and protective solutions products. As a result, our ability to effectively push back against
rising material costs may diminish, although historically Forward China has absorbed these costs. In addition, any inability to obtain supplies from a single or
limited number of suppliers may result in difficulty obtaining the supplies necessary for our business and may restrict our ability to produce our carry and
protective solutions products. Where practical, we intend to establish alternative sources through Forward China to mitigate the risk that the failure of any single
supplier will adversely affect our business. Nevertheless, either a prolonged inability to obtain certain components or the failure of one of our suppliers to do so
could impair our ability to ship products and generate revenues, which could adversely affect our operating results and damage our customer relationships.
In addition, we depend significantly on Forward China as our exclusive buying agent for substantially all of our component parts. As a result, we have limited
visibility as to our supplier base, making it difficult to forecast future events and to plan our operations. In addition, if Forward China fails to satisfactorily perform
its obligations, including payment obligations, to our suppliers or its duties to us as our exclusive buying agent as a result of financial or other difficulties or for any
other reason, or if our relationship with Forward China was to suffer or we are unable to extend our agreement with Forward China which expires in October 2023,
we could suffer irreparable harm resulting in substantial harm to the distribution business.
Our distribution business has benefited from customers deciding to outsource their carry and protective solutions assembly needs to us. If our distribution
customers choose to provide these services in-house or select other providers, our distribution business could suffer.
Our future distribution revenue growth partially depends on new outsourcing opportunities from our distribution customers. Current and prospective customers
continuously evaluate our performance against other providers. They also evaluate the potential benefits of manufacturing their products themselves. To the extent
that outsourcing opportunities are not available either due to these customers deciding to produce these products themselves or to use other providers, our financial
results and future growth could be materially adversely affected.
If we are unable to provide our customers with high-quality products, and service, or if we are unable to deliver our products and/or service to our distribution
customers in a timely manner, our business, financial condition, and results of operations may be materially adversely affected.
In order to maintain our existing customer base and obtain business from new customers, we must demonstrate our ability to produce our products and
services at the level of quality, responsiveness, timeliness, and cost that our customers require. If our products or services are provided at what customers believe
are of a substandard quality, if they are not delivered on time, if we are not responsive to our customers’ demands or cannot meet their needs, our reputation as a
reliable supplier of our products and a sophisticated product designer and developer would likely be damaged. If we are unable to meet anticipated product and
service standards, we may be unable to obtain new or keep our existing distribution customers, and this would have a material adverse effect on our business,
financial condition, and results of operations.
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If we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results. As a result,
current and potential stockholders could lose confidence in our financial reporting, which could harm our business and the trading price of our stock.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports. If we cannot maintain effective controls and
reliable financial reports, our business and operating results could be harmed. We continue to work on improvements to our internal controls over financial
reporting. Any failure to implement and maintain internal controls over our financial reporting or difficulties encountered in the implementation of improvements
in our controls, could cause us to fail to meet our reporting obligations. Any failure to improve our internal controls over financial reporting or to address identified
weaknesses in the future, if they were to occur, could also cause investors to lose confidence in our reported financial information, which could have a negative
impact on the trading price of our stock.
Our results of operations are subject to the risks of fluctuations in the values of foreign currencies relative to the U.S. Dollar.
Our results of operations are expressed in U.S. dollars. When the U.S. dollar appreciates or depreciates in value against a currency in which all or a significant
portion of revenues or other accounts receivable are denominated, such as the Euro, our results of operations can be adversely affected or benefited, respectively.
The degree of impact is proportional to the amount of foreign currency expense or revenue, as the case may be, and the fluctuations in exchange rates over the
period in which the effect is measured on our financial statements. In addition, such currency fluctuations may affect the comparability of our results of operations
between financial periods.
Future revenues are difficult to predict and are likely to show significant variability as a consequence of customer concentration.
Because our revenues are highly concentrated in a few large customers, and because the volumes of these customers’ order flows to us can fluctuate markedly
in a short period of time, our quarterly revenues, and consequently our results of operations, may be highly variable and subject to significant changes over a
relatively short period of time. Our largest distribution customers may keep consumer products with which our carry solutions are packaged “in-box” in active
promotion for many months, or for a very short period of time, depending on various factors, including sales trends for the product, product development cycles,
new product introductions, and our customers' competitors' product offerings. As demand for the consumer product relating to the in-box program matures and
decreases, we may be forced to accept significant price and/or volume reductions in customer orders for our carry solutions, which will adversely affect revenues.
Additionally, our large design and development customers may have their budgets limited from many factors including economic declines (resulting from a
pandemic or any other reason) causing discretionary budgets to decline or may from-time-to-time choose to do their development work in-house. All of these
factors tend to lead to a high degree of variability in our quarterly revenue levels. Significant, rapid shifts in our operating results may occur if and when one or
more of these customers increases or decreases the size(s) of, or eliminates, their orders or engagement from us by amounts that are material to our business.
Our gross margins, and therefore our profitability, vary considerably by customer and by product, and if the revenue contribution from one or more distribution
customers or products changes materially, relative to total revenues, our gross profit percentage may fluctuate.
Our gross profit margins on the distribution products we sell can vary widely depending on the product type, customer, and order size. Because of the broad
variability in price ranges and product types, we anticipate that gross margins, and accordingly their impact on operating income or loss, may fluctuate depending
on the relative revenue contribution from each customer or product. If our gross margins decrease, our results of operations will be adversely affected.
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Product manufacture is often outsourced by our distribution customers to contract manufacturing firms in China and in these cases it is the contract manufacturer
to which we must look for payment.
Contract manufacturing firms are performing manufacturing, assembly, and product packaging functions, including the bundling of our product accessories
with the distribution customer's product. As a consequence of this business practice, we often sell our carry solutions products directly to the contract
manufacturing firm. This is particularly significant in the case of diabetic product sales to certain customers. In these cases, we invoice the contract manufacturing
firm and not the distribution customer. Therefore, it is the contract manufacturing firm to which we must look for payment in such cases and not our distribution
customer. If we fail to receive payment from the contract manufacturer, our ability to be paid for products already delivered would be limited. In such event, our
results of operations will be adversely affected.
Our dependence on foreign manufacturers creates quality control and other risks to our business. From time to time we may experience certain quality control, on-
time delivery, cost, or other issues that may jeopardize customer relationships.
Our reliance on foreign suppliers, manufacturers and other contractors involves significant risks, including risk of product quality issues and reduced control
over quality assurance, manufacturing yields and costs, pricing, timely delivery schedules, the potential lack of adequate manufacturing capacity and availability of
product, the lack of capital and potential misappropriation of our designs. In any such event, our reputation and our business will be harmed.
Our shipments of distribution products may become subject to delays or cancellation due to work stoppages or slowdowns, piracy, damage to port facilities, and
congestion due to inadequacy of port terminal equipment and other causes.
To the extent that there are disruptions or delays in loading container cargo in ports of origin or off-loading cargo at ports of destination as a result of labor
disputes, work-rules related slowdowns, tariff or World Trade Organization-related disputes, piracy, physical damage to port terminal facilities or equipment
caused by severe weather or terrorist incidents, congestion in port terminal facilities, inadequate equipment to load, dock and offload container vessels or energy-
related tie-ups or otherwise, or for other reasons, product shipments to our customers will be delayed. In any such case, our customer may cancel or change the
terms of its purchase order, resulting in a cancellation or delay of payments to us. A closure or partial closure of port facilities or other causes of delays in the
loading, importation, offloading or movement of our products to the shipping destination agreed to with our customer could result in increased expenses, as we try
to avoid such delays, delayed shipments or cancelled orders, or all of the above. Depending on the severity of such consequences, this may have an adverse effect
on our financial condition and results of operations.
Issues with our products may lead to product liability, personal injury or property damage claims, recalls, withdrawals, replacements of products, or regulatory
actions by governmental authorities that could divert resources, affect business operations, decrease sales, increase costs, and put us at a competitive
disadvantage, any of which could have a significant adverse effect on our financial condition.
We may experience issues with products that we source that may lead to product liability, personal injury or property damage claims, recalls, withdrawals,
replacements of products, or regulatory actions by governmental authorities. Any of these activities could result in increased governmental scrutiny, harm to our
reputation, reduced demand by consumers for products, decreased willingness by retailer customers to purchase our products, absence or increased cost of
insurance, or additional safety and testing requirements. Such results could divert development and management resources, adversely affect our business
operations, decrease sales, increase legal fees and other costs, and put us at a competitive disadvantage compared to other companies not affected by similar issues
with products, any of which could have a significant adverse effect on our financial condition and results of operations. Although the Company does not intend on
providing warranties on the products it distributes directly, we can provide no assurances that customers will not seek damages if any of the foregoing events took
place. The Company does not carry product liability insurance. Although we have not had significant claims for damages or losses from the products we distribute,
any uninsured claim, if successful and of significant magnitude, could have a material adverse effect on our business, prospects, results of operations or financial
condition.
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The carrying solutions distribution business is highly competitive and does not pose significant barriers to entry.
There are many competitors in the sale of carry solutions products to our customers including OEMs, and competition is intense. Since little or no significant
proprietary technology is involved in the design, production or distribution of the types of products we sell, others may enter the business with relative ease and
compete against us. Such competition may result in the diminution of our market share or the loss of one or more major customers, thereby adversely affecting our
net revenues, results of operations, and financial condition. Many of our competitors are larger, better capitalized and more diversified than we are and may be
better able to withstand a downturn in the general economy or in the product areas in which we specialize. Potential customers may prefer the pricing terms offered
by competitors. These competitors may also have less sales concentration than we do and be better able to withstand the loss of a key customer or diminution in its
orders. If we are not effectively able to compete, our results of operations will be adversely affected.
If we fail to retain our key personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.
Our future depends, in part, on our ability to attract and retain key sales personnel and the continued contribution of our executive officers including Terence
Wise, our Chief Executive Officer, who would be difficult to replace. Our design and development business employs and contracts highly sophisticated engineers
to provide our customers with a full-service product, design and development team with vast technological knowledge and capabilities. The loss of the services of
any of our key personnel and the process to replace any key personnel would involve significant time and expense and may significantly delay or prevent the
achievement of our business objectives.
If a third party asserts that we are infringing on its intellectual property, whether successful or not, it could subject us to costly and time-consuming litigation or
require us to obtain expensive licenses, and our business may be adversely affected.
Third party lawsuits alleging our infringement of patents, trade secrets or other intellectual property rights could cause us to do one or more of the following:
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stop using technology that contains the allegedly infringing intellectual property;
incur significant legal expenses;
cause our management to divert substantial time to our defenses;
pay substantial damages to the party whose intellectual property rights we may be found to be infringing;
indemnify customers; or
attempt to obtain a license to the relevant intellectual property from third parties, which may not be available to us on reasonable terms or at all.
Third party lawsuits alleging our infringement of patents, trade secrets or other intellectual property rights could have a material adverse effect on our
business, results of operations and financial condition.
If we experience system interruptions, it may cause us to lose customers and may harm our business.
Our inability to maintain and improve our information technology systems and infrastructure may result in system interruptions. System interruptions and slow
delivery times, unreliable service levels, prolonged or frequent service outages, or insufficient capacity may prevent us from efficiently providing services to our
customers on our website, which could result in our losing customers and revenue.
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We lease space for our data center for power, security, connectivity and other services. We also rely on third party providers for bandwidth. We do not control
these vendors and it would take significant time and effort to replace them. We have experienced, and may experience in the future, website disruptions, outages
and other performance problems due to a variety of factors, including infrastructure changes, human or software errors and capacity constraints.
Our systems are vulnerable to damage or interruption from terrorist attacks, floods, fires, power loss, telecommunications failures, hurricanes, computer
viruses, computer denial of service attacks or other attempts to harm our systems. Any such damage or interruption would adversely affect our results of
operations.
Because our networks and IT systems may be vulnerable to unauthorized persons hacking our systems, it could disrupt our operations and result in the theft of our
proprietary information.
A party who is able to breach the security measures on our networks could misappropriate either our or our customers’ proprietary information, or cause
interruptions or malfunctions in our operations. Hacking of companies’ infrastructure is a growing problem. Although we believe our systems and engineering
team have the capability of protecting the Company from any such hacking, we can provide you with no such assurance. If we grow and obtain more visibility, we
may be more vulnerable to hacking. We may be required to expend significant capital and other resources to protect against such threats or to alleviate problems
caused by breaches in security, which could have a material adverse effect on our financial performance and operating results.
Our design business uses software that is highly technical, and undetected errors, if any, could adversely affect our business.
Our design business may use software that is highly technical and complex. Our software has contained, and may now or in the future contain, undetected
errors, bugs, flaws, corrupted data or vulnerabilities. Some errors in our software code may only be discovered after the code has been released. Any errors, bugs,
flaws or corrupted data could result in damage to our reputation, loss of users, or loss of revenue, any of which could adversely affect our business and financial
results.
We maintain cash balances in our bank accounts that exceed the FDIC insurance limitation.
We maintain our cash assets at commercial banks in the U.S. in amounts in excess of the Federal Deposit Insurance Corporation insurance limit of $250,000
and in Europe in amounts that may exceed any applicable deposit insurance limits. In the event of a failure at a commercial bank where we maintain our deposits
or uninsured losses on money market or other cash equivalents in which we maintain cash balances, we may incur a loss to the extent such loss exceeds the
insurance limitation, which could have a material adverse effect upon our financial conditions and our results of operations.
Our Chairman and Chief Executive Officer is a significant shareholder, which makes it possible for him to have significant influence over the outcome of all
matters submitted to our shareholders for approval and which influence may be alleged to conflict with our interests and the interests of our other shareholders.
Terence Wise, our Chairman and Chief Executive Officer, is a significant shareholder who beneficially owns approximately 17% of the outstanding shares of
our common stock as of September 30, 2020. Mr. Wise has substantial influence over the outcome of all matters submitted to our shareholders for approval,
including the election of our directors and other corporate actions. This influence may be alleged to conflict with our interests and the interests of our other
shareholders. In addition, such influence by Mr. Wise could have the effect of discouraging potential business partners or create actual or perceived governance
instabilities that could adversely affect the price of our common stock.
Risks Related to Our Common Stock
Due to factors beyond our control, our stock price may be volatile.
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Any of the following factors could affect the market price of our common stock:
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Our failure to increase revenue in each succeeding quarter and achieve and thereafter maintain profitability;
Our failure to meet our revenue and earnings guidance or our failure to meet financial analysts’ performance expectations;
The loss of Forward China as our agent;
The loss of customers or our failure to attract more customers;
The sale of a large amount of common stock by our shareholders;
Our announcement of a pending or completed acquisition or our failure to complete a proposed acquisition;
An adverse court ruling or regulatory action;
Changes in market valuations of similar companies;
Short selling activities;
Our announcement of any financing or a change in the direction of our business;
Announcements by us, or our competitors, of significant contracts, acquisitions, commercial relationships, joint ventures or capital commitments.
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities
class action suit against us could result in substantial costs and divert our management’s time and attention, which would otherwise be used to benefit our business.
Because our common stock is not actively traded, purchasers of our stock may incur difficulty in selling their shares at or above the price they paid for them, or at
all.
Our average daily trading volume on The Nasdaq Capital Market (“Nasdaq”) has been approximately 120,000 shares of common stock for the six trading days
prior to November 30, 2020. An active market for our common stock may never develop, or if it does, it may not be sustained. Accordingly, investors may
experience difficulty in selling their shares of common stock at or above the price they paid for them, or at all.
Failure to meet the continued listing requirements of Nasdaq, could result in delisting of our common stock, which in its turn would negatively affect the price of
our common stock and limit investors’ ability to trade in our common stock.
Our common stock trades on Nasdaq. Nasdaq rules impose certain continued listing requirements, including the minimum $1 bid price, corporate governance
standards and number of public stockholders. At November 30, 2020, our closing bid price was $1.83. If we fail to meet these continued listing requirements,
Nasdaq may take steps to delist our common stock. If our common stock is delisted from The Nasdaq Capital Market, we could face significant material adverse
consequences, including:
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a limited availability of market quotations for our common stock;
reduced liquidity with respect to our common stock;
a determination that our shares of common stock are a “penny stock” which will require broker-dealers trading in our common stock to adhere to
more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock;
a limited amount of news and analyst coverage for our company; and
a limited ability to issue additional securities or obtain additional financing in the future.
If we become subject to a regulatory investigation, it could cause us to incur substantial costs or require us to change our business practices in a manner
materially adverse to our business.
