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. The following discussion and analysis compares our results of operations for the year ended September 30, 2022 (“Fiscal
2022”) with those for the year ended September 30, 2021 (“Fiscal 2021”). 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 our liquidity, plans on repaying outstanding debt obligations, expectations regarding the effect
of the pandemic and inflation on our business, 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
global design, manufacturing, sourcing and distribution group serving 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, the Company
is now able to introduce proprietary products to the market from concepts brought to it from a number of different sources, both inside
and outside the Company.
Our design division provides
hardware and software product design and engineering services to customers predominantly located in the U.S. Our OEM distribution division
sources and sells carrying cases and other accessories for medical monitoring and diagnostic kits as well as a variety of other portable
electronic and non-electronic devices to OEMs, or their contract manufacturers worldwide, that either package our products as accessories
“in box” together with their branded product offerings or sell them through their retail distribution channels. Our retail
distribution division sources and sells smart-enabled furniture, hot tubs and various other products through various online retailer websites
to customers predominantly located in the U.S.
The effects of the COVID-19 pandemic
continue to impact the retail and OEM distribution segments of our business. The increase in global consumer demand, coupled with the
global shipping container shortage, dramatically increased demand for both ocean freight and ground transportation. These factors led
to a significant increase in freight costs, particularly from the Asia-Pacific region and most notably in Fiscal 2022. Labor shortages
at U.S. ports and in ground transportation services caused container ships to spend a significant amount of time waiting for goods to
be unloaded and to arrive at our warehouses. These factors caused an increase in the demand for and cost of ground transportation and
delayed consumer availability for many of our products in Fiscal 2022. The timing and extent of these COVID-19 related transportation
disruptions are still largely unknown but are expected to continue into Fiscal 2023.
The effects of the pandemic had
a lesser impact on the design segment of our business. Rising inflation caused an increase in the cost of acquiring and retaining our
employees, particularly in the second half of Fiscal 2022. The timing and extent of future inflation is difficult to predict, but we expect
these rising costs to continue into Fiscal 2023.
The effects of COVID-19 may further
impact our business in ways we cannot predict, and such impacts could be significant. The current economic conditions may continue to
negatively impact our results of operations, cash flows and financial position in future periods as well as that of our customers, including
their ability to pay for our products and services and to choose to allocate their budgets to new or existing projects which may or may
not require our products and services. The long-term financial impact on our business cannot be reasonably estimated at this time. As
a result, the effects of COVID-19 may not be fully reflected in our financial results until future periods.
Until the effects of the pandemic
have fully receded, we expect business conditions to remain challenging. In response to these challenges, we will continue to focus
on those factors that we can control: closely managing and controlling our expenses and inventory levels; aligning our design and development
schedules with demand in a proactive manner to minimize our cash operating costs; pursuing further improvements in the productivity and
effectiveness of our development, selling and administrative activities and, where appropriate, taking advantage of opportunities to enhance
our business growth and strategy.
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 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 Distribution Segment
The OEM distribution segment
recognizes revenue when finished goods are shipped to its customers (in general, these conditions occur at either point of shipment or
point of destination, depending on the terms of sale and transfer of control); (ii) there are no other deliverables or performance obligations;
and (iii) there are no further obligations to the customer after the title of the goods has transferred. If 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.
Retail Distribution Segment
The retail distribution segment
sells products primarily through online websites operated by authorized third-party retailers. Revenue is recognized when control, as
defined in Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers”, of the related
goods is transferred to the retailer, which generally occurs upon shipment to the end customer. Other than product delivery, the retail
distribution segment does not typically have other deliverables or performance obligations associated with its products. Revenue is measured
as the amount of consideration expected to be received in exchange for the products provided, net of allowances taken by retailers for
product returns and any taxes collected from customers that will be remitted to governmental authorities. 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.
Design Segment
The design segment applies the
“cost to cost” and “right to invoice” methods of revenue recognition to its contracts with customers. The design
segment typically engages in two types of contracts: (i) time and material and (ii) fixed price. The Company recognizes revenue over time
on its time and material contracts utilizing a “right to invoice” method. Revenues from fixed price contracts that require
performance of services that are not related to the production of tangible assets are recognized by using cost inputs to measure progress
toward the completion of its performance obligations, or the “cost to cost” method. Revenues from fixed price contracts that
contain specific deliverables are recognized when the performance obligation has been satisfied or the transfer of goods to the customer
has been completed and accepted.
