ITEM 1. FINANCIAL STATEMENTS
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
March 31
|
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,529,165
|
|
|
$
|
2,924,627
|
|
Accounts receivable, net
|
|
|
6,331,832
|
|
|
|
7,602,316
|
|
Inventories
|
|
|
2,149,454
|
|
|
|
1,275,694
|
|
Prepaid expenses and other current assets
|
|
|
385,245
|
|
|
|
419,472
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
10,395,696
|
|
|
|
12,222,109
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
187,744
|
|
|
|
215,323
|
|
Intangible assets, net
|
|
|
1,425,036
|
|
|
|
1,531,415
|
|
Goodwill
|
|
|
1,758,682
|
|
|
|
1,758,682
|
|
Operating lease right of use assets, net
|
|
|
3,359,946
|
|
|
|
3,512,042
|
|
Other assets
|
|
|
72,251
|
|
|
|
116,697
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
17,199,355
|
|
|
$
|
19,356,268
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
–
|
|
|
$
|
1,000,000
|
|
Current portion of note payable to Forward China
|
|
|
–
|
|
|
|
1,600,000
|
|
Accounts payable
|
|
|
324,673
|
|
|
|
197,022
|
|
Due to Forward China
|
|
|
3,890,219
|
|
|
|
3,622,401
|
|
Deferred income
|
|
|
137,446
|
|
|
|
485,078
|
|
Current portion of notes payable
|
|
|
72,341
|
|
|
|
983,395
|
|
Current portion of finance lease liability
|
|
|
9,449
|
|
|
|
18,411
|
|
Current portion of deferred consideration
|
|
|
–
|
|
|
|
45,000
|
|
Current portion of operating lease liability
|
|
|
261,536
|
|
|
|
259,658
|
|
Accrued expenses and other current liabilities
|
|
|
454,876
|
|
|
|
615,401
|
|
Total current liabilities
|
|
|
5,150,540
|
|
|
|
8,826,366
|
|
|
|
|
|
|
|
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
Note payable to Forward China, less current portion
|
|
|
1,600,000
|
|
|
|
–
|
|
Notes payable, less current portion
|
|
|
–
|
|
|
|
529,973
|
|
Operating lease liability, less current portion
|
|
|
3,232,169
|
|
|
|
3,359,088
|
|
Finance lease liability, less current portion
|
|
|
2,324
|
|
|
|
12,769
|
|
Deferred consideration, less current portion
|
|
|
60,000
|
|
|
|
45,000
|
|
Total other liabilities
|
|
|
4,894,493
|
|
|
|
3,946,830
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
10,045,033
|
|
|
|
12,773,196
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share; 40,000,000 shares authorized; 9,952,766 and
9,883,851 shares issued and outstanding at March 31, 2021 and September 30, 2020, respectively
|
|
|
99,528
|
|
|
|
98,838
|
|
Additional paid-in capital
|
|
|
19,785,936
|
|
|
|
19,579,684
|
|
Accumulated deficit
|
|
|
(12,731,142
|
)
|
|
|
(13,095,450
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders' equity
|
|
|
7,154,322
|
|
|
|
6,583,072
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
17,199,355
|
|
|
$
|
19,356,268
|
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
For the Three Months Ended
March 31,
|
|
|
For the Six Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net
|
|
$
|
8,395,379
|
|
|
$
|
7,931,377
|
|
|
$
|
18,112,982
|
|
|
$
|
16,324,231
|
|
Cost of sales
|
|
|
6,651,933
|
|
|
|
6,478,228
|
|
|
|
14,106,650
|
|
|
|
13,151,073
|
|
Gross profit
|
|
|
1,743,446
|
|
|
|
1,453,149
|
|
|
|
4,006,332
|
|
|
|
3,173,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing expenses
|
|
|
578,436
|
|
|
|
479,461
|
|
|
|
1,181,397
|
|
|
|
1,014,633
|
|
General and administrative expenses
|
|
|
1,981,186
|
|
|
|
1,625,385
|
|
|
|
3,808,604
|
|
|
|
2,839,351
|
|
Goodwill impairment
|
|
|
–
|
|
|
|
1,015,000
|
|
|
|
–
|
|
|
|
1,015,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(816,176
|
)
|
|
|
(1,666,697
|
)
|
|
|
(983,669
|
)
|
|
|
(1,695,826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on forgiveness of note payable
|
|
|
–
|
|
|
|
–
|
|
|
|
(1,356,570
|
)
|
|
|
–
|
|
Fair value adjustment of earnout consideration
|
|
|
–
|
|
|
|
(350,000
|
)
|
|
|
(30,000
|
)
|
|
|
(350,000
|
)
|
Fair value adjustment of deferred cash consideration
|
|
|
–
|
|
|
|
9,000
|
|
|
|
–
|
|
|
|
9,000
|
|
Interest income
|
|
|
(33,554
|
)
|
|
|
–
|
|
|
|
(56,301
|
)
|
|
|
–
|
|
Interest expense
|
|
|
46,714
|
|
|
|
44,178
|
|
|
|
93,106
|
|
|
|
95,127
|
|
Other expense, net
|
|
|
5,392
|
|
|
|
1,739
|
|
|
|
1,788
|
|
|
|
3,318
|
|
(Loss)/income before income taxes
|
|
|
(834,728
|
)
|
|
|
(1,371,614
|
)
|
|
|
364,308
|
|
|
|
(1,453,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for/(benefit from) income taxes
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$
|
(834,728
|
)
|
|
$
|
(1,371,614
|
)
|
|
$
|
364,308
|
|
|
$
|
(1,453,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.08
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.15
|
)
|
Diluted
|
|
$
|
(0.08
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,909,497
|
|
|
|
9,533,851
|
|
|
|
9,897,385
|
|
|
|
9,533,851
|
|
Diluted
|
|
|
9,909,497
|
|
|
|
9,533,851
|
|
|
|
10,378,733
|
|
|
|
9,533,851
|
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
|
|
For the Three and Six Months Ended March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2020
|
|
|
9,883,851
|
|
|
$
|
98,838
|
|
|
$
|
19,579,684
|
|
|
$
|
(13,095,450
|
)
|
|
$
|
6,583,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
–
|
|
|
|
–
|
|
|
|
41,457
|
|
|
|
–
|
|
|
|
41,457
|
|
Stock options exercised
|
|
|
2,500
|
|
|
|
25
|
|
|
|
1,650
|
|
|
|
–
|
|
|
|
1,675
|
|
Net income
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,199,036
|
|
|
|
1,199,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020
|
|
|
9,886,351
|
|
|
|
98,863
|
|
|
|
19,622,791
|
|
|
|
(11,896,414
|
)
|
|
|
7,825,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
–
|
|
|
|
–
|
|
|
|
21,287
|
|
|
|
–
|
|
|
|
21,287
|
|
Stock options exercised
|
|
|
66,415
|
|
|
|
665
|
|
|
|
141,858
|
|
|
|
–
|
|
|
|
142,523
|
|
Net loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(834,728
|
)
|
|
|
(834,728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2021
|
|
|
9,952,766
|
|
|
$
|
99,528
|
|
|
$
|
19,785,936
|
|
|
$
|
(12,731,142
|
)
|
|
$
|
7,154,322
|
|
|
|
For the Three and Six Months Ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2019
|
|
|
9,533,851
|
|
|
$
|
95,338
|
|
|
$
|
18,936,130
|
|
|
$
|
(11,320,169
|
)
|
|
$
|
7,711,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
–
|
|
|
|
–
|
|
|
|
33,179
|
|
|
|
–
|
|
|
|
33,179
|
|
Net loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(81,657
|
)
|
|
|
(81,657
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
|
9,533,851
|
|
|
|
95,338
|
|
|
|
18,969,309
|
|
|
|
(11,401,826
|
)
|
|
|
7,662,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
–
|
|
|
|
–
|
|
|
|
36,260
|
|
|
|
–
|
|
|
|
36,260
|
|
Net loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(1,371,614
|
)
|
|
|
(1,371,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2020
|
|
|
9,533,851
|
|
|
$
|
95,338
|
|
|
$
|
19,005,569
|
|
|
$
|
(12,773,440
|
)
|
|
$
|
6,327,467
|
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
For the Six Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
364,308
|
|
|
$
|
(1,453,271
|
)
|
Adjustments to reconcile net
income/(loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
62,744
|
|
|
|
69,439
|
|
Depreciation and amortization
|
|
|
171,836
|
|
|
|
138,711
|
|
Bad debt expense/(recovery)
|
|
|
513,691
|
|
|
|
(109,914
|
)
|
Gain on forgiveness of note payable
|
|
|
(1,356,570
|
)
|
|
|
–
|
|
Change in fair value of earn-out
consideration
|
|
|
(30,000
|
)
|
|
|
(350,000
|
)
|
Change in fair value of deferred
cash consideration
|
|
|
–
|
|
|
|
9,000
|
|
Goodwill impairment
|
|
|
–
|
|
|
|
1,015,000
|
|
Impairment of investment
|
|
|
–
|
|
|
|
326,941
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
756,793
|
|
|
|
(563,850
|
)
|
Inventories
|
|
|
(873,760
|
)
|
|
|
972,775
|
|
Prepaid expenses and other current
assets
|
|
|
34,227
|
|
|
|
(168,401
|
)
|
Other assets
|
|
|
44,446
|
|
|
|
70,806
|
|
Accounts payable and due to Forward
China
|
|
|
395,469
|
|
|
|
(985,936
|
)
|
Deferred income
|
|
|
(347,632
|
)
|
|
|
488,156
|
|
Operating lease liabilities
|
|
|
27,055
|
|
|
|
18,831
|
|
Accrued expenses
and other current liabilities
|
|
|
(160,525
|
)
|
|
|
(32,632
|
)
|
Net cash used
in operating activities
|
|
|
(397,918
|
)
|
|
|
(554,345
|
)
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of
property and equipment
|
|
|
(37,878
|
)
|
|
|
(27,207
|
)
|
Net cash used
in investing activities
|
|
|
(37,878
|
)
|
|
|
(27,207
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from line of credit borrowings
|
|
|
150,000
|
|
|
|
200,000
|
|
Repayment of line of credit borrowings
|
|
|
(1,150,000
|
)
|
|
|
(1,100,000
|
)
|
Repayment of notes payable
|
|
|
(84,457
|
)
|
|
|
(46,674
|
)
|
Proceeds from stock options exercised
|
|
|
144,198
|
|
|
|
–
|
|
Repayments of finance leases
|
|
|
(19,407
|
)
|
|
|
(16,488
|
)
|
Payment of deferred
cash consideration
|
|
|
–
|
|
|
|
(200,000
|
)
|
Net cash used
in financing activities
|
|
|
(959,666
|
)
|
|
|
(1,163,162
|
)
|
Net decrease in cash
|
|
|
(1,395,462
|
)
|
|
|
(1,744,714
|
)
|
Cash at beginning of period
|
|
|
2,924,627
|
|
|
|
3,092,813
|
|
Cash at end of period
|
|
$
|
1,529,165
|
|
|
$
|
1,348,099
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid
for interest
|
|
$
|
88,479
|
|
|
$
|
95,127
|
|
Cash paid
for taxes
|
|
$
|
5,636
|
|
|
$
|
1,524
|
|
Supplemental Disclosures of Non-Cash Information:
|
|
|
|
|
|
|
|
|
Lease
assets recorded upon adoption of ASC 842
|
|
$
|
–
|
|
|
$
|
3,648,582
|
|
Lease liabilities
recorded upon adoption of ASC 842
|
|
$
|
–
|
|
|
$
|
3,729,341
|
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 OVERVIEW
Business
Forward Industries, Inc.
(“Forward”, “we” or the “Company”) is a fully integrated design, development and manufacturing solution
provider for top tier medical and technology customers worldwide. As a result of the continued expansion of our design development capabilities
through our wholly-owned subsidiaries, we are now able to introduce proprietary products to the market from concepts brought to us from
a number of different sources, both inside and outside the Company.
Impact of COVID-19
The outbreak of the COVID-19
virus continues to impact our results of operations. While the most significant impact was realized in Fiscal 2020, the virus had a less
significant effect on our results of operations for the first half of Fiscal 2021. The business shutdowns resulting from the pandemic
disrupted our supply chain and the manufacture or shipment of our products and have delayed the rollout of our smart-enabled retail products
to big box retail stores. Additionally, demand for our design and development services continues to be reduced or delayed as a result
of the pandemic as certain customers have reduced discretionary spending. While revenues for the three and six months ended March 31,
2021 increased as compared to the three and six months ended March 31, 2020, they were lower than anticipated due in part to the impact
of COVID-19 and the resulting economic conditions. The impact of lower than anticipated revenue was further complicated by a significant
increase in freight costs due to the global shipping container shortage caused by the pandemic. These challenges were partially offset
by a reduction in certain selling and travel related expenses resulting from government mandated travel restrictions.
The economy has continued
to open in more jurisdictions. However, there continue to be areas impacted by new strains of the virus that could cause government officials
to enact more restrictions on how businesses operate. The future impacts of the pandemic and any resulting economic impact are largely
unknown and could be significant. It is possible that the pandemic, the measures taken by the governments of countries affected and the
resulting economic impact may negatively impact our results of operations, cash flows and financial position in future periods as well
as that of our customers, including their ability to pay for our services and choosing to allocate their budgets to new or existing projects
which may or may not require our services. The long-term financial impact on our business cannot be reasonably estimated at this time.
As a result, the effects of COVID-19 may not be fully reflected in our financial results until future periods. Refer to “Part II,
Item 1A — Risk Factors” for a description of the material risks that the Company currently faces in connection with COVID-19.
Until the pandemic is under
control, we expect business conditions to remain challenging. In response to these challenges, we will continue to focus on those
factors that we can control: closely managing and controlling our expenses; aligning our design and development schedules with demand
in a proactive manner as there are changes in market conditions to minimize our cash operating costs; pursuing further improvements in
the productivity and effectiveness of our development, selling and administrative activities and, where appropriate, taking advantage
of opportunities to enhance our business growth and strategy. To help mitigate the impact of these challenging business conditions, we
have implemented cost cutting initiatives and reduced executive pay and Board of Directors compensation for an undetermined period of
time. There is no assurance these measures will be successful. See “Liquidity and Capital Resources” section of Item 2. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” for further description of these cost cutting measures.
NOTE 2 ACCOUNTING
POLICIES
Basis of Presentation
The accompanying condensed
consolidated financial statements include the accounts of Forward Industries, Inc. and all of its subsidiaries: Forward Industries (IN),
Inc. (“Forward US”), Forward Industries (Switzerland) GmbH (“Forward Switzerland”), Forward Industries UK Limited
(“Forward UK”), Intelligent Product Solutions, Inc. (“IPS”) and Kablooe, Inc. (“Kablooe”). The terms
“Forward”, “we” or the “Company” as used throughout this document are used to indicate Forward Industries,
Inc. and all of its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The acquisition of Kablooe
took place in August 2020 and its results of operations have been included in our condensed consolidated financial statements since the
acquisition date. Accordingly, our results of operations for the three and six months ended March 31, 2021 include Kablooe’s results
of operations, while our results of operations for the three and six months ended March 31, 2020 do not. Key terms of the acquisition
are contained in our Form 10-K filed with the Securities and Exchange Commission on December 17, 2020.
In the opinion of management,
the accompanying condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q reflect all normal recurring
adjustments necessary to present fairly the financial position and results of operations and cash flows for the interim periods presented
herein, but are not necessarily indicative of the results of operations for the year ending September 30, 2021. These condensed consolidated
financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its
Annual Report on Form 10-K for the fiscal year ended September 30, 2020, and with the disclosures and risk factors presented therein.
The September 30, 2020 condensed consolidated balance sheet has been derived from the audited consolidated financial statements. Certain
dollar amounts and percentages have been rounded to their approximate value.
For the six months ended
March 31, 2021, the Company generated net income of $364,000 and used $398,000 of cash flows in operating activities. The Company has
an accumulated deficit of $12,731,000 at March 31, 2021. We believe our existing cash balance and working capital will be sufficient to
meet our liquidity needs through at least June 30, 2022.
Accounting Estimates
The preparation of the Company’s
condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America
(“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.
Revenue Recognition
Distribution Segment
The Company generally recognizes
revenue in its distribution segment when: (i) finished goods are shipped to our distribution customers (in general, these conditions occur
at either point of shipment or point of destination, depending on the terms of sale, i.e., transfer of control); (ii) there are no other
deliverables or performance obligations; and (iii) there are no further obligations to the customer after title to the goods has transferred.
When the Company receives consideration before achieving the criteria previously mentioned, it records a contract liability, which is
classified as a component of deferred income in the accompanying condensed consolidated balance sheets. The distribution segment had no
contract liabilities at March 31, 2021 or September 30, 2019 and $75,000 of contract liabilities at September 30, 2020.
Design Segment
The Company applies the “cost
to cost” and “right to invoice” methods of revenue recognition to the contracts with customers in the design segment.
The design segment typically engages in two types of contracts: (i) time and material and (ii) fixed price. The Company recognizes revenue
over time on its time and material contracts utilizing a “right to invoice” method. Revenues from fixed price contracts that
require performance of services that are not related to the production of tangible assets are recognized by using cost inputs to measure
progress toward the completion of its performance obligations, or the “cost to cost” method. Revenues from fixed price contracts
that contain specific deliverables are recognized when the performance obligation has been satisfied or the transfer of goods to the customer
has been completed and accepted.
Recognized revenues that
will not be billed until a later date, or contract assets, are recorded as an asset and classified as a component of accounts receivable
in the accompanying condensed consolidated balance sheets. The design segment had contract assets of $863,000, $649,000 and $611,000 at
March 31, 2021, September 30, 2020 and September 30, 2019, respectively. Contracts where collections to date have exceeded recognized
revenues, or contract liabilities, are recorded as a liability and classified as a component of deferred income in the accompanying condensed
consolidated balance sheets. The design segment had contract liabilities of $137,000, $410,000 and $220,000 at March 31, 2021, September
30, 2020 and September 30, 2019, respectively.
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Accounts Receivable
Accounts receivable consist
of unsecured trade accounts with customers. The Company maintains an allowance for doubtful accounts, which is recorded as a reduction
to accounts receivable on the condensed consolidated financial statements. Collectability of accounts receivable is estimated by evaluating
the number of days accounts are outstanding, customer payment history, recent payment trends and perceived creditworthiness, adjusted
as necessary based on specific customer situations. At March 31, 2021 and September 30, 2020, the Company had allowances for doubtful
accounts of $249,000 and $249,000, respectively, for the distribution segment and $861,000 and $347,000, respectively, for the design
segment.
Goodwill
Goodwill represents the future
economic benefits of assets acquired in a business combination that are not individually identified or separately recognized. The Company’s
goodwill resulted from its acquisitions of IPS in January 2018 and Kablooe in August 2020.
The Company reviews goodwill
for impairment at least annually, or more often if triggering events occur. The Company has two reporting units with goodwill (IPS and
Kablooe) and we perform our annual goodwill impairment test on September 30, the end of the fiscal year, or upon the occurrence of a triggering
event. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred.
If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its
carrying amount, then the Company would not need to perform a quantitative impairment test for the reporting unit. If the Company cannot
support such a conclusion or does not elect to perform the qualitative assessment, then the Company will perform the quantitative impairment
test by comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting
unit exceeds its carrying value, no impairment charge is recognized. If the fair value of the reporting unit is less than its carrying
value, an impairment charge will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value.
A significant amount of judgment is required in performing goodwill impairment tests including estimating the fair value of a reporting
unit. See Note 3.
Intangible Assets
Intangible assets include
trademarks and customer relationships, which resulted from the acquisitions of IPS in January 2018 and Kablooe in August 2020 and are
recorded based on their estimated fair value determined in conjunction with the purchase price allocations. These intangible assets are
amortized over their estimated useful lives, which are periodically evaluated for reasonableness.
Our intangible assets are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
In assessing the recoverability of our intangible assets, we must make estimates and assumptions regarding future cash flows and other
factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether
an impairment charge is recognized and the magnitude of any such charge. Fair value estimates are made at a specific point in time, based
on relevant information. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore
cannot be determined with precision. Changes in assumptions could significantly affect the estimates. If these estimates or material related
assumptions change in the future, we may be required to record impairment charges related to our intangible assets. Management evaluated
and concluded that there were no impairments of intangible assets at March 31, 2021.
Income Taxes
The Company recognizes future
tax benefits and liabilities measured at enacted rates attributable to temporary differences between financial statement and income tax
bases of assets and liabilities and to net tax operating loss carryforwards to the extent that realization of these benefits is more likely
than not. At March 31, 2021, there was no change to our assessment that a full valuation allowance was required against all net deferred
tax assets as it is not probable that such deferred tax assets will be realized. Accordingly, any deferred tax provision or benefit was
offset by an equal and opposite change to the valuation allowance. No current book income tax provision was recorded against book net
income due to the existence of significant net operating loss carryforwards.
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In December 2020, the Company’s
application for forgiveness of its loan received as part of the Payroll Protection Program (“PPP loan”) pursuant to the U.S.
Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was approved. The aggregate loan principal amount forgiven
was $1,357,000. The total amount forgiven will not be recognized as taxable income pursuant to the CARES Act. Pursuant to the Consolidated
Appropriations Act, 2021, which was enacted by Congress and signed into law by the President on December 27, 2020, all expenses utilizing
funds from PPP loans will be deductible against taxable income.