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From time to time, we may receive inquiries from regulators regarding our compliance with laws and other matters. Recently, we incurred significant expenses
responding to an SEC investigation into potential insider trading by certain insiders of the Company. Although that investigation has concluded, responding to, or
defending other such actions would cause us to continue to incur substantial expenses and divert our management’s attention.
Violation of existing or future regulatory orders or consent decrees could subject us to substantial monetary fines and other penalties that could negatively
affect our financial condition and results of operations. In addition, it is possible that future orders issued by, or enforcement actions initiated by, regulatory
authorities could cause us to incur substantial costs or require us to change our business practices in a manner materially adverse to our business.
We do not expect to pay dividends in the future, which means that investors may not be able to realize the value of their shares except through a sale.
We do not anticipate that we will declare or pay a cash dividend. We expect to retain future earnings, if any, for our business and do not anticipate paying
dividends on common stock at any time in the foreseeable future. Because we do not anticipate paying dividends in the future, the only opportunity for our
shareholders to realize the creation of value in our common stock will likely be through a sale of those shares.
ITEm 1B. UNRESOLVED STAFF COmmENTS
Not Applicable.
ITEm 2. PROPERTIES
The Company leases all of its properties where its business is operated. We believe that these properties are adequate for the purposes for which they are used.
All leases are with unaffiliated third parties. We believe that the loss of any lease would not have a material adverse effect on our operations, as we believe that we
could identify and lease comparable facilities upon approximately equivalent terms. The following properties which are material to the Company’s business are
described below:
We lease 14,000 square feet in Hauppauge, New York for our executive offices and IPS, which we rent under a lease agreement scheduled to expire in 2027.
The lease has annual escalations; rent payments were $29,000 per month during Fiscal 2020.
We lease 46,000 square feet in Coon Rapids, Minnesota for Kablooe, which we rent under a lease agreement schedule to expire in June 2021. Rent payments
were $9,200 per month during Fiscal 2020.
ITEm 3. LEGAL PROCEEDINGS
On August 21, 2020, IPS was named a third-party defendant in a patent dispute claim currently pending in the U.S. District Court for the Eastern District of
New York. The complaint, which contains no specific amount of monetary damages, asserts that certain intellectual property was misappropriated by IPS and one
of its former employees. IPS denies the allegations, believes the action is without merit and intends to vigorously defend it. The Company received permission
from the District Court to file a motion to dismiss the complaint and filed such motion on December 14, 2020.
From time to time, the Company may become a party to other legal actions or proceedings in the ordinary course of its business. As of September 30, 2020,
there were no such actions or proceedings, either individually or in the aggregate, that, if decided adversely to the Company’s interests, the Company believes
would be material to its business.
ITEm 4. mINE SAFETY DISCLOSURES.
Not Applicable.
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ITEm 5. mARKET FOR REGISTRANT’S COmmON EQUITY, RELATED SHAREHOLDER mATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
PART II
Market for Common Stock
The principal market for our common stock is Nasdaq. Our common stock is traded under the symbol “FORD”.
On November 30, 2020, the closing price for our common stock was $1.83.
Holders of common stock.
At November 30, 2020, there were approximately 75 holders of record of our common stock. Because many of our shares of common stock are held by
brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Dividends
We have not paid any cash dividends on our common stock since 1987 and do not plan to pay cash dividends in the foreseeable future. The payment of
dividends in the future, if any, will depend upon our results of operations, as well as our short-term and long-term cash availability, net working capital, working
capital needs, and other factors, as determined by our Board of Directors. Currently, except as may be provided by applicable laws, there are no contractual or
other restrictions on our ability to pay dividends if we were to decide to declare and pay them.
Recent Sales of Unregistered Securities
None.
ITEm 6. SELECTED FINANCIAL DATA
Not applicable.
ITEm 7. mANAGEmENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this
report on Form 10-K. All dollar amounts and percentages presented herein have been rounded to approximate values. In addition to historical information, this
discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under “Risk Factors.”
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Cautionary statement regarding Forward-Looking Statement
This report includes “forward-looking statements”, as such term is used within the meaning of the Private Securities Litigation Reform Act of 1995. These
statements include, among other things, statements regarding:
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Expectations regarding having our products in retail outlets;
Expectations regarding the timing and success of integrating Kablooe in the Company’s historical business;
Liquidity
as well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forward-looking statements generally can be
identified by words such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "projects," "will be," "will continue," "will likely
result," and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties,
which could cause our actual results to differ materially and adversely from those reflected in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed in this Annual Report on Form 10-K, and in particular, the risks discussed under the
caption "Risk Factors" in Item 1A of this report and those discussed in other documents we file with the SEC. We undertake no obligation to revise or publicly
release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to
place undue reliance on such forward-looking statements.
Business Overview
Forward Industries, Inc. is a fully integrated design, development and manufacturing solution provider for top tier medical and technology customers
worldwide. As a result of the continued expansion of our design development capabilities through our wholly owned subsidiaries, IPS and Kablooe, we are now
able to introduce proprietary products to the market from concepts brought to us from a number of different sources, both inside and outside the Company.
The future impacts of the COVID-19 pandemic and any resulting economic impact are largely unknown and could be significant. It is possible that the
COVID-19 pandemic, the measures taken by the governments of countries affected and the resulting economic impact may negatively impact our results of
operations, cash flows and financial position in future periods as well as that of our customers, including their ability to pay for our services and choosing to
allocate their budgets to new or existing projects which may or may not require our services. The long-term financial impact on our business cannot be reasonably
estimated at this time. As a result, the effects of COVID-19 may not be fully reflected in our financial results until future periods.
Until there is a vaccine and treatment that is widely distributed, we expect business conditions to remain challenging. In response to these challenges, we will
continue to focus on those factors that we can control: closely managing and controlling our expenses; aligning our design and development schedules with
demand in a proactive manner as there are changes in market conditions to minimize our cash operating costs; pursuing further improvements in the productivity
and effectiveness of our development, selling and administrative activities and, where appropriate, taking advantage of opportunities to enhance our business
growth and profitability strategy.
Additionally, see Part I., Item 1A. Risk Factors - The adverse impact of COVID-19 on our businesses will continue for an unknown length of time and may
continue to impact our results of operations.
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Variability of Revenues and Results of Operation
Because a high percentage of our revenues is highly concentrated in a few large customers, and because the volumes of these customers’ order flows to us are
highly variable, with short lead times, our quarterly revenues, and consequently our results of operations, are susceptible to significant variability over a relatively
short period of time.
Critical Accounting Policies and Estimates
We have identified the accounting policies and significant estimation processes below as critical to our business operations and the understanding of our
results of operations. The discussion below is not intended to be comprehensive. In many cases, the accounting treatment of a particular transaction is specifically
dictated by U.S. GAAP, with no need for management’s judgment. In other cases, management is required to exercise judgment in the application of accounting
principles with respect to particular transactions. The impact and any associated risks related to these policies on our business operations are discussed throughout
this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect reported and expected financial results.
For a detailed discussion of the applications of these and other accounting policies, see “Item 8. Financial Statements and Supplementary Data” in this Annual
Report. Our preparation of our Consolidated Financial Statements requires us to make estimates and assumptions that are believed to be reasonable under the
circumstances. There can be no assurance that actual results will not differ from those estimates and such differences could be significant.
Revenue Recognition
Distribution Segment
The Company generally recognizes revenue in its distribution segment when: (i) finished goods are shipped to our distribution customers (in general, these
conditions occur at either point of shipment or point of destination, depending on the terms of sale, i.e., transfer of control); (ii) there are no other deliverables or
performance obligations; and (iii) there are no further obligations to the customer after the title of the goods has transferred. When the Company receives
consideration before achieving the criteria previously mentioned, it records a contract liability, which is classified as a component of deferred income in the
accompanying consolidated balance sheets. Contract liabilities at September 30, 2020 and 2019 were $75,000 and $0, respectively, for the distribution segment.
Design Segment
The Company applies the “cost to cost” and “right to invoice” methods of revenue recognition to the contracts with customers in the design segment. The
design segment typically engages in two types of contracts: (i) time and material and (ii) fixed price contracts. The Company recognizes revenue over time on its
time and material contracts utilizing a “right to invoice” method. Revenues from fixed price contracts that require performance of services that are not related to
the production of tangible assets are recognized by using cost inputs to measure progress toward the completion of its performance obligations or the “cost to cost”
method. Revenues from contracts that contain specific deliverables are recognized when the performance obligation has been satisfied or the transfer of goods to
the customer has been completed and accepted.
Recognized revenues that will not be billed until a later date, or contract assets, are recorded as an asset and classified as a component of accounts receivable
in the accompanying consolidated balance sheets. Contract assets at September 30, 2020 and 2019 were $649,000 and $611,000, respectively. Contracts where
collections to date have exceeded recognized revenues, or contract liabilities, are recorded as a liability and classified as a component of deferred income in the
accompanying consolidated balance sheets. Contract liabilities at September 30, 2020 and 2019 were $410,000 and $220,000, respectively.
21
Business Combinations
The Company allocates the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated
fair values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the
fair values of assets acquired and liabilities assumed, the Company makes significant estimates and assumptions, especially with respect to intangible assets.
Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships and developed
technology, discount rates and terminal values. Our estimate of fair value is based upon assumptions believed to be reasonable, but actual results may differ from
estimates.
Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and
liabilities assumed.
Segment Reporting
The Company has two reportable segments: distribution and design. The distribution segment consists of two reporting units (Forward US and Forward
Switzerland, that collectively comprise one operating segment) that source and distribute carrying cases and other accessories for medical monitoring and
diagnostic kits and a variety of other portable electronic and non-electronic devices. The design segment consists of two operating segments (IPS and Kablooe,
which have been aggregated into one reportable segment) that provide a full spectrum of hardware and software product design and engineering services.
Organizing our business through these operating segments allows us to align our resources and manage our operations. Our chief operating decision maker
regularly reviews operating segment revenue and profitability when assessing financial results of operating segments and allocating resources.
We measure the performance of our operating segments based upon operating segment revenue and operating income or loss. Segment operating income or
loss includes revenues earned and expenses incurred directly by the operating segment, including cost of sales and selling, marketing, and general and
administrative expenses (see Note 16 for more discussion on operating segments).
Goodwill and Intangible Assets
The Company reviews goodwill for impairment at least annually, or more often if triggering events occur. The Company has two reporting units with goodwill
and we perform our annual goodwill impairment test on September 30, the end of the fiscal year, or upon the occurrence of a triggering event. The Company has
the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company can support the conclusion
that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company would not need to perform the
impairment test for the reporting unit. If the Company cannot support such a conclusion or does not elect to perform the qualitative assessment, then the Company
will compare the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying value, no
impairment charge is recognized. If the fair value of the reporting unit is less than its carrying value, an impairment charge will be recognized for the amount by
which the reporting unit’s carrying amount exceeds its fair value. A significant amount of judgment is required in performing goodwill impairment tests including
estimating the fair value of a reporting unit and the implied fair value of goodwill. During Fiscal 2020, the Company recorded an impairment charge related to
goodwill (See Note 4).
22
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13 “Fair Value Measurement –
Disclosure Framework (Topic 820)” to improve the disclosure requirements on fair value measurements. The updated guidance is effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company
does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In November 2019, the FASB issued ASU 2019-08, “Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic
606)” to provide guidance for share-based payment awards granted to a customer in conjunction with selling goods or services accounted for under Topic 606. The
pronouncement is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company does not expect the
adoption of this guidance to have a material impact on its consolidated financial statements.
In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” ASU 2019-11 is an
accounting pronouncement that provides clarity to and amends earlier guidance on this topic and would be effective concurrently with the adoption of such earlier
guidance. This pronouncement is effective for the Company for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years. The
Company is currently evaluating the effects of this pronouncement on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)” addressing customers’
accounting for implementation costs incurred in a cloud computing arrangement that is a service contract, which requires customers to apply internal-use software
guidance to determine the implementation costs that are able to be capitalized. Capitalized implementation costs are required to be amortized over the term of the
arrangement, beginning when the cloud computing arrangement is ready for its intended use. The effective date of the new guidance for public companies is for
fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the
adoption of this guidance to have a material impact on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This guidance removes
certain exceptions to the general principles in Topic 740 and provides consistent application of U.S. GAAP by clarifying and amending existing guidance. The
effective date of the new guidance for public companies is for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. Early
adoption is permitted. The Company is currently evaluating the timing of adoption and impact of the updated guidance on its consolidated financial statements.
RESULTS OF OPERATIONS FOR FISCAL 2020 COmPARED TO FISCAL 2019
Net Loss
Distribution Segment
Distribution segment net loss was $1,321,000 in Fiscal 2020 compared to $1,811,000 in Fiscal 2019. The decrease in net loss in Fiscal 2020 was due to an
increase in other income related to fair value adjustments (non-cash income), a decrease in general and administrative expenses, partially offset by lower revenue
and gross profit.
Design Segment
Net loss for the design segment was $364,000 in Fiscal 2020 as compared to $1,793,000 in Fiscal 2019. The decrease in net loss in Fiscal 2020 resulted from
higher gross profit, lower general and administrative expenses, partially offset by the impairment of goodwill (non-cash expense).
23
Main components of net loss for the distribution and design segments are reflected in the table below:
Net revenues
Consolidated
$
34,478 $
main Components of Net Income
(amounts in thousands)
Fiscal 2020
Distribution
Design
Consolidated Distribution
Design
Fiscal 2019
20,752 $
13,726 $
37,409 $
21,988 $
15,421 $
Increase
(Decrease)
Consolidated
(2,931)
$
Gross profit
Sales and marketing
expenses
General and administrative
expenses
Goodwill impairment
Operating loss
Other (income)/expense, net
Income tax
provision/(benefit)
Net loss
$
6,639 $
2,775 $
3,864 $
6,581 $
3,375 $
3,206 $
1,951
1,495
456
1,965
1,441
524
5,655
1,015
(1,982)
(216)
9
(1,775) $
2,884
–
(1,604)
(202)
9
(1,411) $
2,771
1,015
(378)
(14)
–
(364) $
7,713
–
(3,097)
511
(4)
(3,604) $
3,311
–
(1,377)
438
(4)
(1,811) $
4,402
–
(1,720)
73
–
(1,793) $
58
(14)
(2,058)
1,015
1,115
(727)
13
1,829
Consolidated basic and diluted income loss per share was $0.19 and $0.38 for Fiscal 2020 Fiscal 2019, respectively.
Net Revenues
We generate revenue through two reportable segments: distribution and design. We believe that our total revenue will increase in the future as we grow our
retail business and integrate the Kablooe business. We continue to work on integrating the sales forces for both the distribution and design segments of our
business to explore synergistic opportunities.
The chart below indicates the revenues by operating segment for Fiscal 2020 and Fiscal 2019:
Distribution
Design
Total
(amounts in thousands)
Fiscal 2020
Fiscal 2019
$
$
20,752 $
13,726
34,478 $
21,988
15,421
37,409
$
$
Increase
(Decrease)
(1,236)
(1,695)
(2,931)
24
Distribution Segment
Net revenues in the distribution segment declined $1,236,000, or 5.6%, to $20,752,000 in Fiscal 2020 from $21,988,000 in Fiscal 2019 due to reduced
revenues in the sale of diabetic products partially offset by an increase in other product revenue. Revenues from diabetic products declined $2,314,000 and
revenues from other products increased $1,078,000. We believe this decrease in diabetic product sales and increase in other product sales is a trend that will
continue.
The following tables set forth revenues by channel, product line and geographic location of our distribution segment customers for the periods indicated:
Diabetic products
Other products
Total net revenues
Diabetic products
Other products
Total net revenues
Diabetic Product Revenues
Net Revenues for Fiscal 2020
(amounts in thousands)
Americas
APAC
EmEA
Total
$
$
$
$
4,896
2,439
7,335
Americas
5,187
1,126
6,313
$
$
$
$
5,572
760
6,332
$
$
Net Revenues for Fiscal 2019
(amounts in thousands)
APAC
EmEA
6,645
1,151
7,796
$
$
6,769
316
7,085
7,719
160
7,879
$
$
$
$
17,237
3,515
20,752
Total
19,551
2,437
21,988
Our distribution segment sources to the order of, and sells carrying cases for, blood glucose diagnostic kits directly to OEMs (or their contract manufacturers).
The OEM customer or its contract manufacturer packages our carry cases “in box” as a custom accessory for the OEM’s blood glucose testing and monitoring kits,
or to a lesser extent, sell them through their retail distribution channels.