Recognized revenues that will
not be billed until a later date, or contract assets, are recorded as an asset and classified as a component of accounts receivable in
the accompanying consolidated balance sheets. 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.
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 worldwide. The retail distribution segment sources and sells smart-enabled furniture, hot tubs and a variety of
other products through various online retailer websites to customers predominantly located in the U.S. The design segment consists of
two operating segments (IPS and Kablooe, which have been aggregated into one reportable segment) that provide a full spectrum of hardware
and software product design and engineering services to customers predominantly located in the U.S.
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. Segment assets consist of accounts
receivable and inventory, which are regularly reviewed by the CODM, as well as goodwill and intangible assets resulting from design segment
acquisitions (see Note 15 to the consolidated financial statements).
Inventory Valuation
Inventories consist primarily
of finished goods and are stated at the lower of cost (determined by the first-in, first-out method) or net realizable value. Based on
management’s estimates, an allowance is made to reduce excess, obsolete, or otherwise unsellable inventories to net realizable value.
The allowance is established through charges to cost of sales in the Company’s consolidated statements of operations. In determining
the adequacy of the allowance, management’s estimates are based upon several factors, including analyses of inventory levels, historical
loss trends, sales history and projections of future sales demand. The Company’s estimates of the allowance may change from time
to time based on management’s assessments, and such changes could be material.
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 (the IPS and Kablooe operating
segments) and we perform our annual goodwill impairment test on September 30, the end of the fiscal year, or upon the occurrence of a
triggering event. 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
amount, no impairment charge is recognized. If the fair value of the reporting unit is less than its carrying amount, 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. There were no indications
of goodwill impairment in Fiscal 2022 or Fiscal 2021.
Our intangible assets are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In assessing
the recoverability of our intangible assets, we must make estimates and assumptions regarding future cash flows and other factors to determine
the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether an impairment charge
is recognized and the magnitude of any such charge. Fair value estimates are made at a specific point in time, based on relevant information.
These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined
with precision. Changes in assumptions could significantly affect the estimates. If these estimates or material related assumptions change
in the future, we may be required to record impairment charges related to our intangible assets. There were no indications of impairment
of intangible assets in Fiscal 2022 or 2021.
Recent Accounting Pronouncements
In November 2019, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 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 adopted this guidance in the first quarter of fiscal 2022 with no material
impact to our consolidated financial statements.
RESULTS OF OPERATIONS FOR FISCAL 2022 COMPARED
TO FISCAL 2021
Consolidated Results
The table below summarizes our consolidated results
of operations for Fiscal 2022 as compared to Fiscal 2021:
Consolidated Results of Operations
Fiscal 2022 Fiscal 2021 Change ($) Change (%)
The increase in net revenues
in Fiscal 2022 was primarily driven by revenue growth in the design segment and to a lesser extent, revenue growth in the retail segment,
which was partially offset by a decline in revenue in the OEM distribution segment.
Gross profit increased $234,000,
but gross margin declined from 20.8% in Fiscal 2021 to 19.8% in Fiscal 2022. Better utilization and higher billing rates in the design
segment were mostly offset by higher importation and logistics costs, which drove OEM and retail distribution margins down. Due to inflation
and the continued uncertainty surrounding supply chain stability, management believes there will be continued volatility in OEM and retail
distribution cost of sales in Fiscal 2023.
Sales and marketing expenses
increased due to higher advertising and promotional costs, primarily in the retail segment. Sales and marketing expenses as a percentage
of revenue increased from 6.4% in Fiscal 2021 to 6.7% in Fiscal 2022. If revenues from the retail segment grow to comprise a larger portion
of the overall business, management expects sales and marketing costs, both in total and as a percentage of revenue, to increase in future
periods.
