In
this Annual Report on Form 10-K, unless the context otherwise requires, the following terms have the meanings assigned to them
as set forth below:
“Forward”, “Forward Industries”, “we”,
“our”, and the “Company” refer to Forward Industries, Inc., a New York corporation, together with its consolidated
subsidiaries;
“Common stock” refers to the common stock, $.01 par value per share, of Forward Industries, Inc.;
“Forward US” refers to Forward Industries’ wholly owned subsidiary Forward Industries (IN), Inc., an Indiana
corporation;
“Forward Switzerland” refers to Forward Industries’ wholly owned subsidiary Forward Industries (Switzerland)
GmbH, a Swiss corporation;
“Forward UK” refers to Forward Industries’ wholly owned subsidiary Forward Industries UK Limited, a UK corporation;
“IPS” refers to Forward Industries’ wholly-owned
subsidiary Intelligent Product Solutions, Inc., a New York corporation;
“Forward China” refers to Forward Industries Asia-Pacific
Corporation (f/k/a Seaton Global Corporation), a British Virgin Islands registered corporation that is Forward’s exclusive
sourcing agent in the Asia Pacific Region;
“U.S. GAAP” refers to accounting principles generally accepted in the United States of America;
“Commission” refers to the United States Securities and Exchange Commission;
“Exchange Act” refers to the United States Securities Exchange Act of 1934, as amended;
“Fiscal 2019” refers to our fiscal year ended September 30, 2019;
“Fiscal 2018” refers to our fiscal year ended September 30, 2018;
“Europe” refers to the countries included in the European Union;
“EMEA Region” refers to the geographic area encompassing Europe, the Middle East and Africa;
“APAC Region” refers to the Asia Pacific Region, consisting of Australia, New Zealand, Hong Kong, Taiwan, China, South
Korea, Japan, Singapore, Malaysia, Thailand, Indonesia, India, the Philippines and Vietnam;
“Americas” refers to the geographic area encompassing North America, Central America, and South America; and
“OEM” refers to Original Equipment Manufacturer.
PART I
ITEM 1. BUSINESS
General
Forward Industries,
Inc. (“Forward” or the “Company”), through its wholly-owned subsidiaries, Intelligent Product Solutions
(“IPS”), Forward US, Forward Switzerland and Forward UK, is a single source solution provider for the full spectrum
of hardware and software product design and engineering services as well as a designer and distributer of carry and protective
solutions. The Company offers a full suite of product development services required to conceptualize, create, and maintain products
throughout the entire product life-cycle, from product concept and design to production support and field support. Forward provides
clients, both large and small, a “one-stop-shop” for product design, development, manufacturing, and distribution.
Historically, our
principal customer market has been original equipment manufacturers, or “OEMs” (or the contract manufacturing firms
of these OEM customers), that either package their products as accessories “in box” together with their branded product
offerings, or sell them through their retail distribution channels.
On January 29, 2019,
the Company entered into a distribution agreement with Mooni AB International. By virtue of our strategic collaboration and distribution
agreement with Mooni AB International, we have secured a portfolio of smart enabled products which we anticipate will be distributed
through retail outlets in the United States. As a result of this collaboration and other product initiatives, the Company began
is investing in and building out a distribution network for retail. The distribution network will be responsible for placing 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 our strategy of taking a product
from concept to the consumer. We anticipate having product in retail outlets by the second fiscal quarter of 2020. We have developed
a sales team that covers North America by leveraging the manufacturer's representative model. We have identified and signed agreements
with long-established firms that have years of experience and relationships with big box retailers that we are targeting in both
the United States and Canada.
Through the manufacture
representative agreements we currently have in place, we hope to gain sales coverage to retailers such as Best Buy, Target, Walmart,
Costco, CVS, Walgreens, Staples, Office Depot and many others. The manufacture representative model allows us to engage and support
a large sales team and cover a lot of territory with a variable cost model as these representatives work on commission only.
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. The Company believes that
the design and engineering service capabilities of IPS will augment the Company’s core sourcing 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 business, 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 Asia-Pacific Region, which we refer to as the “APAC Region”; (ii) Europe,
the Middle East, and Africa, which we refer to as the “EMEA Region”; and (iii) the Americas.
IPS is currently actively
providing product development services for Fortune 500 companies, established mid-level companies, and start-ups. The wide range
of industries served includes industrial electronics, medical and dental equipment, food/beverage, U.S. Department of Defense,
certain luxury brands, and oil/gas.
Products
The Company’s
distribution products include carrying cases and other accessories for medical monitoring and diagnostic kits and a variety of
other portable electronic and non-electronic products (such as sporting and recreational products, bar code scanners, smartphones,
GPS location devices, tablets, and firearms).
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 13 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 1% 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 2019, our Diabetic Products
customers accounted for approximately 89% of our total net revenues in the distribution business, compared to 89% in Fiscal 2018.
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. For Fiscal 2019, our Other Products accounted for approximately 11% of our total net revenues in the distribution
business, compared to 11% in Fiscal 2018.
The acquisition of
IPS has enabled us to provide a complete range of design, engineering and development services with respect to a diverse array
of consumer and industrial electronics products. These include but are not limited to medical products, smart displays, beverage
vending, enterprise and mobile software applications, lighting, security and detections systems, cameras, wearables and vehicle
controls. Solutions in these and other areas are designed and developed in-house, beginning at product concept, extending through
design, engineering and prototype, and final design for manufacturing and Computer-Aided Design (“CAD”) files. As a
combined company, we are able to provide manufacturing sourcing and final product support and delivery services for initial short-run,
low volume products.
Product Development
In our distribution
business, the product life cycle in distributing and selling our technology solutions to our customers is as described below. 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 customer’s
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. In-house capabilities (over 100 designers and engineers including
contractors) include the following:
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User Experience/User Interface (UX/UI) Design and Development
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IoT System Architecture
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Distribution
Channels of Distribution
We primarily ship
our products directly to our distribution 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.
Distribution Hubs for Customers
During Fiscal 2017,
we had distribution hub arrangements with four distribution customers. Effective May 1, 2017, one of the hub arrangements was changed
from consignment to FOB shipping point. Accordingly, as of September 30, 2019, we had distribution hub arrangements with three
distribution customers. These arrangements obligate us to supply our products to our customer’s distribution hubs (may be
multiple locations) where their products are manufactured, kitted, and/or warehoused pending sale, and where our products are packaged
“in box” with the distribution customer’s products or, to a much lesser extent, distributed for retail sale.
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 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.
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
On September 9, 2015,
the Company renewed a Buying Agency and Supply Agreement (the “Supply Agreement”) with Forward China (the “Agent”)
on substantially the same terms as its previous buying agency and supply agreement with the Agent, which was due to expire on September
11, 2015. The Supply Agreement provides that the Agent acts as the Company’s exclusive buying agent of carry and protective
solutions. 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, 2020. Mr. 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 of our carrying solutions products for our distribution business from independent suppliers in China through the Agent. Depending
on the product, we may require several different suppliers to furnish component parts or pieces.
We place orders with
the Agent at the time we receive firm purchase orders and/or forecasts from our distribution customers for a particular product.
Accordingly, 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 customer’s anticipated delivery
demands. Beginning September 1, 2013 we began making purchases directly from Forward China. During the years ended September 30,
2019 and 2018, 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 services 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 that may be affiliated with one or more of our suppliers. In July 2015, Forward China received its ISO 9001:2008 quality
certification, which was renewed in July 2018 and is valid until July 2021.
IPS 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 IPS works closely with the customer to identify and correct any quality issues that arise.
Competition
Distribution Business
The distribution business,
or OEM 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 IPS are unique. The IPS management team is aware that there are very few competitive
firms that have the full set of capabilities that IPS has under one roof. There are however, numerous design and engineering companies
that compete with IPS in specific industries and/or with specific targeted skills or competitive advantages.
Employees
As of December 12
2019, we had 73 full-time employees. We consider our employee relations to be satisfactory. None of our employees are covered by
a collective bargaining agreement.
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 regulation 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 IPS 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.
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
During Fiscal 2019, 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 2019, we
generated an operating loss of approximately $3.1 million and had net cash used in operating activities of approximately $2.0 million.
Although we generated net income in Fiscal 2018 and 2017, we incurred significant losses from operations in Fiscal 2019. We can
provide no assurance that we will not continue to experience operating losses. In addition to our $1.3 million commercial line
of credit (the “Line of Credit”) of which approximately $1.3 million has been utilized as of the date of this report,
Forward China holds a $1.6 million note which is due January 17, 2020. 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.
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 approximately 89% of our distribution net revenues in Fiscal 2019. 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 has been 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
approximately 87% and 84% of distribution net revenues in Fiscal 2019 and Fiscal 2018, respectively. Additionally four of our largest
design and development customers accounted for approximately 53% and 47% of design and development net revenues in Fiscal 2019
and Fiscal 2018 (beginning with the acquisition of IPS), respectively. 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 generally
begin to reduce or discontinue the practice of including carry case accessories “in box” or if our customers experience
reduced demand for their products as a result of political changes, we may incur a significant decline in our revenues and our
results of operations and financial condition would be materially and adversely affected.
Rising threats of international tariffs,
including tariffs applied to goods between the U.S. and China, may materially and adversely affect our business.
Rising threats of
international tariffs, including tariffs applied to goods traded between the U.S. and China, could materially and adversely affect
our business and results of operations. Since the beginning of 2018, there has been increasing rhetoric, in some cases coupled
with legislative or executive action, from several U.S. and foreign leaders regarding the possibility of instituting tariffs on
the foreign imports of certain materials and products. More specifically, throughout 2019 and 2018, 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.
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 IPS.
Changes in political conditions in China
and changes in the state of China-U.S. relations, including the current trade war, 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 pressures 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 2019,
we continued to experience significant pricing pressure from our largest distribution customers to reduce the prices we charge
them. When we are unable to extract comparable concessions from our suppliers on prices they charge us, our product sales margins
erode. In addition, competitors may reduce their average selling prices faster than we are able to reduce costs, which can also
accelerate the rate of decline of our selling prices.
In addition to margin
compression from customers in general, we are encountering increased pricing from our Chinese suppliers who are reacting to inflationary
increases in materials and labor costs incurred by them. In addition, prices that our Chinese vendors charge to us may reflect
appreciation of the Chinese currency against the U.S. dollar, which can be passed through to us in the form of higher U.S. dollar
prices. This in turn will tend to reduce gross profit if we are unable to raise our prices. Any decrease in demand for our products,
coupled with pressure from the market and our customers to decrease our prices, would materially adversely affect our business,
financial condition, and results of operations.
Increasingly, our distribution customers
are requesting that we enter into supply agreements with them that have restrictive terms and conditions. These agreements typically
include provisions that increase our financial exposure, which could result in significant costs to us.
Increasingly, our
distribution customers are requesting that we enter into supply agreements with them. These agreements typically do not include
volume commitments, but do include provisions that generally serve to increase our exposure for product liability and limited sales
returns, which could result in higher costs to us as a result of such claims. In addition, these agreements typically contain provisions
that seek to limit our operational and pricing flexibility and extend payment terms, which could materially adversely affect our
cash flow, business, financial condition, and results of operations.
Our distribution business depends on
a single exclusive buying agent who, in turn, depends on a limited number of key suppliers.
Our Chairman, Chief
Executive Officer and largest shareholder is the owner of Forward China, our exclusive sourcing agent in the Asia Pacific region.