Revenues from diabetic products declined $2,314,000, or 11.8%, to $17,237,000 in Fiscal 2020 from $19,551,000 in Fiscal 2019. The decline was primarily
due to lower revenues from two major diabetic customers (Diabetic Products Customers B and C). Revenue declines from other major diabetic customers were less
significant and were partially offset by an increase in revenue from all of our other diabetic products customers. As mentioned above, management believes that
revenues from diabetic customers will continue to decline.
The following table sets forth our distribution segment net revenues by diabetic products customer for the periods indicated:
Diabetic Products Customer A
Diabetic Products Customer B
Diabetic Products Customer C
Diabetic Products Customer D
All other Diabetic Products Customers
Total Diabetic Revenue
(amounts in thousands)
Fiscal 2020
Fiscal 2019
Increase
(Decrease)
$
$
6,145 $
3,448
4,912
1,924
808
17,237 $
6,513
4,128
6,114
2,265
531
19,551
$
$
(368)
(680)
(1,202)
(341)
277
(2,314)
25
Revenues from diabetic products represented 83% of net revenues for the distribution segment in Fiscal 2020 compared to 89% in Fiscal 2019.
Other Product Revenues
Our distribution segment also sources and sells cases and protective solutions to OEMs for a diverse array of portable electronic and non-electronic products
(such as sporting and recreational products, bar code scanners, GPS devices, tablets and firearms) on a made-to-order basis that are customized to fit the products
sold by our OEM customers. In Fiscal 2020, other product revenues were also derived from the sales and sourcing of personal protective equipment.
Revenues from other products increased $1,078,000, or 44%, to $3,515,000 in Fiscal 2020 from $2,437,000 in Fiscal 2019. Revenues from the sale of personal
protective equipment increased $758,000 and sales from other products increased $320,000. We will continue to focus on our sales and sales support teams in our
attempt to expand and diversify our other products customer base.
Revenues of other products represented 17% of our net revenues in Fiscal 2020 as compared to 11% in Fiscal 2019.
Design Segment
Net revenues in the design segment declined $1,695,000, or 11.0%, to $13,726,000 in Fiscal 2020 from $15,421,000 in Fiscal 2019. The decline in revenues
was due to the reduction or delay in demand for design and development projects, partially related to COVID-19. Since its acquisition on August 17, 2020,
Kablooe generated revenue of $172,000 in Fiscal 2020. The following table sets forth our design segment net revenues by major customers for the periods
indicated:
Design Segment Customer 1
Design Segment Customer 2
Design Segment Customer 3
Design Segment Customer 4
Design Segment Customer 7
All other Design Segment Customers
Total net revenues
Gross Profit
Distribution Segment
(amounts in thousands)
Fiscal 2020
Fiscal 2019
Increase
(Decrease)
$
$
2,585 $
1,781
1,958
–
–
7,402
13,726 $
–
1,476
2,985
2,616
1,080
7,264
15,421
$
$
2,585
305
(1,027)
(2,616)
(1,080)
138
(1,695)
Gross profit for the distribution segment declined $600,000, or 17.8%, to $2,775,000 in Fiscal 2020 from $3,375,000 in Fiscal 2019. Gross margin declined to
13.4% in Fiscal 2020, compared to 15.3% in Fiscal 2019.
These declines were driven primarily by lower sales revenue and a shift to lower-margin cases and pricing pressures on diabetic products from customers. The
decline in gross margin from our diabetic products was partially offset by higher gross margins on the sale of personal protective equipment in Fiscal 2020. We are
working on expanding our product offering to include higher margin products as well as enhancing our sales efforts to raise top side gross sales to raise total gross
profit.
26
Design Segment
Gross profit for the design segment increased $658,000, or 20.5%, to $3,864,000 in Fiscal 2020 from $3,206,000 in Fiscal 2019. Gross margin improved from
20.8% Fiscal 2019 to 28.2% in Fiscal 2020. Gross margin in Fiscal 2019 was significantly lower than historical performance due to project overruns for two
significant customers in that year. Depreciation expense, which is allocated to cost of sales for the design segment, was $98,000 and $139,000 for Fiscal 2020 and
Fiscal 2019, respectively.
Sales and marketing Expenses
Distribution Segment
Sales and marketing expenses for the distribution segment increased $54,000, or 3.7%, to $1,495,000 in Fiscal 2020 from $1,441,000 in Fiscal 2019. The
increase was primarily due to additional amortization on the cost of the Mooni Agreement (see Note 19). Sales and marketing expenses for the distribution segment
increased to 7.2% of revenues in Fiscal 2020 from 6.6% in Fiscal 2019.
Design Segment
Sales and marketing expenses for the design segment decreased $68,000, or 13.0%, to $456,000 in Fiscal 2020 from $524,000 in Fiscal 2019. The decrease
was primarily due to lower sales commissions and entertainment related expenses, partially offset by higher sales salaries. Sales and marketing expenses for the
design segment remained fairly consistent at 3.3% of revenues in Fiscal 2020 compared to 3.4% in Fiscal 2019.
General and Administrative Expenses
Distribution Segment
General and administrative expenses for the distribution segment declined $427,000, or 12.9%, to $2,884,000 in Fiscal 2020 from $3,311,000 in Fiscal 2019.
This decline was primarily due to a $511,000 reduction in legal fees related to responding to an SEC subpoena in Fiscal 2019 (which includes an $80,000 insurance
settlement received in Fiscal 2020), a decrease in bad debt expense of $69,000, partially offset by higher professional fees of $100,000 (related to the Kablooe
acquisition, valuation work and other matters), severance costs of $157,000 and $65,000 related to internal software implementation projects. General and
administrative expenses as a percentage of revenue for the distribution segment decreased to 13.9% in Fiscal 2020 from 15.1% in Fiscal 2019.
Design Segment
General and administrative expenses for the design segment decreased $1,631,000, or 37.1%, to $2,771,000 in Fiscal 2020 from $4,402,000 for Fiscal 2019.
The decrease is primarily related to a $2,075,000 reduction in bad debt expense, partially offset by the $327,000 investment impairment discussed in Note 6.
Amortization of intangible assets is allocated to general and administrative expenses in the design segment. Amortization of intangible assets was $167,000 and
$163,000 for Fiscal 2020 and Fiscal 2019, respectively.
27
Other (Income)/Expense
Distribution Segment
The distribution segment reported other income of $202,000 in Fiscal 2020 as compared to other expense of $438,000 in Fiscal 2019. The variance is due to
fair value adjustments of $334,000 in Fiscal 2020 to reduce the deferred consideration liability associated with the IPS acquisition as compared to fair value
adjustments of $296,000 in Fiscal 2019 to increase this deferred consideration liability.
Design Segment
The design segment reported other income of $14,000 in Fiscal 2020 as compared to other expense of $73,000 in Fiscal 2019. The change relates to interest
payments of $61,000 received on the note receivable written off in Fiscal 2019 (See Note 6). In addition, interest expense was lower in Fiscal 2020 due to lower
interest rates and a reduction in the average amount of debt outstanding.
Income Taxes
In Fiscal 2020, the Company recorded a tax provision of $9,000, generated a loss before income taxes of $1,766,000 and had an effective tax rate of 0.5%. In
Fiscal 2019, the Company recorded a tax benefit of $4,000, generated a loss before income taxes of $3,604,000 and had an effective tax rate of 0.1%.
The Company maintains significant net operating loss carryforwards and does not recognize a significant income tax provision/(benefit) as its deferred tax
provision is typically offset by maintaining a full valuation allowance on its net deferred tax assets. The Fiscal 2020 tax provision is primarily comprised of income
taxes assessed in states where net operating losses are not available.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity is our operations. The primary demand on our working capital has historically been (i) operating losses, (ii) repayment of debt
obligations, and (iii) any increases in accounts receivable and inventories arising in the ordinary course of business. Historically, our sources of liquidity have been
adequate to satisfy working capital requirements arising in the ordinary course of business.
As of the filing date of this report, we had $300,000 available under our $1,300,000 line of credit which matures May 31, 2021. Additionally, Forward China
holds a $1,600,000 promissory note which was extended to December 31, 2021 (see Note 14). Although this note has been extended on multiple occasions to assist
the Company with its liquidity position, we plan on funding the repayment at maturity using existing cash balances and/or obtaining an additional credit facility as
deemed necessary. We can provide no assurance that Forward China will extend the note again if we request an extension nor that any such credit facility will be
available on terms acceptable to us or at all.
As discussed in Note 18, on April 18, 2020, the Company entered into a loan in an aggregate principal amount of $1,357,000 under the Paycheck Protection
Program (the “PPP Loan”) pursuant to the recently enacted U.S. Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). In December 2020, the
Small Business Administration approved our forgiveness request for this loan.
We anticipate that our liquidity and financial resources for the next 12 months from the date of the filing of this report will be adequate to manage our
operating and financial requirements. If we have the opportunity to make a strategic acquisition (as we have in the past with the acquisitions of IPS and Kablooe)
or an investment in a product or partnership, we may require additional capital beyond our current cash balance to fund the opportunity. If we seek to raise
additional capital, there is no assurance that we will be able to raise funds on terms that are acceptable to us or at all.
28
At September 30, 2020, our working capital (current assets less current liabilities) was $3,396,000 compared to $3,542,000 at September 30, 2019. As of
November 30, 2020, we had $2,594,000 of cash on hand.
Although we do not anticipate the need to purchase any additional material capital assets in order to carry out our business, it may be necessary for us to
purchase equipment and other capital assets in the future, depending on need.
Cash Flows
During Fiscal 2020 and Fiscal 2019, our sources and uses of cash were as follows:
Cash Flows from Operating Activities
During Fiscal 2020, cash used in operating activities of $263,000 resulted from a net loss of $1,775,000, an increase in accounts receivable of $733,000, non-
cash fair value adjustments of $334,000, and bad debt recoveries of $78,000, partially offset by non-cash impairment charges of $1,342,000, depreciation and
amortization of $272,000, share-based compensation of $245,000 and the net change in other operating assets and liabilities of $798,000.
During Fiscal 2019, cash used in operating activities of $1,970,000 resulted from a net loss of $3,604,000, a reduction of accounts payable (including due to
Forward China) of $975,000, a net loss reconciling adjustment of $327,000 for the fair value of cost method investment for services provided, an increase in
prepaid expenses and other current assets of $193,000, an increase in other assets of $191,000 and an increase in inventory of $40,000, partially offset by the
reduction of accounts receivable of $264,000, an increase in accrued expenses and other current liabilities of $97,000, an increase in deferred income of $95,000,
and the add-back of non-cash items including bad debt expense of $2,065,000, depreciation and amortization of $312,000, share-based compensation expense of
$216,000, deferred rent amortization of $16,000 and a non-cash increase of $296,000 in fair value adjustments of the earn-out consideration and deferred cash
consideration.
Cash Flows from Investing Activities
In Fiscal 2020, cash used for investing activities of $390,000 primarily resulted from the $353,000 cash consideration paid for the Kablooe acquisition and
purchases of property and equipment of $68,000.
In Fiscal 2019, cash used for investing activities of $33,000 resulted from purchases of property and equipment.
Cash Flows from Financing Activities
In Fiscal 2020, cash provided by financing activities of $485,000 consisted of $1,357,000 proceeds from the PPP Loan, borrowings of $900,000 under our line
of credit and $32,000 in proceeds from stock options exercised, partially offset by $1,200,000 in repayments on the line of credit, $500,000 paid out on the deferred
cash consideration and $104,000 in repayments on notes payable and capital leases.
In Fiscal 2019, cash provided by financing activities of $726,000 consisted of $1,550,000 in borrowings on the line of credit, offset by $600,000 in repayments
on the line of credit and $225,000 in repayments on notes payable and capital leases.
ITEm 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT mARKET RISK
Not applicable.
29
ITEm 8. FINANCIAL STATEmENTS AND SUPPLEmENTARY DATA
The consolidated financial statements and notes thereto included in this Annual Report may be found beginning on page F-1 of this Annual Report on Form
10-K.
ITEm 9. CHANGES IN AND DISAGREEmENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEm 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of our
disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on their evaluation, our
Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2020.
management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). Our management, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the
effectiveness of our internal control over financial reporting as of the end of the period covered by this report. In making this assessment, our management used the
criteria set forth by the Committee of Sponsor Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework as issued in 2013.
Based on that evaluation, our management concluded that our internal control over financial reporting as of September 30, 2020 was effective based on that
criteria.
Our internal control over financial reporting is a process designed under the supervision of our Principal Executive Officer and Principal Financial Officer to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in
accordance with U.S. GAAP. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
policies or procedures may deteriorate.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the
Exchange Act during the fourth quarter of Fiscal 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
ITEm 9B. OTHER INFORmATION
None.
30
ITEm 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information required by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed with the
SEC within 120 days of the fiscal year ended September 30, 2020. Our Board has adopted a Code of Business Conduct and Ethics applicable to all officers,
directors and employees, which is available on our website (https://forwardindustries.com/investors/governance/) under "Corporate Governance." We intend to
satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of our Code of Conduct and by posting such
information on the website address and location specified above.
ITEm 11. EXECUTIVE COmPENSATION
The information required by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed with the
SEC within 120 days of the fiscal year ended September 30, 2020.
ITEm 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND mANAGEmENT
The information required by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed with the
SEC within 120 days of the fiscal year ended September 30, 2020.
ITEm 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed with the
SEC within 120 days of the fiscal year ended September 30, 2020.
ITEm 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed with the
SEC within 120 days of the fiscal year ended September 30, 2020.
31
ITEm 15. EXHIBITS AND FINANCIAL STATEmENT SCHEDULES
(a)
Documents filed as part of the report.
PART IV
(1)
(2)
Financial Statements. See Index to Consolidated Financial Statements, which appears on page F-1 hereof. The financial statements listed in the
accompanying Index to Consolidated Financial Statements are filed herewith in response to this Item.
Financial Statements Schedules. All schedules are omitted because they are not applicable or because the required information is contained in the
consolidated financial statements or notes included in this report.
(3)
Exhibits. See the Exhibit Index.
32
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: December 17, 2020
Signatures
FORWARD INDUSTRIES, INC.
By: /s/ Terence Wise
Terence Wise
Chief Executive Officer
(Principal Executive Officer)
In accordance with the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated:
December 17, 2020
December 17, 2020
December 17, 2020
December 17, 2020
December 17, 2020
/s/ Terence Wise
Terence Wise
Principal Executive Officer and Director
/s/ Anthony Camarda
Anthony Camarda
Principal Financial Officer and Chief Accounting Officer
/s/ Howard Morgan
Howard Morgan
Director
/s/ Sangita Shah
Sangita Shah
Director
/s/ James Ziglar
James Ziglar
Director
33
EXHIBIT INDEX
Incorporated by
Reference
Exhibit
No.
2.1
2.2
3.1
3.2
3.3
3.4
4.1
4.2
10.1
10.2
10.2(a)
10.2(b)
10.2(c)
10.2(d)
10.2(e)
10.3
10.4
10.5
Exhibit Description
Stock Purchase Agreement dated January 18, 2018 - Intelligent Product Solutions, Inc.+
Asset Purchase Agreement by and among Forward Industries, Inc., Kablooe, Inc., Kablooe
Design, Inc. and Tom KraMer dated August 17, 2020+
Restated Certificate of Incorporation
Certificate of Amendment of the Certificate of Incorporation, April 26, 2013
Certificate of Amendment of the Certificate of Incorporation, June 28, 2013
Third Amended and Restated Bylaws, as of May 28, 2014
Description of securities registered under Section 12 of the Exchange Act of 1934
Promissory Note dated January 18, 2018 – Forward Industries (Asia-Pacific) (as amended and
restated)
2011 Long Term Incentive Plan, as amended
Buying Agency and Supply Agreement - Forward Industries (Asia-Pacific) Corporation
Amendment No. 1 to Buying Agency and Supply Agreement - Forward Industries (Asia-Pacific)
Corporation
Amendment No. 2 to Buying Agency and Supply Agreement - Forward Industries (Asia-Pacific)
Corporation
Amendment No. 3 to Buying Agency and Supply Agreement – Forward Industries (Asia-
Pacific) Corporation
Amendment No. 4 to Buying Agency and Supply Agreement – Forward Industries (Asia-
Pacific) Corporation
Amendment No. 5 to Buying Agency and Supply Agreement – Forward Industries (Asia-
Pacific) Corporation
Form of Employment Agreement dated January 18, 2018+*
Employment Agreement dated May 16, 2018 - Terence Wise*
Employment Agreement between Forward Industries, Inc. and Anthony Camarda, dated June
26, 2020*
Paycheck Protection Program Term Note payable to TD Bank, N.A. dated April 18, 2020
List of Subsidiaries
Consent of Independent Registered Public Accounting Firm
CEO Certifications (302)
CFO Certification (302)
CEO and CFO Certifications (906)
10.6
21.1
23.1
31.1
31.2
32.1
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
Filed or
Furnished
Herewith
Number
2.1
2.1
Form
8-K
8-K
10-K
8-K
8-K
10-K
10-K
10-Q
10-K
10-Q
Date
1/18/18
8/17/20
12/8/10
4/26/13
7/3/13
12/10/14
12/27/19
2/14/19
12/16/15
8/14/17
8-K
9/22/17
3(i)
3.1
3.1
3(ii)
4.1
4.3
10.7
10.2
10.1
10-Q
5/15/19
10.1(c)
10-K
12/27/19
10.3(d)
8-K
10-Q
8-K
1/18/18
5/18/18
7/2/20
8-K
4/22/20
10.1
10.5
10.1
10.1
Filed
Filed
Filed
Filed
Filed
Filed
Furnished
Filed
Filed
Filed
Filed
Filed
Filed
* Management compensatory agreement or arrangement.