General and administrative expenses
increased in Fiscal 2022, primarily related to an increase in payroll costs and non-employee board members’ cash and equity compensation
due to the cost cutting measures taken in Fiscal 2021 which were not implemented in Fiscal 2022. These increases were partially offset
by lower bad debt expense. Management continues to monitor the various components of general and administrative expenses and how these
costs are affected by inflationary and other factors. We intend to adjust these costs as needed based on the overall needs of the business.
We reported other expense of
$135,000 in Fiscal 2022 as compared to other income of $1,289,000 in Fiscal 2021. The variance is primarily due to the $1,357,000 forgiveness
of note payable related to the Paycheck Protection Program loan (“PPP loan”) and to a lesser extent, driven by a decrease
in interest income on a note receivable from a customer which was fully reserved for in Fiscal 2019.
In Fiscal 2022, we recorded a
tax provision of $3,000, generated a loss before income taxes of $1,376,000 and had an effective tax rate of (0.2%). 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 was not recognized as taxable income per the Coronavirus
Aid, Relief and Economic Security Act (the “CARES Act”). 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 $(0.14) and $0.05 for Fiscal 2022 and Fiscal 2021, 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.
Segment Results of Operations
OEM Distribution Retail Distribution Design Corporate Expenses Consolidated
OEM Distribution
Net revenues in the OEM distribution
segment declined due to reduced revenues in the sale of diabetic products and, to a lesser extent, a decline in other OEM product revenue.
Revenues from diabetic products declined $1,185,000 and revenues from other products declined $69,000. As consumer demand increases for
diabetic testing products which require no carrying case, we expect diabetic product sales to represent a smaller portion of our OEM distribution
revenue.
The following tables set forth
revenues by product line of our OEM distribution segment customers for the periods indicated:
OEM Revenues by Product Line
Fiscal 2022 Fiscal 2021 Change ($) 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 due to lower revenues from all major diabetic customers due to a reduction in the volume of orders from most major diabetic customers.
An increase in competition and continued pricing pressures, driven by inflation and in some cases a transition to lower cost carrying
cases, drove diabetic revenues down further. These declines were partially offset by a net increase in revenue from other diabetic customers
which were less significant. As mentioned above, management believes that revenues from diabetic customers will continue to decline.
Revenues from diabetic products
represented 85% of net revenues for the OEM distribution segment in Fiscal 2022 compared to 86% in Fiscal 2021.
Other Product Revenues
Our OEM distribution segment
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
decreased due to a decrease in sales volume from certain existing customers, which was offset by increases in business from other 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.
Operating Income
Operating income for the OEM
distribution segment declined and operating income margin declined to 5.0% in Fiscal 2022, compared to 7.7% in Fiscal 2021, primarily
due to rising material and importation costs and continued pricing pressure from our major diabetic customers. The cost of importing
all products from China has increased and both the diabetic and other OEM product lines have experienced pricing pressures from customers,
resulting in a decrease in gross margin as compared to the prior year. The decline in gross margin was partially mitigated by lower selling
and marketing costs related to OEM sales commissions. 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 increased in Fiscal
2022 due to an increase in sales volume on certain products with two retailers. As the cost of products increases and inflation continues
to reduce consumer spending, profitability becomes more challenging in the retail segment. We plan to focus our sales and sales support
teams on efforts to match our product offerings with consumer demand, strategically increase the volume of revenue from more profitable
products and expand these product offerings through additional retailer websites.
The rising cost of freight, storage
and other logistics services outpaced the increase in revenue, which, when coupled with additional expense associated with increases in
other inventory related costs, led to a decrease in gross profit from Fiscal 2021 to Fiscal 2022. This was further exacerbated by higher
sales and marketing expenses related to sales commissions, and advertising and promotional expenses necessary to support the growth in
revenue, which increased the operating loss margin from 24.5% in Fiscal 2021 to 43.8% in Fiscal 2022.
Design Segment
The increase in net revenues
was driven by new customers and an increase in projects from certain existing customers, which was partially offset by declines in revenues
from certain prior year customers.