We have entered into a Buying Agency and Supply Agreement with Forward China whereby Forward China will act as the Company’s
exclusive agent to arrange for sourcing, manufacturing and exporting the Company’s distribution products. Historically, Forward
China has relied on a limited number of suppliers to supply the component parts and pieces necessary for the production of our
carry and protective solutions products. As a result, our ability to effectively push back against rising material costs may diminish,
although thus far 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 were to suffer or we are unable to extend our agreement with Forward China which expires in October 2020, we
could suffer irreparable harm resulting in substantial harm to the distribution business.
Our distribution business has benefited
from customers deciding to outsource their carry and protective solutions assembly needs to us. If our distribution customers choose
to provide these services in-house or select other providers, our distribution business could suffer.
Our future distribution
revenue growth partially depends on new outsourcing opportunities from our distribution customers. Current and prospective customers
continuously evaluate our performance against other providers. They also evaluate the potential benefits of manufacturing their
products themselves. To the extent that outsourcing opportunities are not available either due to these customers deciding to produce
these products themselves or to use other providers, our financial results and future growth could be materially adversely affected.
If we are unable to provide our customers
with high-quality products, and service, or if we are unable to deliver our products and/or service to our distribution customers
in a timely manner, our business, financial condition, and results of operations may be materially adversely affected.
In order to maintain
our existing customer base and obtain business from new customers, we must demonstrate our ability to produce our products and
services at the level of quality, responsiveness, timeliness, and cost that our customers require. If our products or services
are provided at what customers believe are of a substandard quality, if they are not delivered on time, if we are not responsive
to our customers’ demands or cannot meet their needs, our reputation as a reliable supplier of our products and a sophisticated
product designer and developer would likely be damaged. If we are unable to meet anticipated product and service standards, we
may be unable to obtain new or keep our existing distribution customers, and this would have a material adverse effect on our business,
financial condition, and results of operations.
If we fail to maintain an effective
system of internal controls over financial reporting, we may not be able to accurately report our financial results. As a result,
current and potential stockholders could lose confidence in our financial reporting, which could harm our business and the trading
price of our stock.
Effective internal
controls over financial reporting are necessary for us to provide reliable financial reports. If we cannot maintain effective controls
and reliable financial reports, our business and operating results could be harmed. We continue to work on improvements to our
internal controls over financial reporting. Any failure to implement and maintain internal controls over our financial reporting
or difficulties encountered in the implementation of improvements in our controls, could cause us to fail to meet our reporting
obligations. Any failure to improve our internal controls over financial reporting or to address identified weaknesses in the future,
if they were to occur, could also cause investors to lose confidence in our reported financial information, which could have a
negative impact on the trading price of our stock.
Our results of operations are subject
to the risks of fluctuations in the values of foreign currencies relative to the U.S. Dollar.
Our results of operations
are expressed in U.S. dollars. When the U.S. dollar appreciates or depreciates in value against a currency in which all or a significant
portion of revenues or other accounts receivable are denominated, such as the Euro, our results of operations can be adversely
affected or benefited, respectively. The degree of impact is proportional to the amount of foreign currency expense or revenue,
as the case may be, and the fluctuations in exchange rates over the period in which the effect is measured on our financial statements.
In addition, such currency fluctuations may affect the comparability of our results of operations between financial periods.
Future revenues are difficult to predict
and are likely to show significant variability as a consequence of customer concentration.
Because our revenues
are highly concentrated in a few large customers, and because the volumes of these customers’ order flows to us can fluctuate
markedly in a short period of time, our quarterly revenues, and consequently our results of operations, may be highly variable
and subject to significant changes over a relatively short period of time. Our largest distribution customers may keep consumer
products with which our carry solutions are packaged “in-box” in active promotion for many months, or for a very short
period of time, depending on various factors, including sales trends for the product, product development cycles, new product introductions,
and our customers' competitors' product offerings. As demand for the consumer product relating to the in-box program matures and
decreases, we may be forced to accept significant price and/or volume reductions in customer orders for our carry solutions, which
will adversely affect revenues. Additionally, our large design and development customers may have their budgets limited from many
factors including economic declines causing discretionary budgets to decline or may from-time-to-time choose to do their development
work in-house. All of these factors tend to lead to a high degree of variability in our quarterly revenue levels. Significant,
rapid shifts in our operating results may occur if and when one or more of these customers increases or decreases the size(s) of,
or eliminates, their orders or engagement from us by amounts that are material to our business.
Our gross margins, and therefore our
profitability, vary considerably by customer and by product, and if the revenue contribution from one or more distribution customers
or products changes materially, relative to total revenues, our gross profit percentage may fluctuate.
Our gross profit margins
on the distribution products we sell can vary widely depending on the product type, customer, and order size. Because of the broad
variability in price ranges and product types, we anticipate that gross margins, and accordingly their impact on operating income
or loss, may fluctuate depending on the relative revenue contribution from each customer or product. If our gross margins decrease,
our results of operations will be adversely affected.
Product manufacture is often outsourced
by our distribution customers to contract manufacturing firms in China and in these cases it is the contract manufacturer to which
we must look for payment.
Contract manufacturing
firms are performing manufacturing, assembly, and product packaging functions, including the bundling of our product accessories
with the distribution customer's product. As a consequence of this business practice, we often sell our carry solutions products
directly to the contract manufacturing firm. This is particularly significant in the case of diabetic product sales to certain
customers. In these cases, we invoice the contract manufacturing firm and not the distribution customer. Therefore, it is the contract
manufacturing firm to which we must look for payment in such cases and not our distribution customer. If we fail to receive payment
from the contract manufacturer, our ability to be paid for products already delivered would be limited. In such event, our results
of operations will be adversely affected.
Our dependence on foreign manufacturers
creates quality control and other risks to our business. From time to time we may experience certain quality control, on-time delivery,
cost, or other issues that may jeopardize customer relationships.
Our reliance on foreign
suppliers, manufacturers and other contractors involves significant risks, including risk of product quality issues and reduced
control over quality assurance, manufacturing yields and costs, pricing, timely delivery schedules, the potential lack of adequate
manufacturing capacity and availability of product, the lack of capital and potential misappropriation of our designs. In any such
event, our reputation and our business will be harmed.
Our shipments of distribution products
may become subject to delays or cancellation due to work stoppages or slowdowns, piracy, damage to port facilities, and congestion
due to inadequacy of port terminal equipment and other causes.
To the extent that
there are disruptions or delays in loading container cargo in ports of origin or off-loading cargo at ports of destination as a
result of labor disputes, work-rules related slowdowns, tariff or World Trade Organization-related disputes, piracy, physical damage
to port terminal facilities or equipment caused by severe weather or terrorist incidents, congestion in port terminal facilities,
inadequate equipment to load, dock and offload container vessels or energy-related tie-ups or otherwise, or for other reasons,
product shipments to our customers will be delayed. In any such case, our customer may cancel or change the terms of its purchase
order, resulting in a cancellation or delay of payments to us. A closure or partial closure of port facilities or other causes
of delays in the loading, importation, offloading or movement of our products to the shipping destination agreed to with our customer
could result in increased expenses, as we try to avoid such delays, delayed shipments or cancelled orders, or all of the above.
Depending on the severity of such consequences, this may have an adverse effect on our financial condition and results of operations.
Issues with our products may lead to
product liability, personal injury or property damage claims, recalls, withdrawals, replacements of products, or regulatory actions
by governmental authorities that could divert resources, affect business operations, decrease sales, increase costs, and put us
at a competitive disadvantage, any of which could have a significant adverse effect on our financial condition.
We may experience
issues with products that we source that may lead to product liability, personal injury or property damage claims, recalls, withdrawals,
replacements of products, or regulatory actions by governmental authorities. Any of these activities could result in increased
governmental scrutiny, harm to our reputation, reduced demand by consumers for products, decreased willingness by retailer customers
to purchase our products, absence or increased cost of insurance, or additional safety and testing requirements. Such results could
divert development and management resources, adversely affect our business operations, decrease sales, increase legal fees and
other costs, and put us at a competitive disadvantage compared to other companies not affected by similar issues with products,
any of which could have a significant adverse effect on our financial condition and results of operations. Although the Company
does not intend on providing warranties on the products it distributes directly, we can provide no assurances that customers will
not seek damages if any of the foregoing events took place. The Company does not carry product liability insurance. Although we
have not had significant claims for damages or losses from the products we distribute, any uninsured claim, if successful and of
significant magnitude, could have a material adverse effect on our business, prospects, results of operations or financial condition.
The carrying solutions distribution
business is highly competitive and does not pose significant barriers to entry.
There are many competitors
in the sale of carry solutions products to our customers including OEMs, and competition is intense. Since little or no significant
proprietary technology is involved in the design, production or distribution of the types of products we sell, others may enter
the business with relative ease and compete against us. Such competition may result in the diminution of our market share or the
loss of one or more major customers, thereby adversely affecting our net revenues, results of operations, and financial condition.
Many of our competitors are larger, better capitalized and more diversified than we are and may be better able to withstand a downturn
in the general economy or in the product areas in which we specialize. Potential customers may prefer the pricing terms offered
by competitors. These competitors may also have less sales concentration than we do and be better able to withstand the loss of
a key customer or diminution in its orders. If we are not effectively able to compete, our results of operations will be adversely
affected.
If we fail to retain our key personnel,
we may not be able to achieve our anticipated level of growth and our business could suffer.
Our future depends,
in part, on our ability to attract and retain key sales personnel and the continued contribution of our executive officers including
Terence Wise, our Chief Executive Officer, who would be difficult to replace. Our design and development business employs and contracts
highly sophisticated engineers to provide our customers with a full-service product, design and development team with vast technological
knowledge and capabilities. The loss of the services of any of our key personnel and the process to replace any key personnel would
involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.
If a third party asserts that we are
infringing on its intellectual property, whether successful or not, it could subject us to costly and time-consuming litigation
or require us to obtain expensive licenses, and our business may be adversely affected.
Third party lawsuits alleging our infringement
of patents, trade secrets or other intellectual property rights could cause us to do one or more of the following:
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stop using technology that contains the allegedly infringing intellectual property;
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incur significant legal expenses;
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cause our management to divert substantial time to our defenses;
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pay substantial damages to the party whose intellectual property rights we may be found to be infringing;
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indemnify customers; or
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attempt to obtain a license to the relevant intellectual property from third parties, which may not be available to us on reasonable terms or at all.
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Third party lawsuits
alleging our infringement of patents, trade secrets or other intellectual property rights could have a material adverse effect
on our business, results of operations and financial condition.
If we experience system interruptions,
it may cause us to lose customers and may harm our business.
Our inability to
maintain and improve our information technology systems and infrastructure may result in system interruptions. System interruptions
and slow delivery times, unreliable service levels, prolonged or frequent service outages, or insufficient capacity may prevent
us from efficiently providing services to our customers on our website, which could result in our losing customers and revenue.
We lease space for
our data center for power, security, connectivity and other services. We also rely on third party providers for bandwidth. We do
not control these vendors and it would take significant time and effort to replace them. We have experienced, and may experience
in the future, website disruptions, outages and other performance problems due to a variety of factors, including infrastructure
changes, human or software errors and capacity constraints.
Our systems are vulnerable
to damage or interruption from terrorist attacks, floods, fires, power loss, telecommunications failures, hurricanes, computer
viruses, computer denial of service attacks or other attempts to harm our systems. Any such damage or interruption would adversely
affect our results of operations.
Because our networks and IT systems
may be vulnerable to unauthorized persons hacking our systems, it could disrupt our operations and result in the theft of our proprietary
information.