+ Certain schedules, appendices and exhibits to this agreement have been omitted in accordance with Item 601 of Regulation S-K. A copy of any omitted
schedule and/or exhibit will be furnished supplementally to the Securities and Exchange Commission staff upon request.
Copies of this filing (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our shareholders who make a
written request to Forward Industries, Inc.; 700 Veterans Memorial Hwy, Suite 100, Hauppauge, NY 11788; Attention: Corporate Secretary.
34
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEmENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of September 30, 2020 and 2019
Consolidated Statements of Operations for the Years Ended September 30, 2020 and 2019
Consolidated Statements of Shareholders’ Equity for the Years Ended September 30, 2020 and 2019
Consolidated Statements of Cash Flows for the Years Ended September 30, 2020 and 2019
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRm
The Board of Directors and Shareholders of Forward Industries, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Forward Industries, Inc. and Subsidiaries (the “Company”) as of September 30, 2020 and 2019,
and the related consolidated statements of operations, shareholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as
the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the
Company as of September 30, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Notes 2 and 13 to the consolidated financial statements, the Company has changed its method for accounting for leases as of October 1, 2019 due
to the adoption of Accounting Standards Codification Topic 842 Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of
the internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ CohnReznick LLP
We have served as the Company’s auditor since 2011.
Jericho, New York
December 17, 2020
F-2
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets
Current assets:
Cash
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
Investment
Operating lease right of use assets, net
Other assets
Total assets
Liabilities and shareholders' equity
Current liabilities:
Line of credit
Note payable to Forward China
Accounts payable
Due to Forward China
Deferred income
Current portion of notes payable
Current portion of capital leases payable
Current portion of deferred consideration
Current portion of operating lease liability
Accrued expenses and other current liabilities
Total current liabilities
Other liabilities:
Notes payable, less current portion
Operating lease liability, less current portion
Capital lease liability, less current portion
Deferred rent
Deferred consideration, less current portion
Total other liabilities
Total liabilities
Commitments and contingencies
Shareholders' equity:
Common stock, par value $0.01 per share; 40,000,000 shares authorized; 9,883,851 and 9,533,851 shares issued
and outstanding at September 30, 2020 and 2019, respectively
Additional paid-in capital
Accumulated deficit
Total shareholders' equity
$
$
$
September 30,
2020
2019
$
2,924,627
7,602,316
1,275,694
419,472
3,092,813
6,695,120
1,608,827
441,502
12,222,109
11,838,262
215,323
1,531,415
1,758,682
–
3,512,042
116,697
243,002
1,248,712
2,182,427
326,941
–
255,008
19,356,268
$
16,094,352
$
1,000,000
1,600,000
197,022
3,622,401
485,078
983,395
18,411
45,000
259,658
615,401
8,826,366
529,973
3,359,088
12,769
–
45,000
3,946,830
1,300,000
1,600,000
315,444
3,236,693
219,831
54,799
39,941
834,000
–
694,972
8,295,680
–
–
26,438
60,935
–
87,373
12,773,196
8,383,053
98,838
19,579,684
(13,095,450)
95,338
18,936,130
(11,320,169)
6,583,072
7,711,299
Total liabilities and shareholders' equity
$
19,356,268
$
16,094,352
The accompanying notes are an integral part of the consolidated financial statements.
F-3
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEmENTS OF OPERATIONS
Revenues, net
Cost of sales
Gross profit
Sales and marketing
General and administrative
Goodwill impairment
Loss from operations
Fair value adjustment of earn-out consideration
Fair value adjustment of deferred cash consideration
Interest income
Interest expense
Other expense, net
Loss before income taxes
Provision for (benefit from) income taxes
Net loss
Net loss per share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
For the Fiscal Years Ended September
30,
2020
2019
$
$
$
$
$
34,478,358
27,839,851
6,638,507
1,950,704
5,655,186
1,015,000
37,409,030
30,828,148
6,580,882
1,965,230
7,713,035
–
(1,982,383)
(3,097,383)
(350,000)
16,000
(60,932)
174,962
3,701
(1,766,114)
260,000
36,000
–
201,004
13,805
(3,608,192)
9,167
(4,162)
(1,775,281)
$
(3,604,030)
(0.19)
(0.19)
$
$
(0.38)
(0.38)
9,583,441
9,583,441
9,532,034
9,532,034
The accompanying notes are an integral part of the consolidated financial statements.
F-4
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEmENTS OF SHAREHOLDERS' EQUITY
Common Stock
For the Fiscal Year Ended September 30, 2020
Additional
Paid-In
Capital
Amount
Deficit
Accumulated
Shares
Total
Balance at September 30, 2019
9,533,851
$
95,338
$
18,936,130
$
(11,320,169)
$
7,711,299
Share-based compensation
Shares issued for Kablooe acquisition
Stock options exercised
Net loss
–
300,000
50,000
–
–
3,000
500
–
245,154
366,900
31,500
–
–
–
–
(1,775,281)
245,154
369,900
32,000
(1,775,281)
Balance at September 30, 2020
9,883,851
$
98,838
$
19,579,684
$
(13,095,450)
$
6,583,072
Common Stock
For the Fiscal Year Ended September 30, 2019
Additional
Paid-In
Capital
Amount
Deficit
Accumulated
Shares
Total
Balance at September 30, 2018
9,533,851
$
95,338
$
18,720,396
$
(7,716,139)
$
11,099,595
Share-based compensation
Net loss
–
–
–
–
215,734
–
–
(3,604,030)
215,734
(3,604,030)
Balance at September 30, 2019
9,533,851
$
95,338
$
18,936,130
$
(11,320,169)
$
7,711,299
The accompanying notes are an integral part of the consolidated financial statements.
F-5
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEmENTS OF CASH FLOWS
Operating Activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Share-based compensation
Depreciation and amortization
Bad debt (recovery)/expense
Deferred rent
Change in fair value of earn-out consideration
Change in fair value of deferred cash consideration
Goodwill impairment
Fair value of cost method investment for services provided
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
Operating lease liabilities
Accrued expenses and other current liabilities
Net cash used in operating activities
Investing Activities:
Purchases of property and equipment
Cash used in acquisition of Kablooe, Inc.
Cash acquired in acquisition of Kablooe, Inc.
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 PPP loan
Cash proceeds from stock options exercised
Repayments of capital leases
Payment of deferred cash consideration
Net cash provided by financing activities
Net decrease in cash
Cash at beginning of year
Cash at end of year
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest
Cash paid for taxes
Supplemental Disclosures of Non-Cash Information:
Lease assets recorded in accordance with ASC 842
Lease liabilities recorded in accordance with ASC 842
Common stock issued in Kablooe acquisition
Fair value of Kablooe contingent earnout consideration
For the Fiscal Years Ended September
30,
2020
2019
$
(1,775,281)
$
(3,604,030)
245,154
271,973
(78,278)
–
(350,000)
16,000
1,015,000
–
326,941
(733,228)
333,133
30,542
138,311
245,679
219,713
25,945
(194,550)
(262,946)
(68,456)
(352,628)
31,024
(390,060)
900,000
(1,200,000)
(68,551)
1,356,570
32,000
(35,199)
(500,000)
484,820
(168,186)
3,092,813
2,924,627
178,114
4,854
3,825,632
3,906,391
369,900
90,000
$
$
$
$
$
$
$
215,734
311,581
2,065,592
16,013
260,000
36,000
–
(326,941)
–
263,806
(39,913)
(193,068)
(191,458)
(975,265)
94,818
–
97,402
(1,969,729)
(33,138)
–
–
(33,138)
1,550,000
(600,000)
(169,648)
–
–
(54,538)
–
725,814
(1,277,053)
4,369,866
3,092,813
201,004
–
–
–
–
–
$
$
$
$
$
$
$
The accompanying notes are an integral part of the consolidated financial statements.
F-6
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
NOTE 1 OVERVIEW
Business
Forward Industries, Inc. is a fully integrated design, development and manufacturing solution provider for top tier medical and technology customers
worldwide. Through its acquisitions of IPS and Kablooe, the Company has expanded its ability to design and develop solutions for our existing multinational client
base and expand beyond the diabetic product line into a variety of industries with a full spectrum of hardware and software product design and engineering
services. In addition to our existing design and distribution of carry and protective solutions, primarily for handheld electronic devices, the Company is now a one-
stop shop for design, development and manufacturing solutions serving a wide range of clients in the industrial, commercial and consumer industries. The
Company’s previous principal customer market has been original equipment manufacturers, or “OEMs” (or the contract manufacturing firms of these OEM
customers), that either package our products as accessories “in box” together with their branded product offerings or sell them through their retail distribution
channels. The Company’s OEM products include carrying cases and other accessories for medical monitoring and diagnostic kits and a variety of other portable
electronic and non-electronic products (such as sporting and recreational products, bar code scanners, smartphones, GPS location devices, tablets and firearms).
The Company’s OEM customers are located in: (i) the Asia-Pacific region, which we refer to as the “APAC Region”; (ii) Europe, the Middle East, and Africa,
which we refer to as the “EMEA Region”; and (iii) the geographic area encompassing North America, Central America and South America, which we refer to as
the “Americas”. The Company does not manufacture any of its OEM products and sources substantially all of its OEM products from independent suppliers in
China, through Forward Industries Asia-Pacific Corporation, a British Virgin Islands corporation (“Forward China”), See Note 14.
As a result of the expansion of the design development capabilities through its wholly-owned subsidiaries, IPS and Kablooe, the Company is now able to
introduce proprietary products to the market from concepts brought to it from a number of different sources, both inside and outside the Company.
Within this report, certain dollar amounts and percentages have been rounded to their approximate values.
Impact of COVID-19
The outbreak of the COVID-19 virus in China and its subsequent spread throughout the world has impacted our Fiscal 2020 results of operations. In efforts to
contain the virus, authorities have implemented travel restrictions, quarantines, business limitations and shutdowns. Since the majority of our workforce is based in
New York, these restrictions have required substantially all our employees to work from home for much of Fiscal 2020. During the third quarter of Fiscal 2020,
productivity of our direct labor employees was reduced, which caused a decline in revenue and gross profit. As some of these restrictions were relaxed in the fourth
quarter of Fiscal 2020, employees started to return to the office with minimal operational challenges. Business shutdowns resulting from the pandemic disrupted
our supply chain and the manufacture or shipment of our products and have delayed the rollout of our smart enabled retail products to big box retail stores, causing
our distribution segment revenues in Fiscal 2020 to be less than anticipated. Additionally, our design segment reported lower revenues as demand for its design and
development services were reduced or delayed. The impact from lower revenue was partially offset by a reduction in certain selling and travel related expenses
resulting from government mandated stay-at-home orders and travel restrictions as well as revenues derived from sales and sourcing of personal protective
equipment. The pandemic had temporarily impacted our liquidity in Fiscal 2020, as collections of accounts receivable were somewhat delayed at certain times.
F-7
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
The economy started to open in certain jurisdictions where the virus was considered under control. However, there continue to be areas with increased rates of
infection that could cause government officials to enact more restrictions on how businesses operate. The future impacts of the pandemic and any resulting
economic impact are largely unknown and could be significant. It is possible that the pandemic, the measures taken by the governments of countries affected and
the resulting economic impact may negatively impact our results of operations, cash flows and financial position in future periods as well as that of our customers,
including their ability to pay for our services and choosing to allocate their budgets to new or existing projects which require our services. The long-term financial
impact on our business cannot be reasonably estimated at this time. As a result, the effects of COVID-19 may not be fully reflected in our financial results until
future periods. Refer to “Part I, Item 1A — Risk Factors” in this Annual Report for a description of the material risks that the Company currently faces in
connection with COVID-19.
As a result of revenue and earnings shortfalls in the second quarter of Fiscal 2020, due in part to COVID-19 and the related future uncertainty, the Company
revised revenue and operational projections for IPS for the later part of Fiscal 2020 and future periods. These events impacted the carrying value of goodwill (see
Note 4). Until there is a vaccine and treatment that is widely distributed, we expect business conditions to remain challenging. In response to these challenges, we
will continue to focus on those factors that we can control: closely managing and controlling our expenses; aligning our design and development schedules with
demand in a proactive manner as there are changes in market conditions to minimize our cash operating costs; and pursuing further improvements in the
productivity and effectiveness of our development, selling and administrative activities.
NOTE 2 ACCOUNTING POLICIES
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of
America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates and assumptions.
The worldwide spread of COVID-19 has resulted in a global slowdown of economic activity which is likely to decrease demand for a broad variety of goods
and services, while also disrupting sales channels, marketing activities and general business operations for an unknown period of time until the disease is
contained. At this point, the extent to which COVID-19 may impact our financial condition or results of operations is uncertain, and as of the date of issuance of
these consolidated financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates, judgments or adjust
the carrying value of our assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the
consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to our
consolidated financial statements.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Forward Industries, Inc. and its wholly-owned subsidiaries (Forward US,
Forward Switzerland, Forward UK, IPS and Kablooe). All significant intercompany transactions and balances have been eliminated in consolidation. Intercompany
sales of $49,000 and $221,000 from IPS to Forward US have been eliminated in consolidation for Fiscal 2020 and Fiscal 2019, respectively.
The Company incurred a net loss of $1,775,000 for Fiscal 2020 and generated negative cash flow from operations of $263,000. We believe our existing cash
balance and working capital will be sufficient to meet our liquidity needs at least through December 2021.
F-8
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
Segment Reporting
The Company has two reportable segments: distribution and design. The distribution segment consists of two reporting units (Forward US and Forward
Switzerland, that collectively comprise one operating segment) that source and distribute carrying cases and other accessories for medical monitoring and
diagnostic kits and a variety of other portable electronic and non-electronic devices. The design segment consists of two operating segments (IPS and Kablooe,
which have been aggregated into one reportable segment) that provide a full spectrum of hardware and software product design and engineering services.
Organizing our business through these operating segments allows us to align our resources and manage our operations. Our chief operating decision maker
regularly reviews operating segment revenue and profitability when assessing financial results of operating segments and allocating resources.
We measure the performance of our operating segments based upon operating segment revenue and operating income or loss. Segment operating income or
loss includes revenues earned and expenses incurred directly by the operating segment, including cost of sales and selling, marketing, and general and
administrative expenses (see Note 16 for more discussion on operating segments).
Goodwill
The Company reviews goodwill for impairment at least annually, or more often if triggering events occur. The Company has two reporting units with goodwill
(IPS and Kablooe) and we perform our annual goodwill impairment test on September 30, the end of the fiscal year, or upon the occurrence of a triggering event.
The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company can
support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company would not need to
perform the impairment test for the reporting unit. If the Company cannot support such a conclusion or does not elect to perform the qualitative assessment, then
the Company will compare the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its
carrying value, no impairment charge is recognized. If the fair value of the reporting unit is less than its carrying value, an impairment charge will be recognized
for the amount by which the reporting unit’s carrying amount exceeds its fair value. A significant amount of judgment is required in performing goodwill
impairment tests including estimating the fair value of a reporting unit and the implied fair value of goodwill. During Fiscal 2020, the Company recorded an
impairment charge of $1,015,000 related to goodwill (See Note 4).
Intangible Assets
Intangible assets include trademarks and customer relationships, which were acquired as part of the acquisitions of IPS in Fiscal 2018 and Kablooe in Fiscal
2020 (see Note 3) and are recorded based on their estimated fair value determined in conjunction with the purchase price allocation. These intangible assets are
amortized over their estimated useful lives, which are periodically evaluated for reasonableness.
Our intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. In assessing the recoverability of our intangible assets, we must make estimates and assumptions regarding future cash flows and other factors to
determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized
and also the magnitude of any such charge. Fair value estimates are made at a specific point in time, based on relevant information. These estimates are subjective
in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates. If these estimates or material related assumptions change in the future, we may be required to record impairment charges related
to its intangible assets. Management evaluated and concluded that there were no impairments of intangible assets at September 30, 2020.
F-9
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. There were no
cash equivalents at September 30, 2020 and 2019. The Company maintains its cash in bank and financial institution deposits in the United States (that at times may
exceed federally insured limits of $250,000 per financial institution) and Switzerland. At September 30, 2020 and 2019, there were deposits totaling $2,300,000
(which includes $770,000 in a foreign bank) and $2,800,000 (which includes $650,000 in a foreign bank), respectively, held in excess of federally insured limits.
Historically, we have not experienced any losses due to such cash concentrations.
Accounts Receivable
Accounts receivable consist of unsecured trade accounts with customers or their contract manufacturers. The Company performs periodic credit evaluations of
its customers including an evaluation of days outstanding, payment history, recent payment trends, and perceived creditworthiness, and believes that adequate
allowances for any uncollectible receivables are maintained. Credit terms to customers generally range from net thirty (30) days to net one hundred twenty (120)
days. At September 30, 2020, the Company had allowances for doubtful accounts of $249,000 and $347,000 related to the Company’s distribution segment and
design segment accounts receivable, respectively. At September 30, 2019, the Company had allowances for doubtful accounts of $159,000 and $2,033,000 relating
to the Company’s distribution segment and design segment accounts receivable, respectively. The decrease in allowance for doubtful accounts for the design
segment is primarily due to the conversion of the accounts receivable balance from a customer, and the associated allowance for doubtful accounts, of $1,626,000,
to a note receivable (see Note 6).
Inventories
Inventories consist primarily of finished goods and are stated at the lower of cost (determined by the first-in, first-out method) or net realizable value. Based
on management’s estimates, an allowance is made to reduce excess, obsolete, or otherwise un-saleable inventories to net realizable value. The allowance is
established through charges to cost of goods sold in the Company’s consolidated statements of operations. As reserved inventory is disposed of, the Company
charges off the associated allowance. In determining the adequacy of the allowance, management’s estimates are based upon several factors, including analyses of
inventory levels, historical loss trends, sales history and projections of future sales demand. The Company’s estimates of the allowance may change from time to
time based on management’s assessments, and such changes could be material. At September 30, 2020 and 2019, there was no allowance for obsolete inventory.
Property and Equipment
Property and equipment consist of furniture, fixtures, equipment and leasehold improvements and are recorded at cost. Expenditures for major additions and
improvements are capitalized, and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or
otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations
for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method. The estimated useful lives for
furniture, fixtures and equipment ranges from three to five years. Amortization of leasehold improvements is computed using the straight-line method over the
shorter of the remaining lease term or the estimated useful lives of the improvements.
F-10
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
Leases
The Company adopted Accounting Standards Codification (“ASC”) 842, "Leases", effective October 1, 2019 using the modified retrospective transition
method and elected to apply the available practical expedients to enable the preparation of financial information on adoption. The practical expedients applied
under the new standard allow the Company to carry forward the historical lease classification and not reassess its prior conclusions about lease identification or
initial direct costs. In accordance with this guidance, lease assets and liabilities are recognized at commencement date based on the present value of lease payments
over the lease term, using the Company’s incremental borrowing rate commensurate with the lease term, since the Company’s lessors do not provide an implicit
rate, nor is one readily available. The Company has certain leases that may include an option to renew and when it is reasonably probable to exercise such option,
the Company will include the renewal option terms in determining the lease asset and lease liability. Lease assets represent the Company’s right to use an
underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease expense for lease
payments is recognized on a straight-line basis over the lease term. Operating lease assets are shown as right of use assets and financing lease assets are a
component of property and equipment on the consolidated balance sheets. The current and long-term portions of operating and financing lease liabilities are shown
separately as such on the consolidated balance sheets. Upon adoption of ASC 842, the Company recognized right of use assets of $3,649,000 and corresponding
lease liabilities of $3,729,000 pertaining to its operating leases on its consolidated balance sheets.
Income Taxes
The Company recognizes future tax benefits and liabilities measured at enacted rates attributable to temporary differences between financial statement and
income tax bases of assets and liabilities and to net tax operating loss carryforwards to the extent that realization of these benefits is more likely than not. At
September 30, 2020, there was no change to our assessment that a full valuation allowance was required against all net deferred tax assets. Accordingly, any
deferred tax provision or benefit was offset by an equal and opposite change to the valuation allowance. Our income tax provision or benefit is generally not
significant due to the existence of significant net operating loss carryforwards.
Revenue Recognition
Distribution Segment
The Company adopted ASC 606, “Revenue Recognition” effective October 1, 2018. In accordance with this guidance, the Company generally recognizes
revenue in its distribution segment when: (i) finished goods are shipped to our distribution customers (in general, these conditions occur at either point of shipment
or point of destination, depending on the terms of sale, i.e., transfer of control); (ii) there are no other deliverables or performance obligations; and (iii) there are no
further obligations to the customer after the title of the goods has transferred. When the Company receives consideration before achieving the criteria previously
mentioned, it records a contract liability, which is classified as a component of deferred income in the accompanying consolidated balance sheets. Contract
liabilities at September 30, 2020 and 2019 were $75,000 and $0 for the distribution segment.
Design Segment
Under ASC 606, the Company applies the “cost to cost” and “right to invoice” methods of revenue recognition to the contracts with customers in the design
segment. The design segment typically engages in two types of contracts: (i) time and material and (ii) fixed price contracts. The Company recognizes revenue
over time on its time and material contracts utilizing a “right to invoice” method. Revenues from fixed price contracts that require performance of services that are
not related to the production of tangible assets are recognized by using cost inputs to measure progress toward the completion of its performance obligations or the
“cost to cost” method. Revenues from contracts that contain specific deliverables are recognized when the performance obligation has been satisfied or the transfer
of goods to the customer has been completed and accepted.
F-11
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
Recognized revenues that will not be billed until a later date, or contract assets, are recorded as an asset and classified as a component of accounts receivable
in the accompanying consolidated balance sheets. Contract assets at September 30, 2020 and 2019 were $649,000 and $611,000, respectively. Contracts where
collections to date have exceeded recognized revenues, or contract liabilities, are recorded as a liability and classified as a component of deferred income in the
accompanying consolidated balance sheets. Contract liabilities at September 30, 2020 and 2019 were $410,000 and $220,000, respectively.
Shipping and Handling Fees
The Company includes shipping and handling fees billed to customers in net revenues and the related transportation costs in cost of goods sold.
Foreign Currency Transactions
Foreign currency transactions may generate receivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid.
Fluctuations in exchange rates between such foreign currency and the functional currency increase or decrease the expected amount of functional currency cash
flows upon settlement of the transaction. These increases or decreases in expected functional currency cash flows are foreign currency transaction gains or losses
that are included in other expense in the accompanying consolidated statements of operations. The approximate net losses from foreign currency transactions were
$3,000 and $14,000 for the fiscal years ended September 30, 2020 and 2019, respectively. Such foreign currency transaction losses were primarily the result of
Euro denominated revenues from certain customers.
Fair Value measurements
We perform fair value measurements in accordance with the guidance provided by ASC 820, “Fair Value Measurement.” ASC 820 defines fair value as the
price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
When determining the fair value measurements for assets and liabilities required to be recorded at their fair values, we consider the principal or most advantageous
market in which we would transact and consider assumptions that market participants would use when pricing the assets or liabilities, such as inherent risk, transfer
restrictions, and risk of nonperformance.
ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. An asset's or liability's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value
measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value:
·
·
·
Level 1: quoted prices in active markets for identical assets or liabilities;
Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities,
quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or liabilities; or
Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities.
F-12
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
Share-Based Compensation Expense
The Company estimates the fair value of employee and non-employee director share-based compensation on the date of grant using the Black-Scholes option
pricing model, which includes variables such as the expected volatility of the Company’s share price, the exercise behavior of its grantees, interest rates, and
dividend yields. These variables are projected based on the Company’s historical data, experience, and other factors. The fair value of employee and non-employee
director share-based compensation is recognized in the consolidated statements of operations over the related service or vesting period of each grant. In the case of
awards with multiple vesting periods, the Company has elected to use the graded vesting attribution method, which recognizes compensation cost on a straight-line
basis over each separately vesting portion of the award as if the award was, in substance, multiple awards (see Note 9).
Business Combinations
The Company allocates the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated
fair values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the
fair values of assets acquired and liabilities assumed, the Company makes significant estimates and assumptions, especially with respect to intangible assets.
Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships and developed
technology, discount rates and terminal values. Our estimate of fair value is based upon assumptions believed to be reasonable, but actual results may differ from
estimates.
Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and
liabilities assumed.
Reclassifications
Certain amounts in the accompanying Fiscal 2019 financial statements have been reclassified to conform to the Fiscal 2020 presentation.
Recent Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement – Disclosure Framework (Topic 820)” to improve the disclosure requirements on
fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early
adoption is permitted for any removed or modified disclosures. The Company does not expect the adoption of this guidance to have a material impact on its
consolidated financial statements.
In November 2019, the FASB issued ASU 2019-08, “Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic
606)” to provide guidance for share-based payment awards granted to a customer in conjunction with selling goods or services accounted for under Topic 606. The
pronouncement is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company does not expect the
adoption of this guidance to have a material impact on its consolidated financial statements.
F-13
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” ASU 2019-11 is an
accounting pronouncement that provides clarity to and amends earlier guidance on this topic and would be effective concurrently with the adoption of such earlier
guidance. This pronouncement is effective for the Company for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years. The
Company is currently evaluating the effects of this pronouncement on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)” addressing customers’
accounting for implementation costs incurred in a cloud computing arrangement that is a service contract, which requires customers to apply internal-use software
guidance to determine the implementation costs that are able to be capitalized. Capitalized implementation costs are required to be amortized over the term of the
arrangement, beginning when the cloud computing arrangement is ready for its intended use. The effective date of the new guidance for public companies is for
fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the
adoption of this guidance to have a material impact on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This guidance removes
certain exceptions to the general principles in Topic 740 and provides consistent application of U.S. GAAP by clarifying and amending existing guidance. The
effective date of the new guidance for public companies is for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. Early
adoption is permitted. The Company is currently evaluating the timing of adoption and impact of the updated guidance on its consolidated financial statements.
NOTE 3 ACQUISITION
On August 17, 2020, in order to further diversify its customer base and the industries in which it sells its products, the Company and Kablooe, Inc. (a newly
formed wholly-owned subsidiary of the Company) entered into an Asset Purchase Agreement (the “Agreement”) with Kablooe Design, Inc. (“Kablooe Design”)
and its sole shareholder. Kablooe Design is an innovative medical and consumer design and development company whose clients include leading brands in medical
devices. In consideration for the acquisition of substantially all of the assets of Kablooe Design, the Company: (i) paid $353,000 in cash; (ii) issued 300,000 shares
of its common stock; (iii) agreed to pay up to an aggregate $500,000 in contingent earnout payments based on Kablooe meeting certain earnings milestones (as
defined in the Agreement) over a five-year period; and (iv) agreed to make two additional $50,000 retention payments to Kablooe’s Chief Executive Officer on the
fourth and fifth anniversaries of the acquisition based on his continued employment with Kablooe and the achievement of the earnings milestones (as defined in the
Agreement). Additionally, in conjunction with this acquisition, the Company entered into a five-year employment agreement with Kablooe’s Chief Executive
Officer and agreed to pay him a salary of $250,000 per year.
At the date of acquisition, the consideration transferred consisted of cash, shares of Forward’s common stock, and contingent consideration based on the
earnings performance of Kablooe over a five-year period. The acquisition date fair value of consideration transferred consisted of the following:
Cash at closing (1)
Value of Forward's common stock (2)
Fair value of contingent earnout consideration (3)
$
$
353,000
370,000
90,000
813,000
(1) Cash paid by Forward at closing.
(2) Forward issued 300,000 shares of its common stock valued at $1.23 per share, which represents the August 17, 2020 closing price of $1.37 per share, less
an estimated 10% reduction in fair value related to restrictions that limit their marketability for a period of six months.
(3) Fair value of the contingent consideration is measured using the Black-Scholes option pricing method. Contingent consideration is to be paid in cash only
upon Kablooe meeting certain earnings milestones over a five-year period.
F-14
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed on the acquisition date:
Cash
Accounts receivable
Customer relationships (8 yr life)
Trademark (15 yr life)
Property and equipment
Other assets
Total identifiable assets acquired
Accounts payable
Accrued liabilities
Deferred revenue
Debt
Total liabilities assumed
Net identifiable assets acquired
Goodwill
Net assets acquired
$
$
31,000
96,000
340,000
110,000
9,000
9,000
595,000
(22,000)
(135,000)
(46,000)
(170,000)
(373,000)
222,000
591,000
813,000
In relation to our acquisition of Kablooe, we incurred $78,000 of acquisition related costs in Fiscal 2020, including legal and valuation costs. These costs were
expensed as incurred and included as a component of general and administrative expenses on the consolidated statement of operations. Kablooe’s results of
operations have been included in the consolidated financial statements since the acquisition date. Our consolidated statement of operations for Fiscal 2020 includes
revenue of $172,000 for Kablooe.
NOTE 4 INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
The Company’s intangible assets consist of the following:
September 30, 2020
Customer
Relationships
Trademark
Total Intangible
Assets
Trademark
September 30, 2019
Customer
Relationships
Total Intangible
Assets
Gross carrying amount
Less accumulated amortization
Net carrying amount
$
$
585,000 $
(86,000)
499,000 $
1,390,000 $
(358,000)
1,032,000 $
1,975,000 $
(444,000)
1,531,000 $
475,000 $
(54,000)
421,000 $
1,050,000 $
(222,000)
828,000 $
1,525,000
(276,000)
1,249,000
F-15
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
The Company’s intangible assets were acquired as a result of the acquisitions of Kablooe and IPS in Fiscal 2020 and Fiscal 2018, respectively, and are
amortized over their expected useful lives. The useful lives are 15 years for the trademarks and 8 years for the customer relationships. The intangible assets are
held under the design segment of our business. During Fiscal 2020 and Fiscal 2019, the Company recorded amortization expense related to intangible assets of
$167,000 and $162,000, respectively, which is included in general and administrative expenses in the Company’s consolidated statements of operations.
At September 30, 2020, estimated amortization expense for the Company’s intangible assets for each of the next five years and thereafter is as follows:
Years Ending September 30,
2021
2022
2023
2024
2025
Thereafter
Total
Goodwill
Amount
213,000
213,000
213,000
213,000
213,000
466,000
1,531,000
$
$
The Company’s goodwill resulted from the acquisitions of Kablooe and IPS in Fiscal 2020 and Fiscal 2018, respectively. All of the Company’s goodwill is
held under the design segment of our business. Goodwill is not deductible for tax purposes.
During Fiscal 2020, the Company experienced triggering events that prompted the testing of its goodwill for impairment. Those triggering events included the
reduction in fair value of the IPS contingent earn-out consideration discussed in Note 6 and revised revenue and operational projections for IPS for the later part of
Fiscal 2020 and future periods. Based on these factors, we concluded that it was more likely than not that the fair value of the IPS reporting unit had declined
below its carrying amount. The Company then calculated the fair value of this reporting unit using Level 3 inputs, which is a combination of asset-based, income
and market approaches. These estimates and assumptions included discount rate, terminal growth rate, selection of peer group companies and control premium
applied as well as forecasts of revenue growth rates, gross margins, operating margins, and working capital requirements. Any changes in the judgments, estimates,
or assumptions used could produce significantly different results. We concluded the IPS reporting unit’s fair value was below its carrying value by $1,015,000 and
an impairment charge was recognized for this amount in Fiscal 2020. The Company performed the annual goodwill impairment test for Fiscal 2019 and determined
there was no impairment.
Below is the rollforward of goodwill for the design segment, the only reportable segment with goodwill:
Balance at September 30, 2019
Acquisition of Kablooe
IPS goodwill impairment
Balance September 30, 2020
Design Segment
Consolidated
$
2,183,000 $
2,183,000
591,000
(1,015,000)
591,000
(1,015,000)
$
1,759,000 $
1,759,000
F-16
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
NOTE 5 PROPERTY AND EQUIPmENT
Property and equipment and related accumulated depreciation and amortization are summarized by reportable segment in the table below:
Consolidated
2020
Distribution
Design
Consolidated
2019
Distribution
Design
September 30,
Computer software and hardware
Furniture and fixtures
Equipment
Leasehold improvements
Property and equipment, cost
Less: accumulated depreciation and
amortization
Property and equipment, net
$
$
488,000 $
147,000
61,000
2,000
698,000
$
146,000
28,000
–
–
174,000
342,000 $
119,000
61,000
2,000
524,000
312,000 $
199,000
308,000
42,000
861,000
278,000 $
79,000
4,000
42,000
403,000
(483,000)
215,000 $
(151,000)
23,000
$
(332,000)
192,000 $
(618,000)
243,000 $
(385,000)
18,000 $
34,000
120,000
304,000
–
458,000
(233,000)
225,000
Depreciation expense was $105,000 and $149,000 for Fiscal 2020 and Fiscal 2019, respectively.
NOTE 6 FAIR VALUE mEASUREmENTS
The deferred consideration of $90,000 at September 30, 2020 represents the fair value of the contingent earnout consideration related to the acquisition of
Kablooe. The current and non-current portions of this liability of $45,000 each are shown in the corresponding categories on the consolidated balance sheet at
September 30, 2020. The deferred consideration of $834,000 on our consolidated balance sheet at September 30, 2019 was the $484,000 present value of the
deferred cash consideration related to the acquisition of IPS and the $350,000 estimated fair value of the contingent earnout consideration related to the acquisition
of IPS. The IPS earnout consideration was adjusted down to $0 in Fiscal 2020 due to the low likelihood of IPS reaching the earnings targets outlined in the Stock
Purchase Agreement.
The following table presents the placement in the fair value hierarchy and summarizes the change in fair value of the earn-out consideration for Fiscal 2020
and Fiscal 2019:
Fair value measurement at reporting date using
Quoted prices in
active markets for
identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Balance
September 30, 2018
$
538,000
$
–
$
–
$
538,000
Increase in fair value of IPS deferred cash consideration
Increase in fair value of IPS earn-out consideration
September 30, 2019
Increase in fair value of IPS deferred cash consideration
Decrease in the fair value of IPS earnout consideration
Payout of IPS deferred cash consideration
Fair value of Kablooe contingent earnout consideration
September 30, 2020
$
36,000
260,000
834,000
16,000
(350,000)
(500,000)
90,000
90,000
$
F-17
–
–
–
–
–
–
–
–
$
–
–
–
–
–
–
–
–
$
36,000
260,000
834,000
16,000
(350,000)
(500,000)
90,000
90,000
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
The fair value of the Kablooe contingent earn-out consideration will be measured on a recurring basis at each reporting date. The following inputs and
assumptions were used in the Black-Scholes valuation model to estimate the fair value of the Kablooe earn-out consideration at September 30, 2020:
Volatility
Risk free interest rate
Expected term, in years
Dividend yield
40%
1%
0.5 - 4.5
0%
During Fiscal 2019, the Company and a customer entered into an agreement, whereby the Company received common stock in the customer as compensation
for product design services provided by the Company. The shares represent less than a 2% ownership interest in the customer. Pursuant to ASC 820, management
estimated the initial fair value of the investment to be $327,000, based on a private placement round of common stock issued to third party private investors of the
customer at a time close to the valuation date. Based on this valuation, the Company recognized revenue and a cost method investment for that amount in Fiscal
2019. Management determined that the inputs used to value the investment are observable, either directly or indirectly, and therefore classified as a Level 2
valuation. Pursuant to ASC 820, the transaction price of the cash financing round establishes the fair value of the common stock issued as consideration unless one
of the following conditions exists:
a. The transaction is between related parties,
b. The transaction takes place under duress or the seller is forced to accept the price in the transaction,
c. The unit of account represented by the transaction price is different from the unit of account for the asset or liability measured at fair value,
or
d. The market in which the transaction takes place is different from the principal market (or most advantageous market).
On January 21, 2020, the Company executed a non-negotiable promissory note with a principal amount of $1,626,000 with the same design segment customer
in which we are invested to recover accounts receivable which had been reserved as bad debt in Fiscal 2019. Beginning on April 1, 2020, monthly interest and
principal payments, based on a one-year amortization schedule, were due and payable in arrears on the first day of the month until March 1, 2021. Interest accrues
at a rate of 8% per annum. Since no payments were received through June 30, 2020, the note receivable is fully reserved on the Company’s consolidated balance
sheets. In the fourth quarter of Fiscal 2020, the Company received $134,000 from this customer, of which $61,000 was applied to past due interest and penalties
and recorded as interest income, and $73,000 was applied to principal and recorded as a recovery of bad debt expense as a reduction of general and administrative
expense.
During Fiscal 2020, as a result of the customer’s default on the promissory note, the impact of COVID-19, and performance of the business in which the
Company is invested, including its inability to generate revenue, management concluded the investment was also impaired and it recorded an impairment charge of
$327,000 to fully reserve the investment on the Company’s consolidated balance sheet at September 30, 2020. The impairment charge is included in the general
and administrative expenses of the consolidated statement of operations.
F-18
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
The following table presents the placement in the fair value hierarchy and summarizes the change in fair value of the cost method investment during Fiscal
2020 and Fiscal 2019:
Fair value measurement at reporting date using
Quoted prices in
active markets for
identical assets
(Level 1)
Balance
Significant other
observable inputs
(Level 2)
Significant
unobservable inputs
(Level 3)
September 30, 2019
$
327,000
$
–
$
327,000
$
Impairment of cost method investment
(327,000)
–
(327,000)
September 30, 2020
$
–
$
–
$
–
$
–
–
–
NOTE 7 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities by operating segment at September 30, 2020 and 2019 are as follows:
Consolidated
2020
Distribution
Design
Consolidated
2019
Distribution
Design
September 30,
Paid time off
Other payroll related costs
Legal fees
Other
Total
$
$
296,000
178,000
18,000
123,000
615,000
$
$
36,000
58,000
–
14,000
108,000
$
$
260,000 $
120,000
18,000
109,000
507,000 $
170,000 $
187,000
154,000
184,000
695,000 $
40,000 $
33,000
154,000
31,000
258,000 $
130,000
154,000
–
153,000
437,000
NOTE 8 SHAREHOLDERS’ EQUITY
Anti-Takeover Provisions
Shareholder Rights Plan
On April 26, 2013, the Board of Directors (the "Board") adopted a Shareholder Rights Plan, as set forth in the Rights Agreement between the Company and
American Stock Transfer & Trust Company, LLC, as Rights Agent. Pursuant to the Rights Agreement, the Board declared a dividend distribution of one Right (a
"Right") for each outstanding share of Company Common Stock, par value $0.01 per share (the "Common Stock") to shareholders of record at the close of
business on May 6, 2013, which date will be the record date, and for each share of Common Stock issued (including shares distributed from treasury) by the
Company thereafter and prior to the Distribution Date (as described below and defined in the Rights Agreement). Each Right entitles the registered holder, subject
to the terms of the Rights Agreement, to purchase from the Company one one-thousandth of a share of Series A Participating Preferred Stock, $0.01 par value per
share (the "Series A Preferred Stock"), at an exercise price of $4.00 per one one-thousandth of a share of Series A Preferred Stock, subject to adjustment.
F-19
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
Initially, no separate Rights certificates will be distributed and instead the Rights will attach to all certificates representing shares of outstanding Common
Stock. Subject to certain exceptions specified in the Rights Agreement, the Rights will separate from the Common Stock and become exercisable on the
distribution date (the "Distribution Date"), which will occur on the earlier of (i) the 10th business day (or such later date as may be determined by the Board) after
the public announcement that an Acquiring Person (as defined in the Rights Agreement) has acquired beneficial ownership of 20% or more of the Common Stock
then outstanding; or (ii) the 10th business day (or such later date as may be determined by the Board) after a person or group announces a tender or exchange offer
that would result in a person or group of affiliated and associated persons beneficially owning 20% or more of the Common Stock then outstanding.
“Blank Check” Preferred Stock
The Company is authorized to issue up to 4,000,000 shares of "blank check" preferred stock. The Board has the authority and discretion, without shareholder
approval, to issue preferred stock in one or more series for any consideration it deems appropriate, and to fix the relative rights and preferences thereof including
their redemption, dividend and conversion rights. Of these shares, 100,000 shares have been authorized as the Series A Participating Preferred Stock. There were
no shares of preferred stock outstanding at September 30, 2020 and 2019.
Warrants
At September 30, 2020, the Company had 151,335 warrants outstanding and exercisable. The warrants have exercise prices ranging from $1.75 to $1.84 per
share and have a weighted average exercise price of $1.80 per share. At September 30, 2020, 76,335 of these warrants have a remaining life of 3.3 years and
75,000 warrants have an expiration date 90 days after a registration statement registering common stock (other than pursuant to an employee benefit plan) is
declared effective by the Securities and Exchange Commission.
Other Activity
In Fiscal 2020, the Company issued 300,000 shares of its common stock in connection with the Kablooe acquisition (see Note 3) and issued 50,000 shares of
its common stock pursuant to the exercise of stock options (see Note 9).
NOTE 9 SHARE-BASED COmPENSATION
2011 Long Term Incentive Plan
In March 2011, shareholders of the Company approved the 2011 Long Term Incentive Plan (the "2011 Plan"), which originally authorized 850,000 shares of
common stock for grants of various types of equity awards to officers, directors, employees, consultants, and independent contractors. On February 13, 2018, the
shareholders of the Company approved an amendment to the 2011 Plan to increase the aggregate number of shares of the Company's common stock authorized for
issuance under the 2011 Plan by 1,000,000 shares of common stock, from 850,000 shares of common stock to 1,850,000 shares of common stock. Forfeited awards
are eligible for re-grant under the 2011 Plan. The exercise prices of stock options granted may not be less than the fair market value of the common stock as quoted
at the close on the Nasdaq Stock Market on the grant date. The Compensation Committee administers the 2011 Plan. Options generally expire five to ten years
after the date of grant. The total shares of common stock available for grants of equity awards under the 2011 Plan was 291,000 as of September 30, 2020.
F-20
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
2007 Equity Incentive Plan
The 2007 Equity Incentive Plan (the "2007 Plan"), which was approved by shareholders of the Company in May 2007, and, as amended in February 2010,
expired in accordance with its terms in May 2017. However, there remain 2,500 shares associated with unexercised options as of September 30, 2020. The exercise
price of stock options granted may not be less than the fair market value of the common stock as quoted at the close on the Nasdaq Stock Market on the grant date.
There are no unvested restricted stock awards related to the 2007 Plan. The Compensation Committee administers the 2007 Plan. Options generally expire ten
years after the date of grant.
Stock Options
The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions in the following
table. The expected term represents the period over which the stock option awards are expected to be outstanding. The Company utilizes the simplified method to
develop an estimate of the expected term of “plain vanilla” option grants. The expected volatility used is based on the historical price of the Company’s stock over
the most recent period commensurate with the expected term of the award. The risk-free interest rate used is based on the implied yield of U.S. Treasury zero-
coupon issues with a remaining term equivalent to the award’s expected term. The Company historically has not paid any dividends on its common stock and had
no intention to do so on the date the share-based awards were granted. The estimated annual forfeiture rate is based on management’s expectations and will reduce
expense ratably over the vesting period. The forfeiture rate will be adjusted periodically based on the extent to which actual option forfeitures differ, or are
expected to differ, from the previous estimate, when it is material.
In applying the Black-Scholes option pricing model to options granted, the Company used the following assumptions:
Expected term (years)
Expected volatility
Risk free interest rate
Expected dividends
Estimated annual forfeiture rate
In Fiscal 2020, the Company made the following option grants:
Fiscal 2020
Fiscal 2019
2.5-3.0
65%-79%
0.15%-1.39%
0%
0%-10%
2.50-2.75
82%
2.53%
0%
0%
· Options to non-employee directors to purchase an aggregate of 248,019 shares of its common stock at an exercise price of $1.13 per share. The
options were granted in February 2020, vest one year from the date of grant, expire five years from the date of grant and had an aggregate grant date
fair value of $145,000, which is being recognized ratably over the vesting period.
· Options to its Chief Executive Officer to purchase 180,395 shares of its common stock at an exercise price of $1.40 per share. These options were
granted in September 2020, vested immediately, expire five years from the date of grant and had an aggregate grant date fair value of $100,000,
which was fully recognized on the date of grant.
· Options to an employee to purchase 27,329 shares of its common stock at an exercise price of $1.42 per share. These options were granted in August
2020, vest ratably over two years, expire five years from the date of grant and had an aggregate grant date fair value of $20,000, which is being
recognized ratably over the vesting period.
F-21
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
In Fiscal 2019, the Company made the following option grants:
· Options to non-employee directors to purchase an aggregate of 150,021 shares of its common stock at an exercise price of $1.54 per share. The
options were granted in February 2019, vested one year from the grant date, expire five years from the date of grant and had an aggregate grant date
fair value of $120,000, which is being amortized ratably over the vesting period.
· Options to non-employee directors to purchase an aggregate of 140,460 shares of common stock at an exercise price of $1.54 per share. The options
were granted in February 2019, vested immediately, expire five years from the date of grant and had an aggregate grant date fair value of $108,000,
which was fully recognized on the date of grant.
The options granted during Fiscal 2020 and Fiscal 2019 had a weighted average grant date value of $0.58 and $0.78 per share, respectively. The Company
recognized compensation expense for stock option awards of $245,000 and $212,000 during Fiscal 2020 and Fiscal 2019, respectively, in its consolidated
statements of operations.
During Fiscal 2020, the Company issued 50,000 shares of its common stock pursuant to the exercise of stock options at an exercise price of $0.64 per share for
aggregate cash proceeds of $32,000. The intrinsic value of the options exercised was $33,000. No options were exercised in Fiscal 2019.
At September 30, 2020, there was $75,000 of unrecognized compensation cost related to nonvested stock option awards that is expected to be recognized over
a weighted average period of 0.6 years.
The following table summarizes stock option activity during Fiscal 2020:
Outstanding, September 30, 2019
Granted
Exercised
Forfeited
Expired
Outstanding, September 30, 2020
Exercisable, September 30, 2020
Number of
Options
813,000
456,000
(50,000)
(16,000)
(65,000)
1,138,000
844,000
$
$
$
$
$
$
$
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Life (Yrs.)
Aggregate
Intrinsic
Value
1.69
1.25
0.64
2.97
2.64
1.49
1.61
3.7
3.5
$
$
73,000
8,600
Options outstanding at September 30, 2020 and September 30, 2019 have an exercise price between $0.64 and $3.73 per share.
F-22
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
Restricted Stock Awards
The Company recognized compensation expense of $0 and $3,000 during Fiscal 2020 and Fiscal 2019, respectively, for restricted stock awards in its
consolidated statements of operations. At September 30, 2020, there was no unrecognized compensation expense related to nonvested restricted stock awards.
NOTE 10 INCOmE TAXES
The following table summarizes the Company’s consolidated provision/(benefit) for U.S. federal, state and foreign taxes on income:
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Change in valuation allowance
Income tax provision/(benefit)
Fiscal 2020
Fiscal 2019
$
(4,000) $
13,000
–
414,000
82,000
283,000
788,000
(779,000)
$
9,000 $
(4,000)
–
–
(713,000)
(127,000)
(46,000)
(890,000)
886,000
(4,000)
F-23
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
The deferred tax provision/(benefit) is the change in the deferred tax assets and liabilities representing the tax consequences of changes in the amounts of
temporary differences, net operating loss carryforwards and changes in tax rates during the fiscal year. The Company’s deferred tax assets and liabilities are
comprised of the following:
Deferred tax assets
Net operating losses
Capital loss carryforwards
Share-based compensation
Alternative minimum and other tax credits
Excess tax over book basis in inventory
Reserves and other allowances
Deferred rent
Accrued compensation
Accrued expenses
Depreciation
Charitable contributions
Total deferred tax assets
Deferred tax liabilities
Prepaid expenses
Intangible assets
481 Election (IPS)
Total deferred tax liabilities
Valuation allowance
Net deferred tax assets
September 30,
2020
2019
$
1,812,000 $
–
180,000
5,000
20,000
155,000
13,000
70,000
–
31,000
3,000
2,289,000
(58,000)
(245,000)
(99,000)
(402,000)
(1,887,000)
$
– $
2,311,000
38,000
169,000
9,000
32,000
535,000
19,000
9,000
151,000
27,000
1,000
3,301,000
(141,000)
(298,000)
(196,000)
(635,000)
(2,666,000)
–
For Fiscal 2020 and Fiscal 2019, the Company recorded a provision for income taxes which includes net expense of $9,000 in Fiscal 2020, and a benefit of
$4,000 in Fiscal 2019. The Fiscal 2020 net expense of $9,000 includes state income tax expenses of $13,000, partially offset by a $4,000 refund of the remaining
unused balance of alternative minimum tax (“AMT”) credits. The $4,000 tax benefit recorded in Fiscal 2019 related to a partial refund of AMT tax. Under the Tax
Cuts and Jobs Act of 2017, AMT was repealed. The tax code in turn provided for a refund of the tax credits that existed on December 31, 2017 at a 50% rate in tax
years 2018, 2019 and 2020, with any remaining credits being fully refundable in 2021. The CARES Act now allows corporations to immediately claim unused
AMT credits on their current year tax return. State income tax expense is the result of taxable income in states where net operating loss carryforwards (“NOLs”)
are not available.
F-24
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
At September 30, 2020, the Company had available net NOLs for U.S. federal income tax purposes of $7,020,000. NOLs generated prior to 2018 expire
beginning in 2031 while NOLs generated after 2018 have an indefinite carryforward period. The NOLs result in a deferred tax asset with respect to U.S. federal
income taxes of $1,700,000. In addition, at September 30, 2020, the Company had available NOLs for foreign income tax purposes of $610,000, resulting in a
deferred tax asset of $114,000, expiring through 2024. The Company has capital loss carryovers of $160,000, which expired in Fiscal 2020, as no capital gain has
been recognized to utilize this deferred tax asset. Total net deferred tax assets, before valuation allowance, were $1,887,000 and $2,666,000 at September 30, 2020
and 2019, respectively. Undistributed earnings of the Company's foreign subsidiaries are considered permanently reinvested; therefore, in accordance with U.S.
GAAP, no provision for U.S. federal and state income taxes would result. In Fiscal 2020, Forward Switzerland and Forward U.K. had net income for tax purposes
of $116,000 and $13,000, respectively.
At September 30, 2020, as part of its periodic evaluation of the necessity to maintain a valuation allowance against its deferred tax assets, and after
consideration of all factors, including, among others, projections of future taxable income, current year NOL utilization and the extent of the Company's
cumulative losses in recent years, the Company determined that, on a more likely than not basis, it would not be able to use remaining deferred tax assets, except
with respect to the U.S. federal income taxes in the event the Company elects to effect repatriation of certain foreign source income of Forward Switzerland, which
income is currently considered to be permanently reinvested and for which no U.S. tax liability has been accrued. Accordingly, the Company has determined to
maintain a full valuation allowance against its net deferred tax assets. At September 30, 2020 and 2019, the valuation allowance was $1,887,000 and $2,666,000,
respectively. In the future, the utilization of the Company's NOLs may be subject to certain change of control limitations. If the Company determines that it will be
able to use some or all of its deferred tax assets in a future reporting period, the adjustment to reduce or eliminate the valuation allowance would reduce its income
tax expense and increase after-tax income.
The significant elements contributing to the difference between the U.S. federal statutory tax rate and the Company’s effective tax rate are as follows:
U.S. federal statutory rate
State tax rate, net of federal benefit
Foreign rate differential
Other
Change in tax credits
Effect of state tax rate change
Capital loss - expiration
Change in valuation allowance
State income taxes
Federal AMT
Permanent differences
Effective tax rate
Fiscal 2020
Fiscal 2019
21.0%
(1.9%)
(14.9%)
(10.6%)
(0.2%)
1.5%
(2.1%)
41.1%
(0.7%)
0.2%
(33.9%)
(0.5%)
21.0%
2.8%
1.4%
1.9%
(0.1%)
–
–
(26.6%)
–
0.1%
(0.4%)
0.1%
F-25
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
In November 2020, the IRS issued Revenue Ruling 2020-27, providing its position regarding the deductibility for federal income tax purposes of otherwise
deductible expenses incurred when a taxpayer receives a PPP loan. This ruling states the taxpayer may not deduct those expenses in the taxable year in which the
expenses were paid or incurred if the taxpayer reasonably expects to receive forgiveness of the covered loan. In accordance with this ruling, the Company has
excluded these qualifying expenses from taxable income and recorded this difference as a permanent item.
At September 30, 2020 and 2019, the Company has not accrued any interest or penalties related to uncertain tax positions. It is the Company's policy to
recognize interest and/or penalties, if any, related to income tax matters in income tax expense in the consolidated statements of operations. For the periods
presented in the accompanying consolidated statements of operations, no material income tax related interest or penalties were assessed or recorded. All fiscal
years prior to the fiscal year ended September 30, 2017 are closed to federal and state examination.
NOTE 11 LOSS PER SHARE
Basic loss per share data for each period presented is computed using the weighted average number of shares of common stock outstanding during each such
period. Diluted loss per share data is computed using the weighted average number of common and dilutive common equivalent shares outstanding during each
period. Dilutive common-equivalent shares consist of shares that would be issued upon the exercise of stock options and warrants, computed using the treasury
stock method.
The following securities were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive:
Options
Warrants
Total potentially dilutive shares
NOTE 12 COmmITmENTS AND CONTINGENCIES
Guarantee Obligation
Fiscal 2020
Fiscal 2019
1,138,000
151,000
1,289,000
813,000
151,000
964,000
In February 2010, Forward Switzerland and its European logistics provider (freight forwarding and customs agent) entered into a Representation Agreement
(the “Representation Agreement”) whereby, among other things, the European logistics provider agreed to act as Forward Switzerland's fiscal representative in The
Netherlands for the purpose of providing services in connection with any value added tax matters. As part of this agreement, Forward Switzerland agreed to
provide an undertaking (in the form of a bank letter of guarantee) to the logistics provider with respect to any value added tax liability arising in The Netherlands
that the logistics provider is required to pay to Dutch tax authorities on its behalf.
In February 2010, Forward Switzerland entered into a guarantee agreement with a Swiss bank relating to the repayment of any amount up to €75,000 (equal to
approximately $88,000 at September 30, 2020) paid by such bank to the logistics provider in order to satisfy such undertaking pursuant to the bank letter of
guarantee. Forward Switzerland would be required to perform under the guarantee agreement only in the event that (i) a value added tax liability is imposed on the
Company's revenues in The Netherlands; (ii) the logistics provider asserts that it has been called upon in its capacity as surety by the Dutch Receiver of Taxes to
pay such taxes; (iii) Forward Switzerland or the Company on its behalf fails or refuses to remit the amount of value added tax due to the logistics provider upon its
demand; and (iv) the logistics provider makes a drawing under the bank letter of guarantee. Under the Representation Agreement, Forward Switzerland agreed that
the letter of guarantee would remain available for drawing for three years following the date that its relationship terminates with the logistics provider to satisfy any
value added tax liability arising prior to expiration of the Representation Agreement but asserted by The Netherlands after expiration.
F-26
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
The initial term of the bank letter of guarantee expired February 28, 2011, but it renews automatically for one-year periods on February 28 of each subsequent
year unless Forward Switzerland provides the Swiss bank with written notice of termination at least 60 days prior to the renewal date. It is the intent of Forward
Switzerland and the logistics provider that the bank letter of guarantee amount be adjusted annually. In consideration of the issuance of the letter of guarantee,
Forward Switzerland has granted the Swiss bank a security interest in all of its assets on deposit with, held by, or credited to Forward Switzerland’s accounts with,
the Swiss bank (approximately $770,000 at September 30, 2020). At September 30, 2020, the Company had not incurred a liability in connection with this
guarantee.
Legal Proceedings
On August 21, 2020, IPS was named a third-party defendant in a patent dispute claim currently pending in the U.S. District Court for the Eastern District of
New York. The complaint, which contains no specific amount of monetary damages, asserts that certain intellectual property was misappropriated by IPS and one
of its former employees. IPS denies the allegations, believes the action is without merit and intends to vigorously defend it. The Company received permission
from the District Court to file a motion to dismiss the complaint and filed such motion on December 14, 2020.
From time to time, the Company may become a party to other legal actions or proceedings in the ordinary course of its business. At September 30, 2020, there
were no such actions or proceedings, either individually or in the aggregate, that, if decided adversely to its interests, the Company believes would be material to its
business.
NOTE 13 LEASES
On October 1, 2019, the Company adopted the updated guidance on leases using the modified retrospective transition method. Results for Fiscal 2020 are
presented under the updated guidance, while Fiscal 2019 is reported in accordance with historical lease accounting guidance.
The Company’s operating leases are primarily for corporate, sales and administrative office space. Total operating lease expense was $562,000 in Fiscal 2020
and total rent expense was $473,000 in Fiscal 2019. These expenses are recorded in general and administrative expenses on the consolidated statements of
operations.
The Company leases certain computer equipment through finance lease agreements expiring through July 2024. Amortization expense related to assets under
finance leases was $42,000 for Fiscal 2020. Interest expense related to assets under finance leases was $3,000 for Fiscal 2020. The following is a summary of
computer equipment held under capital leases:
Cost
Accumulated depreciation
Net book value
September 30,
2020
2019
$
$
203,000 $
(180,000)
23,000 $
203,000
(138,000)
65,000
F-27
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
At September 30, 2020, additional information related to operating and finance leases was as follows:
Weighted Average Remaining Lease Term:
Operating Leases
Finance Leases
Weighted Average Discount Rate:
Operating Leases
Finance Leases
10.9 years
0.9 years
5.7%
5.8%
Future minimum payments under non-cancellable operating and finance leases are as follows:
Fiscal Years Ended September 30,
2021
2022
2023
2024
2025
Thereafter
Total future minimum lease payments
Less imputed interest
Total
NOTE 14 RELATED PARTY TRANSACTIONS
Buying Agency and Supply Agreement
Operating Leases
$
458,000 $
430,000
426,000
433,000
395,000
2,805,000
4,947,000
(1,328,000)
3,619,000 $
Finance Leases
24,000
10,000
–
–
–
–
34,000
(3,000)
31,000
$
The Company has a Buying Agency and Supply Agreement (the “Supply Agreement”) with Forward China. The Supply Agreement provides that, upon the
terms and subject to the conditions set forth therein, Forward China will act as the Company’s exclusive buying agent and supplier of Products (as defined in the
Supply Agreement) in the Asia-Pacific region. The Company purchases products at Forward China’s cost and also pays to Forward China a monthly service fee
equal to the sum of (i) $100,000, and (ii) 4% of “Adjusted Gross Profit”, which is defined as the selling price less the cost from Forward China. The Supply
Agreement expires October 22, 2023. Terence Wise, Chief Executive Officer and Chairman of the Company, is the owner of Forward China. In addition, Jenny P.
Yu, a Managing Director of Forward China, beneficially owns more than 5% of the Company’s common stock. The Company recorded service fees to Forward
China of $1,363,000 and $1,398,000 during Fiscal 2020 and Fiscal 2019, respectively, which are included as a component of cost of sales when revenue is
recognized on sales of the related products.
F-28
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
On August 14, 2018, the Company entered into a formal agreement, confluent with the Supply Agreement noted above, to address the potential impact of
customers sourcing directly from Forward China. Although unlikely, customers may be introduced directly or indirectly by the Company to Forward China. In the
event a customer determines to bypass the services of the Company and do business directly with Forward China, Forward China has agreed to pay a commission
of 50% of the net revenue generated from the products or services sold to the customer after deduction of direct costs. No commissions have been received per this
agreement during Fiscal 2020 or Fiscal 2019.
At September 30, 2020, the Company made $107,000 in prepayments to Forward China for inventory purchases, which is included in prepaid expenses and
other current assets on the consolidated balance sheet.
Promissory Note
On January 18, 2018, the Company issued a $1,600,000 promissory note payable to Forward China in order to fund the acquisition of IPS. The promissory
note bears interest at a rate of 8% per annum and had an original maturity date of January 18, 2019. Monthly interest payments commenced on February 18, 2018.
The Company incurred and paid $128,000 in interest expense associated with this note in both Fiscal 2020 and Fiscal 2019. At September 30, 2020, after being
extended, the maturity date of this note was December 30, 2020. The maturity date of the note has been extended on several occasions to assist the Company with
liquidity. In December 2020, the maturity date of this note was extended to December 31, 2021.
Related Party Sales
During Fiscal 2019, the Company’s design division provided services to a customer whose Chief Operating and Financial Officer and equity owner is an
immediate family member of a director on the Company’s Board of Directors and a member on the Board’s Audit and Compensation committees. The Company
sold design services to this customer of $44,000 and $150,000 in Fiscal 2020 and Fiscal 2019, respectively. At September 30, 2020 and 2019, respectively, there
was $0 and $9,000 in outstanding receivables from this customer.
NOTE 15 401(k) PLAN
The Company maintains a 401(k) benefit plan allowing eligible employees to make pre-tax contributions of a portion of their salary in amounts subject to IRS
limitations. The Company made matching contributions of $269,000 and $226,000 during Fiscal 2020 and Fiscal 2019, respectively, which vested immediately and
are reflected in the accompanying consolidated statements of operations as a components of cost of sales and general and administrative expenses.
NOTE 16 SEGmENT AND GEOGRAPHIC INFORmATION
The Company has two reportable segments: distribution and design. See Note 1 for more information on the composition of our reportable segments. The
distribution segment sources and distributes carrying cases and other accessories for medical monitoring and diagnostic kits and a variety of other portable
electronic and non-electronic devices. This segment operates in the EMEA Region, the Americas and the APAC Region. Geographic regions are defined by
reference primarily to the location of the customer or its contract manufacturer. The design segment provides a full spectrum of hardware and software product
design and engineering services. This segment operates predominantly in the Americas region.
F-29
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
Segment operating loss and net loss before income taxes are shown in table below:
Revenues, net
Distribution
Design
Total revenues, net
Cost of sales
Distribution
Design
Total cost of sales
Loss from operations
Distribution
Design
Total loss from operations
Other (income)/expense, net
Distribution
Design
Total other (income)/expense, net
Loss before income taxes
Distribution
Design
Total loss before income taxes
Segment assets are shown in the table below:
Distribution
Design
Total
Fiscal 2020
Fiscal 2019
20,752,000 $
13,726,000
34,478,000 $
21,988,000
15,421,000
37,409,000
17,978,000 $
9,862,000
27,840,000 $
18,613,000
12,215,000
30,828,000
(1,604,000) $
(378,000)
(1,982,000) $
(1,377,000)
(1,720,000)
(3,097,000)
(202,000) $
(14,000)
(216,000) $
438,000
73,000
511,000
(1,402,000) $
(364,000)
(1,766,000) $
(1,815,000)
(1,793,000)
(3,608,000)
September 30,
2020
8,289,000 $
11,067,000
19,356,000 $
2019
9,554,000
6,540,000
16,094,000
$
$
$
$
$
$
$
$
$
$
$
$
F-30
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
Revenues from External Customers
Consolidated
The following table sets forth our consolidated net revenues by geographic region for Fiscal 2020 and Fiscal 2019. All of the design segment customer
revenues are classified under the United States within the Americas region:
EMEA Region:
Germany
Poland
Great Britain
Switzerland
Austria
Other
Total EMEA Region
Americas:
United States [1]
Other
Total Americas
APAC Region:
Hong Kong
Malaysia
China
Singapore
Taiwan
Other
Total APAC Region
Total Net Revenues
Fiscal 2020
Fiscal 2019
$
$
3,375,000 $
2,675,000
267,000
–
406,000
362,000
7,085,000
21,017,000
44,000
21,061,000
4,876,000
200,000
217,000
228,000
162,000
649,000
6,332,000
34,478,000 $
3,875,000
3,355,000
–
297,000
186,000
166,000
7,879,000
21,730,000
4,000
21,734,000
6,017,000
153,000
318,000
564,000
164,000
580,000
7,796,000
37,409,000
[1]
Includes $13,726,000 and $15,421,000 of revenue in Fiscal 2020 and Fiscal 2019, respectively, attributed to the design segment whose customers reside in
the United States.