Operating income increased and
operating income margin improved from 3.6% in Fiscal 2021 to 10.6% in Fiscal 2022. The increase in gross profit, driven by higher revenue
and better utilization and billing rates, was further enhanced by a decrease in general and administrative expenses primarily due to a
reduction in bad debt expense, partially offset by higher payroll 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, 2022,
our working capital was $4,362,000 compared to $5,587,000 at September 30, 2021, the decrease primarily due to higher payables and accrued
expenses, partially offset by higher inventory levels. At November 30, 2022, we had approximately $3,200,000 cash on hand and $1,300,000
available under our line of credit with a bank which matures May 31, 2023.
Forward China, our largest vendor
and an entity owned by our Chairman of the Board and Chief Executive Officer, holds a $1,600,000 promissory note (the “FC Note”)
issued by us which matures on December 31, 2024 (see Note 13 to the consolidated financial statements). The balance of the FC Note was
reduced to $1,400,000 after we made principal payments of $200,000 in Fiscal 2022. Although the FC 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. Additionally, Forward China has extended payment terms on our outstanding payables
due to them when necessary. We can provide no assurance that (i) Forward China will extend the FC Note again if we request an extension,
(ii) Forward China will continue to extend payment terms on outstanding payables when we need them, or (iii) any additional credit facility
will be available on terms acceptable to us or at all.
We anticipate that our liquidity
and financial resources for the 12 months following the date of this report will be adequate to manage our operating and financial requirements.
If we have the opportunity to make a strategic acquisition (as we have in the past with the acquisitions of IPS and Kablooe) or an investment
in a product or partnership, we may require additional capital beyond our current cash balance to fund the opportunity. If we seek to
raise additional capital, there is no assurance that we will be able to raise funds on terms that are acceptable to us or at all. In the
current environment of rising interest rates, any future borrowing is expected to result in higher interest expense.
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 2022 and Fiscal
2021, our sources and uses of cash were as follows:
Operating Activities
During Fiscal 2022, cash provided
by operating activities of $1,535,000 resulted from an increase in accounts payable and amounts due to Forward China of $1,856,000, a
decrease in accounts receivable of $953,000, non-cash charges for depreciation, amortization, share-based compensation and bad debt expense
of $775,000, an increase in accrued expenses of $624,000 and the net change in other operating assets and liabilities of $443,000, partially
offset by the net loss of $1,378,000 and an increase in inventories of $1,738,000.
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.
Investing Activities
In Fiscal 2022 and Fiscal 2021,
cash used for investing activities of $170,000 and $67,000, respectively, resulted from purchases of property and equipment.
Financing Activities
In Fiscal 2022, cash used in
financing activities of $200,000 consisted of principal payments on the promissory note held by Forward China.
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.
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, 2022.
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, 2022 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 2022 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 2023 Annual Meeting of Stockholders to be filed with the SEC
within 120 days of the fiscal year ended September 30, 2022. 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) under “Investors”,
"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 2023 Annual Meeting of Stockholders to be filed with the SEC
within 120 days of the fiscal year ended September 30, 2022.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The information required by this
item is incorporated by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders to be filed with the SEC
within 120 days of the fiscal year ended September 30, 2022.
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 2023 Annual Meeting of Stockholders to be filed with the SEC
within 120 days of the fiscal year ended September 30, 2022.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this
item is incorporated by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders to be filed with the SEC
within 120 days of the fiscal year ended September 30, 2022.
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, 2022
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, 2022 /s/ Sangita Shah Sangita Shah Director
December 16, 2022 /s/ James Ziglar James Ziglar Director
December 16, 2022 /s/ Sharon Hrynkow Sharon Hrynkow 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)
10.11 Consultancy Agreement dated September 1, 2022 - Justwise Group Ltd. Filed
10.12 Employment Agreement dated January 18, 2018 - Robert Wild* Filed
10.13 Employment Agreement dated August 17, 2020 - Tom KraMer* 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.
$ As previously disclosed, this executive officer has received an increase
to his annual Base Salary.
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, 2022 and 2021 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, 2022 and 2021, 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, 2022 and 2021, 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 audits 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 (Note 1 to the
Consolidated Financial Statements)
Significant judgment is exercised by the Company
in determining whether there is substantial doubt the Company will continue as a going concern. Specifically, the Company’s 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 residual effects of the global pandemic, and inflation.