A
party who is able to breach the security measures on our networks could misappropriate either our or our customers’ proprietary
information, or cause interruptions or malfunctions in our operations. Hacking of companies’ infrastructure is a growing
problem. Although we believe our systems and engineering team have the capability of protecting the Company from any such hacking,
we can provide you with no such assurance. If we grow and obtain more visibility, we may be more vulnerable to hacking. We may
be required to expend significant capital and other resources to protect against such threats or to alleviate problems caused
by breaches in security, which could have a material adverse effect on our financial performance and operating results.
Our design business uses software that
is highly technical, and undetected errors, if any, could adversely affect our business.
Our design business
may use software that is highly technical and complex. Our software has contained, and may now or in the future contain, undetected
errors, bugs, flaws, corrupted data or vulnerabilities. Some errors in our software code may only be discovered after the code
has been released. Any errors, bugs, flaws or corrupted data could result in damage to our reputation, loss of users, or loss of
revenue, any of which could adversely affect our business and financial results.
We maintain cash balances in our bank
accounts that exceed the FDIC insurance limitation.
We maintain our cash
assets at commercial banks in the U.S. in amounts in excess of the Federal Deposit Insurance Corporation insurance limit of $250,000
and in Europe in amounts that may exceed any applicable deposit insurance limits. In the event of a failure at a commercial bank
where we maintain our deposits or uninsured losses on money market or other cash equivalents in which we maintain cash balances,
we may incur a loss to the extent such loss exceeds the insurance limitation, which could have a material adverse effect upon our
financial conditions and our results of operations.
Our Chairman and Chief Executive Officer
is a significant shareholder, which makes it possible for him to have significant influence over the outcome of all matters submitted
to our shareholders for approval and which influence may be alleged to conflict with our interests and the interests of our other
shareholders.
Terence Wise, our
Chairman and Chief Executive Officer, is a significant shareholder who beneficially owns approximately 17% of the outstanding shares
of our common stock as of December 12, 2019. Mr. Wise has substantial influence over the outcome of all matters submitted to our
shareholders for approval, including the election of our directors and other corporate actions. This influence may be alleged to
conflict with our interests and the interests of our other shareholders. In addition, such influence by Mr. Wise could have the
effect of discouraging potential business partners or create actual or perceived governance instabilities that could adversely
affect the price of our common stock.
Risks Related to Our Common Stock
Due to factors beyond our control, our
stock price may be volatile.
Any of the following
factors could affect the market price of our common stock:
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Our failure to increase revenue in each succeeding quarter;
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Our failure to achieve and maintain profitability;
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Our failure to meet our revenue and earnings guidance or our failure to meet financial analysts’ performance expectations;
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The loss of Forward China as our agent;
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The loss of a number of buyers or our failure to attract more buyers;
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The sale of a large amount of common stock by our shareholders;
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Our announcement of a pending or completed acquisition or our failure to complete a proposed acquisition;
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An adverse court ruling or regulatory action;
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Changes in market valuations of similar companies;
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Short selling activities;
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Our announcement of any financing which is dilutive to our shareholders;
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Our announcement of a change in the direction of our business; or
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Announcements by us, or our competitors,
of significant contracts, acquisitions, commercial relationships, joint ventures or
capital commitments.
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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 14,300 shares of common stock for the
six trading days prior to December 17, 2019. An active market for our common stock may never develop, or if it does, it may not
be sustained. Accordingly, investors may experience difficulty is 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. As of December 23, 2019, our closing bid price was $1.00. If we fail to meet these
continued listing requirements, Nasdaq may take steps to delist our common stock. If our common stock is delisted from The Nasdaq
Capital Market, we could face significant material adverse consequences, including:
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a limited availability of market quotations for our common stock;
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reduced liquidity with respect to our common stock;
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a determination that our shares of
common stock are a “penny stock” which will require broker-dealers trading in our common stock to adhere to
more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our
common stock;
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a limited amount of news and analyst coverage for our company; and
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a limited ability to issue additional securities or obtain additional financing in the future.
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If we become subject to a regulatory
investigation, it could cause us to incur substantial costs or require us to change our business practices in a manner materially
adverse to our business.
From time to time,
we may receive inquiries from regulators regarding our compliance with laws and other matters. We have 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 will 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
We lease approximately
2,800 square feet in West Palm Beach, Florida for our executive offices, which we rent under a lease agreement scheduled to expire
in September 2020. The lease has annual escalations; rent payments were approximately $7,000 per month during Fiscal 2019.
We lease approximately
14,000 square feet in Hauppauge, New York for IPS, which we rent under a lease agreement scheduled to expire in 2027. The lease
has annual escalations; rent payments were approximately $28,000 per month during Fiscal 2019.
We lease approximately
3,000 square feet in Ronkonkoma, New York for IPS, which we rent under a lease agreement scheduled to expire in 2022. The lease
has annual escalations; rent payments were approximately $4,400 per month during Fiscal 2019.
We sublease approximately
1,300 square feet of office space in Cham, Switzerland, on a month-to-month basis, at the rate of $1,700 per month, from a tenant
at the same location. We use this office as our EMEA Region headquarters from which we coordinate our sales and sales support activities
throughout the EMEA Region.
We believe that each
of the foregoing leased properties is adequate for the purposes for which it is 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.
ITEM 3. LEGAL PROCEEDINGS
From time to time,
the Company may become a party to legal actions or proceedings in the ordinary course of its business. As of September 30, 2019,
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.
The accompanying
notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 OVERVIEW
Forward Industries,
Inc. (“Forward” or the “Company”) is a fully integrated design, development and manufacturing solution
provider for top tier medical and technology customers worldwide. Through its acquisition of Intelligent Product Solutions, Inc.
(“IPS”), the Company has expanded its ability to design and develop solutions for our existing multinational client
base and expanded beyond the diabetic product line operations 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, firearms). The Company’s OEM customers
are located in: (i) the Asia-Pacific Region, which we refer to as the “APAC Region”; (ii) Europe, the Middle East,
and Africa, which we refer to as the “EMEA Region”; and (iii) the Americas. The Company does not manufacture any of
its OEM products and sources substantially all of its OEM products from independent suppliers in China, through Forward China.
As a result of the
expansion of the design development capabilities through its wholly-owned subsidiary, IPS (acquired in January 2018), the Company
now plans to introduce proprietary products to the market from concepts brought to it from a number of different sources, both
inside and outside the Company. The Company provides clients, both big and small, a true, authentic “one-stop-shop”
for product design, development and manufacturing solutions.
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 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.
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 and IPS). All significant intercompany transactions and balances have been eliminated in consolidation. Intercompany
sales of approximately $221,000 and $305,000 from IPS to Forward have been eliminated in consolidation for Fiscal 2019 and Fiscal
2018, respectively.
The Company
incurred a net loss of approximately $3.6 million for the fiscal year ended September 30, 2019 and generated negative cash
flow from operations of approximately $2.0 million. We believe our existing cash balance and working capital will be
sufficient to meet our liquidity needs at least through December 2020.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 ACCOUNTING
POLICIES (Continued)
Segment Reporting
Operating segments
are defined as components of an enterprise about which separate financial information is available that is regularly evaluated
by a chief operating decision maker, or Forward management, in deciding how to allocate resources and in assessing performance.
As a result of the acquisition of IPS, management conducts business through two distinct operating segments, which are also our
reportable segments: distribution and design. Forward US, Forward Switzerland and Forward UK
comprise the distribution operating segment and IPS is the design operating segment. It should be noted that the segment reporting
for design for Fiscal 2018 covers the period following the closing of the acquisition of IPS on January 18, 2018 through September
30, 2018.
Organizing our business
through two operating segments allows us to align our resources and manage the operations. Our management team regularly reviews
operating segment revenue and operating income (loss) 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 (loss). Segment operating income (loss) includes
revenues earned and expenses incurred directly by the operating segment, including cost of sales and selling, marketing, and general
and administrative costs (see Note 16 for more discussion on operating segments).
Goodwill
Goodwill is an asset
representing the future economic benefits arising from other assets acquired in a business combination that are not individually
identified and separately recognized. Goodwill was recognized as a result of the acquisition of IPS in January 2018.
Goodwill is reviewed
for impairment at least annually, and when triggering events occur, in accordance with the provisions of Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, “Intangibles –
Goodwill and Other.” The Company has two reporting units for purposes of evaluating goodwill impairment and perform our annual
goodwill impairment test on September 30 at the end of the fiscal year. 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. Management compared the fair value of the
reporting unit, the design segment which holds the goodwill, with its carrying value. Based on management’s evaluation,
there were no impairments to goodwill at September 30, 2019.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 ACCOUNTING
POLICIES (Continued)
Intangible Assets
Intangible assets
include trademark and customer relationships, which were acquired as part of the acquisition of IPS in January 2018 (see Note 3
for details on intangible assets acquired as part of the acquisition) and are recorded based on the estimated fair value in purchase
price allocation. The 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, 2019.
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, 2019 and 2018. 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, 2019 and 2018, there were deposits totaling approximately $2.8 million (which includes approximately $650,000 in
a foreign bank) and $4.1 million (which includes approximately $1.9 million 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, 2019, there were allowances for doubtful accounts
of approximately $159,000 and $2,033,000 relating to the Company’s distribution segment and design segment accounts receivable,
respectively. At September 30, 2018, the Company had allowances for doubtful accounts of approximately $0 and $126,000 related
to the Company’s distribution segment and design segment accounts receivable, respectively. The increase in allowance for
doubtful accounts for the design segment is primarily due to a full provision for bad debt on trade receivables for a major design
segment customer for approximately $1.6 million. The Company also has an investment in this customer (see Note 6).
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 ACCOUNTING
POLICIES (Continued)
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, 2019 and
2018, there was no allowance for obsolete inventory.
Property and Equipment
Property and equipment
consist of furniture, fixtures, and 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.
Leases
The Company enters
into various lease agreements in conducting its business. At the inception of each lease, the Company evaluates the lease agreement
to determine whether the lease is an operating or capital lease. Leases may contain initial periods of free rent and/or periodic
escalations. When such items are included in a lease agreement, the Company records rent expense on a straight-line basis over
the initial term of a lease. The difference between the rent payment and the straight-line rent expense is recorded as a deferred
rent liability. The Company expenses any additional payments under its operating leases for taxes, insurance or other operating
expenses as incurred.
Income Taxes
The Company recognizes
future tax benefits and liabilities measured at enacted rates attributable to temporary differences between financial statement
and income tax bases of assets and liabilities and to net tax operating loss carryforwards to the extent that realization of these
benefits is more likely than not. As of September 30, 2019, 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. No material current book income tax provision was recorded in 2019 due to net loss
and the existence of significant net operating loss carryforwards, however, approximately $4,000 current year income tax refund
was recorded due to prior year AMT credits being partially refunded in the current year.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 ACCOUNTING
POLICIES (Continued)
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); (ii) there are no
other deliverables; and (iii) there are no further obligations to the customer after the title of the goods has transferred. The
Company defers revenue when it receives consideration before achieving the criteria previously mentioned.
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.
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, 2019 and 2018 were approximately
$611,000 and $0, 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, 2019 and 2018 were approximately $220,000 and $125,000, 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 income (expense)” in the accompanying
consolidated statements of operations. The approximate net losses from foreign currency transactions were approximately $14,000
and $10,000 for the fiscal years ended September 30, 2019 and 2018, respectively. Such foreign currency transaction losses were
primarily the result of Euro denominated revenues from certain customers.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 ACCOUNTING
POLICIES (Continued)
Fair Value Measurements
We perform fair value
measurements in accordance with the guidance provided by ASC 820. 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.
|
Reclassifications
Certain amounts in
the accompanying fiscal 2018 financial statements have been reclassified to conform to the fiscal 2019 presentation.