Fair Value Measurements
We perform fair value measurements
in accordance with the guidance provided by Accounting Standards Codification (“ASC”) 820, “Fair Value Measurement.”
ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required
to be recorded at their fair values, we consider the principal or most advantageous market in which we would transact and consider assumptions
that market participants would use when pricing the assets or liabilities, such as inherent risk, transfer restrictions, and risk of nonperformance.
ASC 820 establishes a fair
value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring
fair value. An asset's or liability's categorization within the fair value hierarchy is based upon the lowest level of input that is significant
to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value:
|
·
|
Level 1: quoted prices in active markets for identical assets or liabilities;
|
|
·
|
Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or
|
|
·
|
Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities.
|
Leases
Lease
assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term, using the
Company’s incremental borrowing rate commensurate with the lease term, since the Company’s lessors do not provide an implicit
rate, nor is one readily available. The Company has certain leases that may include an option to renew and when it is reasonably probable
to exercise such option, the Company will include the renewal option terms in determining the lease asset and lease liability. Lease assets
represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s
obligation to make lease payments arising from the lease. Lease expense for lease payments is recognized on a straight-line basis over
the lease term. Operating lease assets are shown as right of use assets and finance lease assets are a component of property and equipment
on the condensed consolidated balance sheets. The current and long-term portions of operating and finance lease liabilities are shown
separately as such on the condensed consolidated balance sheets.
Business Combinations
The Company allocates the
fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair
values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.
When determining the fair values of assets acquired and liabilities assumed, the Company makes significant estimates and assumptions,
especially with respect to intangible assets.
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Critical estimates in valuing
certain intangible assets include, but are not limited to, future expected cash flows from customer relationships and developed technology,
discount rates and terminal values. Our estimates of fair value are based upon assumptions believed to be reasonable, but actual results
may differ from estimates. Other estimates associated with the accounting for acquisitions may change as additional information becomes
available regarding the assets acquired and liabilities assumed.
Reclassifications
Certain amounts in the accompanying
condensed consolidated financial statements for the three and six months ended March 31, 2020 have been reclassified to conform to the
March 31, 2021 presentation.
Recent Accounting Pronouncements
In August 2018, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, “Fair Value Measurement
- Disclosure Framework (Topic 820)” to improve the disclosure requirements on fair value measurements. The updated guidance is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any
removed or modified disclosures. The Company adopted this guidance in the first quarter of Fiscal 2021 with no material impact to its
condensed consolidated financial statements.
In November 2019, the FASB
issued ASU 2019-08, “Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606)”
to provide guidance for share-based payment awards granted to a customer in conjunction with selling goods or services accounted for under
Topic 606. The pronouncement is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years.
The Company adopted this guidance in the first quarter of Fiscal 2021 with no material impact to its condensed consolidated financial
statements.
In November 2019, the FASB
issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” ASU 2019-11 is
an accounting pronouncement that provides clarity to and amends earlier guidance on this topic and would be effective concurrently with
the adoption of such earlier guidance. This pronouncement is effective for fiscal years beginning after December 15, 2022 and interim
periods within those fiscal years. The Company is currently evaluating the effects of this pronouncement on its condensed consolidated
financial statements.
In
August 2018, the FASB issued ASU 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)”
addressing customers’ accounting for implementation costs incurred in a cloud computing arrangement
that is a service contract, which requires customers to apply internal-use software guidance to determine the implementation costs that
are able to be capitalized. Capitalized implementation costs are required to be amortized over the term of the arrangement, beginning
when the cloud computing arrangement is ready for its intended use. The effective date of the new guidance for public companies is for
fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The
Company adopted this guidance in the first quarter of Fiscal 2021 with no material impact to its condensed consolidated financial statements.
In December 2019, the FASB
issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This guidance removes certain
exceptions to the general principles in Topic 740 and provides consistent application of U.S. GAAP by clarifying and amending existing
guidance. The effective date of the new guidance for public companies is for fiscal years beginning after December 15, 2020 and interim
periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effects of the pronouncement on
its condensed consolidated financial statements.
NOTE 3 INTANGIBLE
ASSETS AND GOODWILL
The Company’s intangible
assets are all held under the design segment of our business. Amortization expense related to intangible assets was $53,000 and $41,000
for the three months ended March 31, 2021 and 2020, respectively, and $106,000 and $81,000 for the six months ended March 31, 2021 and
2020, respectively, which is included in general and administrative expenses on the condensed consolidated statements of operations.
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company’s intangible assets consist
of the following:
|
|
March
31, 2021
|
|
|
September 30, 2020
|
|
|
|
Trademarks
|
|
|
Customer
Relationships
|
|
|
Total
Intangible Assets
|
|
|
Trademarks
|
|
|
Customer
Relationships
|
|
|
Total Intangible Assets
|
|
Gross carrying amount
|
|
$
|
585,000
|
|
|
$
|
1,390,000
|
|
|
$
|
1,975,000
|
|
|
$
|
585,000
|
|
|
$
|
1,390,000
|
|
|
$
|
1,975,000
|
|
Less accumulated amortization
|
|
|
(106,000
|
)
|
|
|
(444,000
|
)
|
|
|
(550,000
|
)
|
|
|
(86,000
|
)
|
|
|
(358,000
|
)
|
|
|
(444,000
|
)
|
Net carrying amount
|
|
$
|
479,000
|
|
|
$
|
946,000
|
|
|
$
|
1,425,000
|
|
|
$
|
499,000
|
|
|
$
|
1,032,000
|
|
|
$
|
1,531,000
|
|
At March 31, 2021, estimated
amortization expense for the Company’s intangible assets for each of the next five years and thereafter is as follows:
Remainder of Fiscal 2021
|
|
$
|
107,000
|
|
Fiscal 2022
|
|
|
213,000
|
|
Fiscal 2023
|
|
|
213,000
|
|
Fiscal 2024
|
|
|
213,000
|
|
Fiscal 2025
|
|
|
213,000
|
|
Thereafter
|
|
|
466,000
|
|
Total
|
|
$
|
1,425,000
|
|
During the three months ended
March 31, 2020, the Company experienced triggering events that prompted the testing of its goodwill for impairment. Those triggering events
included the reduction in fair value of the IPS continent earnout consideration discussed in Note 4 and revised revenue and operational
projections for IPS for the remainder of the 2020 fiscal year and future periods. Based on these factors, the Company concluded that it
was more likely than not that the fair value of the IPS reporting unit had declined below its carrying amount. The Company then calculated
the fair value of this reporting unit using Level 3 inputs, which is a combination of asset-based, income and market approaches. The estimates
and assumptions utilized in the estimated fair value calculation include discount rate, terminal growth rate, selection of peer group
companies and control premium applied as well as forecasts of revenue growth rates, gross margins, operating margins and working capital
requirements. Any changes in the judgments, estimates or assumptions used could produce significantly different results. The Company concluded
the IPS reporting unit’s fair value was below its carrying value by $1,015,000 and an impairment charge was recognized for this
amount in the three months ended March 31, 2020. Based on management’s evaluation, there were no further impairments to goodwill
at September 30, 2020 and there were no triggering events leading to an interim impairment analysis at March 31, 2021.
NOTE 4 FAIR
VALUE MEASUREMENTS
The
deferred consideration of $60,000 and $90,000 at March 31, 2021 and September 30, 2020, respectively, represents the fair value of the
contingent earnout consideration related to the acquisition of Kablooe. The current and non-current portions of this liability are shown
in the corresponding categories on the condensed consolidated balance sheets in each period presented. In December 2020, the Company reduced
this liability from $90,000 to $60,000 based on the low likelihood of Kablooe reaching the first year’s earnings target.
In connection with the acquisition
of IPS in January 2018, the Company agreed to pay deferred cash consideration and contingent earnout consideration to the selling shareholders
of IPS and these liabilities were measured at fair value each reporting period. In March 2020, the fair value of the earnout consideration
was reduced from $350,000 to $0 due to the low likelihood of IPS reaching the underlying earnings target. At September 30, 2020, the Company
had no remaining obligation for consideration payments related to the acquisition of IPS.
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents
the placement in the fair value hierarchy and summarize the changes in fair value of the aforementioned liabilities for the three and
six months ended March 31, 2021:
|
|
|
|
|
Fair
value measurement at reporting date using
|
|
|
|
|
|
|
Quoted prices in active
markets for identical assets
|
|
|
Significant other observable
inputs
|
|
|
Significant unobservable
inputs
|
|
|
|
Balance
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Deferred consideration at September 30, 2020
|
|
$
|
90,000
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
90,000
|
|
Decrease in fair value of Kablooe
contingent earnout consideration
|
|
|
(30,000
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
(30,000
|
)
|
Deferred consideration at December 31, 2020
|
|
|
60,000
|
|
|
|
–
|
|
|
|
–
|
|
|
|
60,000
|
|
Change in fair value of Kablooe contingent
earnout consideration
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Deferred consideration at March 31, 2021
|
|
$
|
60,000
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
60,000
|
|
During Fiscal 2019, the Company
received common stock from a customer as compensation for services provided, which was recorded as a cost-method investment with an estimated
fair value of $327,000. This initial fair value was based on a private placement round of common stock issued to third-party private investors
of the customer at a time close to the valuation date. Management determined that the inputs used to value the investment were observable,
either directly or indirectly, and therefore classified as a level 2 valuation measurement. In March 2020, due to the performance of the
business in which the Company was invested, it concluded the investment was impaired and recorded an impairment charge of $327,000, which
was recorded as a component of general and administrative expenses on the condensed consolidated statement of operations.
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 SEGMENT
INFORMATION
The Company has two reportable
segments: distribution and design. The distribution segment sources and distributes carrying cases and other accessories for medical monitoring
and diagnostic kits and a variety of other portable electronic and non-electronic devices as well as smart-enabled and other products.
The design segment provides a full spectrum of hardware and software product design and engineering services. We measure the performance
of our operating segments based upon revenue and operating income or loss. Operating income/(loss) and net income/(loss) are shown in
the table below:
|
|
For the Three Months Ended
March 31,
|
|
|
For the Six Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Revenues, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
$
|
4,483,000
|
|
|
$
|
4,624,000
|
|
|
$
|
10,088,000
|
|
|
$
|
9,320,000
|
|
Design
|
|
|
3,912,000
|
|
|
|
3,307,000
|
|
|
|
8,025,000
|
|
|
|
7,004,000
|
|
Total revenues, net
|
|
$
|
8,395,000
|
|
|
$
|
7,931,000
|
|
|
$
|
18,113,000
|
|
|
$
|
16,324,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
$
|
3,911,000
|
|
|
$
|
4,063,000
|
|
|
$
|
8,791,000
|
|
|
$
|
8,156,000
|
|
Design
|
|
|
2,741,000
|
|
|
|
2,415,000
|
|
|
|
5,316,000
|
|
|
|
4,995,000
|
|
Total cost of sales
|
|
$
|
6,652,000
|
|
|
$
|
6,478,000
|
|
|
$
|
14,107,000
|
|
|
$
|
13,151,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
$
|
(528,000
|
)
|
|
$
|
(378,000
|
)
|
|
$
|
(872,000
|
)
|
|
$
|
(821,000
|
)
|
Design
|
|
|
(288,000
|
)
|
|
|
(1,289,000
|
)
|
|
|
(112,000
|
)
|
|
|
(875,000
|
)
|
Total loss from operations
|
|
$
|
(816,000
|
)
|
|
$
|
(1,667,000
|
)
|
|
$
|
(984,000
|
)
|
|
$
|
(1,696,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense/(income), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
$
|
45,000
|
|
|
$
|
(307,000
|
)
|
|
$
|
44,000
|
|
|
$
|
(274,000
|
)
|
Design
|
|
|
(26,000
|
)
|
|
|
12,000
|
|
|
|
(1,392,000
|
)
|
|
|
31,000
|
|
Total other expense/(income), net
|
|
$
|
19,000
|
|
|
$
|
(295,000
|
)
|
|
$
|
(1,348,000
|
)
|
|
$
|
(243,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
$
|
(573,000
|
)
|
|
$
|
(71,000
|
)
|
|
$
|
(916,000
|
)
|
|
$
|
(547,000
|
)
|
Design
|
|
|
(262,000
|
)
|
|
|
(1,301,000
|
)
|
|
|
1,280,000
|
|
|
|
(906,000
|
)
|
Total net (loss)/income
|
|
$
|
(835,000
|
)
|
|
$
|
(1,372,000
|
)
|
|
$
|
364,000
|
|
|
$
|
(1,453,000
|
)
|
The following table presents total assets by operating
segment:
|
|
March 31,
2021
|
|
|
September 30,
2020
|
|
Distribution
|
|
$
|
7,685,000
|
|
|
$
|
8,289,000
|
|
Design
|
|
|
9,514,000
|
|
|
|
11,067,000
|
|
Total
|
|
$
|
17,199,000
|
|
|
$
|
19,356,000
|
|
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 SHARE-BASED
COMPENSATION
2021
Equity Incentive Plan
In
February 2021, shareholders of the Company approved the 2021 Equity Incentive Plan (the “2021 Plan”), which is administered
by the Compensation Committee of the Board of Directors and authorizes 1,291,000 shares of common stock for grants of various types of
equity awards to officers, directors, employees and consultants. Upon approval of the 2021 Plan, no additional awards were granted under
the 2011 Long Term Incentive Plan (the “2011 Plan”), which expired according to its terms in March 2021. Shares authorized
under the 2021 Plan include 1,000,000 new shares and 291,000 shares that remained available under the 2011 Plan. Awards which are forfeited
or expire are eligible for regrant under the 2021 Plan. The exercise prices of stock options granted may not be less than the fair market
value of the common stock as quoted on the Nasdaq stock market on the grant date and the expiration date of option awards may not exceed
10 years.
Stock Options
No
options were granted during the three or six months ended March 31, 2021.
In
February 2020, the Company granted options to non-employee directors to purchase an aggregate of 248,000 shares of its common stock at
an exercise price of $1.13 per shares. The options vested one year from the date of grant, expire five years from the date of grant and
had an aggregate grant date fair value of $145,000, which was recognized ratably over the vesting period. These options, which were the
only options granted during the three and six months ended March 31, 2020, had a grant-date fair value of $0.58 per share.
During
the six months ended March 31, 2021, the Company issued 69,000 shares of its common stock pursuant to the exercise of stock options for
aggregate cash proceeds of $144,000. There were no options exercised during the six months ended March 31, 2020.
The
Company recognized compensation expense for stock option awards of $21,000 and $36,000 during the three months ended March 31, 2021 and
2020, respectively, and $63,000 and $69,000 during the six months ended March 31, 2021 and 2020, respectively, in its condensed consolidated
statements of operations.
At
March 31, 2021, there was $10,000 of total unrecognized compensation cost related to nonvested stock option awards that is expected to
be recognized over a weighted average period of 1.0 year.
NOTE 7 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 shares that would be issued upon the exercise of stock
options and warrants, computed using the treasury stock method. A reconciliation of basic and diluted earnings/(loss) per share is as
follows:
|
|
For the Three Months Ended
March 31,
|
|
|
For the Six Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$
|
(835,000
|
)
|
|
$
|
(1,372,000
|
)
|
|
$
|
364,000
|
|
|
$
|
(1,453,000
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
9,909,000
|
|
|
|
9,534,000
|
|
|
|
9,897,000
|
|
|
|
9,534,000
|
|
Dilutive common share equivalents
|
|
|
–
|
|
|
|
–
|
|
|
|
482,000
|
|
|
|
–
|
|
Weighted average diluted shares outstanding
|
|
|
9,909,000
|
|
|
|
9,534,000
|
|
|
|
10,379,000
|
|
|
|
9,534,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.08
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.15
|
)
|
Diluted
|
|
$
|
(0.08
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.15
|
)
|
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following securities
were excluded from the calculation of diluted earnings/(loss) per share in each period because their inclusion would have been anti-dilutive:
|
|
For the Three Months Ended
March 31,
|
|
|
For the Six Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Options
|
|
|
1,049,000
|
|
|
|
1,004,000
|
|
|
|
10,000
|
|
|
|
1,004,000
|
|
Warrants
|
|
|
151,000
|
|
|
|
151,000
|
|
|
|
–
|
|
|
|
151,000
|
|
Total potentially dilutive shares
|
|
|
1,200,000
|
|
|
|
1,155,000
|
|
|
|
10,000
|
|
|
|
1,155,000
|
|
NOTE 8 CONCENTRATIONS
Concentration of Revenues and Accounts Receivable
For the three and six months
ended March 31, 2021 and 2020, the Company had customers whose individual percentage of their respective segment’s revenues and
accounts receivable was 10% or greater. The concentrations of revenues and accounts receivable for each reportable segment are as follows:
Distribution Segment Revenues Concentration
|
|
For the Three Months Ended
March 31,
|
|
|
For the Six Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Customer A
|
|
|
28%
|
|
|
|
37%
|
|
|
|
28%
|
|
|
|
35%
|
|
Customer B
|
|
|
19%
|
|
|
|
20%
|
|
|
|
18%
|
|
|
|
17%
|
|
Customer C
|
|
|
28%
|
|
|
|
16%
|
|
|
|
25%
|
|
|
|
24%
|
|
Customer D
|
|
|
7%
|
|
|
|
12%
|
|
|
|
9%
|
|
|
|
8%
|
|
Totals
|
|
|
82%
|
|
|
|
85%
|
|
|
|
80%
|
|
|
|
84%
|
|
Design Segment Revenues Concentration
|
|
For the Three Months Ended
March 31,
|
|
|
For the Six Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Customer 1
|
|
|
6%
|
|
|
|
21%
|
|
|
|
9%
|
|
|
|
15%
|
|
Customer 2
|
|
|
9%
|
|
|
|
16%
|
|
|
|
11%
|
|
|
|
13%
|
|
Customer 3
|
|
|
10%
|
|
|
|
14%
|
|
|
|
9%
|
|
|
|
18%
|
|
Customer 4
|
|
|
20%
|
|
|
|
–
|
|
|
|
17%
|
|
|
|
–
|
|
Customer 5
|
|
|
1%
|
|
|
|
9%
|
|
|
|
1%
|
|
|
|
11%
|
|
Total
|
|
|
46%
|
|
|
|
60%
|
|
|
|
47%
|
|
|
|
57%
|
|
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Distribution Segment Accounts Receivable
Concentration
|
|
March 31,
2021
|
|
|
September 30,
2020
|
|
Customer A
|
|
|
23%
|
|
|
|
23%
|
|
Customer B
|
|
|
30%
|
|
|
|
22%
|
|
Customer C
|
|
|
19%
|
|
|
|
20%
|
|
Customer D
|
|
|
13%
|
|
|
|
17%
|
|
Totals
|
|
|
85%
|
|
|
|
82%
|
|
Design Segment Accounts Receivable Concentration
|
|
March 31,
2021
|
|
|
September 30,
2020
|
|
Customer 1
|
|
|
20%
|
|
|
|
24%
|
|
Customer 3
|
|
|
11%
|
|
|
|
5%
|
|
Customer 4
|
|
|
12%
|
|
|
|
6%
|
|
Customer 5
|
|
|
2%
|
|
|
|
10%
|
|
Customer 6
|
|
|
–
|
|
|
|
14%
|
|
Totals
|
|
|
45%
|
|
|
|
59%
|
|
NOTE 9 RELATED
PARTY TRANSACTIONS
Buying Agency and Supply Agreement
The Company has a Buying
Agency and Supply Agreement (the “Supply Agreement”) with Forward Industries Asia-Pacific Corporation (“Forward China”).
The Supply Agreement provides that, upon the terms and subject to the conditions set forth therein, Forward China will act as the Company’s
exclusive buying agent and supplier of Products (as defined in the Supply Agreement) in the Asia-Pacific region. The Company
purchases products at Forward China’s cost and also pays to Forward China a monthly service fee equal to the sum of: (i) $100,000
and (ii) 4% of “Adjusted Gross Profit”, which is defined as the selling price less the cost from Forward China. The Supply
Agreement expires October 22, 2023. Terence Wise, Chief Executive Officer and Chairman of the Company, is the owner of Forward China.
In addition, Jenny P. Yu, a Managing Director of Forward China, beneficially owns more than 5% of the Company’s common stock. The
Company recorded service fees to Forward China of $340,000 and $339,000 during the three months ended March 31, 2021 and 2020, respectively,
and $683,000 and $676,000 during the six months ended March 31, 2021 and 2020, respectively, which are included as a component of cost
of sales upon sales of the related products.
The Company has a separate
agreement with Forward China to address the potential impact of customers sourcing directly from Forward China. In the event a customer
bypasses the services of the Company and does business directly with Forward China, Forward China will pay a commission of 50% of the
net revenue, less direct costs, generated from the products or services sold. The Company recognized $12,000 of commissions related to
this agreement during the six months ended March 31, 2021. No commissions were recognized during the three or six months ended March 31,
2020.
The Company had no prepayments
to Forward China for inventory purchases at March 31, 2021 and $107,000 of prepayments for inventory purchases at September 30, 2020,
which are included in prepaid expenses and other current assets on the condensed consolidated balance sheets.
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Promissory Note
On January 18, 2018, the
Company issued a $1,600,000 promissory note payable to Forward China to fund the acquisition of IPS. The promissory note bears an interest
rate of 8% per annum and had an original maturity date of January 18, 2019. Monthly interest payments commenced on February 18, 2018.
The Company incurred and paid $32,000 for the three months ended March 31, 2021 and 2020 and $64,000 for the six months ended March 31,
2021 and 2020 in interest expense associated with this note. The maturity date of this note was extended to December 31, 2022.
Related Party Sales
The Company’s design
division provided services to a customer whose former Chief Operating and Financial Officer and equity owner is an immediate family member
of a director on the Company’s Board of Directors. The director is a member of the Board’s Audit, Governance and Compensation
Committees. The Company sold design services to this customer of $6,000 and $44,000 for the three and six months ended March 31, 2020,
respectively. There were no sales to this customer for the three or six months ended March 31, 2021.
Related Party Activity
In October 2020, the Company
began selling smart-enabled furniture, which is sourced by Forward China and sold in the U.S. under the Koble brand name. The Koble brand
is owned by The Justwise Group Ltd., a company owned by Terrence Wise, Chief Executive Officer and Chairman of the Company. The Company
recognized revenues from the sale of Koble products in the U.S. of $154,000 and $339,000 during the three and six months ended March 31,
2021, respectively.
NOTE 10 LEGAL
PROCEEDINGS
On August 21, 2020, IPS was
named a third-party defendant in a patent dispute claim currently pending in the U.S. District Court for the Eastern District of New York.
The complaint, which contains no specific amount of claimed monetary damages, asserts that certain intellectual property was misappropriated
by IPS and one of its former employees. IPS denies the allegations, believes the action is without merit and intends to vigorously
defend it. The Company filed a motion to dismiss the complaint on December 14, 2020. The court has not yet ruled on the Company’s
motion.
From time to time, the Company
may become a party to other legal actions or proceedings in the ordinary course of its business. At March 31, 2021, 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.
NOTE 11 LINE
OF CREDIT
The Company,
specifically IPS, has a $1,300,000 revolving line of credit with a bank which was renewed at the discretion of the lender on August
5, 2020. The line of credit had a maturity date of May 31, 2021 at March 31, 2021, is guaranteed by the Company and is secured by
all of IPS’ assets. The interest rate on the line of credit is 0.75% above The Wall Street Journal prime rate. The
effective interest rate was 4.0% at both March 31, 2021 and September 30, 2020. In March 2021, the Company paid down the outstanding
balance on the line of credit and $1,300,000 was available at March 31, 2021. The Company is subject to certain debt-service ratio
requirements which are measured annually. At September 30, 2020, the Company was in violation of the required debt-service ratio
covenants but was granted a waiver of the violation from the lender. In May 2021, the bank renewed the line of credit with a
maturity date of May 31, 2022.
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 DEBT
On April 18, 2020, the Company
entered into a loan in an aggregate principal amount of $1,357,000 under the Paycheck Protection Program of the CARES Act. The loan was
unsecured, bore interest at a rate of 1% per annum, and was scheduled to mature on April 18, 2022. In October 2020, the Company filed
for forgiveness of this loan and in December 2020, the Small Business Administration (“SBA”) approved our forgiveness request
for this loan. The forgiveness has been accounted for as an extinguishment of debt and the resulting gain has been recorded as forgiveness
of note payable on the condensed consolidated statement of operations for the six months ended March 31, 2021. There is a six-year period
during which the SBA can review the Company’s forgiveness.
In connection with the acquisition
of Kablooe, the Company assumed a loan payable with a principal amount of $170,000. The loan matures in August 2021, bears interest at
a rate of 6.0% per annum and is secured by all of Kablooe’s assets. Interest and principal payments of $15,000 are payable monthly
until maturity. The outstanding balance at March 31, 2021 and September 30, 2020 was $72,000 and $156,000, respectively.
NOTE 13 MOONI
AGREEMENT
On January 29, 2019, the
Company entered into a three-year Distribution Agreement (the “Agreement”) with Mooni International AB (“Mooni”)
and its owner. In accordance with the Agreement, the Company (i) was appointed as the exclusive distributor of Mooni's current and future
products (including future products developed or offered by Mooni and/or the owner) in North America, (ii) subject to certain repayment
requirements, paid $400,000 to Mooni, and (iii) was granted an option to purchase a controlling interest of Mooni at a valuation not to
exceed $5 million which, if exercised, would have been effective on the 12-month anniversary of the effective date of the Agreement. This
option was not exercised and therefore expired. Additionally, Forward China, a company owned by Terence Wise, the Company's Chairman and
Chief Executive Officer, was named the designated supplier under the Agreement.
The Company generated revenues
from this agreement of $454,000 since it began selling Mooni products in Fiscal 2020. The current and long-term portions of the unamortized
fee of $111,000 and $0, respectively, at March 31, 2021 and $133,000 and $45,000, respectively, at September 30, 2020, are included in
prepaid expenses and other current assets and other assets, respectively, in the accompanying condensed consolidated financial statements.
Amortization of the cost for the three and six months ended March 31, 2021 of $33,000 and $67,000, respectively, and for the three and
six months ended March 31, 2020 of $33,000 and $67,000, respectively, is included in sales and marketing expenses in the accompanying
condensed consolidated statements of operations.
NOTE 14 LEASES
The Company’s operating
leases are primarily for corporate, sales and administrative office space. Total operating lease expense was $152,000 and $304,000 for
the three and six months ended March 31, 2021, respectively, and $122,000 and $255,000 for the three and six months ended March 31, 2020,
respectively, and is recorded in general and administrative expenses on the condensed consolidated statements of operations.
The Company leases certain
computer equipment through various finance lease agreements expiring through July 2022. The net book value of assets under finance leases
was $18,000 and $23,000 at March 31, 2021 and September 30, 2020, respectively.
In March 2021, the Company
signed a renewal to extend the term of its lease in Minnesota for an additional 60 months. The renewal of this operating lease commences
July 1, 2021 and payments under it escalate 2.75% per year. The monthly rent payment is $10,000 per month, which includes taxes and operating
expenses as defined in the agreement.
FORWARD INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Additional information related
to operating and finance leases at March 31, 2021 and September 30, 2020 is as follows:
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Weighted Average Remaining Lease Term (Yrs):
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
10.5
|
|
|
|
10.9
|
|
Finance leases
|
|
|
0.9
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Discount Rate:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
5.7%
|
|
|
|
5.7%
|
|
Finance leases
|
|
|
5.8%
|
|
|
|
5.8%
|
|
At March 31, 2021, future
minimum payments under non-cancellable operating and finance leases were as follows:
|
|
Operating Leases
|
|
|
Finance Leases
|
|
Remainder of Fiscal 2021
|
|
$
|
232,000
|
|
|
$
|
5,000
|
|
Fiscal 2022
|
|
|
430,000
|
|
|
|
10,000
|
|
Fiscal 2023
|
|
|
426,000
|
|
|
|
–
|
|
Fiscal 2024
|
|
|
433,000
|
|
|
|
–
|
|
Fiscal 2025
|
|
|
395,000
|
|
|
|
–
|
|
Thereafter
|
|
|
2,805,000
|
|
|
|
–
|
|
Total future minimum lease payments
|
|
|
4,721,000
|
|
|
|
15,000
|
|
Less imputed interest
|
|
|
(1,227,000
|
)
|
|
|
(3,000
|
)
|
Present value of lease liabilities
|
|
$
|
3,494,000
|
|
|
$
|
12,000
|
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion
and analysis should be read in conjunction with our unaudited condensed consolidated financial statements, and the notes thereto, and
other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements
and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020. The following discussion
and analysis compares our consolidated results of operations for the three and six months ended March 31, 2021 (the “2021 Quarter”
and the “2021 Period”, respectively) with those for the three and six months ended March 31, 2020 (the “2020 Quarter”
and the “2020 Period”, respectively). All dollar amounts and percentages presented herein have been rounded to approximate
values.
Cautionary Note Regarding Forward-Looking Statements
This report contains “forward-looking
statements”, as such term is used within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include,
among other things, statements regarding:
|
·
|
expectations regarding the impact of the pandemic on our business,
|
|
·
|
expectations regarding the length of the pandemic’s business disruption,
|
|
·
|
expectations regarding revenues,
|
|
·
|
plans regarding the repayment of debt, and
|
|
·
|
beliefs regarding our capital
|
as well as other statements regarding our future
operations, financial condition and prospects and business strategies. Forward-looking statements can be identified by words such as “anticipates,”
“intends,” “plans,” “seeks,” “believes,” “estimates,” “expects,”
“predicts,” “projects,” “will be” and “will continue” and similar expressions. Forward-looking
statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because
forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are
difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you
therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or
assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking
statements include the failure to receive material orders, our ability to successfully market and sell products that we develop, the effects
of the COVID-19 outbreak, including levels of consumer, business and economic confidence generally, the duration of the COVID-19 outbreak
and severity of such outbreak, the pace of recovery following the COVID-19 outbreak, the effect on our supply chain, our ability to implement
cost containment; and the adverse effects of the COVID-19 outbreak on our business or the market price of our common stock, failure
to diversify the industries in which we sell our products, potential imposed tariffs or other restrictions placed on imports by the U.S.
government, and continued pricing pressure on our products. Further information on our risk factors is contained in our filings with the
SEC, including our Form 10-K for the year ended September 30, 2020. Any forward-looking statement made by us speaks only as of the date
on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible
for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new
information, future developments or otherwise, except as may be required by law.
Business Overview
Forward Industries, Inc.
is a fully integrated design, development and manufacturing solution provider for top tier medical and technology customers worldwide.
As a result of the continued expansion of our design development capabilities through our wholly-owned subsidiaries, IPS and Kablooe,
we are now able to introduce proprietary products to the market from concepts brought to us from a number of different sources, both inside
and outside the Company.
The acquisition of Kablooe
took place in August 2020 and its results of operations have been included in our condensed consolidated financial statements since the
acquisition date. Accordingly, our results of operations for the 2021 Quarter and the 2021 Period include Kablooe’s results of operations,
while our results of operations for the 2020 Quarter and the 2020 Period do not. Key terms of the acquisition are contained in our Form
10-K filed with the Securities and Exchange Commission on December 17, 2020.
The future impacts of the
COVID-19 pandemic and any resulting economic impact are largely unknown and could be significant. It is possible that the COVID-19 pandemic,
the measures taken by the governments of countries affected and the resulting economic impact may continue to negatively impact our results
of operations, cash flows and financial position in future periods as well as that of our customers, including their ability to pay for
our services and choosing to allocate their budgets to new or existing projects which may or may not require our services. The long-term
financial impact on our business cannot be reasonably estimated at this time. As a result, the effects of COVID-19 may not be fully reflected
in our financial results until future periods.
Until the pandemic is under
control, we expect business conditions to remain challenging. In response to these challenges, we will continue to focus on those
factors that we can control: closely managing and controlling our expenses; aligning our design and development schedules with demand
in a proactive manner as there are changes in market conditions to minimize our cash operating costs; pursuing further improvements in
the productivity and effectiveness of our development, selling and administrative activities and, where appropriate, taking advantage
of opportunities to enhance our business growth and strategy. To help mitigate the impact of these challenging business conditions, we
have implemented cost cutting initiatives and reduced executive pay and Board of Directors compensation for an undetermined period of
time. There is no assurance these measures will be successful. See “Liquidity and Capital Resources” section for further description
of these cost cutting measures.
Refer to “Part II,
Item 1A — Risk Factors” for a description of the material risks that the Company currently faces in connection with COVID-19.
Variability of Revenues and Results of Operations
A significant portion of
our revenue is concentrated with several large customers, some of which are the same and some of which change over time. Orders from some
of these customers can be highly variable, with short lead times, which can cause our quarterly revenues, and consequently our results
of operations, to vary over a relatively short period of time.
Critical Accounting Policies and Estimates
We discuss the material accounting
policies that are critical in making the estimates and judgments in our Annual Report on Form 10-K for the fiscal year ended September
30, 2020, under the caption “Management’s Discussion and Analysis—Critical Accounting Policies and Estimates”.
There has been no material change in critical accounting policies or estimates during the period covered by this report.
Recent Accounting Pronouncements
For information on recent
accounting pronouncements and impacts, see Note 2 to the unaudited condensed consolidated financial statements.
RESULTS OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 2021 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2020
Net Loss
Distribution Segment
Distribution segment net
loss was $573,000 in the 2021 Quarter compared to $71,000 in the 2020 Quarter. The increase to the net loss was primarily due to a reduction
in the non-cash fair value adjustments to reduce acquisition-related earnout liabilities (see Note 4) coupled with higher sales and marketing
expenses, as reflected in the table below.
Design Segment
Design segment net loss
was $262,000 in the 2021 Quarter compared to $1,301,000 in the 2020 Quarter. The reduction to the net loss was primarily due to a
reduction in impairment charges (see Notes 3 and 4) and higher gross profit, partially offset by higher general and administrative
expenses, as reflected in the table below:
|
|
Main
Components of Net Loss
|
|
|
|
(amounts in thousands)
|
|
|
|
2021
Quarter
|
|
|
2020
Quarter
|
|
|
Increase
(Decrease)
|
|
|
|
Consolidated
|
|
|
Distribution
|
|
|
Design
|
|
|
Consolidated
|
|
|
Distribution
|
|
|
Design
|
|
|
Consolidated
|
|
Net revenues
|
|
$
|
8,395
|
|
|
$
|
4,483
|
|
|
$
|
3,912
|
|
|
$
|
7,931
|
|
|
$
|
4,624
|
|
|
$
|
3,307
|
|
|
$
|
464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
1,743
|
|
|
$
|
572
|
|
|
$
|
1,171
|
|
|
$
|
1,453
|
|
|
$
|
561
|
|
|
$
|
892
|
|
|
$
|
290
|
|
Sales and marketing expenses
|
|
|
578
|
|
|
|
480
|
|
|
|
98
|
|
|
|
480
|
|
|
|
351
|
|
|
|
129
|
|
|
|
98
|
|
General and administrative expenses
|
|
|
1,981
|
|
|
|
620
|
|
|
|
1,361
|
|
|
|
1,625
|
|
|
|
588
|
|
|
|
1,037
|
|
|
|
356
|
|
Goodwill impairment
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,015
|
|
|
|
–
|
|
|
|
1,015
|
|
|
|
(1,015
|
)
|
Operating loss
|
|
|
(816
|
)
|
|
|
(528
|
)
|
|
|
(288
|
)
|
|
|
(1,667
|
)
|
|
|
(378
|
)
|
|
|
(1,289
|
)
|
|
|
851
|
|
Other expense/(income), net
|
|
|
19
|
|
|
|
45
|
|
|
|
(26
|
)
|
|
|
(295
|
)
|
|
|
(307
|
)
|
|
|
12
|
|
|
|
314
|
|
Net loss
|
|
$
|
(835
|
)
|
|
$
|
(573
|
)
|
|
$
|
(262
|
)
|
|
$
|
(1,372
|
)
|
|
$
|
(71
|
)
|
|
$
|
(1,301
|
)
|
|
$
|
537
|
|
Basic and diluted
loss per share were $0.08 and $0.14, respectively, for the 2021 Quarter and the 2020 Quarter.
Net Revenues
Distribution Segment
Net revenues in the distribution
segment decreased $141,000, or 3.0%, to $4,483,000 in the 2021 Quarter from $4,624,000 in the 2020 Quarter, the result of a decrease in
diabetic product line revenue, partially offset by an increase in other product revenue. Revenues from diabetic products decreased $252,000
and revenue from other products increased $111,000. In future periods, we believe other product sales will continue to increase while
diabetic product sales will continue to decline.
The following tables set
forth revenues by channel, product line and geographic location of our distribution segment customers for the periods indicated:
|
|
Net Revenues for the 2021 Quarter
|
|
|
|
(amounts in thousands)
|
|
|
|
Americas
|
|
|
APAC
|
|
|
EMEA
|
|
|
Total
|
|
Diabetic products
|
|
$
|
882
|
|
|
$
|
1,405
|
|
|
$
|
1,549
|
|
|
$
|
3,836
|
|
Other products
|
|
|
473
|
|
|
|
168
|
|
|
|
6
|
|
|
|
647
|
|
Total net revenues
|
|
$
|
1,355
|
|
|
$
|
1,573
|
|
|
$
|
1,555
|
|
|
$
|
4,483
|
|
|
|
Net Revenues for the 2020 Quarter
|
|
|
|
(amounts in thousands)
|
|
|
|
Americas
|
|
|
APAC
|
|
|
EMEA
|
|
|
Total
|
|
Diabetic products
|
|
$
|
1,342
|
|
|
$
|
842
|
|
|
$
|
1,904
|
|
|
$
|
4,088
|
|
Other products
|
|
|
337
|
|
|
|
166
|
|
|
|
33
|
|
|
|
536
|
|
Total net revenues
|
|
$
|
1,679
|
|
|
$
|
1,008
|
|
|
$
|
1,937
|
|
|
$
|
4,624
|
|
Diabetic Product Revenues
Our distribution segment
manufactures to the order of, and sells carrying cases for, blood glucose diagnostic kits directly to original equipment manufacturers
(“OEM”s) or their contract manufacturers. The OEM customer or its contract manufacturer packages our carrying cases “in
box” as a custom accessory for the OEM’s blood glucose testing and monitoring kits, or to a lesser extent, sells them through
their retail distribution channels.
Revenues from diabetic products
decreased $252,000, or 6.2%, to $3,836,000 in the 2021 Quarter from $4,088,000 in the 2020 Quarter. This decrease was primarily due to
lower revenues from three major diabetic customers (Diabetic Products Customers A, B and D), partially offset by an increase in revenue
from Diabetic Products Customer C. As mentioned above, management believes that revenues from diabetic customers will continue to decline
in future periods.
The following table sets
forth our distribution segment net revenues by diabetic products customer for the periods indicated:
|
|
Diabetic Revenues
|
|
|
|
(amounts in thousands)
|
|
|
|
2021
Quarter
|
|
|
2020
Quarter
|
|
|
Increase
(Decrease)
|
|
Diabetic Products Customer A
|
|
$
|
1,275
|
|
|
$
|
1,709
|
|
|
$
|
(434
|
)
|
Diabetic Products Customer B
|
|
|
869
|
|
|
|
948
|
|
|
|
(79
|
)
|
Diabetic Products Customer C
|
|
|
1,244
|
|
|
|
735
|
|
|
|
509
|
|
Diabetic Products Customer D
|
|
|
304
|
|
|
|
537
|
|
|
|
(233
|
)
|
All other Diabetic Products Customers
|
|
|
144
|
|
|
|
159
|
|
|
|
(15
|
)
|
Total Diabetic Revenue
|
|
$
|
3,836
|
|
|
$
|
4,088
|
|
|
$
|
(252
|
)
|
Revenues from diabetic products
represented 86% of our distribution segment’s net revenues in the 2021 Quarter compared to 88% in the 2020 Quarter.
Other Product Revenues
Other product revenues include
cases and protective solutions sourced and sold to OEMs for a diverse array of portable electronic and non-electronic products (such as
sporting and recreational products, bar code scanners, GPS location devices, tablets and firearms) on a made-to-order basis that are customized
to fit the products sold by our OEM customers. Other product revenues also include sales of smart-enabled and other products sold through
our retail distribution network.
Revenues from other products
increased $111,000, or 20.7%, to $647,000 in the 2021 Quarter from $536,000 in the 2020 Quarter, primarily due to the increase in sales
of smart-enabled and other products sold through our retail distribution network, driven by new product offerings and the expansion of
our retail distribution network. This increase was partially offset by a decline in sales of non-medical cases and protective solutions.
We will continue to focus on our sales and sales support teams in our continued efforts to expand and diversify our other products customer
base as well as take advantage of opportunities to source other products.
Revenues from other products
represented 14% of our net revenues in the 2021 Quarter compared to 12% of our net revenues in the 2020 Quarter.
Design Segment
Net revenues in the design
segment increased $605,000, or 18.3%, to $3,912,000 in the 2021 Quarter from $3,307,000 in the 2020 Quarter, primarily driven by revenues
generated by Kablooe, which was acquired in August 2020. The remaining variance was driven by new business from existing customers, partially
offset by a decline in revenue from certain other customers as projects were either completed or spending was reduced in response to COVID-19.
The following table sets forth our design segment net revenues by major customers for the 2021 Quarter:
|
|
Design Revenues
|
|
|
|
(amounts in thousands)
|
|
|
|
2021
Quarter
|
|
|
2020
Quarter
|
|
|
Increase
(Decrease)
|
|
Design Segment Customer 1
|
|
$
|
225
|
|
|
$
|
700
|
|
|
$
|
(475
|
)
|
Design Segment Customer 2
|
|
|
364
|
|
|
|
540
|
|
|
|
(176
|
)
|
Design Segment Customer 3
|
|
|
409
|
|
|
|
452
|
|
|
|
(43
|
)
|
Design Segment Customer 4
|
|
|
773
|
|
|
|
–
|
|
|
|
773
|
|
Design Segment Customer 5
|
|
|
22
|
|
|
|
287
|
|
|
|
(265
|
)
|
All other Design Segment Customers
|
|
|
2,119
|
|
|
|
1,328
|
|
|
|
791
|
|
Total design segment revenues
|
|
$
|
3,912
|
|
|
$
|
3,307
|
|
|
$
|
605
|
|
Gross Profit
Distribution Segment
Gross profit for the distribution
segment increased $11,000, or 2.0%, to $572,000 in the 2021 Quarter as compared to $561,000 in the 2020 Quarter, and gross margin improved
from 12.1% to 12.8% in the same period. The increase in both gross profit and margin are driven by higher margins on the sale of non-medical
cases and other products. This increase in profit margin was partially offset by the continued decline in gross margin on diabetic products
due to a shift to lower margin cases and pricing pressures on diabetic products from customers. We continue to work on expanding our product
offering to include higher margin products and enhancing our sales efforts to grow revenue and increase gross profit.
Design Segment
Gross profit for the
design segment increased $279,000, or 31.3%, to $1,171,000 in the 2021 Quarter from $892,000 in the 2020 Quarter. Gross margin
improved from 27.0% to 29.9% in the same period. The acquisition of Kablooe in August 2020 accounted for the improvement in
both gross profit and margin in the 2021 Quarter, which was partially offset by lower utilization rates in the beginning of the 2021
Quarter. Depreciation expense, which is allocated to cost of sales for the design segment, was $24,000 and $28,000 for the 2021
Quarter and 2020 Quarter, respectively.
Sales and Marketing Expenses
Distribution Segment
Sales and marketing expenses
for the distribution segment increased $129,000, or 36.8%, to $480,000 in the 2021 Quarter from $351,000 in the 2020 Quarter. The increase
was primarily due to expenses associated with growing our retail distribution network. Sales and marketing expenses for the distribution
segment increased to 10.7% of revenues in the 2021 Quarter as compared to 7.6% of revenues in the 2020 Quarter.
Design Segment
Sales and marketing expenses
for the design segment decreased $31,000, or 24.0%, to $98,000 in the 2021 Quarter from $129,000 in the 2020 Quarter. The decrease in
sales and marketing expenses is primarily due to lower payroll costs. Sales and marketing expenses for the design segment decreased to
2.5% of revenues in the 2021 Quarter from 3.9% of revenues in the 2020 Quarter.
General and Administrative Expenses
Distribution Segment
General and administrative
expenses in the distribution segment increased $32,000, or 5.4%, to $620,000 in the 2021 Quarter from $588,000 in the 2020 Quarter. The
increase was primarily comprised of an insurance settlement recovery of $80,000 received in the 2020 Quarter, an increase in professional
fees and higher insurance premiums, partially offset by a $55,000 decrease in software implementation costs and a $52,000 reduction in
Board of Director expenses. General and administrative expenses for the distribution segment increased to 13.8% of revenues in the 2021
Quarter as compared to 12.7% of revenues in the 2020 Quarter.
Design Segment
General and administrative
expenses for the design segment increased $324,000, or 31.2%, to $1,361,000 in the 2021 Quarter from $1,037,000 in the 2020 Quarter. The
increase is primarily driven by a $470,000 increase in bad debt expense, general and administrative costs of $267,000 generated by Kablooe,
which was acquired in August 2020, partially offset by a decrease in investment impairment expense of $327,000 (see Note 4) and an $85,000
reduction in professional fees, primarily due to reduced software implementation costs. General and administrative expenses for the design
segment increased to 34.8% of revenues in the 2021 Quarter as compared to 31.4% of revenues in the 2020 Quarter.
Other Income / (Expense)
Distribution Segment
The distribution segment
reported other expense of $45,000 in the 2021 Quarter as compared to other income of $307,000 in the 2020 Quarter. The variance is primarily
due the net $341,000 fair value adjustments recorded in the 2020 Quarter associated with the reduction of the IPS contingent earnout liability
(see Note 4).
Design Segment
The design segment reported
other income of $26,000 in the 2021 Quarter as compared to other expense of $12,000 in the 2020 Quarter, primarily related to interest
income on the note receivable from a customer which was fully reserved in Fiscal 2019 and lower interest expense due to a reduction in
the average amount of debt outstanding.
Income Taxes
For the 2021 Quarter, the
Company generated a net loss of $835,000. The Company maintains significant net operating loss carryforwards and does not recognize income
tax expense / (benefit) as its deferred tax provision is typically offset by a full valuation allowance on its net deferred tax asset.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED
MARCH 31, 2021 COMPARED TO THE SIX MONTHS ENDED MARCH 31, 2020
Net Income/(Loss)
Distribution Segment
Distribution segment
net loss was $916,000 in the 2021 Period compared to $547,000 in the 2020 Period. The increase to the net loss was primarily due to
a reduction in other income resulting from non-cash fair value adjustments to acquisition related earnout liabilities (see Note 4)
and an increase in sales and marketing expenses, partially offset by higher gross profit, as reflected in the table below.
Design Segment
Design segment net
income was $1,280,000 in the 2021 Period compared to a net loss of $906,000 in the 2020 Period. The net income generated in the 2021
Period resulted from the $1,357,000 forgiveness of note payable associated with the PPP loan. A reduction in impairment charges (see
Notes 3 and 4) and higher gross profit, primarily due to the acquisition of Kablooe in August 2020, were partially offset by higher
general and administrative expenses, as reflected in the table below:
|
|
Main Components of Net Income/(Loss)
|
|
|
|
(amounts in thousands)
|
|
|
|
2021 Period
|
|
|
2020 Period
|
|
|
Increase (Decrease)
|
|
|
|
Consolidated
|
|
|
Distribution
|
|
|
Design
|
|
|
Consolidated
|
|
|
Distribution
|
|
|
Design
|
|
|
Consolidated
|
|
Net revenues
|
|
$
|
18,113
|
|
|
$
|
10,088
|
|
|
$
|
8,025
|
|
|
$
|
16,324
|
|
|
$
|
9,320
|
|
|
$
|
7,004
|
|
|
$
|
1,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
4,006
|
|
|
$
|
1,297
|
|
|
$
|
2,709
|
|
|
$
|
3,173
|
|
|
$
|
1,164
|
|
|
$
|
2,009
|
|
|
$
|
833
|
|
Sales and marketing expenses
|
|
|
1,181
|
|
|
|
967
|
|
|
|
214
|
|
|
|
1,014
|
|
|
|
742
|
|
|
|
272
|
|
|
|
167
|
|
General and administrative expenses
|
|
|
3,809
|
|
|
|
1,202
|
|
|
|
2,607
|
|
|
|
2,840
|
|
|
|
1,243
|
|
|
|
1,597
|
|
|
|
969
|
|
Goodwill impairment
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,015
|
|
|
|
–
|
|
|
|
1,015
|
|
|
|
(1,015
|
)
|
Operating loss
|
|
|
(984
|
)
|
|
|
(872
|
)
|
|
|
(112
|
)
|
|
|
(1,696
|
)
|
|
|
(821
|
)
|
|
|
(875
|
)
|
|
|
712
|
|
Other (income)/expense, net
|
|
|
(1,348
|
)
|
|
|
44
|
|
|
|
(1,392
|
)
|
|
|
(243
|
)
|
|
|
(274
|
)
|
|
|
31
|
|
|
|
(1,105
|
)
|
Net income/(loss)
|
|
$
|
364
|
|
|
$
|
(916
|
)
|
|
$
|
1,280
|
|
|
$
|
(1,453
|
)
|
|
$
|
(547
|
)
|
|
$
|
(906
|
)
|
|
$
|
1,817
|
|
Basic and diluted
earnings/(loss) per share were $0.04 and $(0.15), respectively, for the 2021 Period and the 2020 Period.
Net Revenues
Distribution Segment
Net revenues in the distribution
segment increased $768,000, or 8.2%, to $10,088,000 in the 2021 Period from $9,320,000 in the 2020 Period, primarily due to an increase
in other product revenue. Revenues from other products increased $731,000 and revenue from diabetic products increased $37,000. In future
periods, we believe other product sales will increase while diabetic product sales will decline.
The following tables set
forth revenues by channel, product line and geographic location of our distribution segment customers for the periods indicated:
|
|
Net Revenues for the 2021 Period
|
|
|
|
(amounts in thousands)
|
|
|
|
Americas
|
|
|
APAC
|
|
|
EMEA
|
|
|
Total
|
|
Diabetic products
|
|
$
|
2,552
|
|
|
$
|
2,813
|
|
|
$
|
2,940
|
|
|
$
|
8,305
|
|
Other products
|
|
|
1,316
|
|
|
|
421
|
|
|
|
46
|
|
|
|
1,783
|
|
Total net revenues
|
|
$
|
3,868
|
|
|
$
|
3,234
|
|
|
$
|
2,986
|
|
|
$
|
10,088
|
|
|
|
Net Revenues for the 2020 Period
|
|
|
|
(amounts in thousands)
|
|
|
|
Americas
|
|
|
APAC
|
|
|
EMEA
|
|
|
Total
|
|
Diabetic products
|
|
$
|
2,667
|
|
|
$
|
2,460
|
|
|
$
|
3,141
|
|
|
$
|
8,268
|
|
Other products
|
|
|
635
|
|
|
|
322
|
|
|
|
95
|
|
|
|
1,052
|
|
Total net revenues
|
|
$
|
3,302
|
|
|
$
|
2,782
|
|
|
$
|
3,236
|
|
|
$
|
9,320
|
|
Diabetic Product Revenues
Our distribution segment
manufactures to the order of, and sells carrying cases for, blood glucose diagnostic kits directly to OEMs (or their contract manufacturers).
The OEM customer or its contract manufacturer packages our carrying cases “in box” as a custom accessory for the OEM’s
blood glucose testing and monitoring kits, or to a lesser extent, sells them through their retail distribution channels.
Revenues from diabetic products
increased $37,000, or 0.4%, to $8,305,000 in the 2021 Period from $8,268,000 in the 2020 Period. This increase was primarily due to higher
revenues from three major diabetic customers (Diabetic Products Customers B, C and D). The higher revenue from these three customers was
partially offset by revenue declines from Diabetic Products Customer A and other diabetic customers, which were less significant. As mentioned
above, management believes that revenues from diabetic customers will decline in future periods.
The following table sets
forth our distribution segment net revenues by diabetic products customer for the periods indicated:
|
|
2021
Period
|
|
|
2020
Period
|
|
|
Increase (Decrease)
|
|
Diabetic Products Customer A
|
|
$
|
2,849
|
|
|
$
|
3,316
|
|
|
$
|
(467
|
)
|
Diabetic Products Customer B
|
|
|
1,770
|
|
|
|
1,577
|
|
|
|
193
|
|
Diabetic Products Customer C
|
|
|
2,523
|
|
|
|
2,201
|
|
|
|
322
|
|
Diabetic Products Customer D
|
|
|
952
|
|
|
|
770
|
|
|
|
182
|
|
All other Diabetic Products Customers
|
|
|
211
|
|
|
|
404
|
|
|
|
(193
|
)
|
Total Diabetic Revenue
|
|
$
|
8,305
|
|
|
$
|
8,268
|
|
|
$
|
37
|
|
Revenues from diabetic products
represented 82% of our distribution segment’s net revenues in the 2021 Period compared to 89% in the 2020 Period.
Other Product Revenues
Other product revenues include
cases and protective solutions sourced and sold to OEMs for a diverse array of portable electronic and non-electronic products (such as
sporting and recreational products, bar code scanners, GPS location devices, tablets and firearms) on a made-to-order basis that are customized
to fit the products sold by our OEM customers. Other product revenues also include sales of smart-enabled and other products sold through
our retail distribution network.
Revenues from other products
increased $731,000, or 69.5%, to $1,783,000 in the 2021 Period from $1,052,000 in the 2020 Period, due to the increase in sales of non-medical
cases and protective solutions and smart enabled products, both driven by an increase in customers and higher sales volume. We will continue
to focus on our sales and sales support teams in our continued efforts to expand and diversify our other products customer base as well
as take advantage of opportunities to source other products.
Revenues from other products
represented 18% of our net revenues in the 2021 Period compared to 11% of our net revenues in the 2020 Period.
Design Segment
Net revenues in the design
segment increased $1,021,000, or 14.6%, to $8,025,000 in the 2021 Period from $7,004,000 in the 2020 Period, primarily driven by revenues
generated by Kablooe, which was acquired in August 2020. The remaining variance was driven by a decline in revenue from certain existing
customers as projects were either completed or customer spending was reduced in response to COVID-19, partially offset by new business
from both new and existing customers. The following table sets forth our design segment net revenues by major customers for the 2021 Period:
|
|
Design Revenues
|
|
|
|
(amounts in thousands)
|
|
|
|
2021
Period
|
|
|
2020
Period
|
|
|
Increase (Decrease)
|
|
Design Segment Customer 1
|
|
$
|
689
|
|
|
$
|
1,083
|
|
|
$
|
(394
|
)
|
Design Segment Customer 2
|
|
|
864
|
|
|
|
898
|
|
|
|
(34
|
)
|
Design Segment Customer 3
|
|
|
755
|
|
|
|
1,297
|
|
|
|
(542
|
)
|
Design Segment Customer 4
|
|
|
1,371
|
|
|
|
–
|
|
|
|
1,371
|
|
Design Segment Customer 5
|
|
|
54
|
|
|
|
746
|
|
|
|
(692
|
)
|
All other Design Segment Customers
|
|
|
4,292
|
|
|
|
2,980
|
|
|
|
1,312
|
|
Total design segment revenues
|
|
$
|
8,025
|
|
|
$
|
7,004
|
|
|
$
|
1,021
|
|
Gross Profit
Distribution Segment
Gross profit for the distribution
segment increased $133,000, or 11.4%, to $1,297,000 in the 2021 Period as compared to $1,164,000 in the 2020 Period, and gross margin
improved from 12.5% to 12.9% in the same period. The increase in both gross profit and margin are driven by higher margins on the sale
of non-medical cases and other products. This increase in profit margin was partially offset by the continued decline in gross margin
on diabetic products due to a shift to lower margin cases and pricing pressures on diabetic products from customers. We continue to work
on expanding our product offering to include higher margin products and enhancing our sales efforts to grow revenue and increase gross
profit.
Design Segment
Gross profit for the design
segment increased $700,000, or 34.8%, to $2,709,000 in the 2021 Period from $2,009,000 in the 2020 Period. Gross margin improved
from 28.7% to 33.8% in the same period. The acquisition of Kablooe accounted for the majority of the increase in both gross profit
and margin in the 2021 Period. Gross margin gains in the first quarter of Fiscal 2021 resulting from higher billing rates were partially
offset by lower utilization rates in the 2021 Quarter. Depreciation expense, which is allocated to cost of sales for the design segment,
was $62,000 and $54,000 for the 2021 Period and 2020 Period, respectively.
Sales and Marketing Expenses
Distribution Segment
Sales and marketing expenses
for the distribution segment increased $225,000, or 30.3%, to $967,000 in the 2021 Period from $742,000 in the 2020 Period. The increase
was primarily due to expenses associated with growing our retail distribution network. Sales and marketing expenses for the distribution
segment increased to 9.6% of revenues in the 2021 Period as compared to 8.0% of revenues in the 2020 Period.
Design Segment
Sales and marketing expenses
for the design segment decreased $58,000, or 21.3%, to $214,000 in the 2021 Period from $272,000 in the 2020 Period. The decrease in sales
and marketing expenses is primarily due to lower payroll costs. Sales and marketing expenses for the design segment decreased to 2.7%
of revenues in the 2021 Period from 3.9% of revenues in the 2020 Period.
General and Administrative Expenses
Distribution Segment
General and administrative
expenses in the distribution segment decreased $41,000, or 3.3%, to $1,202,000 in the 2021 Period from $1,243,000 in the 2020 Period.
The decrease was primarily driven by a $66,000 reduction in Board of Directors costs and a $60,000 reduction in technology expenses, primarily
due to lower software implementation costs, partially offset by an $80,000 insurance recovery received in the 2020 Period. General and
administrative expenses for the distribution segment decreased to 11.9% of revenues in the 2021 Period as compared to 13.3% of revenues
in the 2020 Period.
Design Segment
General and
administrative expenses for the design segment increased $1,010,000, or 63.2%, to $2,607,000 in the 2021 Period from $1,597,000 in
the 2020 Period. The increase is primarily driven by a $228,000 increase in payroll related costs, general and administrative costs
of $507,000 generated by Kablooe, which was acquired in August 2020, and a $613,000 increase in bad debt expense, partially offset
by a decrease in impairment charges (see Note 4) and lower professional fees related to a reduction in software implementation
costs. General and administrative expenses for the design segment increased to 32.5% of revenues in the 2021 Period as compared to
22.8% of revenues in the 2020 Period.
Other Income / (Expense)
Distribution Segment
The distribution
segment reported other expense of $44,000 in the 2021 Period as compared to other income of $274,000 in the 2020 Period. The
variance is primarily due to the decrease in other income related to fair value adjustments associated with the Kablooe and IPS
contingent earnout liabilities (see Note 4).
Design Segment
The design segment reported
other income of $1,392,000 in the 2021 Period as compared to other expense of $31,000 in the 2020 Period. The primary component of other
income in the 2021 Period was the $1,357,000 forgiveness of note payable related to the PPP loan. Other less significant factors contributing
to the change were interest income on the note receivable from a customer which was fully reserved for in Fiscal 2019 and lower interest
expense due to a reduction in the average amount of debt outstanding.
Income Taxes
For the 2021 Period, the
Company generated net income of $364,000, primarily resulting from the $1,357,000 forgiveness of the PPP loan, which will not be recognized
as taxable income per the CARES Act. The Company maintains significant net operating loss carryforwards and does not recognize income
tax expense / (benefit) as its deferred tax provision is typically offset by a full valuation allowance on its net deferred tax asset.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity
is our operations. The primary demands on our working capital have historically been (i) operating losses, (ii) repayment of debt obligations,
and (iii) any increases in accounts receivable and inventories arising in the ordinary course of business. Historically, our sources of
liquidity have been adequate to satisfy working capital requirements arising in the ordinary course of business. At March 31, 2021, our
working capital was $5,245,000 compared to $3,396,000 at September 30, 2020.
In an abundance of
caution and to proactively conserve the Company’s cash flow, we implemented certain cost-cutting measures which became
effective in April 2021. These cost cutting measures included (i) our executive officers agreeing to a temporary pay cut and our
Chief Executive Officer temporarily forgoing his base salary, (ii) a reduction in our head count and amounts paid to outside
consultants and (iii) non-employee Board members agreeing to reduce their board fees for the remainder of the fiscal year. The
Company anticipates that these pay cuts and other reductions will last for three months and result in approximately $200,000 of cash
savings in the third quarter of Fiscal 2021. The Company will reevaluate the continuing need for these measures. In light of these circumstances, the Compensation Committee of the Board of Directors deferred a
recommendation for director equity compensation until such time as the Company’s performance improved. Therefore, in
addition to cash savings, the resulting reduction in equity compensation will lower the Company’s non-cash expenses in future
periods.
At April 30, 2021, we had
approximately $1,300,000 cash on hand and $1,300,000 available under our line of credit which matures May 31, 2022. Additionally, Forward
China holds a $1,600,000 promissory note which matures December 31, 2022. Although this note has been extended on multiple occasions to
assist us with our liquidity position, we plan on funding the repayment at maturity using existing cash balances and/or obtaining an additional
credit facility as deemed necessary. We can provide no assurance that Forward China will extend the note again if we request an extension
nor that any such credit facility will be available on terms acceptable to us or at all.
We anticipate that our liquidity
and financial resources will be adequate to manage our operating and financial requirements until at least June 30, 2022. If we have the
opportunity to make a strategic acquisition (as we have in the past with the acquisitions of IPS and Kablooe) or an investment in a product
or partnership, we may require additional capital beyond our current cash balance to fund the opportunity. If we seek to raise additional
capital, there is no assurance that we will be able to raise funds on terms that are acceptable to us or at all.
Although we do not anticipate
the need to purchase additional material capital assets in order to carry out our business, it may be necessary for us to purchase equipment
and other capital assets in the future, depending on need.
Cash Flows
During the six months ended
March 31, 2021 and 2020, our sources and uses of cash were as follows:
Operating Activities
During the 2021 Period, cash
used in operating activities of $398,000 primarily resulted from an operating loss of $984,000, a decrease in deferred income of $348,000,
an increase in inventories of $874,000, a decrease in accrued expenses of $161,000, partially offset by non-cash expenses of $748,000
relating to depreciation, amortization, share-based compensation and bad debt expense, a decrease of $757,000 in accounts receivable,
an increase of $395,000 in accounts payable and amounts due to Forward China and the net change in other operating assets and liabilities
of $69,000.
During the 2020 Period, cash
used in operating activities of $554,000 primarily resulted from an operating loss of $1,696,000, an increase in accounts receivable of
$564,000, a decrease in accounts payable, accrued expenses and amounts due to Forward China of $1,019,000, an increase in prepaid expenses
and other current assets of $168,000, bad debt recoveries of $110,000 and net changes in other operating assets and liabilities of $7,000,
partially offset by a decline in inventories of $972,000, an increase in deferred income of $488,000, non-cash impairment charges of $1,342,000,
and other non-cash expenses of $208,000 relating to depreciation, amortization, and share-based compensation.
Investing Activities
Cash used in investing activities
in the 2021 Period and the 2020 Period of $38,000 and $27,000, respectively, resulted from purchases of property and equipment.
Financing Activities
In the 2021 Period, cash
used in financing activities of $960,000 consisted of net repayments of the line of credit of $1,000,000, repayments of notes payable
and finance leases of $104,000, partially offset by proceeds from stock options exercised of $144,000.
In the 2020 Period, cash
used in financing activities of $1,163,000 consisted of $900,000 in net repayments on the line of credit, $200,000 paid out on deferred
cash consideration and $63,000 in repayments of notes payable and finance leases.
Related Party Transactions
For information on related
party transactions and their financial impact, see Note 9 to the unaudited condensed consolidated financial statements contained herein.