Given these factors, the related audit effort
in evaluating management’s judgments in determining the Company’s ability to continue as a going concern was challenging,
subjective, and complex and required a high degree of auditor judgment.
How our Audit Addressed the Critical Audit
Matter
Our principal audit procedures related to the
Company’s assessment of going concern included the following:
/s/ CohnReznick LLP
We have served as the Company’s auditor since
2011.
Melville, New York
December 16, 2022
(PCAOB No. 596)
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30,
Assets
Current assets:
Liabilities and shareholders' equity
Current liabilities:
Current portion of earnout consideration 25,000 25,000
Other liabilities:
Earnout consideration, less current portion 45,000 45,000
Commitments and contingencies (Note 11) – –
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 )
Interest income – (88,760 )
Provision for income taxes 2,554 –
(Loss)/earnings 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, 2022
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
For the Fiscal Year Ended September 30, 2021
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 )
Changes in operating assets and liabilities:
Net changes in operating lease liabilities 44,076 49,258
Accrued expenses and other current liabilities 624,409 (87,427 )
Net cash provided by/(used in) operating activities 1,534,788 (528,311 )
Investing Activities:
Purchases of property and equipment (169,631 ) (67,207 )
Net cash used in investing activities (169,631 ) (67,207 )
Financing Activities:
Proceeds from line of credit borrowings – 150,000
Repayment of line of credit borrowings – (1,150,000 )
Repayment of notes payable – (156,798 )
Repayment of note payable to Forward China (200,000 ) –
Proceeds from stock options exercised – 267,711
Repayments of finance leases – (29,657 )
Supplemental Disclosures of Cash Flow Information:
Supplemental Disclosures of Non-Cash Information:
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 global design, manufacturing, sourcing and distribution group
serving 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, the Company is able to introduce proprietary products to the market from concepts
brought to it from a number of different sources, both inside and outside the Company.
The Company’s design division
provides hardware and software product design and engineering services to customers predominantly located in the U.S. The Company’s
OEM distribution division sources and sells carrying cases and other accessories for medical monitoring and diagnostic kits as well as
a variety of other portable electronic and non-electronic devices to original equipment manufacturers (“OEM”s), or their contract
manufacturers worldwide, 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 retail distribution division sources and sells smart-enabled
furniture, hot tubs and various other products through various online retailer websites to customers predominantly located in the U.S.
The Company does not manufacture
any of its OEM or retail products and sources substantially all of these products from independent suppliers in China, through Forward
Industries Asia-Pacific Corporation, a British Virgin Islands corporation (“Forward China”). See Note 13.
Liquidity
In Fiscal 2022, the Company
generated a net loss of $1,378,000
and $1,535,000
of cash flows from operating activities. Based on our forecasted cash flows, we believe our existing cash balance and working
capital will be sufficient to meet our liquidity needs through at least December 31, 2023.
Impact of COVID-19
The effects of the COVID-19 pandemic
continue to impact the retail and OEM distribution segments of our business. The increase in global consumer demand, coupled with the
global shipping container shortage, dramatically increased demand for both ocean freight and ground transportation. These factors led
to a significant increase in freight costs, particularly from the Asia-Pacific region and most notably in Fiscal 2022. Labor shortages
at U.S. ports and in ground transportation services caused container ships to spend a significant amount of time waiting for goods to
be unloaded and to arrive at our warehouses. These factors caused an increase in the demand for and cost of ground transportation and
delayed consumer availability for many of our products in Fiscal 2022. The timing and extent of these COVID-19 related transportation
disruptions are still largely unknown but are expected to continue into Fiscal 2023.
The effects of the pandemic had
a lesser impact on the design segment of our business. Rising inflation caused an increase in the cost of acquiring and retaining our
employees, particularly in the second half of Fiscal 2022. The timing and extent of future inflation is difficult to predict, but we expect
these rising costs to continue into Fiscal 2023.
The effects of COVID-19 may further
impact our business in ways we cannot predict, and such impacts could be significant. The current economic conditions may continue to
negatively impact our results of operations, cash flows and financial position in future periods as well as that of our customers, including
their ability to pay for our products and services and to choose to allocate their budgets to new or existing projects which may or may
not require our products and 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.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS