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 Statements
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 growth in retail;
· Plans on repaying outstanding debt obligations;
· 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 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 Fiscal 2021 include Kablooe’s results of operations for 12 months,
while our results of operations for Fiscal 2020 include Kablooe’s results of operations for approximately six weeks. Key terms of
the acquisition are described in Note 3 to the consolidated financial statements.
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 the pandemic is fully
controlled, 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
implemented cost-cutting initiatives and reduced executive pay and Board of Directors compensation for the three months ended June 30,
2021. See “Liquidity and Capital Resources” section for further description of these cost-cutting measures.
Additionally, see Part I,
Item 1A “Risk Factors” for a description of the material risks we currently face 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 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. The
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
OEM and Retail Distribution Segments
We generally recognize revenue
in our OEM and retail distribution segments when: (i) finished goods are shipped to our customers (in general, these conditions occur
at either point of shipment or point of destination, depending on the terms of sale and transfer of control); (ii) there are no other
deliverables or performance obligations; and (iii) there are no further obligations to the customer after the title of the goods has transferred.
When we receive consideration before achieving the criteria previously mentioned, we record a contract liability, which is classified
as a component of deferred income in the accompanying consolidated balance sheets. The OEM distribution segment had no contract liabilities
at September 30, 2021, 2020 or 2019. The retail distribution segment had contract liabilities of $0, $75,000 and $0 at September 30, 2021,
2020 and 2019, respectively.
Design Segment
We apply 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. We recognize revenue
over time on our 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. The design segment had contract assets of $693,000, $649,000 and $611,000 at September
30, 2021, 2020 and 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 consolidated balance sheets. The design
segment had contract liabilities of $188,000, $410,000 and $220,000 at September 30, 2021, 2020 and 2019, respectively.
Business Combinations
We allocate 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, we make 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
We have three reportable
segments: OEM distribution, retail distribution and design. The OEM distribution segment sources and distributes carrying cases and other
accessories for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic devices directly
to OEMs or their contract manufacturers. The retail distribution segment sources and sells smart-enabled furniture and a variety of other
products through agreements with various retailers, both in stores and through online retailer websites. The design reportable 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.
Our chief operating decision
maker (“CODM”) regularly reviews revenue and operating income for each segment to assess financial results and allocate resources.
For our OEM and retail distribution segments, we exclude general and administrative and general corporate expenses from their measure
of profitability as these expenses are not allocated to the segments and therefore not included in the measure of profitability used by
the CODM. For the design segment, general and administrative expenses directly attributable to that segment are included in its measure
of profitability as these expenses are included in the measure of its profitability reviewed by the CODM. We do not include intercompany
activity in our segment results to be consistent with the information that is presented to the CODM (see Note 16 to the consolidated
financial statements).
Goodwill and Intangible Assets
We review goodwill
for impairment at least annually, or more often if triggering events occur. We have 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. We have the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred.
If we 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 we would not need to perform a quantitative impairment test for the reporting unit. If we cannot support such a conclusion
or do not elect to perform the qualitative assessment, then we 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. During Fiscal 2020, we recorded
an impairment charge related to goodwill (See Note 4 to the consolidated financial statements). There were no impairment charges in Fiscal
2021.
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. We adopted this guidance in the first quarter of Fiscal 2021 with no material impact to our 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.
We adopted this guidance in the first quarter of Fiscal 2021 with no material impact to our 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 us for fiscal years beginning after December 15, 2022 and interim
periods within those fiscal years. We are currently evaluating the effects of this pronouncement on our 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. We adopted this guidance in the first quarter of Fiscal 2021 with
no material impact to our 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. We are currently evaluating the effects of this pronouncement on our consolidated
financial statements.