F-31
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
major Customers and Concentrations by Geographic Region
In Fiscal 2020 and Fiscal 2019, the Company had significant customers whose individual percentage of the Company’s total revenues was 10% or greater. The
risk of collecting accounts receivable from all customers is enhanced as a result of the economic impact of the COVID-19 pandemic. The concentrations of
revenues and accounts receivable for each operating segment are detailed below.
Distribution Segment Revenues Concentration
The following customers or their affiliates or contract manufacturers accounted for more than 10% of the distribution segment’s net revenues, by geographic
region, and in segment total for Fiscal 2020 and Fiscal 2019:
Customer A
Customer B
Customer C
Customer D
Totals
Customer A
Customer B
Customer C
Customer D
Totals
EmEA
Americas
APAC
Total
Fiscal 2020
46%
24%
–
14%
84%
39%
16%
1%
11%
67%
Fiscal 2019
1%
9%
76%
2%
88%
EmEA
Americas
APAC
Total
42%
29%
–
13%
84%
42%
22%
3%
15%
82%
–
6%
76%
3%
85%
29%
17%
24%
9%
79%
30%
19%
28%
10%
87%
Design Segment Revenues Concentration
All of our design segment customers operate in the United States. The following customers accounted for more than 10% of the design segment’s net revenues
for Fiscal 2020 and Fiscal 2019:
Customer 1
Customer 2
Customer 3
Customer 4
Total
Fiscal 2020
Fiscal 2019
19%
13%
14%
–
46%
1%
9%
19%
17%
46%
F-32
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
Distribution Segment Accounts Receivable Concentration
At September 30, 2020 and 2019, concentrations of accounts receivable with significant customers representing 10% or more of distribution segment accounts
receivable were as follows:
Customer A
Customer B
Customer C
Customer D
Totals
Design Segment Accounts Receivable Concentration
September 30,
2020
2019
23%
22%
20%
17%
82%
29%
21%
16%
24%
90%
At September 30, 2020 and 2019, concentrations of accounts receivable with significant customers representing 10% or greater of design segment accounts
receivable were as follows:
Customer 1
Customer 3
Customer 4
Customer 5
Customer 6
Totals
September 30,
2020
2019
24%
5%
–
14%
10%
53%
3%
19%
44%
5%
3%
74%
F-33
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
Long-Lived Assets
Identifiable long-lived assets, consisting predominantly of property, plant and equipment, by operating segment are presented net of accumulated depreciation
and amortization. All of the Company’s long-lived assets are geographically located in the Americas region. See table below:
Consolidated
$
215,000 $
–
–
215,000 $
$
September 30,
2020
2019
Distribution
Design
Consolidated
Distribution
Design
23,000 $
–
–
23,000 $
192,000 $
–
–
192,000 $
243,000 $
–
–
243,000 $
18,000 $
–
–
18,000 $
225,000
–
–
225,000
Americas
APAC
EMEA
Total long-lived assets (net)
Total Liabilities
The following table presents total liabilities by operating segment for the years ended September 30, 2019 and 2018:
Distribution
Design
Total
Supplier Concentration
September 30,
2020
2019
$
$
5,780,000 $
6,993,000
12,773,000 $
6,061,000
2,322,000
8,383,000
The Company procures all its supply of carrying solutions products for the distribution segment from independent suppliers in China through Forward China.
Depending on the product, Forward China may require several different suppliers to furnish component parts or pieces. The Company purchased 100% of its OEM
products from Forward China in Fiscal 2020 and 2019.
The Company procures materials and supplies used to build prototypes and “mock-ups” for design service projects. Vendors are from the United States.
NOTE 17 LINE OF CREDIT
The Company, specifically IPS, has a $1,300,000 revolving line of credit which was renewed at the discretion of the lender on August 5, 2020. The line of
credit has a maturity date of May 31, 2021, is guaranteed by the Company and is secured by all of IPS’ assets. The interest rate on the line of credit is 0.75% above
The Wall Street Journal prime rate. The effective interest rate at September 30, 2020 and 2019 was 4.0% and 5.75%, respectively. As of September 30, 2020, the
Company had $300,000 available under the line of credit. The Company is subject to certain debt-service ratio requirements which are measured annually. At
September 30, 2020 and 2019 the Company was in violation of the required debt-service ratio covenants but was granted a waiver of the violation from the lender
in both years.
F-34
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEmENTS
NOTE 18 DEBT
On April 18, 2020, the Company entered into a loan in an aggregate principal amount of $1,357,000 under the Paycheck Protection Program (the “PPP Loan”)
pursuant to the recently enacted U.S. Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The loan matures on April 18, 2022 and bears an
interest rate of 1.00% per annum. The Company was originally scheduled to pay monthly principal and interest payments on the outstanding principal balance of
this loan beginning November 18, 2020 until maturity when the entire principal balance remaining unpaid, along with all accrued and unpaid interest, was to be
due and payable in full. This loan is unsecured, and subject to forgiveness in accordance with the terms of the CARES Act. We have accounted for these proceeds
as a loan and the current and long-term portions of $827,000 and $530,000, respectively, are included in the corresponding categories of notes payable on the
consolidated balance sheets. In October 2020, the Company filed for forgiveness of this loan and in December, the Small Business Administration approved our
forgiveness request for this loan.
In connection with the acquisition of Kablooe, the Company assumed a loan payable with a principal amount of $170,000. The loan matures in August 2021,
bears interest at a rate of 6.0% per annum and is secured by all of Kablooe’s assets. Interest and principal payments of $15,000 are payable monthly until maturity.
The outstanding balance at September 30, 2020 was $156,000.
On April 1, 2016, IPS entered into a term loan with a lender in the amount of $325,000. The loan matured on April 1, 2020 and bore interest at a rate of
4.215% per annum. Interest and principal of $7,378 were paid on a monthly basis through maturity. This loan was secured by all of IPS’ assets and was guaranteed
by the Company. The outstanding balance at September 30, 2020 and 2019 was $0 and $52,000, respectively.
On December 11, 2017, IPS entered into an installment payment financing arrangement with a lender in the amount of $23,000. IPS made monthly payments
of $1,035, which includes an implied interest rate of 9.5%, for 24 months. The last payment was made in December 2019. The loan balance was $0 and $3,000 at
September 30, 2020 and 2019, respectively.
Future minimum principal payment requirements on our notes payable (including the PPP loan) are as follows:
Fiscal 2021
Fiscal 2022
Total
NOTE 19 mOONI AGREEmENT
$
$
983,000
530,000
1,513,000
On January 29, 2019, the Company entered into a three-year Distribution Agreement (the “Agreement”) with Mooni International AB and its owner. In
accordance with the Agreement, the Company: (i) was appointed as the exclusive distributor of Mooni's current and future products (including future products
developed or offered by Mooni and/or the owner) in North America, (ii) subject to certain repayment requirements, the Company paid $400,000 to Mooni, and (iii)
was granted an option to purchase a controlling interest of Mooni at a valuation not to exceed $5 million which, if exercised, would be effective on the 12 month
anniversary of the effective date of the Agreement. This option was not exercised and therefore expired. The Company generated $263,000 of revenue from this
agreement in Fiscal 2020. Additionally, Forward China, a company owned by Terence Wise, the Company's Chairman and Chief Executive Officer, was named
the designated supplier under the Agreement. The current and long-term portions of the unamortized fee of $133,000 and $45,000, respectively, at September 30,
2020 and $133,000 and $178,000, respectively, at September 30, 2019, are included in prepaid and other current assets and other assets, respectively, in the
accompanying consolidated balance sheets. Amortization of the cost for Fiscal 2020 and Fiscal 2019 of $133,000 and $89,000, respectively, is included in sales
and marketing expenses in the accompanying consolidated statements of operations.
F-35
Exhibit 4.2
U.S. $1,600,000
AmENDED AND RESTATED PROmISSORY NOTE
January 18, 2018
The undersigned maker, Forward Industries Inc, a New York Corporation (“Borrower”) promises to pay to the order of Forward Industries (Asia-Pacific)
Corporation (“Lender”), at 101, Building 13, Bishui Laintian,, New Century Villas, Dongguan City, Guandong Province, China, 523123, the principal sum of one
million six hundred thousand Dollars (U.S. $1,600,000), together with interest accruing thereon from the date hereof at the rate and time hereinafter provided.
Interest (computed on the basis of a 360-day year for the actual number of days elapsed) on the outstanding balance of principal evidenced by this Note
shall accrue at a rate per annum (the “Applicable Interest Rate”) equal to eight percent (8%).
Interest only shall be due and payable on February 18, 2018, and on the 18th day (or 17th on the maturity date) of each month thereafter until December
31, 2021, at which time the entire principal and all accrued interest hereunder shall be immediately due and payable in full.
The failure of Borrower to pay to Lender promptly within five (5) days after written notice from Lender that amounts are due and payable under this Note
shall constitute an event or default under this Note. At any time after the occurrence of any such event of default, the indebtedness evidenced by this Note and/or
any note(s) or other obligation(s) which may be taken in renewal, extension, substitution or modification of all or any part of the indebtedness evidenced thereby
and all other obligations of Borrower to Lender howsoever created and existing shall, at the option of the Lender in its sole discretion, immediately become due
and payable without demand upon or notice to Borrower, and Lender shall be entitled to exercise all remedies as provided by law and/or equity.
Borrower hereby waives presentment for payment, demand, notice of dishonor and protest and agrees that (i) any collateral, lien or right of setoff securing
any indebtedness evidenced by this Note may, from time to time, in whole or in part, be exchanged or released, and any person liable on or with respect to this
Note may be released, all without notice to or further reservations of rights against Borrower, any endorser, surety or guarantor and all without in any way affecting
or releasing the liability of Borrower, any endorser, surety or guarantor, and (ii) none of the terms or provisions hereof may be waived, altered, modified or
amended except as Lender may consent thereto in writing.
Borrower hereby agrees to pay all out-of-pocket costs and expenses, including reasonable attorneys’ fees, incurred by Lender in the collection of the
indebtedness evidenced by this Note, in enforcing any of the rights, powers, remedies and privileges of Lender hereunder, or in connection with any further
negotiations, modifications, releases, or otherwise incurred by Lender in connection with this Note. As used in this Note, the term “attorneys’ fees” shall mean
reasonable charges and expenses for legal services rendered to or on behalf of Lender in connection with the collection of the indebtedness evidenced by this Note
at any time whether prior to the commencement of judicial proceedings and/or thereafter at the trial and/or appellate level and/or in pre-judgment and post-
judgment or bankruptcy proceedings.
1
In no event shall the rate of interest charged under this Note exceed the rate that may legally be charged to Borrower for obligations of this nature under
the laws of the State of Florida, and any interest that may be paid in excess of the legal limit shall, at the option of Lender, be refunded to Borrower or shall be
applied towards payment of the principal obligation under this Note.
If any installment of interest, principal or principal and interest shall become overdue for a period in excess of ten (10) days, in addition to such payment,
a “late charge” in the amount of five percent (5%) of such overdue payment shall be paid by Borrower to Lender on demand for the purpose of defraying the
expenses incident to handling such delinquent payments.
During the continuation of any default by Borrower in the payment of any installment of interest, principal or principal and interest under this Note, the
interest rate provided herein shall be increased to a rate which shall be equal to the maximum rate of interest allowable under the laws of the State of Florida.
Venue of any litigation arising in connection with this Note shall be in Palm Beach County, Florida.
To the extent that Lender receives any payment on account of any of Borrower’s obligations, and any such payment(s) or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside, subordinate and/or required to be repaid to a trustee, receiver or any other person or
entity under any bankruptcy act, state or federal law, common law or equitable cause, then, to the extent of such payment(s) received, Borrower’s obligations or
part thereof intended to be satisfied shall be revived and continue in full force and effect, as if such payment(s) had not been received by Lender and applied on
account of Borrower’s obligations.
Borrower agrees that this Note shall be deemed to have been made under and shall be governed by the laws of the State of Florida in all respects,
including matters of construction, validity and performance. If any provisions of this Note shall be deemed unenforceable under applicable law, such provision
shall be ineffective, but only to the extent of such unenforceability, without invalidating the remainder of such provision or the remaining provisions of this Note.
All of the terms and provisions of this Note shall be applicable to and be binding upon each and every maker, endorser, surety, guarantor, all other persons who are
or may become liable for the payment hereof and their heirs, personal representatives, successors or assigns.
BORROWER AND LENDER (BY ACCEPTING THIS NOTE) HEREBY MUTUALLY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING
OR COUNTERCLAIM BROUGHT BY EITHER BORROWER OR LENDER AGAINST THE OTHER AND BASED UPON, ARISING OUT OF, OR IN
CONNECTION WITH, THIS NOTE OR OTHER DOCUMENTS EXECUTED IN CONNECTION WITH THE LOAN EVIDENCED BY THIS NOTE.
FORWARD INDUSTRIES, INC.
By:___________________________________
Name: _________________
Its: Chief Financial Officer
STATE OF _________________
COUNTY OF _______________
)
) SS:
)
The foregoing Promissory Note was acknowledged before me this _____ day of _______________, 20__, by ____________________, the
_______________ of _______________
____________________________________, a ____________________, on behalf of the _______________, ( ) who is personally known to me OR ( ) who
produced ____________________________________________________________ as identification.
____________________________________
Notary Signature
____________________________________
Print Notary Name
NOTARY PUBLIC
State of _______________ at Large
My Commission Expires:
Promissory Note Signature Page
2
Exhibit 10.2(e)
October 21, 2020
Forward Industries Asia-Pacific Corporation
10F-5 No. 16, Lane 609
Chung Shin Road, Section 5
San Chung District
New Taipei City, Taiwan, Republic of China
Attention: Mr. Terrance Wise
Dear Terry:
This documents our understanding regarding the extension of the Term of that certain Buying Agency and Supply Agreement between Forward
Industries, Inc. (“Forward”) and Forward Industries (Asia-Pacific) Corporation (“Forward China”) dated September 9, 2015, as amended (the “Agreement”). For
good and valuable consideration, which is hereby acknowledged, Forward China has agreed to extend the Term of the Agreement until October 22, 2023. The
extension is effective as of October 22, 2020. Forward and Forward China agree to review the terms of the Agreement on an annual basis. Section 8 of the
Agreement is hereby amended to reflect the extension of the Term.
If you are agreeable to the foregoing, please sign below.
Sincerely,
/s/Anthony Camarda
Anthony Camarda, CFO of Forward Industries, Inc.
I hereby agree:
/s/Terence Wise
Terrance Wise, Principal of Forward Industries (Asia-Pacific) Corporation
List of Subsidiaries of Forward Industries, Inc.
Exhibit 21.1
Intelligent Product Solutions, Inc., a New York Corporation
Kablooe, Inc., a New York Corporation
Forward Industries (Switzerland) GmbH, a Swiss Corporation
Forward Ind. (UK) Limited, Limited Company of England and Wales
Forward Industries (IN), Inc., an Indiana corporation
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We consent to the incorporation by reference in the Registration Statement on Form S-8 (Registration File No. 333- 225968 and 333-194510) of Forward
Industries, Inc., of our report on our audits of the consolidated financial statements of Forward Industries, Inc. and Subsidiaries as of and for the years ended
September 30, 2020 and 2019, dated December 17, 2020, which report appears in this Annual Report on Form 10-K of Forward Industries, Inc. for the year ended
September 30, 2020.
/s/ CohnReznick LLP
Jericho, New York
December 17, 2020
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Terence Wise, certify that:
1. I have reviewed this annual report on Form 10-K of Forward Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: December 17, 2020
/s/ Terence Wise
Terence Wise
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Anthony Camarda, certify that:
1. I have reviewed this annual report on Form 10-K of Forward Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: December 17, 2020
/s/ Anthony Camarda
Anthony Camarda
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Forward Industries, Inc. (the “Company”) on Form 10-K for the fiscal year ended September 30, 2020, as filed with the
Securities and Exchange Commission on the date hereof, I, Terence Wise, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley
Act of 2002, that to my knowledge:
1.
2.
The annual report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and
The information contained in the annual report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Exhibit 32.1
/s/ Terence Wise
Terence Wise
Chief Executive Officer
(Principal Executive Officer)
Dated: December 17, 2020
In connection with the annual report of Forward Industries, Inc. (the “Company”) on Form 10-K for the fiscal year ended September 30, 2020, as filed with the
Securities and Exchange Commission on the date hereof, I, Anthony Camarda, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-
Oxley Act of 2002, that to my knowledge:
1.
2.
The annual report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and
The information contained in the annual report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
/s/ Anthony Camarda
Anthony Camarda
Chief Financial Officer
(Principal Financial Officer)
Dated: December 17, 2020