ITEM 1. FINANCIAL STATEMENTS
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| |
| | |
| |
| |
March 31, | | |
September 30, | |
| |
2022 | | |
2021 | |
| |
(Unaudited) | | |
| |
Assets | |
| | |
| |
Current assets: | |
| | | |
| | |
Cash | |
$ | 1,541,192 | | |
$ | 1,410,365 | |
Accounts receivable, net | |
| 8,685,896 | | |
| 8,760,715 | |
Inventories, net | |
| 3,897,479 | | |
| 2,062,557 | |
Prepaid expenses and other current assets | |
| 816,250 | | |
| 561,072 | |
Total current assets | |
| 14,940,817 | | |
| 12,794,709 | |
| |
| | | |
| | |
Property and equipment, net | |
| 247,345 | | |
| 167,997 | |
Intangible assets, net | |
| 1,212,279 | | |
| 1,318,658 | |
Goodwill | |
| 1,758,682 | | |
| 1,758,682 | |
Operating lease right of use assets, net | |
| 3,741,813 | | |
| 3,743,242 | |
Other assets | |
| 72,251 | | |
| 72,251 | |
| |
| | | |
| | |
Total assets | |
$ | 21,973,187 | | |
$ | 19,855,539 | |
| |
| | | |
| | |
Liabilities and shareholders' equity | |
| | | |
| | |
| |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Note payable to Forward China | |
$ | 1,500,000 | | |
$ | – | |
Accounts payable | |
| 463,901 | | |
| 391,992 | |
Due to Forward China | |
| 7,239,885 | | |
| 5,733,708 | |
Deferred income | |
| 620,572 | | |
| 187,695 | |
Current portion of earnout consideration | |
| 25,000 | | |
| 25,000 | |
Current portion of operating lease liability | |
| 405,811 | | |
| 340,151 | |
Accrued expenses and other current liabilities | |
| 787,010 | | |
| 529,497 | |
Total current liabilities | |
| 11,042,179 | | |
| 7,208,043 | |
| |
| | | |
| | |
Other liabilities: | |
| | | |
| | |
Note payable to Forward China | |
| – | | |
| 1,600,000 | |
Operating lease liability, less current portion | |
| 3,514,064 | | |
| 3,559,053 | |
Earnout consideration, less current portion | |
| 45,000 | | |
| 45,000 | |
Total other liabilities | |
| 3,559,064 | | |
| 5,204,053 | |
| |
| | | |
| | |
Total liabilities | |
| 14,601,243 | | |
| 12,412,096 | |
| |
| | | |
| | |
Commitments and contingencies | |
| – | | |
| – | |
| |
| | | |
| | |
Shareholders' equity: | |
| | | |
| | |
Common stock, par value $0.01 per share; 40,000,000 shares authorized; 10,061,185 shares issued and outstanding at March 31, 2022 and September 30, 2021 | |
| 100,612 | | |
| 100,612 | |
Additional paid-in capital | |
| 20,019,288 | | |
| 19,914,476 | |
Accumulated deficit | |
| (12,747,956 | ) | |
| (12,571,645 | ) |
| |
| | | |
| | |
Total shareholders' equity | |
| 7,371,944 | | |
| 7,443,443 | |
| |
| | | |
| | |
Total liabilities and shareholders' equity | |
$ | 21,973,187 | | |
$ | 19,855,539 | |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| |
| | |
| | |
| | |
| |
| |
For the Three Months Ended
March 31, | | |
For the Six Months Ended
March 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
| | |
| | |
| |
Revenues, net | |
$ | 10,314,563 | | |
$ | 8,395,379 | | |
$ | 21,928,304 | | |
$ | 18,112,982 | |
Cost of sales | |
| 8,061,889 | | |
| 6,651,933 | | |
| 17,056,861 | | |
| 14,106,650 | |
Gross profit | |
| 2,252,674 | | |
| 1,743,446 | | |
| 4,871,443 | | |
| 4,006,332 | |
| |
| | | |
| | | |
| | | |
| | |
Sales and marketing expenses | |
| 704,102 | | |
| 578,436 | | |
| 1,441,780 | | |
| 1,181,397 | |
General and administrative expenses | |
| 1,871,311 | | |
| 1,981,186 | | |
| 3,538,188 | | |
| 3,808,604 | |
| |
| | | |
| | | |
| | | |
| | |
Loss from operations | |
| (322,739 | ) | |
| (816,176 | ) | |
| (108,525 | ) | |
| (983,669 | ) |
| |
| | | |
| | | |
| | | |
| | |
Gain on forgiveness of note payable | |
| – | | |
| – | | |
| – | | |
| (1,356,570 | ) |
Fair value adjustment of earn-out consideration | |
| – | | |
| – | | |
| – | | |
| (30,000 | ) |
Interest income | |
| – | | |
| (33,554 | ) | |
| – | | |
| (56,301 | ) |
Interest expense | |
| 30,864 | | |
| 46,714 | | |
| 63,691 | | |
| 93,106 | |
Other expense, net | |
| 2,732 | | |
| 5,392 | | |
| 4,095 | | |
| 1,788 | |
| |
| | | |
| | | |
| | | |
| | |
Provision for income taxes | |
| – | | |
| – | | |
| – | | |
| – | |
| |
| | | |
| | | |
| | | |
| | |
Net (loss)/income | |
$ | (356,335 | ) | |
$ | (834,728 | ) | |
$ | (176,311 | ) | |
$ | 364,308 | |
| |
| | | |
| | | |
| | | |
| | |
(Loss)/earnings per share: | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | (0.04 | ) | |
$ | (0.08 | ) | |
$ | (0.02 | ) | |
$ | 0.04 | |
Diluted | |
$ | (0.04 | ) | |
$ | (0.08 | ) | |
$ | (0.02 | ) | |
$ | 0.04 | |
| |
| | | |
| | | |
| | | |
| | |
Weighted average common shares outstanding: | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 10,061,185 | | |
| 9,909,497 | | |
| 10,061,185 | | |
| 9,897,385 | |
Diluted | |
| 10,061,185 | | |
| 9,909,497 | | |
| 10,061,185 | | |
| 10,378,733 | |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
| |
| | |
| | |
| | |
| | |
| |
| |
For the Three and Six Months Ended March 31, 2022 | |
| |
| | |
| | |
| | |
| | |
| |
| |
| | |
| | |
Additional | | |
| | |
| |
| |
Common Stock | | |
Paid-In | | |
Accumulated | | |
| |
| |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Total | |
| |
| | |
| | |
| | |
| | |
| |
Balance at September 30, 2021 | |
| 10,061,185 | | |
$ | 100,612 | | |
$ | 19,914,476 | | |
$ | (12,571,645 | ) | |
$ | 7,443,443 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Share-based compensation | |
| – | | |
| – | | |
| 38,800 | | |
| – | | |
| 38,800 | |
Net income | |
| – | | |
| – | | |
| – | | |
| 180,024 | | |
| 180,024 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance at December 31, 2021 | |
| 10,061,185 | | |
| 100,612 | | |
| 19,953,276 | | |
| (12,391,621 | ) | |
| 7,662,267 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Share-based compensation | |
| – | | |
| – | | |
| 66,012 | | |
| – | | |
| 66,012 | |
Net loss | |
| – | | |
| – | | |
| – | | |
| (356,335 | ) | |
| (356,335 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance at March 31, 2022 | |
| 10,061,185 | | |
$ | 100,612 | | |
$ | 20,019,288 | | |
$ | (12,747,956 | ) | |
$ | 7,371,944 | |
| |
For the Three and Six Months Ended March 31, 2021 | |
| |
| | |
| | |
| | |
| | |
| |
| |
| | |
| | |
Additional | | |
| | |
| |
| |
Common Stock | | |
Paid-In | | |
Accumulated | | |
| |
| |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Total | |
| |
| | |
| | |
| | |
| | |
| |
Balance at September 30, 2020 | |
| 9,883,851 | | |
$ | 98,838 | | |
$ | 19,579,684 | | |
$ | (13,095,450 | ) | |
$ | 6,583,072 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Share-based compensation | |
| – | | |
| – | | |
| 41,457 | | |
| – | | |
| 41,457 | |
Stock options exercised | |
| 2,500 | | |
| 25 | | |
| 1,650 | | |
| – | | |
| 1,675 | |
Net income | |
| – | | |
| – | | |
| – | | |
| 1,199,036 | | |
| 1,199,036 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance at December 31, 2020 | |
| 9,886,351 | | |
| 98,863 | | |
| 19,622,791 | | |
| (11,896,414 | ) | |
| 7,825,240 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Share-based compensation | |
| – | | |
| – | | |
| 21,287 | | |
| – | | |
| 21,287 | |
Stock options exercised | |
| 66,415 | | |
| 665 | | |
| 141,858 | | |
| – | | |
| 142,523 | |
Net loss | |
| – | | |
| – | | |
| – | | |
| (834,728 | ) | |
| (834,728 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance at March 31, 2021 | |
| 9,952,766 | | |
$ | 99,528 | | |
$ | 19,785,936 | | |
$ | (12,731,142 | ) | |
$ | 7,154,322 | |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| |
| | | |
| | |
| |
For the Six Months Ended March 31, | |
| |
2022 | | |
2021 | |
Operating Activities: | |
| | | |
| | |
Net (loss)/income | |
$ | (176,311 | ) | |
$ | 364,308 | |
Adjustments to reconcile net (loss)/income to net cash provided by/(used in) operating activities: | |
| | | |
| | |
Share-based compensation | |
| 104,812 | | |
| 62,744 | |
Depreciation and amortization | |
| 156,531 | | |
| 171,836 | |
Bad debt expense | |
| 59,635 | | |
| 513,691 | |
Gain on forgiveness of note payable | |
| – | | |
| (1,356,570 | ) |
Change in fair value of earn-out consideration | |
| – | | |
| (30,000 | ) |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| 15,184 | | |
| 756,793 | |
Inventories | |
| (1,834,922 | ) | |
| (873,760 | ) |
Prepaid expenses and other current assets | |
| (255,178 | ) | |
| 34,227 | |
Other assets | |
| – | | |
| 44,446 | |
Accounts payable and due to Forward China | |
| 1,578,086 | | |
| 395,469 | |
Deferred income | |
| 432,877 | | |
| (347,632 | ) |
Net changes in operating lease liabilities | |
| 22,100 | | |
| 27,055 | |
Accrued expenses and other current liabilities | |
| 257,513 | | |
| (160,525 | ) |
Net cash provided by/(used in) operating activities | |
| 360,327 | | |
| (397,918 | ) |
| |
| | | |
| | |
Investing Activities: | |
| | | |
| | |
Purchases of property and equipment | |
| (129,500 | ) | |
| (37,878 | ) |
Net cash used in investing activities | |
| (129,500 | ) | |
| (37,878 | ) |
| |
| | | |
| | |
Financing Activities: | |
| | | |
| | |
Proceeds from line of credit borrowings | |
| – | | |
| 150,000 | |
Repayment of line of credit borrowings | |
| – | | |
| (1,150,000 | ) |
Repayment of notes payable | |
| – | | |
| (84,457 | ) |
Repayment of note payable to Forward China | |
| (100,000 | ) | |
| – | |
Proceeds from stock options exercised | |
| – | | |
| 144,198 | |
Repayments of finance leases | |
| – | | |
| (19,407 | ) |
Net cash used in financing activities | |
| (100,000 | ) | |
| (959,666 | ) |
| |
| | | |
| | |
Net increase/(decrease) in cash | |
| 130,827 | | |
| (1,395,462 | ) |
Cash at beginning of period | |
| 1,410,365 | | |
| 2,924,627 | |
Cash at end of period | |
$ | 1,541,192 | | |
$ | 1,529,165 | |
| |
| | | |
| | |
Supplemental Disclosures of Cash Flow Information: | |
| | | |
| | |
Cash paid for interest | |
$ | 63,669 | | |
$ | 88,479 | |
Cash paid for taxes | |
$ | 6,795 | | |
$ | 5,636 | |
| |
| | | |
| | |
Supplemental Disclosures of Non-Cash Information: | |
| | | |
| | |
Operating lease right of use assets recorded | |
$ | 204,881 | | |
$ | – | |
Operating lease liabilities recorded | |
$ | 204,881 | | |
$ | – | |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Business
Forward Industries, Inc.
(“Forward”, “we”, “our” or the “Company”) is a fully integrated design, development and
manufacturing solution provider for top tier medical and technology customers worldwide. As a result of the continued expansion of our
design and development capabilities through our wholly-owned subsidiaries, we are now able to introduce proprietary products to the market
from concepts brought to us from a number of different sources, both inside and outside the Company.
Liquidity
For the six months ended
March 31, 2022, the Company generated a net loss of $176,000,
and $360,000
of cash flows from operating activities. We believe our existing cash balance and working capital will be sufficient to meet our
liquidity needs through at least May 31, 2023.
Impact of COVID-19
The
effects of the COVID-19 pandemic continue to impact the retail and OEM distribution segments of our business. The increase in global consumer
demand, coupled with the global shipping container shortage, dramatically increased demand for both ocean freight and ground transportation.
These factors led to a significant increase in freight costs, particularly from the Asia-Pacific region and most notably in the second
quarter of the fiscal year ending September 30, 2022 (“Fiscal 2022”). Labor shortages at U.S. ports and in ground transportation
services caused container ships to spend a significant amount of time waiting for goods to be unloaded and to arrive at our warehouses.
These factors caused an increase in the demand for and cost of ground transportation and delayed consumer availability for many of our
products in the first half of Fiscal 2022. The timing and extent of these COVID-19 related transportation disruptions is still largely
unknown but are expected to continue throughout Fiscal 2022.
The effects of the pandemic
had a lesser impact on the design segment of our business. Rising inflation caused an increase in the cost of acquiring and maintaining
our employees. The timing and extent of future inflation is difficult to predict, but we expect these rising costs to have a more significant
impact in the second half of Fiscal 2022.
The effects of COVID-19 may
further impact our business in ways we cannot predict, and such impacts could be significant. The current economic impact may continue
to negatively impact our results of operations, cash flows and financial position in future periods as well as that of our customers,
including their ability to pay for our services and to choose to allocate their budgets to new or existing projects which may or may not
require our services. The long-term financial impact on our business cannot be reasonably estimated at this time. As a result, the effects
of COVID-19 may not be fully reflected in our financial results until future periods.
Until the effects of the
pandemic have fully receded, we expect business conditions to remain challenging. In response to these challenges, we will continue
to focus on those factors that we can control: closely managing and controlling our expenses; aligning our design and development schedules
with demand in a proactive manner to minimize our cash operating costs; pursuing further improvements in the productivity and effectiveness
of our development, selling and administrative activities and, where appropriate, taking advantage of opportunities to enhance our business
growth and strategy.
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 |
ACCOUNTING POLICIES |
Basis of Presentation
The accompanying condensed
consolidated financial statements include the accounts of Forward Industries, Inc. and all of its subsidiaries: Forward Industries (IN),
Inc. (“Forward US”), Forward Industries (Switzerland) GmbH (“Forward Switzerland”), Forward Industries UK Limited
(“Forward UK”), Intelligent Product Solutions, Inc. (“IPS”) and Kablooe, Inc. (“Kablooe”). The terms
“Forward”, “we”, “our” or the “Company” as used throughout this document are used to indicate
Forward Industries, Inc. and all of its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
In the opinion of management,
the accompanying condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q reflect all normal recurring
adjustments necessary to present fairly the financial position and results of operations and cash flows for the interim periods presented
herein but are not necessarily indicative of the results of operations for the year ending September 30, 2022. These condensed consolidated
financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its
Annual Report on Form 10-K for the fiscal year ended September 30, 2021, and with the disclosures and risk factors presented therein.
The September 30, 2021 condensed consolidated balance sheet has been derived from the audited consolidated financial statements.
Accounting Estimates
The preparation of the Company’s
condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America
(“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.
Throughout this document,
certain dollar amounts and percentages have been rounded to their approximate values.
Segment Reporting
The Company has three reportable
segments: OEM distribution, retail distribution and design. The OEM 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 directly
to OEMs or their contract manufacturers worldwide. The retail distribution segment sources and sells smart-enabled furniture and a variety
of other products to customers predominantly located in the U.S. through agreements with various retailers, both in stores and through
online retailer websites. 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 to customers predominantly
located in the U.S. See Note 5 for more information on segments.
Accounts Receivable
Accounts receivable consist
of unsecured trade accounts with customers. The Company maintains an allowance for doubtful accounts, which is recorded as a reduction
to accounts receivable on the condensed consolidated balance sheets. Collectability of accounts receivable is estimated by evaluating
the number of days accounts are outstanding, customer payment history, recent payment trends and perceived creditworthiness, adjusted
as necessary based on specific customer situations. At March 31, 2022, September 30, 2021 and September 30, 2020, the Company had allowances
for doubtful accounts of $90,000, $90,000 and $249,000, respectively, for the OEM distribution segment and $824,000, $706,000 and $347,000,
respectively, for the design segment. The Company did not have any allowances for doubtful accounts related to its retail distribution
segment at March 31, 2022, September 30, 2021 or September 30, 2020.
FORWARD INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
Company has sales agreements with various retailers which contain different terms for trade discounts, promotional and other allowances.
At March 31, 2022, September 30, 2021 and September 30, 2020, the Company recorded accounts receivable allowances of $25,000, $0 and $0,
respectively, for the retail distribution segment.
Revenue Recognition
Distribution Segments
The Company generally recognizes
revenue in its OEM and retail distribution segments when: (i) finished goods are shipped to its customers (in general, these conditions
occur at either point of shipment or point of destination, depending on the terms of sale and transfer of control); (ii) there are no
other deliverables or performance obligations; and (iii) there are no further obligations to the customer after the title of the goods
has transferred. When the Company receives consideration before achieving the criteria previously mentioned, it records a contract liability,
which is classified as a component of deferred income in the accompanying condensed consolidated balance sheets. The retail distribution
segment had contract liabilities of $0, $0 and $75,000 at March 31, 2022, September 30, 2021 and September 30, 2020, respectively. The
OEM distribution segment had no contract liabilities at March 31, 2022, September 30, 2021 or September 30, 2020.
Design Segment
The Company applies the “cost
to cost” and “right to invoice” methods of revenue recognition to the contracts with customers in the design segment.
The design segment typically engages in two types of contracts: (i) time and material and (ii) fixed price. The Company recognizes revenue
over time on its time and material contracts utilizing a “right to invoice” method. Revenues from fixed price contracts that
require performance of services that are not related to the production of tangible assets are recognized by using cost inputs to measure
progress toward the completion of its performance obligations, or the “cost to cost” method. Revenues from fixed price contracts
that contain specific deliverables are recognized when the performance obligation has been satisfied or the transfer of goods to the customer
has been completed and accepted.
Recognized revenues that
will not be billed until a later date, or contract assets, are recorded as an asset and classified as a component of accounts receivable
in the accompanying condensed consolidated balance sheets. The design segment had contract assets of $607,000, $693,000 and $649,000 at
March 31, 2022, September 30, 2021 and September 30, 2020, respectively. Contracts where collections to date have exceeded recognized
revenues, or contract liabilities, are recorded as a liability and classified as a component of deferred income in the accompanying condensed
consolidated balance sheets. The design segment had contract liabilities of $621,000, $188,000 and $410,000 at March 31, 2022, September
30, 2021 and September 30, 2020, respectively.
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 (the IPS and Kablooe operating segments) and we perform our annual goodwill impairment test on September 30, the end
of the fiscal year, or upon the occurrence of a triggering event. The Company has the option to perform a qualitative assessment to determine
if an impairment is more likely than not to have occurred. If the Company can support the conclusion that it is not more likely than not
that the fair value of a reporting unit is less than its carrying amount, then the Company would not need to perform a quantitative impairment
test for the reporting unit. If the Company cannot support such a conclusion or does not elect to perform the qualitative assessment,
then the Company will perform the quantitative assessment by comparing the fair value of the reporting unit with its carrying amount,
including goodwill. If the fair value of the reporting unit exceeds its carrying value, no impairment charge is recognized. If the fair
value of the reporting unit is less than its carrying value, an impairment charge will be recognized for the amount by which the reporting
unit’s carrying amount exceeds its fair value. A significant amount of judgment is required in performing goodwill impairment tests
including estimating the fair value of a reporting unit. Management evaluated and concluded that there were no indications goodwill was
impaired at March 31, 2022.
FORWARD INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Intangible Assets
Intangible assets include
trademarks and customer relationships, which were acquired as part of the acquisitions of IPS in Fiscal 2018 and Kablooe in Fiscal 2020
and are amortized over their estimated useful lives, which are periodically evaluated for reasonableness.
Our intangible assets are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
In assessing the recoverability of our intangible assets, we must make estimates and assumptions regarding future cash flows and other
factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether
an impairment charge is recognized and the magnitude of any such charge. Fair value estimates are made at a specific point in time, based
on relevant information. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore
cannot be determined with precision. Changes in assumptions could significantly affect the estimates. If these estimates or material related
assumptions change in the future, we may be required to record impairment charges related to our intangible assets. Management evaluated
and concluded that there were no impairments of intangible assets at March 31, 2022.
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 March 31, 2022, there was no change to our assessment that a full valuation allowance was required against all net deferred
tax assets as it is not probable that such deferred tax assets will be realized. Accordingly, any deferred tax provision or benefit was
offset by an equal and opposite change to the valuation allowance. No current book income tax provision was recorded against book net
income due to the existence of significant net operating loss carryforwards.
Fair Value Measurements
We perform fair
value measurements in accordance with the guidance provided by Accounting Standards Codification (“ASC”) 820, “Fair
Value Measurement.” ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets
and liabilities required to be recorded at their fair values, we consider the principal or most advantageous market in which we would
transact and consider assumptions that market participants would use when pricing the assets or liabilities, such as inherent risk, transfer
restrictions, and risk of nonperformance.
ASC 820 establishes a fair
value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring
fair value. An asset's or liability's categorization within the fair value hierarchy is based upon the lowest level of input that is significant
to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value:
|
· |
Level 1: quoted prices in active markets for identical assets or liabilities; |
|
· |
Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or |
|
· |
Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities. |
FORWARD INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Leases
Lease assets and liabilities
are recognized at the 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 condensed consolidated balance
sheets. The current and long-term portions of operating and financing lease liabilities are shown separately as such on the condensed
consolidated balance sheets.
Reclassifications
Certain amounts in the accompanying
financial statements at and for the three and six months ended March 31, 2021 have been reclassified to conform to the current year presentation.
Recent Accounting Pronouncements
In November 2019, the Financial
Accounting Standards Board (“FASB”) issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments
– Credit Losses.” ASU 2019-11 is an accounting pronouncement that provides clarity to and amends earlier guidance on this
topic and would be effective concurrently with the adoption of such earlier guidance. This pronouncement is effective for fiscal years
beginning after December 15, 2022 and interim periods within those fiscal years. The Company is currently evaluating the effects of this
pronouncement on its condensed consolidated financial statements.
In 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 adopted this guidance in the first quarter of fiscal 2022
with no material impact to its condensed consolidated financial statements.
NOTE 3 |
INTANGIBLE ASSETS AND GOODWILL |
Intangible Assets
The Company’s intangible
assets consist of the following:
Intangible Assets | |
| | |
| | |
| | |
| | |
| | |
| |
| |
March 31, 2022 | | |
September 30, 2021 | |
| |
Trademarks | | |
Customer Relationships | | |
Total Intangible Assets | | |
Trademarks | | |
Customer Relationships | | |
Total Intangible Assets | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Gross carrying amount | |
$ | 585,000 | | |
$ | 1,390,000 | | |
$ | 1,975,000 | | |
$ | 585,000 | | |
$ | 1,390,000 | | |
$ | 1,975,000 | |
Less accumulated amortization | |
| (145,000 | ) | |
| (618,000 | ) | |
| (763,000 | ) | |
| (125,000 | ) | |
| (531,000 | ) | |
| (656,000 | ) |
Net carrying amount | |
$ | 440,000 | | |
$ | 772,000 | | |
$ | 1,212,000 | | |
$ | 460,000 | | |
$ | 859,000 | | |
$ | 1,319,000 | |
FORWARD INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company’s intangible
assets were acquired as a result of the acquisitions of Kablooe and IPS in Fiscal 2020 and Fiscal 2018, respectively, and relate to the
design segment of our business. Intangible assets are amortized over their expected useful lives of 15 years for the trademarks and 8
years for the customer relationships. Amortization expense related to intangible assets was $53,000 for the three months ended March 31,
2022 and 2021 and $106,000 for the six months ended March 31, 2022 and 2021, which is included in general and administrative expenses
on the condensed consolidated statements of operations.
At March 31, 2022, estimated
amortization expense for the Company’s intangible assets for each of the next five years and thereafter is as follows:
Estimated amortization expense | |
| | |
Remainder of Fiscal 2022 | |
$ | 106,000 | |
Fiscal 2023 | |
| 213,000 | |
Fiscal 2024 | |
| 213,000 | |
Fiscal 2025 | |
| 213,000 | |
Fiscal 2026 | |
| 121,000 | |
Thereafter | |
| 346,000 | |
Total | |
$ | 1,212,000 | |
Goodwill
Goodwill represents the future
economic benefits of assets acquired in a business combination that are not individually identified or separately recognized. The Company’s
goodwill resulted from the acquisitions of Kablooe and IPS in Fiscal 2020 and Fiscal 2018, respectively. The goodwill associated with
the IPS acquisition is not deductible for tax purposes, but the goodwill associated with the Kablooe acquisition is deductible for tax
purposes. All of the Company’s goodwill is held under the design segment of our business.
NOTE 4 |
FAIR VALUE MEASUREMENTS |
The earnout consideration
of $70,000 at March 31, 2022 and September 30, 2021 represents the fair value of the contingent earnout consideration related to the acquisition
of Kablooe. The fair value of the earnout liability is measured on a recurring basis at each reporting date using a Black-Scholes valuation
model with inputs categorized within level three of the fair value hierarchy. The current and non-current portions of this liability are
shown in the corresponding categories on the condensed consolidated balance sheets in each period presented. During the three and six
months ended March 31, 2022, there were no changes to the fair value of this earnout liability.
NOTE 5 |
SEGMENTS AND CONCENTRATIONS |
The Company has three reportable
segments: OEM distribution, retail distribution and design. See Note 2 for more information on the composition and accounting policies
of our reportable segments.
Our chief operating decision
maker (“CODM”) regularly reviews revenue and operating income for each segment to assess financial results and allocate resources.
In Fiscal 2021, due to the growth of our retail division, we determined it to be a separate reportable segment. For our OEM and retail
distribution segments, we exclude general and administrative and general corporate expenses from their measure of profitability as these
expenses are not allocated to the segments and therefore not included in the measure of profitability used by the CODM. For the design
segment, general and administrative expenses directly attributable to that segment are included in its measure of profitability as these
expenses are included in the measure of its profitability reviewed by the CODM. We do not include intercompany activity in our segment
results shown below to be consistent with the information that is presented to the CODM. Segment assets consist of accounts receivable
and inventory, which are regularly reviewed by the CODM, as well as goodwill and intangible assets resulting from design segment acquisitions.
FORWARD INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The results of operations
for the three and six months ended March 31, 2021 for each segment discussed below have been reformatted from what was previously disclosed
to segregate the retail distribution segment and exclude general corporate expenses from segment operating income to show them as a reconciling
item so that results are comparable to the current period presentation.
Information by segment and
related reconciliations are shown in tables below:
Segment operating income (loss) | |
| | |
| | |
| | |
| |
| |
For the Three Months Ended March 31, | | |
For the Six Months Ended March 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Revenues: | |
| | |
| | |
| | |
| |
OEM distribution | |
$ | 4,676,000 | | |
$ | 4,254,000 | | |
$ | 9,917,000 | | |
$ | 9,467,000 | |
Retail distribution | |
| 649,000 | | |
| 229,000 | | |
| 2,041,000 | | |
| 621,000 | |
Design | |
| 4,990,000 | | |
| 3,912,000 | | |
| 9,970,000 | | |
| 8,025,000 | |
Total segment revenues | |
$ | 10,315,000 | | |
$ | 8,395,000 | | |
$ | 21,928,000 | | |
$ | 18,113,000 | |
| |
| | | |
| | | |
| | | |
| | |
Operating income/(loss): | |
| | | |
| | | |
| | | |
| | |
OEM distribution | |
$ | 326,000 | | |
$ | 302,000 | | |
$ | 823,000 | | |
$ | 719,000 | |
Retail distribution | |
| (356,000 | ) | |
| (210,000 | ) | |
| (584,000 | ) | |
| (389,000 | ) |
Design | |
| 389,000 | | |
| (288,000 | ) | |
| 974,000 | | |
| (112,000 | ) |
Total segment operating income/(loss) | |
| 359,000 | | |
| (196,000 | ) | |
| 1,213,000 | | |
| 218,000 | |
General corporate expenses | |
| (682,000 | ) | |
| (620,000 | ) | |
| (1,322,000 | ) | |
| (1,202,000 | ) |
Total loss from operations | |
| (323,000 | ) | |
| (816,000 | ) | |
| (109,000 | ) | |
| (984,000 | ) |
Other expense/(income), net | |
| 33,000 | | |
| 19,000 | | |
| 67,000 | | |
| (1,348,000 | ) |
(Loss)/income before income taxes | |
$ | ) | |
$ | ) | |
$ | ) | |
$ | |
| |
| | | |
| | | |
| | | |
| | |
Depreciation and amortization: | |
| | | |
| | | |
| | | |
| | |
OEM distribution | |
$ | 3,000 | | |
$ | 2,000 | | |
$ | 4,000 | | |
$ | 4,000 | |
Design | |
| 80,000 | | |
| 77,000 | | |
| 153,000 | | |
| 168,000 | |
Total depreciation and amortization | |
$ | 83,000 | | |
$ | 79,000 | | |
$ | 157,000 | | |
$ | 172,000 | |
Schedule of segment assets | |
| | |
| |
| |
March 31, 2022 | | |
September 30, 2021 | |
Segment Assets: | |
| | | |
| | |
OEM distribution | |
$ | 5,577,000 | | |
$ | 5,898,000 | |
Retail distribution | |
| 3,662,000 | | |
| 2,178,000 | |
Design | |
| 6,316,000 | | |
| 5,824,000 | |
Total segment assets | |
| 15,555,000 | | |
| 13,900,000 | |
General corporate assets | |
| 6,418,000 | | |
| 5,956,000 | |
Total assets | |
$ | 21,973,000 | | |
$ | 19,856,000 | |
The
Company had certain customers in the OEM distribution segment whose individual percentage of the Company’s consolidated revenues
was 10% or greater. Revenues from two customers or their affiliates or contract manufacturers represented 26.2% and 25.7%, respectively,
of the Company’s consolidated revenues for the three and six months ended March 31, 2022. Revenues from three customers or their
affiliates or contract manufacturers represented 40.4% of the Company’s consolidated revenues for the three months ended March 31,
2021 and revenues from two customers or their affiliates or contract manufacturers represented 29.7% of the Company’s consolidated
revenues for the six months ended March 31, 2021.
FORWARD INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months
ended March 31, 2022, the Company had one customer in the design segment whose individual percentage of the Company’s consolidated
revenues was 10% or greater. Revenues from this customer represented 11.7% and 10.2%, respectively, of the Company’s consolidated
revenues for the three and six months ended March 31, 2022. There were no customers in the design segment whose individual percentage
of the Company’s consolidated revenues was 10% or greater during the three or six months ended March 31, 2021.
At March 31, 2022 and September
30, 2021, the Company had customers in the OEM distribution segment whose accounts receivable balance accounted for 10% or more of the
Company’s consolidated accounts receivable. Accounts receivable from two customers or their affiliates or contract manufacturers
represented 34.8% of the Company’s consolidated accounts receivable at March 31, 2022 and revenues from three customers or their
contract manufacturers represented 44.0% of the Company’s consolidated accounts receivable at September 30, 2021.
NOTE 6 |
SHARE-BASED COMPENSATION |
Stock Options
In October 2021 and January
2022, the Company granted options to non-employee directors to purchase an aggregate of 58,000 and 83,000 shares, respectively, of its
common stock at an exercise price of $2.39 and $1.56 per share, respectively. The options expire five years from the date of grant, approximately
half vested immediately and approximately half vest one year from the date of grant. The options have a weighted average grant-date fair
value of $1.03 and $0.72 per share, respectively, and each grant has an aggregate grant-date fair value of $60,000, which will be recognized
ratably over the vesting period.
In January 2022, the Company
granted options to one of its employees to purchase an aggregate of 14,000 shares of its common stock at an exercise price of $1.56 per
share. The options expire five years from the date of grant, approximately one-third vested immediately, approximately one-third vest
one year from the date of grant and approximately one-third vest two years from the date of grant. The options have a weighted average
grant-date fair value of $0.73 per share and an aggregate grant-date fair value of $10,000, which will be recognized ratably over the
vesting period.
In February 2022, the Company
granted options to one of its non-employee directors to purchase an aggregate of 31,000 shares of its common stock at an exercise price
of $1.68 per share. The options vest one year from the date of grant and expire five years from the date of grant. The options have a
weighted average grant-date fair value of $0.80 per share and an aggregate grant-date fair value of $25,000, which will be recognized
ratably over the vesting period.
In February 2022, the Company
granted options to one of its former non-employee directors to purchase an aggregate of 19,000 shares of its common stock at an exercise
price of $1.68 per share. The options vested immediately and expire ten years from the date of grant. The options have a weighted average
grant-date fair value of $1.07 per share and an aggregate grant-date fair value of $20,000, which was fully recognized on the grant date.
There were no options exercised
during the six months ended March 31, 2022. During the six months ended March 31, 2021, the Company issued 69,000 shares of its common
stock pursuant to the exercise of stock options for aggregate cash proceeds of $144,000, which had an aggregate intrinsic value of $122,000.
The Company recognized compensation
expense for stock option awards of $66,000 and $21,000 during the three months ended March 31, 2022 and 2021, respectively, and $105,000
and $63,000 during the six months ended March 31, 2022 and 2021, respectively, which was recorded as a component of general and administrative
expenses in its condensed consolidated statements of operations. At March 31, 2022, there was $54,000 of total unrecognized compensation
cost related to nonvested stock option awards that is expected to be recognized over a weighted average period of 0.8 years.
FORWARD INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 |
EARNINGS PER SHARE |
Basic earnings per share
data for each period presented is computed using the weighted average number of shares of common stock outstanding during each such period.
Diluted earnings per share data is computed using the weighted average number of common and dilutive common equivalent shares outstanding
during each period. Dilutive common-equivalent shares consist of shares that would be issued upon the exercise of stock options and warrants,
computed using the treasury stock method. A reconciliation of basic and diluted earnings per share is as follows:
Schedule of Earnings Per Share, Basic and Diluted | |
| | |
| | |
| | |
| |
| |
For the Three Months Ended March 31, | | |
For the Six Months Ended March 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Numerator: | |
| | |
| | |
| | |
| |
Net (loss)/income | |
$ | (356,000 | ) | |
$ | (835,000 | ) | |
$ | (176,000 | ) | |
$ | 364,000 | |
Denominator: | |
| | | |
| | | |
| | | |
| | |
Weighted average common shares outstanding | |
| 10,061,000 | | |
| 9,909,000 | | |
| 10,061,000 | | |
| 9,897,000 | |
Dilutive common share equivalents | |
| – | | |
| – | | |
| – | | |
| 482,000 | |
Weighted average diluted shares outstanding | |
| 10,061,000 | | |
| 9,909,000 | | |
| 10,061,000 | | |
| 10,379,000 | |
| |
| | | |
| | | |
| | | |
| | |
(Loss)/earnings per share: | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | (0.04 | ) | |
$ | (0.08 | ) | |
$ | (0.02 | ) | |
$ | 0.04 | |
Diluted | |
$ | (0.04 | ) | |
$ | (0.08 | ) | |
$ | (0.02 | ) | |
$ | 0.04 | |
The following securities
were excluded from the calculation of diluted earnings per share in each period because their inclusion would have been anti-dilutive:
Schedule of antidilutive securities excluded | |
| | | |
| | | |
| | | |
| | |
| |
For the Three Months Ended March 31, | | |
For the Six Months Ended March 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Options | |
| 1,110,000 | | |
| 1,049,000 | | |
| 1,110,000 | | |
| 10,000 | |
Warrants | |
| 151,000 | | |
| 151,000 | | |
| 151,000 | | |
| – | |
Total potentially dilutive shares | |
| 1,261,000 | | |
| 1,200,000 | | |
| 1,261,000 | | |
| 10,000 | |
NOTE 8 |
RELATED PARTY TRANSACTIONS |
Buying Agency and Supply
Agreement
The Company has a
Buying Agency and Supply Agreement (the “Supply Agreement”) with Forward Industries Asia-Pacific Corporation
(“Forward China”). The Supply Agreement provides that, upon the terms and subject to the conditions set forth therein,
Forward China will act as the Company’s exclusive buying agent and supplier of Products (as defined in the Supply Agreement)
in the Asia-Pacific region. The Company purchases products at Forward China’s cost and pays 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 $350,000
and $340,000
during the three months ended March 31, 2022 and 2021, respectively, and $712,000
and $683,000
during the six months ended March 31, 2022 and 2021, respectively, which are included as a component of cost of sales upon sales of
the related products.
FORWARD INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company made prepayments
to Forward China for inventory purchases of $418,000 and $317,000 at March 31, 2022 and September 30, 2021, respectively, which is included
in prepaid expenses and other current assets on the condensed consolidated balance sheets.
Promissory Note
On January 18, 2018, the
Company issued a $1,600,000 unsecured promissory note payable to Forward China to fund the acquisition of IPS. The promissory note bears
an interest rate of 8% per annum and had an original maturity date of January 18, 2019. Monthly interest payments commenced on February
18, 2018, with the principal due at maturity. The Company incurred and paid interest associated with this note of $31,000 and $32,000,
respectively, in the three months ended March 31, 2022 and 2021 and $63,000 and $64,000, respectively, in the six months ended March
31, 2022 and 2021. The maturity date of this note was extended to December 31, 2022. The maturity date of this note has been extended
on several occasions to assist the Company with liquidity. The Company made principal payments of $100,000 on this note during the six
months ended March 31, 2022.
Other Related Party Activity
In October 2020, the
Company began selling smart-enabled furniture, which is sourced by Forward China and sold in the U.S. under the Koble brand name.
The Koble brand is owned by The Justwise Group Ltd. (“JustWise”), a company owned by Terence Wise, Chief Executive
Officer and Chairman of the Company. The Company recognized revenues from the sale of Koble products of $441,000
and $154,000
in the three months ended March 31, 2022 and 2021, respectively, and $981,000
and $339,000
in the six months ended March 31, 2022 and 2021, respectively. The Company entered into an agreement with JustWise effective March
1, 2022 under which (i) JustWise will perform design and marketing services related to the Koble products sold by the Company and
(ii) the Company was granted a license to sell Koble products. In exchange for such services, the Company will pay JustWise $10,000
per month plus 1% of the cost of Koble products purchased from Forward China. This agreement is effective until August 31, 2022,
will be extended thereafter for a mutually agreed upon term and can be terminated thereafter by either party giving three
months’ notice. The Company incurred costs of $10,000
under this agreement for the three and six months ended March 31, 2022, which were included in selling and marketing expenses on the
condensed consolidated statement of operations.
As previously disclosed,
on August 21, 2020, IPS was named a third-party defendant in a patent dispute claim 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. In October 2021, the Court ruled that the misappropriation claim was invalid. The remaining
allegation was that IPS breached a non-disclosure agreement with a party to the case. In January 2022, all claims in this matter were
dismissed without prejudice.
From time to time, the Company
may become a party to other legal actions or proceedings in the ordinary course of its business. At March 31, 2022, there were no such
actions or proceedings, either individually or in the aggregate, that, if decided adversely to the Company’s interests, the Company
believes would be material to its operations or cash flows.
The Company, specifically
IPS, has a $1,300,000 revolving line of credit which was renewed in February 2022. The line of credit has a maturity date of May 31, 2023,
is guaranteed by the Company and is secured by all of IPS’ assets. The interest rate on the line of credit is 0.75% above The
Wall Street Journal prime rate. The effective interest rate was 4.25% and 4.0% at March 31, 2022 and September 30, 2021, respectively.
At March 31, 2022, the Company had $1,300,000 available under the line of credit. The Company is subject to certain debt-service ratio
requirements which are measured annually. At September 30, 2021, the Company was in compliance with such covenants.
FORWARD INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 U.S. Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The loan was unsecured, bore interest
at a rate of 1% per annum, and was scheduled to mature on April 18, 2022. In October 2020, the Company filed for forgiveness of this loan
and in December 2020, the Small Business Administration (“SBA”) approved its forgiveness request. The forgiveness has been
accounted for as an extinguishment of debt and the resulting gain has been recorded as forgiveness of note payable on the condensed consolidated
statement of operations for the six months ended March 31, 2021. There is a six-year period during which the SBA can review the Company’s
forgiveness.
The Company’s operating
leases are primarily for corporate, sales and administrative office space. Cash paid for amounts included in operating lease liabilities
for the six months ended March 31, 2022 and 2021, which have been included in cash flows from operating activities, was $294,000
and $226,000,
respectively. Details of operating lease expense are as follows:
Schedule of operating lease expense | |
| | | |
| | | |
| | | |
| | |
| |
For the Three Months Ended March 31, | | |
For the Six Months Ended March 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Operating lease expense included in: | |
| | | |
| | | |
| | | |
| | |
Sales and marketing expense | |
$ | 13,000 | | |
$ | 14,000 | | |
$ | 27,000 | | |
$ | 28,000 | |
General and administrative expense | |
| 141,000 | | |
| 138,000 | | |
| 283,000 | | |
| 276,000 | |
Total | |
$ | 154,000 | | |
$ | 152,000 | | |
$ | 310,000 | | |
$ | 304,000 | |
At March 31, 2022, the Company’s
operating leases had a weighted average remaining lease term of 8.6 years and a weighted average discount rate of 5.6%.
At March 31, 2022, future
minimum payments under non-cancellable operating leases were as follows:
Schedule of future minimum payments under operating & financial leases | |
| | |
Remainder of Fiscal 2022 | |
$ | 306,000 | |
Fiscal 2023 | |
| 626,000 | |
Fiscal 2024 | |
| 639,000 | |
Fiscal 2025 | |
| 556,000 | |
Fiscal 2026 | |
| 510,000 | |
Thereafter | |
| 2,398,000 | |
Total future minimum lease payments | |
| 5,035,000 | |
Less imputed interest | |
| (1,115,000 | ) |
Present value of lease liabilities | |
$ | 3,920,000 | |
Consolidated Results
The table below summarizes our consolidated results
of operations for the 2022 Quarter as compared to the 2021 Quarter:
| |
Consolidated Results of Operations | |
| |
2022
Quarter | | |
2021
Quarter | | |
Change ($) | | |
Change (%) | |
Revenues, net | |
$ | 10,315,000 | | |
$ | 8,395,000 | | |
$ | 1,920,000 | | |
| 22.9% | |
Cost of sales | |
| 8,063,000 | | |
| 6,652,000 | | |
| 1,411,000 | | |
| 21.2% | |
Gross profit | |
| 2,252,000 | | |
| 1,743,000 | | |
| 509,000 | | |
| 29.2% | |
Sales and marketing expenses | |
| 704,000 | | |
| 578,000 | | |
| 126,000 | | |
| 21.8% | |
General and administrative expenses | |
| 1,871,000 | | |
| 1,981,000 | | |
| (110,000 | ) | |
| (5.6% | ) |
Loss from operations | |
| (323,000 | ) | |
| (816,000 | ) | |
| 493,000 | | |
| (60.4% | ) |
Other expense, net | |
| 33,000 | | |
| 19,000 | | |
| 14,000 | | |
| 73.7% | |
Provision for income taxes | |
| – | | |
| – | | |
| – | | |
| – | |
Net loss | |
$ | (356,000 | ) | |
$ | (835,000 | ) | |
$ | 479,000 | | |
| (57.4% | ) |
The discussion that follows
below provides further details about our results of operations for the 2022 Quarter as compared to the 2021 Quarter.
Net revenues increased across
all segments, with the most significant growth coming from the IPS component of the design segment.
Our gross profit increased,
primarily driven by the increase in revenues, and gross margin improved from 20.8% in the 2021 Quarter to 21.8% in the 2022 Quarter. Higher
utilization rates coupled with an increase in the average bill rate drove design segment margins higher. However, higher importation and
logistics costs drove margins down in both the OEM and retail distribution segments. Management believes there will be continued volatility
in OEM and retail distribution cost of sales for the remainder of Fiscal 2022.
Sales and marketing expenses
increased in the 2022 Quarter primarily due to higher advertising costs and sales commissions related to our retail distribution segment.
Sales and marketing as a percentage of revenues remained relatively flat at 6.8% in the 2022 Quarter. As we continue to invest in the
retail segment and as it grows to represent a larger component of the overall business, management expects sales and marketing costs,
both in total and as a percentage of revenues, to increase in future periods.
General and administrative
expenses declined in the 2022 Quarter, primarily related to lower bad debt expense in the design segment. These declines were partially
offset by slightly higher corporate expenses, primarily related to an increase in non-employee board members’ equity compensation.
Management continues to monitor the various components of general and administrative expenses and how these costs are affected by inflationary
and other factors. We intend to make adjustments to these costs as needed based on the overall needs of the business.
Other expense, net increased
due to a decrease in interest income on a customer note receivable, partially offset by lower interest expense due to a reduction in the
average amount of debt outstanding.
We generated a net loss of
$356,000 and $835,000 in the 2022 and 2021 Quarter, respectively. We maintain significant net operating loss carryforwards and do not
recognize income tax expense or benefit as our deferred tax provision is typically offset by a full valuation allowance on our net deferred
tax asset.
Consolidated basic and diluted
loss per share were $0.04 and $0.08 for the 2022 Quarter and the 2021 Quarter, respectively.
Segment Results
The discussion that follows
below provides further details about the results of operations for each segment as compared to the prior year quarter. Due to the growth
of our retail division, we determined it to be a separate reportable segment in the fourth quarter of fiscal 2021. The results of operations
for the 2021 Quarter for each segment discussed below have been reformatted from what was previously disclosed to segregate the retail
distribution segment and exclude general corporate expenses from segment operating income to show them as a reconciling item so that results
are comparable to the current year presentation.
| |
Segment Results of Operations | |
| |
OEM Distribution | | |
Retail Distribution | | |
Design | | |
Corporate Expenses | | |
Consolidated | |
2022 Quarter revenues | |
$ | 4,676,000 | | |
$ | 649,000 | | |
$ | 4,990,000 | | |
$ | – | | |
$ | 10,315,000 | |
2021 Quarter revenues | |
| 4,254,000 | | |
| 229,000 | | |
| 3,912,000 | | |
| – | | |
| 8,395,000 | |
Change | |
$ | 422,000 | | |
$ | 420,000 | | |
$ | 1,078,000 | | |
$ | – | | |
$ | 1,920,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
2022 Quarter operating income/(loss) | |
$ | 326,000 | | |
$ | (356,000 | ) | |
$ | 389,000 | | |
$ | (682,000 | ) | |
$ | (323,000 | ) |
2021 Quarter operating income/(loss) | |
| 302,000 | | |
| (210,000 | ) | |
| (288,000 | ) | |
| (620,000 | ) | |
| (816,000 | ) |
Change | |
$ | 24,000 | | |
$ | (146,000 | ) | |
$ | 677,000 | | |
$ | (62,000 | ) | |
$ | 493,000 | |
OEM Distribution Segment
Net revenues in the OEM distribution
segment increased due primarily to an increase in sales of diabetic products, while an increase in revenues from other products comprised
a lesser portion of the increase. As consumer demand increases for diabetic testing products which require no carrying case, we expect
diabetic product sales to represent a smaller portion of our OEM distribution revenue.
The following tables set
forth revenues by product line of our OEM distribution segment customers for the periods indicated:
| |
OEM Revenues by Product Line | |
| |
2022 Quarter | | |
2021 Quarter | | |
Change ($) | | |
Change (%) | |
Diabetic products | |
$ | 4,159,000 | | |
$ | 3,836,000 | | |
$ | 323,000 | | |
| 8.4% | |
Other products | |
| 517,000 | | |
| 418,000 | | |
| 99,000 | | |
| 23.7% | |
Total net revenues | |
$ | 4,676,000 | | |
$ | 4,254,000 | | |
$ | 422,000 | | |
| 9.9% | |
Diabetic Product Revenues
Our OEM distribution segment
manufactures to the order of, and sells carrying cases for, blood glucose diagnostic kits directly to OEMs (or their contract manufacturers).
The OEM customer or its contract manufacturer packages our carry cases “in box” as a custom accessory for the OEM’s
blood glucose testing and monitoring kits, or to a lesser extent, sells them through their retail distribution channels.
Revenues
from diabetic products increased in the 2022 Quarter primarily due to logistical delays caused by limited cargo capacity in the first
quarter of Fiscal 2022 which were resolved in the 2022 Quarter. This increase was further enhanced by a slight increase in demand for
some products. As mentioned above, management believes that revenues from diabetic customers will continue to decline in future periods.
Revenues from diabetic products
represented 89% of net revenues for the OEM distribution segment in the 2022 Quarter compared to 90% in the 2021 Quarter. The remaining
revenues from our OEM distribution segment are described below.
Other Product Revenues
Our OEM distribution segment
also sources and sells cases and protective solutions for a diverse array of portable electronic and non-electronic products (such as
sporting and recreational products, bar code scanners, GPS location devices, tablets and firearms) on a made-to-order basis that are customized
to fit the products sold by our OEM customers.
Revenues from other products
increased primarily due to higher sales volume with existing customers. We will continue to focus on our sales and sales support teams
in our continued efforts to expand and diversify our other products customer base.
Operating Income
Operating income for the
OEM distribution segment increased and operating income margin remained relatively consistent at 7.0%. The higher gross margins derived
from other product revenue was offset by declining margins on diabetic products due to higher freight and other importation costs and
pricing pressures from customers, resulting in a decrease in gross margin as compared to the prior year quarter. The decline in gross
margin was mitigated by lower selling and marketing costs resulting from a reduction in contract sales personnel, which improved operating
income and helped maintain the operating income margin.
Retail Distribution Segment
Net revenues increased due
to new product offerings and the continued expansion of our retail distribution network; revenue derived from new retailers as well as
an increase in volume with certain existing retailers. We will continue to focus on our sales and sales support teams in our attempt to
expand and diversify our retail product offerings.
Although revenues increased,
the increase in operating loss was driven by higher cost of sales caused by higher freight and other importation costs, supply chain issues
and higher sales and marketing expenses driven by higher sales commission resulting from the increase in revenue and higher advertising
and promotion expenses.
Design Segment
The increase in net revenues
in the design segment was driven by an increase in projects from new and existing customers, which was partially offset by declines in
revenues from certain prior year customers.
Operating income for the
design segment increased and operating income margin improved from (7.4%) in the 2021 Quarter to 7.8% in 2022 Quarter. The increase in
gross profit, driven by higher revenues and better utilization and billing rates, was further enhanced by a decrease in general and administrative
expenses primarily due to a reduction in bad debt expense.
RESULTS OF OPERATIONS FOR
THE SIX MONTHS ENDED MARCH 31, 2022 COMPARED TO THE SIX MONTHS ENDED MARCH 31, 2021
Consolidated Results
The table below summarizes our consolidated results
of operations for the 2022 Period as compared to the 2021 Period:
| |
Consolidated Results of Operations | |
| |
2022
Period | | |
2021
Period | | |
Change ($) | | |
Change (%) | |
Revenues, net | |
$ | 21,928,000 | | |
$ | 18,113,000 | | |
$ | 3,815,000 | | |
| 21.1% | |
Cost of sales | |
| 17,057,000 | | |
| 14,107,000 | | |
| 2,950,000 | | |
| 20.9% | |
Gross profit | |
| 4,871,000 | | |
| 4,006,000 | | |
| 865,000 | | |
| 21.6% | |
Sales and marketing expenses | |
| 1,442,000 | | |
| 1,181,000 | | |
| 261,000 | | |
| 22.1% | |
General and administrative expenses | |
| 3,538,000 | | |
| 3,809,000 | | |
| (271,000 | ) | |
| (7.1% | ) |
Loss from operations | |
| (109,000 | ) | |
| (984,000 | ) | |
| 875,000 | | |
| (88.9% | ) |
Other expense/(income), net | |
| 67,000 | | |
| (1,348,000 | ) | |
| 1,415,000 | | |
| (105.0% | ) |
Provision for income taxes | |
| – | | |
| – | | |
| – | | |
| – | |
Net (loss)/income | |
$ | (176,000 | ) | |
$ | 364,000 | | |
$ | (540,000 | ) | |
| (148.4% | ) |
The discussion that follows
below provides further details about our results of operations for the 2022 Period as compared to the 2021 Period.
Net revenues increased across
all segments, most notably in the design and retail distribution segments and to a lesser extent, in the OEM distribution segment.
Our gross profit increased,
primarily driven by the increase in revenues, but gross margin remained relatively consistent at 22.2%. Better utilization and higher
billing rates in the design segment were mostly offset by higher importation and logistics costs, which drove OEM and retail distribution
margins down. Management believes there will be continued volatility in OEM and retail distribution cost of sales for the remainder of
Fiscal 2022.
Sales and marketing expenses
increased in the 2022 Period primarily due to higher advertising and promotional costs coupled with sales commissions related to our retail
distribution segment. Sales and marketing as a percentage of revenues increased slightly to 6.6% in the 2022 Period. As we continue to
invest in the retail business and as it grows to represent a larger component of the overall business, management expects sales and marketing
costs, both in total and as a percentage of revenues, to increase in future periods.
General and administrative
expenses declined in the 2022 Period, primarily related to lower bad debt expense in the design segment. These declines were partially
offset by higher corporate expenses, primarily related to an increase in non-employee board members’ equity compensation and a reduction
in certain foreign tax credits received for research and development activities. Management continues to monitor the various components
of general and administrative expenses and how these costs are affected by inflationary and other factors. We intend to make adjustments
to these costs as needed based on the overall needs of the business.
We reported other expense
of $67,000 in the 2022 Period as compared to net other income of $1,348,000 in the 2021 Period. The decrease is primarily due to the forgiveness
of note payable related to the PPP loan in the 2021 Period, which did not recur in the 2022 Period. A decrease in interest payment on
a customer note receivable contributed to the balance of the change.
In the 2022 Period, we generated
a net loss of $176,000. In the 2021 Period, we generated net income of $364,000, primarily resulting from the $1,357,000 forgiveness of
note payable related to the PPP loan, which was not recognized as taxable income per the CARES Act. We maintain significant net operating
loss carryforwards and do not recognize income tax expense or benefit as our deferred tax provision is typically offset by a full valuation
allowance on our net deferred tax asset.
Consolidated basic and diluted
(loss)/earnings per share were $(0.02) and $0.04 for the 2022 Period and the 2021 Period, respectively.
Segment Results
The discussion that follows
below provides further details about the results of operations for each segment as compared to the prior year period. Due to the growth
of our retail division, we determined it to be a separate reportable segment in the fourth quarter of fiscal 2021. The results of operations
for the 2021 Period for each segment discussed below have been reformatted from what was previously disclosed to segregate the retail
distribution segment and exclude general corporate expenses from segment operating income to show them as a reconciling item so that results
are comparable to the current year presentation.
| |
Segment Results of Operations | |
| |
OEM Distribution | | |
Retail Distribution | | |
Design | | |
Corporate Expenses | | |
Consolidated | |
2022 Period revenues | |
$ | 9,917,000 | | |
$ | 2,041,000 | | |
$ | 9,970,000 | | |
$ | – | | |
$ | 21,928,000 | |
2021 Period revenues | |
| 9,467,000 | | |
| 621,000 | | |
| 8,025,000 | | |
| – | | |
| 18,113,000 | |
Change | |
$ | 450,000 | | |
$ | 1,420,000 | | |
$ | 1,945,000 | | |
$ | – | | |
$ | 3,815,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
2022 Period operating income/(loss) | |
$ | 823,000 | | |
$ | (584,000 | ) | |
$ | 974,000 | | |
$ | (1,322,000 | ) | |
$ | (109,000 | ) |
2021 Period operating income/(loss) | |
| 719,000 | | |
| (389,000 | ) | |
| (112,000 | ) | |
| (1,202,000 | ) | |
| (984,000 | ) |
Change | |
$ | 104,000 | | |
$ | (195,000 | ) | |
$ | 1,086,000 | | |
$ | (120,000 | ) | |
$ | 875,000 | |
OEM Distribution Segment
Net revenues in the OEM
distribution segment increased primarily due to higher sales of other OEM products coupled with a smaller increase in diabetic product
revenue. Revenues from other products increased $362,000 and revenue from diabetic products increased $88,000. As consumer demand increases
for diabetic testing products which require no carrying case, we expect diabetic product sales to represent a smaller portion of our
OEM distribution revenue.
The following tables set
forth revenues by product line of our OEM distribution segment customers for the periods indicated:
| |
OEM Revenues by Product Line | |
| |
2022 Period | | |
2021 Period | | |
Change ($) | | |
Change (%) | |
Diabetic products | |
$ | 8,393,000 | | |
$ | 8,305,000 | | |
$ | 88,000 | | |
| 1.1% | |
Other products | |
| 1,524,000 | | |
| 1,162,000 | | |
| 362,000 | | |
| 31.2% | |
Total net revenues | |
$ | 9,917,000 | | |
$ | 9,467,000 | | |
$ | 450,000 | | |
| 4.8% | |
Diabetic Product Revenues
Our OEM distribution segment
manufactures to the order of, and sells carrying cases for, blood glucose diagnostic kits directly to OEMs (or their contract manufacturers).
The OEM customer or its contract manufacturer packages our carry cases “in box” as a custom accessory for the OEM’s
blood glucose testing and monitoring kits, or to a lesser extent, sells them through their retail distribution channels.
Revenues
from diabetic products increased due to higher revenues from one major diabetic customer. The higher revenue from this customer was due
to a short-term increase in demand for certain products that are being phased out, coupled with delays in placing orders near the end
of Fiscal 2021 which resulted in more revenue being recognized in the first half of Fiscal 2022. These increases were partially offset
by lower revenue from other diabetic customers, which were less significant. As mentioned above, management believes that revenues from
diabetic customers will continue to decline in future periods.
Revenues from diabetic products
represented 85% of net revenues for the OEM distribution segment in the 2022 Period compared to 88% in the 2021 Period. The remaining
revenues from our OEM distribution segment are described below.
Other Product Revenues
Our OEM distribution segment
also sources and sells cases and protective solutions for a diverse array of portable electronic and non-electronic products (such as
sporting and recreational products, bar code scanners, GPS location devices, tablets and firearms) on a made-to-order basis that are customized
to fit the products sold by our OEM customers.
Revenues from other products
increased due to an increase in sales volume from existing customers. We will continue to focus on our sales and sales support teams in
our continued efforts to expand and diversify our other products customer base.
Operating Income
Operating income for the
OEM distribution segment increased and operating income margin improved to 8.3% in the 2022 Period from 7.6% in the 2021 Period. The higher
gross margins derived from other products was mostly offset by declining margins on diabetic products due to pricing pressures from customers,
resulting in a slight decrease in gross margin as compared to the prior year quarter. The decline in gross margin was mitigated by lower
selling and marketing costs related to OEM sales commissions.
Retail Distribution Segment
Net revenues increased due
to new product offerings and the continued expansion of our retail distribution network; revenue derived from new retailers as well as
an increase in volume with certain existing retailers. We will continue to focus on our sales and sales support teams in our attempt to
expand and diversify our retail product offerings.
The increase in gross profit
driven by higher revenues was offset by higher sales and marketing expenses related to sales commissions, advertising and promotional
expenses to support the growth in revenue.
Design Segment
The increase in net revenues
in the design segment was driven by new customers and an increase in projects from certain existing customers, which was partially offset
by declines in revenues from certain prior year customers.
Operating income for the
design segment increased and operating income margin improved from (1.4%) in the 2021 Period to 9.8% in 2022 Period. The increase in gross
profit, driven by higher revenues and better utilization and billing rates, was further enhanced by a decrease in general and administrative
expenses primarily due to a reduction in bad debt expense.
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. At March 31, 2022, our
working capital was $3,899,000 compared to $5,587,000 at September 30, 2021; the decrease primarily due to the remaining $1,500,000 balance
on the note payable to Forward China becoming a current liability at March 31, 2022 as opposed to a long-term liability at September 30,
2021.
At April 30, 2022, we had
$1,900,000 cash on hand and $1,300,000 available under our line of credit which matures May 31, 2023. Additionally, Forward China, our
largest vendor and an entity owned by our Chairman of the Board and Chief Executive Officer, holds a $1,600,000 promissory note issued
by the Company which matures on December 31, 2022 (see Note 8 to the condensed consolidated financial statements). The balance of this
promissory note was reduced to $1,500,000 after the Company made principal payments of $100,000 in Fiscal 2022. Although this promissory
note has been extended on multiple occasions to assist us with our liquidity position, we plan on funding the repayment at maturity using
existing cash balances and/or obtaining an additional credit facility as deemed necessary. Forward China has extended payment terms on
our outstanding payables due to them when necessary. We can provide no assurance that (i) Forward China will extend the promissory note
again if we request an extension, (ii) Forward China will continue to extend payment terms when we need them, or (iii) any additional
credit facility will be available on terms acceptable to us or at all.
We anticipate that our liquidity
and financial resources for the 12 months following the date 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.
Although we do not anticipate
the need to purchase additional material capital assets in order to carry out our business, it may be necessary for us to purchase equipment
and other capital assets in the future, depending on need.
Cash Flows
During the 2022 Period and
2021 Period, our sources and uses of cash were as follows:
Operating
Activities
During the 2022 Period, cash
provided by operating activities of $360,000 primarily resulted from an increase in accounts payable, accrued expenses and amounts due
to Forward China of $1,836,000, an increase in deferred income of $433,000 and non-cash expenses of $321,000 for depreciation, amortization,
share-based compensation and bad debt expense, partially offset by an operating loss of $109,000, an increase in inventories of $1,835,000,
a decrease in prepaid expenses and other current liabilities of $255,000 and the net change in other operating assets and liabilities
of $31,000.
During the 2021 Period, cash
used in operating activities of $398,000 primarily resulted from an operating loss of $984,000, a decrease in deferred income of $348,000,
an increase in inventories of $874,000, a decrease in accrued expenses of $161,000, partially offset by non-cash expenses of $748,000
relating to depreciation, amortization, share-based compensation and bad debt expense, a decrease of $757,000 in accounts receivable,
an increase of $395,000 in accounts payable and amounts due to Forward China and the net change in other operating assets and liabilities
of $69,000.
Investing
Activities
Cash used in investing activities
in the 2022 Period and the 2021 Period of $130,000 and $38,000, respectively, resulted from purchases of property and equipment.
Financing
Activities
In the 2022 Period, cash
used in financing activities of $100,000 consisted of principal payments on the promissory note held by Forward China.
In the 2021 Period, cash
used in financing activities of $960,000 consisted of net repayments of the line of credit of $1,000,000, repayments of notes payable
and finance leases of $104,000, partially offset by proceeds from stock options exercised of $144,000.
Related Party Transactions
For information on related
party transactions and their financial impact, see Note 8 to the unaudited condensed consolidated financial statements contained herein.