RESULTS OF OPERATIONS FOR FISCAL 2021 COMPARED
TO FISCAL 2020
Consolidated Results
The table below summarizes our consolidated results
of operations for Fiscal 2021 as compared to Fiscal 2020:
Consolidated Results of Operations
Fiscal 2021 Fiscal 2020 Change ($) Change (%)
Net revenues increased 13.2%
from Fiscal 2020 to Fiscal 2021. The timing of the Kablooe acquisition in August 2020 accounted for $2,059,000 of the increase, with the
majority of the remaining increase due to the growth of the retail business.
Gross profit increased 22.5%
from Fiscal 2020 to Fiscal 2021 and gross margin increased from 19.3% to 20.8% in the same period. The increase in gross profit was primarily
attributable to the increase in revenues resulting from the Kablooe acquisition in August 2020 and retail sales. The improvement in gross
margin was due to higher margins in the design segment, partially offset by pricing pressures in the OEM segment and higher cost of products
in the retail segment.
Sales and marketing expenses
increased 28.3% from Fiscal 2020 to Fiscal 2021. The increase was primarily due to higher advertising costs and sales commissions as we
continue to expand our retail segment. Sales and marketing as a percentage of revenues increased to 6.4% in Fiscal 2021 from 5.7% in Fiscal
2020.
General and administrative
expenses increased 13.1%, from Fiscal 2020 to Fiscal 2021. The increase was driven by several factors including $836,000 of additional
expenses resulting from Kablooe, which was acquired in August 2020 and a $583,000 increase in bad debt expense. These increases were partially
offset by a $327,000 decrease in impairment charges (see Note 6 to the consolidated financial statements), lower personnel and Board of
Director expenses resulting from the cost-cutting measures taken in the third quarter of Fiscal 2021, a reduction in severance costs and
lower professional fees. General and administrative expenses remained consistent at 16.4% of revenues in Fiscal 2021 and Fiscal 2020.
We reported other income
of $1,289,000 in Fiscal 2021 as compared to $216,000 in Fiscal 2020. The increase is due to the $1,357,000 forgiveness of note payable
related to the Paycheck Protection Program loan (“PPP loan”) and an increase in interest income on a note receivable from
a customer which was fully reserved for in Fiscal 2019. These increases in other income were partially offset by a decrease in fair value
adjustments associated with acquisition related liabilities (see Note 6 to the consolidated financial statements).
In Fiscal 2021, we recorded
no tax provision or benefit, and we generated income before income taxes of $524,000, primarily resulting from the $1,357,000 forgiveness
of note payable related to the PPP loan. The forgiveness of the PPP loan will not be recognized as taxable income per the Coronavirus
Aid, Relief and Economic Security Act (the “CARES Act”). In Fiscal 2020, we 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%.
We maintain significant net
operating loss carryforwards and do not recognize a significant income tax provision or benefit as our deferred tax provision is typically
offset by maintaining a full valuation allowance on our net deferred tax assets.
Consolidated basic and diluted
earnings/(loss) per share was $0.05 and $(0.19) for Fiscal 2021 Fiscal 2020, respectively.
Segment Results
The discussion that follows
below provides further details about the results of operations for each segment as compared to the prior year. In Fiscal 2021, due to
the growth of our retail division, we determined it to be a separate reportable segment. The Fiscal 2020 results of operations for each
segment discussed below have been reformatted from what was previously disclosed to segregate the retail distribution segment and exclude
general corporate expenses from segment operating income to show them as a reconciling item so that results are comparable to the current
year presentation.
Segment Results of Operations
OEM Distribution Retail Distribution Design Corporate Expenses Consolidated
OEM Distribution
Net revenues
in the OEM distribution segment declined 2.2% due to reduced revenues in the sale of diabetic products, partially offset by an increase
in other product revenue. Revenues from diabetic products declined $649,000 and revenues from other products increased $213,000. As consumer
demand increases for diabetic testing products which require no carrying case, we expect diabetic product sales to represent a smaller
portion of our OEM distribution revenue.
The following tables set
forth revenues by product line of our OEM distribution segment customers for the periods indicated:
OEM Revenues by Product Line
Fiscal 2021 Fiscal 2020 Change ($) Change (%)
Diabetic Product Revenues
Our OEM 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, sells them through their retail distribution channels.
Revenues from diabetic products
declined 3.8%, primarily due to lower revenues from one major diabetic customer, which resulted from their switch to a lower cost product,
coupled with delays caused by supply chain constraints. Revenue declines from other major diabetic customers were less significant and
were partially offset by an increase in revenue from all other diabetic products customers. As mentioned above, management believes that
revenues from diabetic customers will continue to decline. Revenues from diabetic products represented 86% of net revenues for the OEM
distribution segment in Fiscal 2021 compared to 87% in Fiscal 2020.
Other Product Revenues
Our OEM distribution segment
also sources and sells cases and protective solutions for a diverse array of portable electronic and non-electronic products (such as
sporting and recreational products, bar code scanners, GPS devices, tablets and firearms) on a made-to-order basis that are customized
to fit the products sold by our OEM customers.
Revenues from other products
increased 8.6% due to the acquisition of new customers plus higher volume from certain existing customers. 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 14% of our OEM distribution revenues in Fiscal 2021 as compared to 13% in Fiscal 2020.
Operating Income
Operating income for the
OEM distribution segment declined $137,000, or 8.5%, from Fiscal 2020 to Fiscal 2021 and operating income margin declined to 7.7% in Fiscal
2021, compared to 8.2% in Fiscal 2020. 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 other products in Fiscal 2021. We continue to work on expanding our product offerings to include higher
margin products and enhancing our sales efforts to grow revenue and increase gross profit.
Retail Distribution Segment
Net revenues in the retail
distribution segment increased $2,157,000 in Fiscal 2021 due to new product offerings and the continued expansion of our retail distribution
network, revenue derived from new retail agreements as well as an increase in volume with certain existing retailers. In Fiscal 2020,
$758,000 of retail distribution revenues were derived from the sale and sourcing of personal protective equipment, the result of demand
caused by the pandemic, which did not recur in Fiscal 2021. We will continue to focus on our sales and sales support teams in our attempt
to expand and diversify our retail product offerings.
Operating loss for the retail
distribution segment increased $442,000 in Fiscal 2021. The increase in revenues was offset by higher cost of sales caused by supply chain
issues and the elimination of the sale of personal protective equipment from Fiscal 2020, which generated higher gross margins. Selling
and marketing expenses increased as well driven by higher sales commissions resulting from the increase in revenue.
Design Segment
Net revenues in the
design segment increased $2,823,000, or 20.6%. The increase in revenues was primarily due to the $2,059,000 additional revenue generated
by Kablooe, which was acquired in August 2020. Additional revenue from new and existing customers drove the balance of the increase, which
was partially offset by declines in revenues from certain prior year customers.
Operating income/(loss) for
the design segment improved $981,000, primarily due to the reduction of $1,342,000 of impairment charges from Fiscal 2020. Gross margin
improvements driven by better utilization rates and the inclusion of a full year of Kablooe results were offset by additional general
and administrative expenses relating to a $673,000 increase in bad debt expense and higher personnel costs.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity
is our operations. The primary demand on our working capital has historically been (i) operating losses, (ii) repayment of debt obligations,
and (iii) any increases in accounts receivable and inventories arising in the ordinary course of business. Historically, our sources of
liquidity have been adequate to satisfy working capital requirements arising in the ordinary course of business. At September 30, 2021,
our working capital was $5,587,000 compared to $3,396,000 at September 30, 2020. The improvement in working capital was primarily
due to the extension of the $1,600,000 note payable to Forward China to December 31, 2022. Our largest vendor is Forward China, a related
entity, which is able to extend payment terms on outstanding liabilities when necessary (see Note 14 to the consolidated financial statements).
We can provide no assurances that any such extension will be given if requested.
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. These cost-cutting measures ended in
June 2021 and compensation was returned to pre-existing amounts in July 2021. The Company estimates that these pay cuts and other
reductions resulted in approximately $200,000 of cash savings in the third quarter of Fiscal 2021. The Company will reevaluate any
future need for these or similar cost-cutting measures as business conditions warrant. In light of these circumstances, the
Compensation Committee of the Board of Directors deferred a recommendation for director equity compensation. Therefore, in
addition to cash savings, the resulting reduction in equity compensation lowered the Company’s non-cash expenses in the third
and fourth quarters of Fiscal 2021.
At November 30, 2021, we
had $1,200,000 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 (see Note 14). 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.
As discussed in Note 18 to
the consolidated financial statements, on April 18, 2020, we entered into a PPP loan in an aggregate principal amount of $1,357,000. In
December 2020, the Small Business Administration (“SBA”) approved our forgiveness request for this loan. There is a six-year
period during which the SBA can review this forgiveness.
We anticipate that our liquidity
and financial resources will be adequate to manage our operating and financial requirements until at least December 31, 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 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 2021 and Fiscal
2020, our sources and uses of cash were as follows:
Operating Activities
During Fiscal 2021, cash
used in operating activities of $528,000 resulted from an operating loss of $765,000, an increase in accounts receivable of $1,665,000,
an increase in inventories of $787,000, a decrease in deferred income of $297,000 and the net change in other operating assets and liabilities
of $223,000, partially offset by an increase in accounts payable and amounts due to Forward China of $2,306,000 and non-cash expenses
of $903,000 related to depreciation, amortization, share-based compensation and bad debt expense.
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.
Investing Activities
In Fiscal 2021, cash used
for investing activities of $67,000 resulted from purchases of property and equipment.
In Fiscal 2020, cash used
for investing activities of $390,000 resulted from the $322,000 net cash consideration for the Kablooe acquisition and purchases of property
and equipment of $68,000.
Financing Activities
In Fiscal 2021, cash used
in financing activities of $919,000 consisted of net repayments under our line of credit of $1,000,000, repayments of notes payable and
finance lease liabilities of $187,000, partially offset by proceeds from stock options exercised of $268,000.
In Fiscal 2020, cash provided
by financing activities of $485,000 consisted of $1,357,000 proceeds from the PPP loan and $32,000 in proceeds from stock options exercised,
partially offset by net repayments of $300,000 on the line of credit, payments of $500,000 of deferred cash consideration and $104,000
in repayments on notes payable and finance 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 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, 2021.
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 Sponsoring 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, 2021 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 2021 that materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS
THAT PREVENT INSPECTIONS
Not Applicable.
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 2022 Annual Meeting of Stockholders to be filed with
the SEC within 120 days of the fiscal year ended September 30, 2021. 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 2022 Annual Meeting of Stockholders to be filed with
the SEC within 120 days of the fiscal year ended September 30, 2021.
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 2022 Annual Meeting of Stockholders to be filed with
the SEC within 120 days of the fiscal year ended September 30, 2021.
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 2022 Annual Meeting of Stockholders to be filed with
the SEC within 120 days of the fiscal year ended September 30, 2021.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required
by this item is incorporated by reference to our Proxy Statement for the 2022 Annual Meeting of Stockholders to be filed with
the SEC within 120 days of the fiscal year ended September 30, 2021.
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 16, 2021
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 16, 2021 /s/ Howard Morgan Howard Morgan Director
December 16, 2021 /s/ Sangita Shah Sangita Shah Director
December 16, 2021 /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)
10.4(a) Form of Employment Agreement dated May 26, 2021* 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.SCH Inline XBRL Taxonomy Extension Schema Document Filed
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document Filed
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document Filed
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document Filed
101.PRE Inline 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 at September 30, 2021 and 2020 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.
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, 2021 and 2020, 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, 2021 and 2020, 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.
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.
Critical Audit
Matters
The critical audit matter communicated
below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to
be communicated to the audit committee and that: (i) related to accounts or disclosures that are material to the consolidated financial
statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter
does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the
critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they
relate.
Assessment of Going Concern
We
identified the Company’s assessment of going concern as a critical audit matter. Auditing the Company’s assessment of
going concern was complex and subjective due to the significant estimation and judgment used in forecasted cash flows. Specifically,
the forecasted cash flows are sensitive to significant assumptions such as projected revenue and projected operating results, all of
which are affected by the expected future market or economic conditions, including the effects of the global pandemic. In addition,
the Company’s largest vendor and lender is a related entity, as disclosed in Note 14. This related entity has a history of
extending payment terms to the Company, when necessary.
The primary procedures we performed
to address this critical matter included the following:
/s/ CohnReznick LLP
We have served
as the Company’s auditor since 2011.
Melville, New
York
December
16, 2021
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30
Assets
Current assets:
Liabilities and shareholders' equity
Current liabilities:
Note payable to Forward China – 1,600,000
Current portion of notes payable – 983,395
Current portion of finance lease liability 1,523 18,411
Current portion of earnout consideration 25,000 45,000
Accrued expenses and other current liabilities 527,974 615,401
Other liabilities:
Note payable to Forward China 1,600,000 –
Notes payable, less current portion – 529,973
Finance lease liability, less current portion – 12,769
Earnout consideration, less current portion 45,000 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,
Gain on forgiveness of note payable (1,356,570 ) –
Fair value adjustment of earnout consideration (20,000 ) (350,000 )
Fair value adjustment of deferred cash consideration – 16,000
Provision for income taxes – 9,167
Earnings/(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, 2021
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
For the Fiscal Year Ended September 30, 2020
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:
Gain on forgiveness of note payable (1,356,570 ) –
Change in fair value of earn-out consideration (20,000 ) (350,000 )
Change in fair value of deferred cash consideration – 16,000
Impairment of investment – 326,941
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (141,600 ) 30,542
Net changes in operating lease liabilities 49,258 25,945
Accrued expenses and other current liabilities (87,427 ) (194,550 )
Investing Activities:
Purchases of property and equipment (67,207 ) (68,456 )
Cash used in acquisition of Kablooe, Inc. – (352,628 )
Cash acquired in acquisition of Kablooe, Inc. – 31,024
Net cash used in investing activities (67,207 ) (390,060 )
Financing Activities:
Proceeds from note payable – 1,356,570
Payment of deferred cash consideration – (500,000 )
Net cash (used in)/provided by financing activities (918,744 ) 484,820
Supplemental Disclosures of Cash Flow Information:
Supplemental Disclosures of Non-Cash Information:
Common stock issued in Kablooe acquisition $ – $ 369,900
Fair value of Kablooe contingent earnout consideration $ – $ 90,000
The accompanying notes are
an integral part of the consolidated financial statements.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 OVERVIEW
Business
Forward Industries, Inc.
(“Forward”, “we”, “our”, or the “Company”), is a fully integrated design, development
and manufacturing solution provider for top tier medical and technology customers worldwide. Through its acquisitions of IPS and Kablooe,
the Company has expanded its ability to design and develop solutions for our existing multinational client base and expand beyond the
diabetic product line into a variety of industries with a full spectrum of hardware and software product design and engineering services.
In addition to our existing design and distribution of carry and protective solutions, primarily for handheld electronic devices, the
Company is now a one-stop shop for design, development and manufacturing solutions serving a wide range of clients in the industrial,
commercial and consumer industries. The Company’s previous principal customer market has been original equipment manufacturers,
or “OEMs” (or the contract manufacturing firms of these OEM customers), that either package our products as accessories “in
box” together with their branded product offerings or sell them through their retail distribution channels. The Company’s
OEM products include carrying cases and other accessories for medical monitoring and diagnostic kits and a variety of other portable electronic
and non-electronic products (such as sporting and recreational products, bar code scanners, smartphones, GPS location devices, tablets
and firearms). The Company’s OEM customers are located in: (i) the Asia-Pacific region, which we refer to as the “APAC Region”;