Share-Based Compensation Expense
The Company recognizes
employee and director share-based compensation in its consolidated statements of operations at the grant date fair value of stock
options and other equity-based compensation. The determination of stock option grant date fair value is estimated using the Black-Scholes
option-pricing model, which includes variables such as the expected volatility of the Company’s share price, the exercise
behavior of its grantees, interest rates, and dividend yields. These variables are projected based on the Company’s historical
data, experience, and other factors. 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 - Share-Based Compensation). In addition, the Company
recognizes share-based compensation to non-employees based upon the fair value, using the Black-Scholes option pricing model, determined
at the deemed measurement dates over the related contract service period.
Business Combinations
The Company allocates
the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired 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.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 ACCOUNTING POLICIES (Continued)
The Company recognizes
the purchase of assets and the assumption of liabilities as an asset acquisition, if the transaction does not constitute a business
combination. The excess of the fair value of the purchase price is allocated on a relative fair value basis to the identifiable
assets and liabilities. No goodwill is recorded in an asset acquisition.
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.
Recent Accounting Pronouncements
In May 2014, the FASB
issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” (“ASU
2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition” (“ASC
605”) and most industry-specific guidance throughout ASC 605. ASU 2014-09 establishes principles for recognizing revenue
upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in
exchange for those goods or services. The guidance in ASU 2014-09 was revised in July 2015 to be effective for interim periods
beginning on or after December 15, 2017 and should be applied on a transitional basis either retrospectively to each prior reporting
period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial
application. In 2016, FASB issued additional ASUs that clarify the implementation guidance on principal versus agent considerations
(ASU 2016-08), on identifying performance obligations and licensing (ASU 2016-10), and on narrow-scope improvements and practical
expedients (ASU 2016-12) as well as on the revenue recognition criteria and other technical corrections (ASU 2016-20). These new
standards became effective during the first quarter of fiscal 2019 and were adopted using the modified retrospective method. The
Company has performed a review of ASU 2014-09 as compared to its previous accounting policies for our products and services revenues
and did not identify any material impact to revenue. Therefore, there was no adjustment to retained earnings for a cumulative effect.
Effective October
1, 2018, the Company adopted ASC 606 and has elected the modified retrospective method on existing contracts at the date of adoption.
The Company has implemented the necessary changes to such business processes, controls and systems to effectively review and account
for the new contracts under this standard.
Revenues recognized
from the distribution segment under ASC 606 are consistent with previous revenue recognition standards under ASC 605, whereby revenue
is typically recognized at either the point of shipment or point of destination, depending on the terms of the sale.
Regarding the Company’s
design segment, the Company has evaluated the changes from adopting this new standard on its financial reporting, disclosures and
its various revenue streams. The Company now recognizes revenue over time on its time and material contracts utilizing a “right
to invoice” method which is similar to previous revenue recognition standards under ASC 605. Revenues from fixed-price type
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. This method is similar to the method formerly
applied to certain of the Company’s contracts covered by the previous revenue recognition standards under ASC 605. In some
cases, contracts contain an arrangement of specific deliverables or production of prototypes, or a distinct performance obligation,
and the Company allocates the transaction price to the performance obligation on a relative standalone selling price basis.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 ACCOUNTING POLICIES (Continued)
In February 2016,
the FASB issued ASU 2016-02, “Leases (Topic 842),” which will require lessees to report most leases as assets
and liabilities on the balance sheet, while lessor accounting will remain substantially unchanged. This ASU requires a modified
retrospective transition approach for existing leases, whereby the new rules will be applied to the earliest year presented. The
new standard is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted. The Company
adopted ASU 2016-02 effective October 1, 2019 and upon adoption of Topic 842 the Company expects recognition of additional assets
and corresponding liabilities pertaining to its operating leases on its consolidated balance sheets. The Company expects the adoption
will result in an increase in other assets and an increase in other liabilities of approximately $3.7 million. The Company does
not expect the adoption of the new standard to have a significant impact on its consolidated statements of operations and cash
flows.
In August 2016, the
FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,”
providing additional guidance on several cash flow classification issues, with the goal of the update to reduce the current and
potential future diversity in practice. The amendments in this update are effective for fiscal years beginning after December 15,
2017, and interim periods within those fiscal years. The Company early adopted ASU No. 2016-15 and the adoption did not have any
impact on the Company’s consolidated financial statements.
In the first quarter
of 2019, the Company adopted FASB ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than
Inventory” (“ASU 2016-16”), which requires the recognition of the income tax consequences of an intra-entity
transfer of an asset, other than inventory, when the transfer occurs. The adoption of ASU 2016-16 did not have an impact to the
consolidated financial statements due to the Company’s maintenance of a full valuation allowance on the Company’s net
deferred tax asset.
In January 2017,
the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill
Impairment.” ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating the requirement to compare
the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test referenced in
ASC 350, “Intangibles - Goodwill and Other (“ASC 350”).” As a result, an entity should perform
its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An
impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair
value. However, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting
unit. ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019, including any interim
impairment tests within those annual periods, with early application permitted for interim or annual goodwill impairment
tests performed on testing dates after January 1, 2017. The Company adopted ASU 2017-04 in the first quarter of Fiscal 2019
and the adoption did not have any impact on the Company’s consolidated financial statements.
In May 2017, the FASB
issued ASU No. 2017-09, “Scope of Modification Accounting”, to provide guidance on which changes to the terms
or conditions of a share-based payment award require an entity to apply modification accounting. The Company adopted ASU No. 2017-09
in the first quarter of Fiscal 2019 and the adoption did not have any impact on the Company’s consolidated financial statements.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 ACCOUNTING
POLICIES (Continued)
In March 2018, the
FASB issued ASU 2018-05, “Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin
No. 118.” The ASU adds various Securities and Exchange Commission (“SEC”) paragraphs pursuant to the issuance
of the December 2017 SEC Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs
Act (“SAB 118”)”, which was effective immediately. The SEC issued SAB 118 to address concerns about reporting
entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Cuts and Jobs
Act in the period of enactment. SAB 118 allows disclosure that determination of some or all of the income tax effects from the
Tax Cuts and Jobs Act may be incomplete by the due date of the financial statements and, if possible, provide a reasonable estimate.
The Company has accounted for the tax effects of the Tax Cuts and Jobs Act under the guidance of SAB 118.
In June 2018, the
FASB issued ASU 2018-07, “Compensation — Stock Compensation (Topic 718),” (“ASU 2018-07”). ASU 2018-07
is intended to reduce cost and complexity and to improve financial reporting for nonemployee share-based payments. Currently, the
accounting requirements for nonemployee and employee share-based payment transactions are significantly different. ASU 2018-07
expands the scope of Topic 718, Compensation — Stock Compensation (which currently only includes share-based payments to
employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based
payments to nonemployees and employees will be substantially aligned. This ASU supersedes Subtopic 505-50, “Equity —
Equity-Based Payments to Nonemployees.” The amendments in this ASU are effective for fiscal years beginning after December
15, 2018, and interim periods within that fiscal year. Early adoption is permitted, but no earlier than a company’s adoption
date of Topic 606, Revenue from Contracts with Customers. The Company early adopted ASU 2018-07 effective October 1, 2019. The
adoption of ASU 2018-07 did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the
FASB issued ASU 2018-13, “Fair Value Measurement - Disclosure Framework (Topic 820).” The updated guidance improves
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 is currently assessing the timing and impact of adopting the updated provisions.
In November 2019,
the FASB issued ASU 2019-08, “Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers
(Topic 606).” ASU 2019-08 is an accounting pronouncement which expands the scope of ASC Topic 718 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 is currently evaluating the effects of this pronouncement on our consolidated financial statements along with the effects
of ASU 2018-07 noted above.
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 amends ASU 2016-13, “Financial Instruments –
Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU 2019-11 amendment provides
clarity and improves the codification to ASU 2016-03. The pronouncement would be effective concurrently with the adoption of
ASU 2016-03. The pronouncement is effective for fiscal years beginning after December 15, 2019 and interim periods within
those fiscal years. The Company is currently evaluating the effects of this pronouncement on our consolidated financial
statements.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 ACQUISITION
On January 18, 2018,
the Company entered into a Stock Purchase Agreement (the “Agreement”) by and among the Company, IPS, the holders of
all of the common stock of IPS, Inc. (the “Sellers”) and Mitchell Maiman, President of IPS, representing the Sellers.
In consideration for the acquisition of all of IPS’ outstanding securities, the Company: (i) paid approximately $1.9 million
in cash; (ii) assumed approximately $1.5 million of outstanding debt; (iii) issued a total of 401,836 shares of the Company’s
common stock to the two owners of IPS; (iv) agreed to pay $1,000,000 of deferred cash consideration (with the first payment of
$500,000 due and paid on May 31, 2018, the second payment of $200,000 due on September 30, 2019, and third payment of $300,000
due on September 30, 2020); and (v) agreed to pay up to $2.2 million of earnout payments based upon IPS meeting certain EBITDA
milestones (as defined in the Agreement) over a three-year period. Additionally, the Company entered into three-year employment
agreements with both Mitchell Maiman and Paul Severino (Chief Operating Officer of IPS), and agreed to pay them each $256,000 per
year. In order to fund the acquisition of IPS, the Company issued a $1.6 million promissory note payable to Forward China Industries
(Asia-Pacific) Corporation (“Forward China”) due January 18, 2019. The promissory note bears an interest
rate of 8% per annum and requires monthly interest payments commencing February 18, 2018. Forward China is an entity which
is principally owned by the Company’s Chairman and Chief Executive Officer. As part of the Agreement, IPS entered into
at-will employment agreements with two additional key employees. Pursuant to the employment agreements, the employees were issued
a total of 40,184 shares of the Company’s common stock of which 40% vested immediately with the remainder vesting in two
equal increments on the six-month and twelve-month anniversary of the grant date, subject to continued employment on such vesting
dates.
At the date of acquisition,
the purchase consideration consists of cash, equity in Forward’s (“Buyer’s”) stock, deferred cash and contingent
consideration based on earn-out performance over a three-year period. Acquisition-related costs were expensed as incurred and are
included in the general and administrative expenses within the consolidated statements of operations. The purchase consideration
components are summarized in the table below (amounts stated in thousands):
Cash at closing (1)
|
|
$
|
1,930
|
|
Value of Equity in Buyer's Common Stock (2)
|
|
|
500
|
|
Fair Value of Earn-Out Consideration (3)
|
|
|
600
|
|
Fair Value of Deferred Cash Consideration (4)
|
|
|
936
|
|
Total Purchase Consideration
|
|
$
|
3,966
|
|
|
(1)
|
Cash paid by Forward at closing funded, in part, by a $1.6 million promissory note issued to Forward
China, a related party of Forward. The remainder of the cash was funded by Forward’s operating cash account.
|
|
(2)
|
Forward issued 401,836 shares of common stock valued at the January 18, 2018 closing price of $1.24
per share for an aggregated value of approximately $500,000.
|
|
(3)
|
Fair Value of the Earn-Out consideration is measured using the Black-Scholes option pricing method.
Earn-Out is to be paid in cash only upon meeting certain EBITDA milestones over a three-year period.
|
|
(4)
|
Fair value of the Deferred Cash consideration is the present value of the $1,000,000 payable in
three increments with an applied discount rate ranging between 4.73% and 5.33%.
|
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 ACQUISITION (Continued)
The following table
summarizes the allocation of the assets acquired and liabilities assumed based on their estimated fair values on the acquisition
date and the related estimated useful lives of the amortizable intangible assets acquired (in thousands, except for estimated useful
life):
Current Assets:
|
|
|
|
Preliminary estimated useful life
|
Cash and Equivalents
|
|
$
|
600
|
|
|
Accounts Receivable
|
|
|
2,489
|
|
|
Other Current Assets
|
|
|
52
|
|
|
Total Current Assets
|
|
|
3,141
|
|
|
Current Liabilities:
|
|
|
|
|
|
Accounts Payable
|
|
|
(149
|
)
|
|
Deferred Revenue
|
|
|
(267
|
)
|
|
Accrued and Other Current Liabilities
|
|
|
(548
|
)
|
|
Total Current Liabilities
|
|
|
(964
|
)
|
|
|
|
|
|
|
|
Property and Equipment
|
|
|
346
|
|
|
Other Long-Term Assets
|
|
|
51
|
|
|
Deferred Tax Liability
|
|
|
(747
|
)
|
|
Assumed Debt
|
|
|
(1,568
|
)
|
|
|
|
|
|
|
|
Finite-Lived Intangible Assets:
|
|
|
|
|
|
Trademark
|
|
|
475
|
|
15 years
|
Customer Relationships
|
|
|
1,050
|
|
8 years
|
Total Intangible Assets
|
|
|
1,525
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
2,182
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,966
|
|
|
On June 30, 2018,
the Earn-out consideration was revalued and adjusted down by $510,000 due to the high likelihood that IPS would not meet certain
EBITDA milestones per the Stock Purchase Agreement for Fiscal year 2018. On September 30, 2019, the Earn-out consideration was
revalued and adjusted up by $260,000 based on the updated projections in meeting the EBITDA milestones (see Note 6 - Fair Value
Measurements).
In relation to our
acquisition of IPS, we incurred approximately $296,000 of expenses in Fiscal 2018 related to the transaction, including legal costs,
financial and legal diligence, tax accounting, and valuation.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 ACQUISITION (Continued)
Pro Forma Impact
The following schedule
presents unaudited consolidated pro forma results of operations for Fiscal 2018 as if the IPS acquisition had occurred on October
1, 2017. This information does not purport to be indicative of the actual results that would have occurred if the IPS acquisition
had actually been completed on October 1, 2017, nor is it necessarily indicative of the future operating results or the financial
position of the combined companies. The unaudited pro forma results of operations do not reflect the cost of any integration activities
or benefits that may result from synergies that may be derived from any integration activities.
|
|
Year Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Revenue
|
|
$
|
37,409,030
|
|
|
$
|
38,849,084
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,604,030
|
)
|
|
$
|
1,308,838
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.38
|
)
|
|
$
|
0.14
|
|
Diluted
|
|
$
|
(0.38
|
)
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Outstanding Shares
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,532,034
|
|
|
|
9,666,506
|
|
Diluted
|
|
|
9,532,034
|
|
|
|
9,756,505
|
|
NOTE 4 INTANGIBLE
ASSETS and GOODWILL
Intangible Assets
The following table
provides information regarding the Company’s intangible assets, which consist of the following:
|
|
2019
|
|
|
2018
|
|
|
|
Trademark
|
|
|
Customer Relationships
|
|
|
Total Intangible Assets
|
|
|
Trademark
|
|
|
Customer Relationships
|
|
|
Total Intangible Assets
|
|
Gross carrying amount
|
|
$
|
475,000
|
|
|
$
|
1,050,000
|
|
|
$
|
1,525,000
|
|
|
$
|
475,000
|
|
|
$
|
1,050,000
|
|
|
$
|
1,525,000
|
|
Less accumulated amortization
|
|
|
(53,703
|
)
|
|
|
(222,585
|
)
|
|
|
(276,288
|
)
|
|
|
(22,123
|
)
|
|
|
(91,695
|
)
|
|
|
(113,818
|
)
|
Net carrying amount
|
|
$
|
421,297
|
|
|
$
|
827,415
|
|
|
$
|
1,248,712
|
|
|
$
|
452,877
|
|
|
$
|
958,305
|
|
|
$
|
1,411,182
|
|
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4
INTANGIBLE ASSETS and GOODWILL (Continued)
The Company’s
intangible assets were acquired as a result of the acquisition of IPS on January 18, 2018 and are amortized over their expected
useful lives. The useful lives are 15 years for the Trademark and 8 years for the Customer Relationships. The intangible assets
are held under the design segment of our business. During the years ended September 30, 2019 and 2018, the Company recorded amortization
of approximately $162,000 and $114,000, respectively, which is included under the general and administrative expenses in the Company’s
consolidated statements of operations.
Estimated amortization
expense for the Company’s intangible assets for each of the five succeeding years and thereafter at September 30, 2019 is
as follows:
Years ending September 30,
|
|
|
Amount
|
|
|
2020
|
|
|
$
|
162,917
|
|
|
2021
|
|
|
|
162,917
|
|
|
2022
|
|
|
|
162,917
|
|
|
2023
|
|
|
|
162,917
|
|
|
2024
|
|
|
|
162,917
|
|
|
Thereafter
|
|
|
|
434,127
|
|
|
Total
|
|
|
$
|
1,248,712
|
|
Goodwill
The
Company recognized goodwill as a result of the acquisition of IPS on January 18, 2018 in the amount of approximately $2,182,000.
The Company’s goodwill is held under the design segment of our business. Goodwill is not deductible for tax purposes.
On June 30, 2018,
the Company adjusted down the fair value of the earn-out consideration in connection with the IPS acquisition as a result of a
shortfall in earnings performance for IPS. The shortfall in the performance was also considered a triggering event with regards
to the evaluation of the carrying value of our trademark and customer relationship intangible assets as well as the goodwill resulting
from the acquisition of IPS. As such, the Company performed an assessment of the carrying values considering specific qualitative
facts and circumstances, macroeconomic factors and utilizing the initial inputs and projections that supported the initial fair
value valuations of the intangible assets acquired from IPS. Based on these assessments, the Company concluded that the trademark,
customer list and goodwill were not impaired during Fiscal 2018.
The Company performed
the annual goodwill impairment test for the year ended September 30, 2019 and determined no impairment.
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 reporting segment in the table below:
|
|
September
30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Consolidated
|
|
|
Distribution
|
|
|
Design
|
|
|
Consolidated
|
|
|
Distribution
|
|
|
Design
|
|
Computer software and hardware
|
|
$
|
312,610
|
|
|
$
|
278,131
|
|
|
$
|
34,479
|
|
|
$
|
282,644
|
|
|
$
|
275,386
|
|
|
$
|
7,258
|
|
Furniture and fixtures
|
|
|
198,250
|
|
|
|
78,605
|
|
|
|
119,645
|
|
|
|
198,454
|
|
|
|
80,209
|
|
|
|
118,245
|
|
Equipment
|
|
|
308,703
|
|
|
|
4,318
|
|
|
|
304,385
|
|
|
|
305,338
|
|
|
|
4,318
|
|
|
|
301,020
|
|
Leasehold improvements
|
|
|
42,020
|
|
|
|
42,020
|
|
|
|
–
|
|
|
|
42,020
|
|
|
|
42,020
|
|
|
|
–
|
|
Property and equipment, cost
|
|
|
861,583
|
|
|
|
403,074
|
|
|
|
458,509
|
|
|
|
828,456
|
|
|
|
401,933
|
|
|
|
426,523
|
|
Less: accumulated depreciation and amortization
|
|
|
(618,581
|
)
|
|
|
(385,249
|
)
|
|
|
(233,332
|
)
|
|
|
(469,481
|
)
|
|
|
(375,062
|
)
|
|
|
(94,419
|
)
|
Property and equipment, net
|
|
$
|
243,002
|
|
|
$
|
17,825
|
|
|
$
|
225,177
|
|
|
$
|
358,975
|
|
|
$
|
26,871
|
|
|
$
|
332,104
|
|
Depreciation expense was approximately
$149,000 and $114,000 for the fiscal years ended September 30, 2019 and 2018, respectively.
NOTE 6 FAIR
VALUE MEASUREMENTS
We perform fair value
measurements in accordance with the guidance provided by ASC 820. 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.
|
The
short-term deferred cash consideration of $834,000 on our consolidated balance sheet includes a deferred cash component with a
present value of $484,000 and an earn-out consideration component with a fair value of $350,000 measured using the Black-Scholes
option pricing method, a Level 3 valuation technique. The fair value of the earn-out consideration was deemed to be $350,000 at
September 30, 2019 based on the likelihood of IPS reaching the projected EBITDA milestones.
FORWARD
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6
FAIR VALUE MEASUREMENTS (Continued)
The
following table presents the placement in the fair value hierarchy and summarizes the change in fair value of the earn-out consideration
for the years ended September 30, 2018 and 2019:
|
|
|
|
|
Fair value measurement at reporting date using
|
|
|
|
|
|
|
Quoted prices in active markets for identical assets
|
|
|
Significant other observable inputs
|
|
|
Significant unobservable inputs
|
|
|
|
Balance
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017:
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Fair Value at date of acquisition - January 18, 2018
|
|
|
600,000
|
|
|
|
–
|
|
|
|
–
|
|
|
|
600,000
|
|
Decrease in fair value of earn-out consideration
|
|
|
(510,000
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
(510,000
|
)
|
September 30, 2018:
|
|
$
|
90,000
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
90,000
|
|
Increase in fair value of earn-out consideration
|
|
|
260,000
|
|
|
|
–
|
|
|
|
–
|
|
|
|
260,000
|
|
September 30, 2019:
|
|
$
|
350,000
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
350,000
|
|
The
fair value of the earn-out consideration will be measured on a recurring basis at each reporting date. The following table provides
the unobservable inputs and assumptions used to measure the earn-out consideration at September 30, 2019:
Description
|
|
Valuation technique
|
|
Unobservable Inputs
|
|
Range
|
|
|
|
|
|
|
|
Earn-out consideration
|
|
Black-Scholes
|
|
Volatility
|
|
38%
|
|
|
|
|
Risk free interest rate
|
|
1.73%
|
|
|
|
|
Expected term, in years
|
1.164
|
|
|
|
|
Dividend yield
|
|
0.00%
|
FORWARD
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6
FAIR VALUE MEASUREMENTS (Continued)
During
the year ended September 30, 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 approximately a less
than 2% ownership interest in the customer. Pursuant to ASC 820, management has estimated the value of the common stock consideration
to be $326,941, based on a recent private placement round of common stock issued to third party private investors of the customer
for cash, and has recognized revenue and a cost method investment for that amount. Management has determined that the inputs used
to value the common stock 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).
|
The
following table presents the placement in the fair value hierarchy and summarizes the establishment of fair value of the cost method
investment during the year ended September 30, 2019:
|
|
|
|
|
Fair value measurement at reporting date using
|
|
|
|
|
|
|
Quoted prices in active markets for identical assets
|
|
|
Significant other observable inputs
|
|
|
Significant unobservable inputs
|
|
|
|
Balance
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018:
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock - cost method investment
|
|
|
326,941
|
|
|
|
–
|
|
|
|
326,941
|
|
|
|
–
|
|
September 30, 2019:
|
|
$
|
326,941
|
|
|
$
|
–
|
|
|
$
|
326,941
|
|
|
$
|
–
|
|
The Company recorded a full provision of
outstanding receivables of $1.6 million in Fiscal 2019 for the same customer in which we hold the investment noted above. Management
does not believe the investment is impaired as a result of the full provision for outstanding receivables for this customer.
FORWARD
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 ACCRUED
EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities
by operating segment as of the fiscal years ended September 30, 2019 and 2018 are summarized in the table below:
|
|
September
30,
|
|
|
|
2019
|
|
2018
|
|
|
|
Consolidated
|
|
|
Distribution
|
|
|
Design
|
|
|
Consolidated
|
|
|
Distribution
|
|
|
Design
|
|
Accrued bonuses and sales commissions
|
|
$
|
45,681
|
|
|
$
|
32,745
|
|
|
$
|
12,936
|
|
|
$
|
189,015
|
|
|
$
|
47,087
|
|
|
$
|
141,928
|
|
Accrued vacation
|
|
|
169,902
|
|
|
|
40,307
|
|
|
|
129,595
|
|
|
|
168,401
|
|
|
|
31,075
|
|
|
|
137,326
|
|
Accrued contract labor
|
|
|
141,567
|
|
|
|
–
|
|
|
|
141,567
|
|
|
|
126,889
|
|
|
|
–
|
|
|
|
126,889
|
|
Accrued legal fees
|
|
|
154,000
|
|
|
|
154,000
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Other
|
|
|
183,822
|
|
|
|
30,686
|
|
|
|
153,136
|
|
|
|
110,582
|
|
|
|
36,367
|
|
|
|
74,215
|
|
Accrued expenses and other current liabilities
|
|
$
|
694,972
|
|
|
$
|
257,738
|
|
|
$
|
437,234
|
|
|
$
|
594,887
|
|
|
$
|
114,529
|
|
|
$
|
480,358
|
|
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.
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, 2019 and 2018.
FORWARD
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8
SHAREHOLDERS’ EQUITY (Continued)
Warrants
Effective January
22, 2018 through January 24, 2018, nine warrant holders exercised (via cashless exercises) an aggregate of 521,621 warrants with
an exercise price of $1.84 per share and were issued an aggregate of 223,704 shares of the Company's common stock.
Effective June 26,
2018, a warrant holder exercised (via a cashless exercise) 50,890 warrants with an exercise price of $1.84 per share and was issued
8,520 shares of the Company's common stock.
As of September 30,
2019, 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. 76,335 warrants have a remaining life of 3.87 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 SEC.
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 ten
years after the date of grant. The total shares of common stock available for grants of equity awards under the 2011 Plan was 730,972
as of September 30, 2019.
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 remained 67,500 shares associated with unexercised options as
of September 30, 2019. 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 following assumptions.
The expected term represents the period over which the stock option awards are expected to be outstanding. The Company utilizes
the “simplified” method to develop an estimate of the expected term of “plain vanilla” employee option
grants. The expected volatility used is based on the historical price of the Company’s stock over the most recent period
commensurate with the expected term of the award. The risk-free interest rate used is based on the implied yield of U.S. Treasury
zero-coupon issues with a remaining term equivalent to the award’s expected term. The Company historically has not paid any
dividends on its common 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.
FORWARD
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 SHARE-BASED COMPENSATION
(Continued)
In applying the Black-Scholes
option pricing model to options granted, the Company used the following assumptions:
|
|
For the Years Ended September 30,
|
|
|
2019
|
|
2018
|
Expected term (years)
|
|
2.50-2.75
|
|
2.50-5.00
|
Expected volatility
|
|
82.0%
|
|
80.0%-103.1%
|
Risk free interest rate
|
|
2.53%
|
|
2.45%-2.84%
|
Expected dividends
|
|
0.00%
|
|
0.00%
|
Estimated annual forfeiture rate
|
|
0%
|
|
10%
|
On February
5, 2019, the Company granted five-year options to directors to purchase an aggregate of 150,021 shares of common stock at an exercise
price of $1.54 per share. The shares vest one year from the grant date. The options had an aggregate grant date fair value of $120,000,
which is being amortized over the vesting period of the options.
On February
5, 2019, the Company granted five-year immediately vested options to directors to purchase an aggregate of 140,460 shares of common
stock at an exercise price of $1.54 per share. The options had an aggregate grant date fair value of $107,800, which was recognized
immediately.
On February 23, 2018,
the Company granted five-year options to employees to purchase an aggregate of 68,000 shares of common stock at an exercise price
of $1.67 per share. The shares vest ratably over three years on the grant date anniversaries. The options had an aggregate grant
date fair value of $77,128, which is being amortized over the vesting period of the options.
On April 25,
2018, the Company granted immediately vested ten-year options to purchase an aggregate of 40,816 shares of common stock to
two former directors and immediately vested five-year options to purchase 214,000 shares of common stock to a director, all
at an exercise price of $1.44 per share. The options had an aggregate grant date fair value of $190,890, which was recognized
immediately.
The options granted
during the years ended September 30, 2019 and 2018 had a weighted average grant date value of $0.78 and $0.83 per share, respectively.
The Company recognized
compensation expense of approximately $212,000 and $218,000 during the years ended September 30, 2019 and 2018, respectively, for
stock option awards in its consolidated statements of operations.
As of September 30,
2019, there was approximately $61,000 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.
FORWARD
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 SHARE-BASED COMPENSATION
(Continued)
The following table
summarizes stock option activity during the year ended September 30, 2019:
|
|
|
Number of Options
|
|
|
Weighted Average Exercise
Price
|
|
|
Weighted Average Remaining Life
In Years
|
|
|
Intrinsic Value
|
|
|
Outstanding, September 30, 2018
|
|
|
|
545,066
|
|
|
$
|
1.78
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
290,481
|
|
|
|
1.54
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
(22,668
|
)
|
|
|
1.78
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2019
|
|
|
|
812,879
|
|
|
$
|
1.69
|
|
|
|
3.8
|
|
|
$
|
18,750
|
|
|
Exercisable, September 30, 2019
|
|
|
|
622,007
|
|
|
$
|
1.73
|
|
|
|
3.7
|
|
|
$
|
18,750
|
|
The following table
provides additional information regarding stock option awards that were outstanding and exercisable at September 30, 2019:
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
Outstanding
|
|
|
Average
|
|
|
Average
|
|
|
Exercisable
|
|
Exercise
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
Remaining Life
|
|
|
Number of
|
|
Price
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
In Years
|
|
|
Options
|
|
|
$0.64 to $1.23
|
|
|
$
|
0.80
|
|
|
|
77,500
|
|
|
$
|
0.80
|
|
|
|
5.1
|
|
|
|
77,500
|
|
|
$1.44 to $1.67
|
|
|
|
1.51
|
|
|
|
606,879
|
|
|
|
1.49
|
|
|
|
4.3
|
|
|
|
416,007
|
|
|
$2.20 to $2.85
|
|
|
|
2.48
|
|
|
|
66,000
|
|
|
|
2.48
|
|
|
|
0.6
|
|
|
|
66,000
|
|
|
$3.73 to $3.79
|
|
|
|
3.74
|
|
|
|
62,500
|
|
|
|
3.74
|
|
|
|
1.4
|
|
|
|
62,500
|
|
|
|
|
|
|
|
|
|
|
812,879
|
|
|
|
|
|
|
|
3.7
|
|
|
|
622,007
|
|
Restricted Stock Awards
On January 18, 2018,
the Company granted 40,184 shares of restricted stock to two employees, of which 12,056 shares were forfeited upon an employee
resignation, pursuant to the 2011 Plan. The shares vest as follows: 16,072 shares vested immediately, 12,056 shares vest on July
18, 2018 and 12,056 shares vest on January 18, 2019. The awards had an aggregate grant date value of $49,828, which is being recognized
over the vesting period of the awards.
On April 25, 2018,
the Company granted 20,832 shares of immediately vested restricted stock to two former directors, pursuant to the 2011 Plan. The
awards had an aggregate grant date value of $29,998, which was recognized immediately.
The Company recognized
compensation expense of approximately $3,000 and $72,000 during the years ended September 30, 2019 and 2018, respectively, for
restricted stock awards in its consolidated statements of operations. As of September 30, 2019, there was no unrecognized compensation
expense related to nonvested restricted stock awards.
FORWARD
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 SHARE-BASED COMPENSATION
(Continued)
The following table
summarizes restricted stock activity during the year ended September 30, 2019:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Total
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Fair Value
|
|
Non-vested, September 30, 2018
|
|
|
6,028
|
|
|
$
|
1.24
|
|
|
$
|
7,475
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Vested
|
|
|
(6,028
|
)
|
|
|
1.24
|
|
|
|
(7,475
|
)
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Non-vested, September 30, 2019
|
|
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
NOTE
10 INCOME TAXES
The Company’s
provision (benefit) for income taxes consists of the following United States federal and state, and foreign components:
|
|
For the Fiscal Years Ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
(4,162
|
)
|
|
$
|
–
|
|
State
|
|
|
–
|
|
|
|
–
|
|
Foreign
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(713,066
|
)
|
|
|
1,602,329
|
|
State
|
|
|
(127,140
|
)
|
|
|
152,603
|
|
Foreign
|
|
|
(45,471
|
)
|
|
|
9,234
|
|
|
|
|
(889,839
|
)
|
|
|
1,764,166
|
|
Change in valuation allowance
|
|
|
885,677
|
|
|
|
(2,511,318
|
)
|
Income tax benefit
|
|
$
|
(4,162
|
)
|
|
$
|
(747,152
|
)
|
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 INCOME
TAXES (Continued)
The deferred tax
expense (benefit) is the change in the deferred tax assets and liabilities representing the tax consequences of changes in the
amounts of temporary differences, net operating loss carryforwards and changes in tax rates during the fiscal year. The Company’s
deferred tax assets and liabilities are comprised of the following:
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
2,310,746
|
|
|
$
|
1,919,260
|
|
Capital loss carryforwards
|
|
|
38,120
|
|
|
|
36,705
|
|
Share-based compensation
|
|
|
168,462
|
|
|
|
114,317
|
|
Alternative minimum tax credit
|
|
|
9,165
|
|
|
|
99,757
|
|
Excess tax over book basis in inventory
|
|
|
32,273
|
|
|
|
25,975
|
|
Reserves and other
|
|
|
534,444
|
|
|
|
28,938
|
|
Deferred rent
|
|
|
19,291
|
|
|
|
–
|
|
Accrued compensation
|
|
|
8,832
|
|
|
|
–
|
|
Accrued expenses
|
|
|
151,444
|
|
|
|
–
|
|
Depreciation
|
|
|
27,272
|
|
|
|
–
|
|
Charitable contributions
|
|
|
813
|
|
|
|
–
|
|
|
|
|
3,300,862
|
|
|
|
2,224,952
|
|
Valuation allowance
|
|
|
(2,665,672
|
)
|
|
|
(1,602,725
|
)
|
Net deferred tax assets
|
|
|
635,190
|
|
|
|
622,227
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid insurance
|
|
|
(140,951
|
)
|
|
|
(15,960
|
)
|
Intangible assets
|
|
|
(298,280
|
)
|
|
|
(324,572
|
)
|
481 Election (IPS)
|
|
|
(195,959
|
)
|
|
|
(248,570
|
)
|
Excess book over tax basis in fixed assets
|
|
|
–
|
|
|
|
(33,125
|
)
|
|
|
|
(635,190
|
)
|
|
|
(622,227
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
–
|
|
|
$
|
–
|
|
For the fiscal years
ended September 30, 2019 and 2018, the Company recorded a provision for income taxes which includes a refund of $4,162 in the current
year, and a deferred tax benefit of $747,000 in the prior year. The current year refund of $4,162 is related to a partial refund
of prior year AMT tax.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 INCOME
TAXES (Continued)
At September 30,
2019, the Company had available net operating loss carryforwards (“NOLs”) for the U.S. federal income tax purposes
of approximately $8,010,000. NOLs generated prior to 2018 expire beginning in 2031. NOLs generated after 2018 have an indefinite
carryforward period. The net operating losses result in a deferred tax asset in respect of U.S. federal taxes of approximately
$1,910,000. In addition, at September 30, 2019, the Company had net operating losses available to carry forward for foreign income
tax purposes of approximately $3,815,000, resulting in a deferred tax asset of approximately $397,000, expiring through 2024.
The Company has capital loss carryovers of approximately $160,000 expiring through 2020, resulting in deferred tax assets in respect
of U.S. federal and state income taxes of approximately $38,000. Total net deferred tax assets, before valuation allowance, was
approximately $2,888,000 and $2,225,000 at September 30, 2019 and 2018, respectively. Undistributed earnings of the Company's
foreign subsidiaries are considered to be permanently reinvested; therefore, in accordance with accounting principles generally
accepted in the United States of America, no provision for U.S. federal and state income taxes would result. In the fiscal year
ended September 30, 2019, Forward Switzerland had a net loss of approximately $25,000, and Forward UK had a net loss of approximately
$228,000.
As of September 30, 2019, 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 net operating loss carryforward 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 in
respect of the United States income taxes in the event the Company elects to effect repatriation of certain foreign source income
of its Swiss subsidiary, which income is currently considered to be permanently reinvested and for which no United States tax
liability has been accrued. Accordingly, the Company has determined to maintain a full valuation allowance against its net deferred
tax assets. As of September 30, 2019 and 2018, the valuation allowance was approximately $2,666,000 and $1,603,000, 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 tax expense and increase after-tax income.
The significant elements
contributing to the difference between the United States federal statutory tax rate and the Company’s effective tax rate
are as follows:
|
|
For the Fiscal Years Ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
US federal statutory rate
|
|
|
21.0%
|
|
|
|
21.0%
|
|
State tax rate, net of federal benefit
|
|
|
2.8%
|
|
|
|
2.8%
|
|
Share-based compensation
|
|
|
0.0%
|
|
|
|
(2.2%
|
)
|
Foreign rate differential
|
|
|
1.4%
|
|
|
|
0.5%
|
|
Other
|
|
|
1.9%
|
|
|
|
2.6%
|
|
Change in tax credits
|
|
|
(0.1%
|
)
|
|
|
0.0%
|
|
Effect of federal tax rate change
|
|
|
0.0%
|
|
|
|
208.2%
|
|
Effect of repatriating Swiss earnings
|
|
|
0.0%
|
|
|
|
16.2%
|
|
Capital loss - expiration
|
|
|
0.0%
|
|
|
|
30.0%
|
|
Change in valuation allowance
|
|
|
(26.6%
|
)
|
|
|
(397.2%
|
)
|
Federal Alternative Minimum Taxes (AMT)
|
|
|
0.1%
|
|
|
|
0.0%
|
|
Permanent differences
|
|
|
(0.4%
|
)
|
|
|
0.0%
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
0.1%
|
|
|
|
(118.2%
|
)
|
As of September 30,
2019 and 2018, the Company has not accrued any interest and 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, 2016 are closed
to federal and state examination.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 EARNINGS
(LOSS) PER SHARE
Basic earnings (loss)
per share data for each period presented is computed using the weighted average number of shares of common stock outstanding during
each such period. Diluted earnings (loss) per share data is computed using the weighted average number of common and dilutive
common equivalent shares outstanding during each period. Dilutive common-equivalent shares consist of (i) shares that would be
issued upon the exercise of stock options and warrants, computed using the treasury stock method, and (ii) shares of nonvested
restricted stock. The Company calculated the potential diluted earnings per share in accordance with ASC 260, as follows:
|
|
For the Fiscal Years Ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
Net income (loss) (numerator for basic and diluted earnings (loss) per share)
|
|
$
|
(3,604,030
|
)
|
|
$
|
1,379,320
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding (denominator for basic earnings (loss) per share)
|
|
|
9,532,034
|
|
|
|
9,264,670
|
|
|
|
|
|
|
|
|
|
|
Effects of dilutive securities:
|
|
|
|
|
|
|
|
|
Assumed exercise of stock options, treasury stock method
|
|
|
–
|
|
|
|
36,621
|
|
Assumed vesting of restricted stock, treasury stock method
|
|
|
–
|
|
|
|
53,378
|
|
Dilutive potential common shares
|
|
|
–
|
|
|
|
89,999
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings (loss) per share - weighted average
shares and assumed potential common shares
|
|
|
9,532,034
|
|
|
|
9,354,669
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
(0.38
|
)
|
|
$
|
0.15
|
|
Diluted earnings (loss) per share
|
|
$
|
(0.38
|
)
|
|
$
|
0.15
|
|
The following securities
were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive:
|
|
As of September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Options
|
|
|
812,879
|
|
|
|
469,566
|
|
Warrants
|
|
|
151,335
|
|
|
|
151,335
|
|
Total potentially dilutive shares
|
|
|
964,214
|
|
|
|
620,901
|
|
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 COMMITMENTS
AND CONTINGENCIES
Guarantee Obligation
In February 2010,
Forward Switzerland and its European logistics provider (freight forwarding and customs agent) entered into a Representation Agreement
(the “Representation Agreement”) whereby, among other things, the European logistics provider agreed to act as Forward
Switzerland's fiscal representative in The Netherlands for the purpose of providing services in connection with any value added
tax matters. As part of this agreement, Forward Switzerland agreed to provide an undertaking (in the form of a bank letter of guarantee)
to the logistics provider with respect to any value added tax liability arising in The Netherlands that the logistics provider
is required to pay to Dutch tax authorities on its behalf.
As of February 1,
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 $82,000 as of September 30, 2019) 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.
The initial term of
the bank letter of guarantee expired February 28, 2011, but 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
$650,000 at September 30, 2019). As of September 30, 2019, the Company had not incurred a liability in connection with this guarantee.
Operating Lease Commitments
The Company leases
office space for its corporate headquarters in West Palm Beach, Florida under a 90-month agreement expiring in September 2020.
The operating lease granted six initial months of free rent and escalates at 3% per year. The monthly rent payment is approximately
$7,700, which includes common area maintenance costs.
The Company leases
office space for its Distribution segment sales and administrative office in Cham, Switzerland on a month-to-month basis. The monthly
rent payment is $1,599 CHF, which is approximately $1,615.
IPS leases office
space in Hauppauge, New York under a noncancelable lease agreement expiring in February 2027. The monthly rent payment is approximately
$29,000, which includes power utilities.
IPS leases office
space in Ronkonkoma, New York under a 3 year agreement expiring in January 2022. The monthly rent payment is $4,400
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 COMMITMENTS
AND CONTINGENCIES (Continued)
Capital Leases
The Company, specifically
IPS, leases computer equipment through various capital lease agreements expiring through January 2022. The following is a summary
of computer equipment held under capital leases:
|
|
September 30, 2019
|
|
Computer equipment
|
|
$
|
203,328
|
|
Accumulated depreciation
|
|
|
138,265
|
|
|
|
|
|
|
Net Book Value
|
|
$
|
65,063
|
|
Future minimum payments under these capital
leases are as follows:
Year Ending September 30,
|
|
Amount
|
|
2020
|
|
$
|
41,096
|
|
2021
|
|
|
8,578
|
|
2022
|
|
|
800
|
|
Total minimum lease payments
|
|
$
|
50,474
|
|
Total rent expense
for the years ended September 30, 2019 and 2018 amounted to approximately $473,000 and $342,000, respectively. The following is
a schedule by years of future minimum rental payments required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of September 30, 2019:
Fiscal Years Ended September 30,
|
|
Amount
|
|
2020
|
|
$
|
495,090
|
|
2021
|
|
|
413,331
|
|
2022
|
|
|
380,385
|
|
2023
|
|
|
375,732
|
|
2024
|
|
|
385,644
|
|
Thereafter
|
|
|
974,878
|
|
Total lease commitments
|
|
$
|
3,025,060
|
|
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 RELATED
PARTY TRANSACTIONS
Buying Agency and Supply Agreement
On September 9, 2015,
the Company entered into a Buying Agency and Supply Agreement (the “Supply Agreement”) with Forward Industries Asia-Pacific
Corporation, a British Virgin Islands corporation (“Forward China”). The Supply Agreement, as amended, provides that,
upon the terms and subject to the conditions set forth therein, Forward China will act as the Company’s exclusive buying
agent and supplier of Products (as defined in the Supply Agreement) in the Asia 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. Terence Bernard
Wise, Chief Executive Officer and Chairman of the Company, is a principal of Forward China. In addition, Jenny P. Yu, a Managing
Director of Forward China, beneficially owns more than 5% of the Company’s shares of common stock. The Company recognized
approximately $1,398,000 and $1,426,000 during the fiscal years ended September 30, 2019 and 2018, respectively, in service fees
paid to Forward China, which are included as a component of cost of goods sold in the accompanying consolidated statements of operations.
Effective October 22, 2019, the Company extended the term of the supply agreement to October 22, 2020 under the same terms, substantially.
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 agreement during Fiscal 2019 and 2018.
Promissory Note
On January 18, 2018,
the Company issued a $1.6 million promissory note payable to Forward China in order to fund the acquisition of IPS. The promissory
note bears an interest rate of 8% per annum. Monthly interest payments commenced on February 18, 2018. The original maturity date
was January 18, 2019 and has been extended to January 17, 2020. The maturity date of the note has been extended on several occasions
to assist the Company with liquidity. The Company made approximately $128,000 and $85,000 in interest payments associated with
the note in Fiscal 2019 and Fiscal 2018, respectively.
During Fiscal 2019,
the Company’s design division provided services to a customer, Duality Advisers. The Chief Operating and Financial Officer
and equity owner of Duality Advisers is an immediate family member of a director on the Company’s board and a member on the
Board’s Audit and Compensation committees. The Company sold approximately $150,000 in design services to Duality Advisers
in Fiscal 2019. At September 30, 2019, there was approximately $9,000 in accrued receivables for Duality Advisers.
NOTE 14
LEGAL PROCEEDINGS
From time to time, the Company may become
a party to legal actions or proceedings in the ordinary course of its business. As of September 30, 2019, 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.
On February 13, 2019,
the SEC served certain of the Company’s executive officers and the custodian of records of the Company with subpoenas related
to its investigation on the trading in the Company’s securities surrounding the announcement of the acquisition of IPS. The
Company has cooperated with the Staff’s requests and as recently as October 24, 2019 provided the Staff with requested documents. On
December 18, 2019, the Company received communication from the SEC and the Staff informed us that the investigation has concluded.
The Company is anticipating a letter from the SEC formalizing the conclusion of the investigation.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 401(K)
PLAN
The Company maintains
a 401(k) benefit plan allowing eligible United States-based employees to contribute a portion of their salary in an amount up to
the annual maximum amounts as set periodically by the Internal Revenue Service. In accordance with applicable Safe Harbor provisions,
the Company made matching contributions of approximately $226,000 and $126,000 during the fiscal years ended September 30, 2019
and 2018, respectively, which are reflected in the accompanying consolidated statements of operations. The Company’s contributions
vest immediately.
NOTE 16 OPERATING
SEGMENT INFORMATION
The Company, post
IPS acquisition, conducts its business through two operating segments, which are also its reportable segments:
The Distribution segment
sources and distributes carry and protective product solutions, primarily for hand held electronic devices. Products sourced by
this segment include carrying cases and other accessories for medical monitoring and diagnostic kits, portable consumer electronic
devices (such as smartphones, tablets, personnel computers, notebooks, and GPS devices), and a variety of other portable electronic
and non-electronic products (such as firearms, sporting, and other recreational products). This segment operates in geographic
regions that include 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. It should be noted that financial performance and results of operations in the design segment for the
fiscal year ended September 30, 2018 covers the period following the closing of the acquisition of IPS on January 18, 2018 through
fiscal year end on September 30, 2018.
Segment operating income (loss) and net
income (loss) before taxes for the years ended September 30, 2019 and 2018 are shown in table below:
|
|
For the Year Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Revenue
|
|
|
|
|
|
|
Distribution
|
|
$
|
21,987,670
|
|
|
$
|
24,347,408
|
|
Design
|
|
|
15,421,360
|
|
|
|
10,152,095
|
|
Total revenue
|
|
|
37,409,030
|
|
|
|
34,499,503
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
Distribution
|
|
$
|
18,612,881
|
|
|
$
|
20,286,446
|
|
Design
|
|
|
12,215,267
|
|
|
|
7,644,981
|
|
Total cost of sales
|
|
$
|
30,828,148
|
|
|
$
|
27,931,427
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
|
|
|
|
|
|
|
Distribution
|
|
$
|
(1,376,675
|
)
|
|
$
|
(140,804
|
)
|
Design
|
|
|
(1,720,708
|
)
|
|
|
401,456
|
|
Total income (loss) from operations
|
|
$
|
(3,097,383
|
)
|
|
$
|
260,652
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
Distribution
|
|
$
|
(437,809
|
)
|
|
$
|
401,779
|
|
Design
|
|
|
(73,000
|
)
|
|
|
(30,111
|
)
|
Total other income (expense)
|
|
$
|
(510,809
|
)
|
|
$
|
371,668
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
|
|
Distribution
|
|
$
|
(1,814,484
|
)
|
|
$
|
260,975
|
|
Design
|
|
|
(1,793,708
|
)
|
|
|
371,345
|
|
Total income (loss) before income taxes
|
|
$
|
(3,608,192
|
)
|
|
$
|
632,320
|
|
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 OPERATING
SEGMENT INFORMATION (Continued)
Revenues from External Customers
Consolidated
The following table
sets forth our consolidated net revenues by geographic region for the fiscal years ended September 30, 2019 and 2018. All of design
segment customer revenues are classified under the United States within the Americas region:
|
|
(dollars in thousands)
|
|
|
|
For the Fiscal Years Ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
EMEA Region:
|
|
|
|
|
|
|
|
|
Germany
|
|
$
|
3,875
|
|
|
$
|
3,987
|
|
Poland
|
|
|
3,355
|
|
|
|
4,071
|
|
Switzerland
|
|
|
297
|
|
|
|
407
|
|
Austria
|
|
|
186
|
|
|
|
302
|
|
Other
|
|
|
166
|
|
|
|
553
|
|
Total EMEA Region
|
|
|
7,879
|
|
|
|
9,320
|
|
|
|
|
|
|
|
|
|
|
Americas:
|
|
|
|
|
|
|
|
|
United States [1]
|
|
|
21,730
|
|
|
|
17,307
|
|
Other
|
|
|
4
|
|
|
|
8
|
|
Total Americas
|
|
|
21,734
|
|
|
|
17,315
|
|
|
|
|
|
|
|
|
|
|
APAC Region:
|
|
|
|
|
|
|
|
|
Hong Kong
|
|
|
6,017
|
|
|
|
6,485
|
|
Malaysia
|
|
|
153
|
|
|
|
480
|
|
China
|
|
|
318
|
|
|
|
248
|
|
Singapore
|
|
|
564
|
|
|
|
338
|
|
Taiwan
|
|
|
164
|
|
|
|
195
|
|
Other
|
|
|
580
|
|
|
|
119
|
|
Total APAC Region
|
|
|
7,796
|
|
|
|
7,865
|
|
Total Net Revenues
|
|
$
|
37,409
|
|
|
$
|
34,500
|
|
[1] Includes $15.421 million of revenue attributed to IPS whose customers reside in the United States
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 OPERATING
SEGMENT INFORMATION (Continued)
Major Customers and Concentrations by Geographic Region
Distribution Segment
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 the fiscal years ended September 30, 2019 and 2018.
|
|
For the Fiscal Year Ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
|
|
Americas
|
|
|
|
APAC
|
|
|
|
Total
|
|
Diabetic Products Customer A
|
|
|
49%
|
|
|
|
42%
|
|
|
|
–
|
|
|
|
30%
|
|
Diabetic Products Customer B
|
|
|
29%
|
|
|
|
22%
|
|
|
|
6%
|
|
|
|
19%
|
|
Diabetic Products Customer C
|
|
|
–
|
|
|
|
3%
|
|
|
|
76%
|
|
|
|
28%
|
|
Diabetic Products Customer D
|
|
|
13%
|
|
|
|
15%
|
|
|
|
3%
|
|
|
|
10%
|
|
Totals
|
|
|
91%
|
|
|
|
82%
|
|
|
|
85%
|
|
|
|
87%
|
|
|
|
For the Fiscal Year Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
|
|
Americas
|
|
|
|
APAC
|
|
|
|
Total
|
|
Diabetic Products Customer A
|
|
|
42%
|
|
|
|
36%
|
|
|
|
–
|
|
|
|
20%
|
|
Diabetic Products Customer B
|
|
|
30%
|
|
|
|
28%
|
|
|
|
–
|
|
|
|
27%
|
|
Diabetic Products Customer C
|
|
|
–
|
|
|
|
–
|
|
|
|
82%
|
|
|
|
27%
|
|
Diabetic Products Customer D
|
|
|
13%
|
|
|
|
16%
|
|
|
|
2%
|
|
|
|
10%
|
|
Totals
|
|
|
85%
|
|
|
|
80%
|
|
|
|
84%
|
|
|
|
84%
|
|
Four customers (including
their affiliates or contract manufacturers) accounted for approximately 90% and 86% of the Company's distribution segment accounts
receivable at September 30, 2019 and 2018, respectively.
Design Segment
All of our design
segment customers operate in the United States.
Four customers accounted for approximately
67% of the Company’s design segment accounts receivable at September 30, 2018. Two customers accounted for approximately
63% of the Company’s design segment accounts receivable at September 30, 2019.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 OPERATING
SEGMENT INFORMATION (Continued)
Total Assets
The following table presents total assets
by operating segment for the years ended September 30, 2019 and 2018:
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Distribution
|
|
$
|
9,554,465
|
|
|
$
|
12,010,344
|
|
Design
|
|
|
6,539,887
|
|
|
|
7,217,522
|
|
Total assets
|
|
$
|
16,094,352
|
|
|
$
|
19,227,866
|
|
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 United States or Americas region.
See table below:
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Consolidated
|
|
|
Distribution
|
|
|
Design
|
|
|
Consolidated
|
|
|
Distribution
|
|
|
Design
|
|
Americas
|
|
$
|
243,002
|
|
|
$
|
17,825
|
|
|
$
|
225,177
|
|
|
$
|
358,975
|
|
|
$
|
26,871
|
|
|
$
|
332,104
|
|
APAC
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
EMEA
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Total long-lived assets (net)
|
|
$
|
243,002
|
|
|
$
|
17,825
|
|
|
$
|
225,177
|
|
|
$
|
358,975
|
|
|
$
|
26,871
|
|
|
$
|
332,104
|
|
Total Liabilities
The following table presents total liabilities
by operating segment for the years ended September 30, 2019 and 2018:
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Distribution
|
|
$
|
6,061,472
|
|
|
$
|
6,568,918
|
|
Design
|
|
|
2,321,581
|
|
|
|
1,559,353
|
|
Total liabilities
|
|
$
|
8,383,053
|
|
|
$
|
8,128,271
|
|
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 OPERATING
SEGMENT INFORMATION (Continued)
Supplier Concentration
The Company procures
all its supply of carrying solutions products for the distribution segment from independent suppliers in China through Forward
China. Depending on the product, Forward China may require several different suppliers to furnish component parts or pieces. The
Company purchased 100% of its OEM products from Forward China in Fiscal 2019 and 2018.
The Company procures
materials and supplies used to build prototypes and “mock-ups” for design service projects. All of the design segment
vendors are located in the United States.
NOTE 17 LINE OF CREDIT
The Company, specifically
IPS, has a $1,300,000 revolving line of credit with TD Bank which renews at the discretion of the lender on April 30, 2019. The
line of credit was amended and modified on September 28, 2018 to extend the line of credit limit from $1,000,000 to $1,300,000
and was also undersigned by Forward Industries, Inc. as the guarantor 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, 2019
was 5.75%. As of September 30, 2019, the Company had $0 available under the line of credit. The Company is subject to certain debt-service
ratio requirements which are measured annually. As of September 30, 2019 the Company was in violation of the required debt-service
ratio covenants. The Company was granted a waiver of the violation from the lender. However, there is a potential risk that the
lender may demand payment in full upon default.
NOTE 18 DEBT
As part of the acquisition
of IPS, which was completed on January 18, 2018, the Company assumed the debt of the following:
On January 8, 2014,
IPS entered into a term loan with a lender in the amount of $1,000,000. The loan matured on January 8, 2019 and bore interest at
a rate of 4.230% per annum. Interest and principal of $18,546 was paid on a monthly basis through maturity. This loan was secured
by all of IPS’ assets and was guaranteed by the Company. Outstanding balance was $0 and $73,528 as of September 30, 2019
and 2018, respectively.
On April 1, 2016,
IPS entered into a term loan with a lender in the amount of $325,000. The loan matures on April 1, 2020 and bears interest at a
rate of 4.215% per annum. Interest and principal of $7,378 is paid on a monthly basis through maturity. This loan is secured by
all of the IPS’ assets and is guaranteed by the Company. Outstanding balance as of September 30, 2018 and 2019 was $51,688
and $135,389, respectively. As of September 30, 2019 the Company was in violation of the required debt-service ratio covenants.
The Company was granted a waiver of the violation from the lender. However, there is a potential risk that the lender may demand
payment in full upon default.
On October 19, 2016,
IPS entered into two term loans with a lender in the amount of $100,000 and $50,000 with the first three monthly payments being
interest only. The loans were scheduled to mature on January 19, 2019 and bore an interest rate of 12% per annum. The loans were
unsecured. The loan balances of approximately $61,000 and $31,000 were paid off immediately after acquisition.
On December 11, 2017,
IPS entered into an installment payment financing arrangement with a lender in the amount of approximately $23,000. IPS makes monthly
payments of $1,035, which includes an implied interest rate of 9.5%, for 24 months. The last payment is scheduled to be made in
December 2019. The loan balance was approximately $3,000 and $16,000 at September 30, 2019 and 2018, respectively.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
18 DEBT (Continued)
Future minimum principal
payment requirements under the working capital term loan agreements in each of the years subsequent to September 30, 2019 are
as follows:
Year
|
|
Amount
|
|
2020
|
|
$
|
54,027
|
|
Thereafter
|
|
|
–
|
|
Total
|
|
$
|
54,027
|
|
NOTE 19 MOONI AGREEMENT
On January 29, 2019,
the Company entered into a three-year Distribution Agreement (the “Agreement”) with Mooni International AB and its
owner, Staffan Bern (the “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. 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. As of September 30,
2019, the unamortized fee of approximately $311,000 is included in the prepaid and other current assets and other assets for the
short-term and long-term components, respectively, in the accompanying consolidated balance sheet. Amortization of the cost for
Fiscal 2019 of approximately $89,000 is included in the Sales and Marketing expenses in the accompanying consolidated statement
of operations.