ITEM 7.MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
The following discussion
and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in
this report on Form 10-K. All dollar amounts and percentages presented herein have been rounded to approximate values. In addition
to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties,
and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result
of certain factors, including but not limited to those set forth under “Risk Factors.”
Cautionary statement regarding Forward-Looking Statement
This report includes
“forward-looking statements”, as such term is used within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements include, among other things, statements regarding:
• Expectations regarding having our products in retail outlets;
• Liquidity
as well as other statements regarding our
future operations, financial condition and prospects, and business strategies. Forward-looking statements generally can be identified
by words such as "anticipates," "believes," "estimates," "expects," "intends,"
"plans," "predicts," "projects," "will be," "will continue," "will likely
result," and similar expressions. These forward-looking statements are based on current expectations and assumptions that
are subject to risks and uncertainties, which could cause our actual results to differ materially and adversely from those reflected
in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to,
those discussed in this Annual Report on Form 10-K, and in particular, the risks discussed under the caption "Risk Factors"
in Item 1A of this report and those discussed in other documents we file with the SEC. We undertake no obligation to revise or
publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks
and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Business Overview
Forward Industries,
Inc. is a fully integrated design, development and manufacturing solution provider for top tier medical and technology customers
worldwide. As a result of the continued expansion of our design development capabilities through our wholly owned subsidiaries,
IPS and Kablooe, we are now able to introduce proprietary products to the market from concepts brought to us from a number of different
sources, both inside and outside the Company.
The future
impacts of the COVID-19 pandemic and any resulting economic impact are largely unknown and could be significant. It is
possible that the COVID-19 pandemic, the measures taken by the governments of countries affected and the resulting economic
impact may negatively impact our results of operations, cash flows and financial position in future periods as well as that
of our customers, including their ability to pay for our services and choosing to allocate their budgets to new or existing
projects which may or may not require our services. The long-term financial impact on our business cannot be reasonably
estimated at this time. As a result, the effects of COVID-19 may not be fully reflected in our financial results until future
periods.
Until there is a
vaccine and treatment that is widely distributed, we expect business conditions to remain challenging. In response to
these challenges, we will continue to focus on those factors that we can control: closely managing and controlling our
expenses; aligning our design and development schedules with demand in a proactive manner as there are changes in market
conditions to minimize our cash operating costs; pursuing further improvements in the productivity and effectiveness of our
development, selling and administrative activities and, where appropriate, taking advantage of opportunities to enhance our
business growth and profitability strategy.
Additionally,
see Part I., Item 1A. Risk Factors - The adverse impact of COVID-19 on our businesses will continue for an unknown length of time
and may continue to impact our results of operations.
Variability of Revenues and Results of Operation
Because a high percentage
of our revenues is highly concentrated in a few large customers, and because the volumes of these customers’ order flows
to us are highly variable, with short lead times, our quarterly revenues, and consequently our results of operations, are susceptible
to significant variability over a relatively short period of time.
Critical Accounting Policies and Estimates
We have identified
the accounting policies and significant estimation processes below as critical to our business operations and the understanding
of our results of operations. The discussion below is not intended to be comprehensive. In many cases, the accounting treatment
of a particular transaction is specifically dictated by U.S. GAAP, with no need for management’s judgment. In other cases,
management is required to exercise judgment in the application of accounting principles with respect to particular transactions.
The impact and any associated risks related to these policies on our business operations are discussed throughout this “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect reported and expected
financial results. For a detailed discussion of the applications of these and other accounting policies, see “Item 8. Financial
Statements and Supplementary Data” in this Annual Report. Our preparation of our Consolidated Financial Statements requires
us to make estimates and assumptions that are believed to be reasonable under the circumstances. There can be no assurance that
actual results will not differ from those estimates and such differences could be significant.
Revenue Recognition
Distribution Segment
The Company
generally recognizes revenue in its distribution segment when: (i) finished goods are shipped to our distribution customers
(in general, these conditions occur at either point of shipment or point of destination, depending on the terms of sale,
i.e., transfer of control); (ii) there are no other deliverables or performance obligations; and (iii) there are no further
obligations to the customer after the title of the goods has transferred. When the Company receives consideration before
achieving the criteria previously mentioned, it records a contract liability, which is classified as a component of deferred
income in the accompanying consolidated balance sheets. Contract liabilities at September 30, 2020 and 2019 were $75,000 and
$0, respectively, for the distribution segment.
Design Segment
The Company applies
the “cost to cost” and “right to invoice” methods of revenue recognition to the contracts with customers
in the design segment. The design segment typically engages in two types of contracts: (i) time and material and (ii) fixed price
contracts. The Company recognizes revenue over time on its time and material contracts utilizing a “right to invoice”
method. Revenues from fixed price contracts that require performance of services that are not related to the production of tangible
assets are recognized by using cost inputs to measure progress toward the completion of its performance obligations or the “cost
to cost” method. Revenues from contracts that contain specific deliverables are recognized when the performance obligation
has been satisfied or the transfer of goods to the customer has been completed and accepted.
Recognized revenues
that will not be billed until a later date, or contract assets, are recorded as an asset and classified as a component of accounts
receivable in the accompanying consolidated balance sheets. Contract assets at September 30, 2020 and 2019 were $649,000 and $611,000,
respectively. Contracts where collections to date have exceeded recognized revenues, or contract liabilities, are recorded as a
liability and classified as a component of deferred income in the accompanying consolidated balance sheets. Contract liabilities
at September 30, 2020 and 2019 were $410,000 and $220,000, respectively.
Business Combinations
The Company allocates
the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their
estimated fair values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities
is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, the Company makes significant
estimates and assumptions, especially with respect to intangible assets.
Critical estimates
in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships and
developed technology, discount rates and terminal values. Our estimate of fair value is based upon assumptions believed to be reasonable,
but actual results may differ from estimates.
Other estimates associated
with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities
assumed.
Segment Reporting
The Company has two
reportable segments: distribution and design. The distribution segment consists of two reporting units (Forward US and Forward
Switzerland, that collectively comprise one operating segment) that source and distribute carrying cases and other accessories
for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic devices. The design segment
consists of two operating segments (IPS and Kablooe, which have been aggregated into one reportable segment) that provide a full
spectrum of hardware and software product design and engineering services.
Organizing our business
through these operating segments allows us to align our resources and manage our operations. Our chief operating decision maker
regularly reviews operating segment revenue and profitability when assessing financial results of operating segments and allocating
resources.
We measure the performance
of our operating segments based upon operating segment revenue and operating income or loss. Segment operating income or loss includes
revenues earned and expenses incurred directly by the operating segment, including cost of sales and selling, marketing, and general
and administrative expenses (see Note 16 for more discussion on operating segments).
Goodwill and Intangible Assets
The Company reviews
goodwill for impairment at least annually, or more often if triggering events occur. The Company has two reporting units with goodwill
and we perform our annual goodwill impairment test on September 30, the end of the fiscal year, or upon the occurrence of a triggering
event. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to
have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting
unit is less than its carrying amount, then the Company would not need to perform the impairment test for the reporting unit. If
the Company cannot support such a conclusion or does not elect to perform the qualitative assessment, then the Company will compare
the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds
its carrying value, no impairment charge is recognized. If the fair value of the reporting unit is less than its carrying value,
an impairment charge will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value.
A significant amount of judgment is required in performing goodwill impairment tests including estimating the fair value of a reporting
unit and the implied fair value of goodwill. During Fiscal 2020, the Company recorded an impairment charge related to goodwill
(See Note 4).
Recent Accounting Pronouncements
In August 2018, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13 “Fair
Value Measurement – Disclosure Framework (Topic 820)” to improve the disclosure requirements on fair value measurements.
The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15,
2019. Early adoption is permitted for any removed or modified disclosures. The Company does not expect the adoption of this guidance
to have a material impact on its consolidated financial statements.
In November 2019,
the FASB issued ASU 2019-08, “Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic
606)” to provide guidance for share-based payment awards granted to a customer in conjunction with selling goods or services
accounted for under Topic 606. The pronouncement is effective for fiscal years beginning after December 15, 2019 and interim periods
within those fiscal years. The Company does not expect the adoption of this guidance to have a material impact on its consolidated
financial statements.
In November 2019,
the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.”
ASU 2019-11 is an accounting pronouncement that provides clarity to and amends earlier guidance on this topic and would be effective
concurrently with the adoption of such earlier guidance. This pronouncement is effective for the Company for fiscal years beginning
after December 15, 2022 and interim periods within those fiscal years. The Company is currently evaluating the effects of this
pronouncement on its consolidated financial statements.
In
August 2018, the FASB issued ASU 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic
350-40)” addressing customers’ accounting for implementation costs incurred
in a cloud computing arrangement that is a service contract, which requires customers to apply internal-use software guidance
to determine the implementation costs that are able to be capitalized. Capitalized implementation costs are required to be
amortized over the term of the arrangement, beginning when the cloud computing arrangement is ready for its intended
use. The effective date of the new guidance for public companies is for fiscal years beginning after December 15,
2019 and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the
adoption of this guidance to have a material impact on its consolidated financial statements.
In December
2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This
guidance removes certain exceptions to the general principles in Topic 740 and provides consistent application of
U.S. GAAP by clarifying and amending existing guidance. The effective date of the new guidance for public companies is for
fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. Early adoption is
permitted. The Company is currently evaluating the timing of adoption and impact of the updated guidance on its consolidated
financial statements.
RESULTS OF OPERATIONS FOR FISCAL 2020
COMPARED TO FISCAL 2019
Net Loss
Distribution Segment
Distribution segment
net loss was $1,321,000 in Fiscal 2020 compared to $1,811,000 in Fiscal 2019. The decrease in net loss in Fiscal 2020 was due to
an increase in other income related to fair value adjustments (non-cash income), a decrease in general and administrative expenses,
partially offset by lower revenue and gross profit.
Design Segment
Net loss for the design
segment was $364,000 in Fiscal 2020 as compared to $1,793,000 in Fiscal 2019. The decrease in net loss in Fiscal 2020 resulted
from higher gross profit, lower general and administrative expenses, partially offset by the impairment of goodwill (non-cash expense).
Main components of
net loss for the distribution and design segments are reflected in the table below:
Main Components of Net Income
(amounts in thousands)
Fiscal 2020 Fiscal 2019 Increase (Decrease)
Consolidated Distribution Design Consolidated Distribution Design Consolidated
Income tax provision/(benefit) 9 9 – (4 ) (4 ) – 13
Consolidated basic and diluted income loss
per share was $0.19 and $0.38 for Fiscal 2020 Fiscal 2019, respectively.
Net Revenues
We generate revenue
through two reportable segments: distribution and design. We believe that our total revenue will increase in the future as we grow
our retail business and integrate the Kablooe business. We continue to work on integrating the sales forces for both the distribution
and design segments of our business to explore synergistic opportunities.
The chart below indicates
the revenues by operating segment for Fiscal 2020 and Fiscal 2019:
(amounts in thousands)
Fiscal 2020 Fiscal 2019 Increase (Decrease)
Distribution Segment
Net revenues in the
distribution segment declined $1,236,000, or 5.6%, to $20,752,000 in Fiscal 2020 from $21,988,000 in Fiscal 2019 due to reduced
revenues in the sale of diabetic products partially offset by an increase in other product revenue. Revenues from diabetic products
declined $2,314,000 and revenues from other products increased $1,078,000. We believe this decrease in diabetic product sales and
increase in other product sales is a trend that will continue.
The following tables
set forth revenues by channel, product line and geographic location of our distribution segment customers for the periods indicated:
Net Revenues for Fiscal 2020
(amounts in thousands)
Americas APAC EMEA Total
Net Revenues for Fiscal 2019
(amounts in thousands)
Americas APAC EMEA Total
Diabetic Product Revenues
Our distribution segment sources to the
order of, and sells carrying cases for, blood glucose diagnostic kits directly to OEMs (or their contract manufacturers). The OEM
customer or its contract manufacturer packages our carry cases “in box” as a custom accessory for the OEM’s blood
glucose testing and monitoring kits, or to a lesser extent, sell them through their retail distribution channels.
Revenues from diabetic
products declined $2,314,000, or 11.8%, to $17,237,000 in Fiscal 2020 from $19,551,000 in Fiscal 2019. The decline was primarily
due to lower revenues from two major diabetic customers (Diabetic Products Customers B and C). Revenue declines from other major
diabetic customers were less significant and were partially offset by an increase in revenue from all of our other diabetic products
customers. As mentioned above, management believes that revenues from diabetic customers will continue to decline.
The following table sets forth our distribution
segment net revenues by diabetic products customer for the periods indicated:
(amounts in thousands)
Fiscal 2020 Fiscal 2019 Increase (Decrease)
All other Diabetic Products Customers 808 531 277
Revenues from diabetic products represented
83% of net revenues for the distribution segment in Fiscal 2020 compared to 89% in Fiscal 2019.
Other Product Revenues
Our distribution segment
also sources and sells cases and protective solutions to OEMs for a diverse array of portable electronic and non-electronic products
(such as sporting and recreational products, bar code scanners, GPS devices, tablets and firearms) on a made-to-order basis that
are customized to fit the products sold by our OEM customers. In Fiscal 2020, other product revenues were also derived from the
sales and sourcing of personal protective equipment.
Revenues from other
products increased $1,078,000, or 44%, to $3,515,000 in Fiscal 2020 from $2,437,000 in Fiscal 2019. Revenues from the sale of personal
protective equipment increased $758,000 and sales from other products increased $320,000. We will continue to focus on our sales
and sales support teams in our attempt to expand and diversify our other products customer base.
Revenues of other
products represented 17% of our net revenues in Fiscal 2020 as compared to 11% in Fiscal 2019.
Design Segment
Net revenues in
the design segment declined $1,695,000, or 11.0%, to $13,726,000 in Fiscal 2020 from $15,421,000 in Fiscal 2019. The decline
in revenues was due to the reduction or delay in demand for design and development projects, partially related to COVID-19.
Since its acquisition on August 17, 2020, Kablooe generated revenue of $172,000 in Fiscal 2020. The following table sets
forth our design segment net revenues by major customers for the periods indicated:
(amounts in thousands)
Fiscal 2020 Fiscal 2019 Increase (Decrease)
Gross Profit
Distribution Segment
Gross profit for the
distribution segment declined $600,000, or 17.8%, to $2,775,000 in Fiscal 2020 from $3,375,000 in Fiscal 2019. Gross margin declined
to 13.4% in Fiscal 2020, compared to 15.3% in Fiscal 2019.
These declines were
driven primarily by lower sales revenue and a shift to lower-margin cases and pricing pressures on diabetic products from customers.
The decline in gross margin from our diabetic products was partially offset by higher gross margins on the sale of personal protective
equipment in Fiscal 2020. We are working on expanding our product offering to include higher margin products as well as enhancing
our sales efforts to raise top side gross sales to raise total gross profit.
Design Segment
Gross profit for the
design segment increased $658,000, or 20.5%, to $3,864,000 in Fiscal 2020 from $3,206,000 in Fiscal 2019. Gross margin improved
from 20.8% Fiscal 2019 to 28.2% in Fiscal 2020. Gross margin in Fiscal 2019 was significantly lower than historical performance
due to project overruns for two significant customers in that year. Depreciation expense, which is allocated to cost of sales for
the design segment, was $98,000 and $139,000 for Fiscal 2020 and Fiscal 2019, respectively.
Sales and Marketing Expenses
Distribution Segment
Sales and marketing
expenses for the distribution segment increased $54,000, or 3.7%, to $1,495,000 in Fiscal 2020 from $1,441,000 in Fiscal 2019.
The increase was primarily due to additional amortization on the cost of the Mooni Agreement (see Note 19). Sales and marketing
expenses for the distribution segment increased to 7.2% of revenues in Fiscal 2020 from 6.6% in Fiscal 2019.
Design Segment
Sales and marketing
expenses for the design segment decreased $68,000, or 13.0%, to $456,000 in Fiscal 2020 from $524,000 in Fiscal 2019. The decrease
was primarily due to lower sales commissions and entertainment related expenses, partially offset by higher sales salaries. Sales
and marketing expenses for the design segment remained fairly consistent at 3.3% of revenues in Fiscal 2020 compared to 3.4% in
Fiscal 2019.
General and Administrative Expenses
Distribution Segment
General and administrative
expenses for the distribution segment declined $427,000, or 12.9%, to $2,884,000 in Fiscal 2020 from $3,311,000 in Fiscal 2019.
This decline was primarily due to a $511,000 reduction in legal fees related to responding to an SEC subpoena in Fiscal 2019 (which
includes an $80,000 insurance settlement received in Fiscal 2020), a decrease in bad debt expense of $69,000, partially offset
by higher professional fees of $100,000 (related to the Kablooe acquisition, valuation work and other matters), severance costs
of $157,000 and $65,000 related to internal software implementation projects. General and administrative expenses as a percentage
of revenue for the distribution segment decreased to 13.9% in Fiscal 2020 from 15.1% in Fiscal 2019.
Design Segment
General and administrative
expenses for the design segment decreased $1,631,000, or 37.1%, to $2,771,000 in Fiscal 2020 from $4,402,000 for Fiscal 2019. The
decrease is primarily related to a $2,075,000 reduction in bad debt expense, partially offset by the $327,000 investment impairment
discussed in Note 6. Amortization of intangible assets is allocated to general and administrative expenses in the design segment.
Amortization of intangible assets was $167,000 and $163,000 for Fiscal 2020 and Fiscal 2019, respectively.
Other (Income)/Expense
Distribution Segment
The distribution segment
reported other income of $202,000 in Fiscal 2020 as compared to other expense of $438,000 in Fiscal 2019. The variance is due to
fair value adjustments of $334,000 in Fiscal 2020 to reduce the deferred consideration liability associated with the IPS acquisition
as compared to fair value adjustments of $296,000 in Fiscal 2019 to increase this deferred consideration liability.
Design Segment
The design segment
reported other income of $14,000 in Fiscal 2020 as compared to other expense of $73,000 in Fiscal 2019. The change relates to interest
payments of $61,000 received on the note receivable written off in Fiscal 2019 (See Note 6). In addition, interest expense was
lower in Fiscal 2020 due to lower interest rates and a reduction in the average amount of debt outstanding.
Income Taxes
In Fiscal 2020, the
Company recorded a tax provision of $9,000, generated a loss before income taxes of $1,766,000 and had an effective tax rate of
0.5%. In Fiscal 2019, the Company recorded a tax benefit of $4,000, generated a loss before income taxes of $3,604,000 and had
an effective tax rate of 0.1%.
The Company maintains
significant net operating loss carryforwards and does not recognize a significant income tax provision/(benefit) as its deferred
tax provision is typically offset by maintaining a full valuation allowance on its net deferred tax assets. The Fiscal 2020 tax
provision is primarily comprised of income taxes assessed in states where net operating losses are not available.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source
of liquidity is our operations. The primary demand on our working capital has historically been (i) operating losses, (ii) repayment
of debt obligations, and (iii) any increases in accounts receivable and inventories arising in the ordinary course of business.
Historically, our sources of liquidity have been adequate to satisfy working capital requirements arising in the ordinary course
of business.
As of the filing date
of this report, we had $300,000 available under our $1,300,000 line of credit which matures May 31, 2021. Additionally, Forward
China holds a $1,600,000 promissory note which was extended to December 31, 2021 (see Note 14). Although this note has been extended
on multiple occasions to assist the Company with its liquidity position, we plan on funding the repayment at maturity using existing
cash balances and/or obtaining an additional credit facility as deemed necessary. We can provide no assurance that Forward China
will extend the note again if we request an extension nor that any such credit facility will be available on terms acceptable to
us or at all.
As discussed in Note
18, on April 18, 2020, the Company entered into a loan in an aggregate principal amount of $1,357,000 under the Paycheck Protection
Program (the “PPP Loan”) pursuant to the recently enacted U.S. Coronavirus Aid, Relief, and Economic Security Act (the
“CARES Act”). In December 2020, the Small Business Administration approved our forgiveness request for this loan.
We anticipate that
our liquidity and financial resources for the next 12 months from the date of the filing of this report will be adequate to manage
our operating and financial requirements. If we have the opportunity to make a strategic acquisition (as we have in the past with
the acquisitions of IPS and Kablooe) or an investment in a product or partnership, we may require additional capital beyond our
current cash balance to fund the opportunity. If we seek to raise additional capital, there is no assurance that we will be able
to raise funds on terms that are acceptable to us or at all.
At September 30, 2020,
our working capital (current assets less current liabilities) was $3,396,000 compared to $3,542,000 at September 30, 2019. As of
November 30, 2020, we had $2,594,000 of cash on hand.
Although we do not
anticipate the need to purchase any additional material capital assets in order to carry out our business, it may be necessary
for us to purchase equipment and other capital assets in the future, depending on need.
Cash Flows
During Fiscal 2020
and Fiscal 2019, our sources and uses of cash were as follows:
Cash Flows from Operating Activities
During Fiscal 2020,
cash used in operating activities of $263,000 resulted from a net loss of $1,775,000, an increase in accounts receivable of $733,000,
non-cash fair value adjustments of $334,000, and bad debt recoveries of $78,000, partially offset by non-cash impairment charges
of $1,342,000, depreciation and amortization of $272,000, share-based compensation of $245,000 and the net change in other operating
assets and liabilities of $798,000.
During Fiscal 2019,
cash used in operating activities of $1,970,000 resulted from a net loss of $3,604,000, a reduction of accounts payable (including
due to Forward China) of $975,000, a net loss reconciling adjustment of $327,000 for the fair value of cost method investment for
services provided, an increase in prepaid expenses and other current assets of $193,000, an increase in other assets of $191,000
and an increase in inventory of $40,000, partially offset by the reduction of accounts receivable of $264,000, an increase in accrued
expenses and other current liabilities of $97,000, an increase in deferred income of $95,000, and the add-back of non-cash items
including bad debt expense of $2,065,000, depreciation and amortization of $312,000, share-based compensation expense of $216,000,
deferred rent amortization of $16,000 and a non-cash increase of $296,000 in fair value adjustments of the earn-out consideration
and deferred cash consideration.
Cash Flows from Investing Activities
In Fiscal 2020, cash
used for investing activities of $390,000 primarily resulted from the $353,000 cash consideration paid for the Kablooe acquisition
and purchases of property and equipment of $68,000.
In Fiscal 2019, cash
used for investing activities of $33,000 resulted from purchases of property and equipment.
Cash Flows from Financing Activities
In Fiscal 2020, cash
provided by financing activities of $485,000 consisted of $1,357,000 proceeds from the PPP Loan, borrowings of $900,000 under our
line of credit and $32,000 in proceeds from stock options exercised, partially offset by $1,200,000 in repayments on the line of
credit, $500,000 paid out on the deferred cash consideration and $104,000 in repayments on notes payable and capital leases.
In Fiscal 2019, cash
provided by financing activities of $726,000 consisted of $1,550,000 in borrowings on the line of credit, offset by $600,000 in
repayments on the line of credit and $225,000 in repayments on notes payable and capital leases.
ITEM 7A.QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial
statements and notes thereto included in this Annual Report may be found beginning on page F-1 of this Annual Report on Form 10-K.
ITEM 9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.CONTROLS AND
PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management carried
out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness
of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange
Act”). Based on their evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our
disclosure controls and procedures were effective as of September 30, 2020.
Management’s Report on Internal Control Over Financial
Reporting
Our management is
responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act). Our management, under the supervision and with the participation of our Principal Executive Officer and Principal
Financial Officer, evaluated the effectiveness of our internal control over financial reporting as of the end of the period covered
by this report. In making this assessment, our management used the criteria set forth by the Committee of Sponsor Organizations
of the Treadway Commission (COSO) in Internal Control-Integrated Framework as issued in 2013. Based on that evaluation, our management
concluded that our internal control over financial reporting as of September 30, 2020 was effective based on that criteria.
Our internal control
over financial reporting is a process designed under the supervision of our Principal Executive Officer and Principal Financial
Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements
for external reporting purposes in accordance with U.S. GAAP. Internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with U.S. GAAP, and that receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with policies or procedures may deteriorate.
Changes in Internal Control
There were no changes
in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d)
of the Exchange Act during the fourth quarter of Fiscal 2020 that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE
The information required
by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed
with the SEC within 120 days of the fiscal year ended September 30, 2020. Our Board has adopted a Code of Business Conduct
and Ethics applicable to all officers, directors and employees, which is available on our website (https://forwardindustries.com/investors/governance/)
under "Corporate Governance." We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment
to, or waiver from, a provision of our Code of Conduct and by posting such information on the website address and location specified
above.
ITEM 11. EXECUTIVE COMPENSATION
The information required
by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed
with the SEC within 120 days of the fiscal year ended September 30, 2020.
ITEM 12. SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required
by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed
with the SEC within 120 days of the fiscal year ended September 30, 2020.
ITEM 13. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required
by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed
with the SEC within 120 days of the fiscal year ended September 30, 2020.
ITEM 14. PRINCIPAL ACCOUNTANT FEES
AND SERVICES
The information required
by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed
with the SEC within 120 days of the fiscal year ended September 30, 2020.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
(a) Documents filed as part of the report.
(3) Exhibits. See the Exhibit Index.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: December 17, 2020
FORWARD INDUSTRIES, INC.
In accordance with the Securities Exchange
Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated:
December 17, 2020 /s/ Howard Morgan Howard Morgan Director
December 17, 2020 /s/ Sangita Shah Sangita Shah Director
December 17, 2020 /s/ James Ziglar James Ziglar Director
EXHIBIT INDEX
Incorporated by Reference
Exhibit No. Exhibit Description Form Date Number Filed or Furnished Herewith
3.1 Restated Certificate of Incorporation 10-K 12/8/10 3(i)
21.1 List of Subsidiaries Filed
23.1 Consent of Independent Registered Public Accounting Firm Filed
31.1 CEO Certifications (302) Filed
31.2 CFO Certification (302) Filed
32.1 CEO and CFO Certifications (906) Furnished
101 .INS XBRL Instance Document Filed
101 .SCH XBRL Taxonomy Extension Schema Document Filed
101 .CAL XBRL Taxonomy Extension Calculation Linkbase Document Filed
101 .DEF XBRL Taxonomy Extension Definition Linkbase Document Filed
101 .LAB XBRL Taxonomy Extension Label Linkbase Document Filed
101 .PRE XBRL Taxonomy Extension Presentation Linkbase Document Filed
* Management compensatory agreement
or arrangement.
+ Certain schedules,
appendices and exhibits to this agreement have been omitted in accordance with Item 601 of Regulation S-K. A copy of any omitted
schedule and/or exhibit will be furnished supplementally to the Securities and Exchange Commission staff upon request.
Copies of this filing (including the
financial statements) and any of the exhibits referred to above will be furnished at no cost to our shareholders who make a written
request to Forward Industries, Inc.; 700 Veterans Memorial Hwy, Suite 100, Hauppauge, NY 11788; Attention: Corporate Secretary.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of September 30, 2020 and 2019 F-3
Notes to Consolidated Financial Statements F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
The Board of
Directors and Shareholders of Forward Industries, Inc. and Subsidiaries
Opinion on the Financial
Statements
We have
audited the accompanying consolidated balance sheets of Forward Industries, Inc. and Subsidiaries (the “Company”) as
of September 30, 2020 and 2019, and the related consolidated statements of operations, shareholders’ equity and cash flows
for the years then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion,
the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September
30, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
Change in Accounting
Principle
As discussed
in Notes 2 and 13 to the consolidated financial statements, the Company has changed its method for accounting for leases as of
October 1, 2019 due to the adoption of Accounting Standards Codification Topic 842 Leases.
Basis for Opinion
These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted
our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an understanding of the internal control over financial reporting but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits
included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ CohnReznick
LLP
We have
served as the Company’s auditor since 2011.
Jericho,
New York
December
17, 2020
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30,
Assets
Current assets:
Operating lease right of use assets, net 3,512,042 –
Liabilities and shareholders' equity
Current liabilities:
Current portion of capital leases payable 18,411 39,941
Current portion of deferred consideration 45,000 834,000
Current portion of operating lease liability 259,658 –
Accrued expenses and other current liabilities 615,401 694,972
Other liabilities:
Notes payable, less current portion 529,973 –
Operating lease liability, less current portion 3,359,088 –
Capital lease liability, less current portion 12,769 26,438
Deferred consideration, less current portion 45,000 –
Commitments and contingencies
Shareholders' equity:
The accompanying
notes are an integral part of the consolidated financial statements.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Years Ended September 30,
Fair value adjustment of earn-out consideration (350,000 ) 260,000
Fair value adjustment of deferred cash consideration 16,000 36,000
Interest income (60,932 ) –
Provision for (benefit from) income taxes 9,167 (4,162 )
Net loss per share:
Weighted average common shares outstanding:
The accompanying notes are an integral part of the consolidated financial statements.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Fiscal Year Ended September 30, 2020
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
For the Fiscal Year Ended September 30, 2019
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
The accompanying notes are an integral part of the consolidated financial statements.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended September 30,
Operating Activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Change in fair value of earn-out consideration (350,000 ) 260,000
Change in fair value of deferred cash consideration 16,000 36,000
Fair value of cost method investment for services provided – (326,941 )
Impairment of investment 326,941 –
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 30,542 (193,068 )
Operating lease liabilities 25,945 –
Accrued expenses and other current liabilities (194,550 ) 97,402
Investing Activities:
Purchases of property and equipment (68,456 ) (33,138 )
Cash used in acquisition of Kablooe, Inc. (352,628 ) –