Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2020

 

OR

 

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________________ to ________________

 

Commission file number 001-34780

 

FORWARD INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

 

New York   13-1950672
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
700 Veterans Memorial Highway, Suite 100, Hauppauge, NY   11788
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (631) 547-3041

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.01 FORD

  The Nasdaq Stock Market

  (The Nasdaq Capital Market)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x     No  o

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  x     No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨   Accelerated filer   ¨
Non-accelerated filer     x   Smaller reporting company  x
    Emerging growth company  ¨

 

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o     No  x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 9,583,851 shares as of August 7, 2020 

 
 

   

 

 

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

 

PART I. FINANCIAL INFORMATION Page
No.
Item 1. Financial Statements  
  Condensed Consolidated Balance Sheets as of June 30, 2020 (Unaudited) and September 30, 2019 3
  Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended June 30, 2020 and 2019 4
  Condensed Consolidated Statements of Shareholders' Equity (Unaudited) for the Nine Months Ended June 30, 2020 and 2019 5
  Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended June 30, 2020 and 2019 6
  Notes to Condensed Consolidated Financial Statements 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
Item 4. Controls and Procedures 35
     
PART II. OTHER INFORMATION  
Item 1. Legal Proceedings 36
Item 1A. Risk Factors 36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 36
Item 3. Defaults Upon Senior Securities 37
Item 4. Mine Safety Disclosures 37
Item 5. Other Information 37
Item 6. Exhibits 37
  Signatures 38

 

 

 

 

 2 

 

 

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

             

   June 30,   September 30, 
   2020   2019 
   (Unaudited)   (Note 1) 
Assets          
           
Current assets:          
Cash  $3,084,635   $3,092,813 
Accounts receivable, net   8,264,935    6,695,120 
Inventories   727,419    1,608,827 
Prepaid expenses and other current assets   502,893    441,502 
           
Total current assets   12,579,882    11,838,262 
           
Property and equipment, net   219,375    243,002 
Intangible assets, net   1,126,299    1,248,712 
Goodwill   1,167,427    2,182,427 
Investment       326,941 
Operating lease right of use assets, net   3,409,259     
Other assets   138,002    255,008 
           
Total assets  $18,640,244   $16,094,352 
           
Liabilities and shareholders' equity          
           
Current liabilities:          
Line of credit  $1,000,000   $1,300,000 
Accounts payable   297,098    315,444 
Due to Forward China   3,199,874    3,236,693 
Deferred income   525,763    219,831 
Current portion of notes payable   2,196,621    1,654,799 
Current portion of capital leases payable   24,733    39,941 
Deferred consideration   296,000    834,000 
Current portion of operating lease liability   238,413     
Accrued expenses and other current liabilities   625,540    694,972 
Total current liabilities   8,404,042    8,295,680 
           
Other liabilities:          
Capital leases payable, less current portion   15,402    26,438 
Deferred rent       60,935 
Operating lease liability, less current portion   3,278,908     
Notes payable, less current portion   759,949     
Total other liabilities   4,054,259    87,373 
           
Total liabilities   12,458,301    8,383,053 
           
Commitments and contingencies          
           
Shareholders' equity:          
          
Common stock, par value $0.01 per share; 40,000,000 shares authorized; 9,583,851 and 9,533,851 shares issued and outstanding at June 30, 2020 and September 30, 2019, respectively   95,838    95,338 
Additional paid-in capital   19,074,747    18,936,130 
Accumulated deficit   (12,988,642)   (11,320,169)
           
Total shareholders' equity   6,181,943    7,711,299 
           
Total liabilities and shareholders' equity  $18,640,244   $16,094,352 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 3 

 

 

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

       

 

   For the Three Months Ended
June 30,
   For the Nine Months Ended
June 30,
 
   2020   2019   2020   2019 
                 
Revenues, net  $9,548,732   $9,909,452   $25,872,963   $28,265,202 
Cost of sales   7,773,944    8,014,998    20,925,017    23,756,862 
Gross profit   1,774,788    1,894,454    4,947,946    4,508,340 
                     
Sales and marketing   464,247    539,072    1,478,880    1,437,047 
General and administrative   1,485,447    1,405,249    4,324,798    4,676,748 
Goodwill impairment           1,015,000     
                     
Loss from operations   (174,906)   (49,867)   (1,870,732)   (1,605,455)
                     
Fair value adjustment of earn-out consideration           350,000     
Fair value adjustment of deferred cash consideration   (3,000)       (12,000)    
Interest expense   (37,148)   (52,216)   (132,275)   (150,304)
Other expense, net   (148)   (1,979)   (3,466)   (9,735)
                     
Net loss  $(215,202)  $(104,062)  $(1,668,473)  $(1,765,494)
                     
Net loss per share:                    
Basic  $(0.02)  $(0.01)  $(0.18)  $(0.19)
Diluted  $(0.02)  $(0.01)  $(0.18)  $(0.19)
                     
Weighted average common shares outstanding:                    
Basic   9,534,407    9,533,851    9,534,034    9,531,422 
Diluted   9,534,407    9,533,851    9,534,034    9,531,422 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 

 

 

 4 

 

 

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(UNAUDITED)

                     

 

           Additional         
   Common Stock   Paid-In   Accumulated     
   Shares   Amount   Capital   Deficit   Total 
                     
Balance - September 30, 2019   9,533,851   $95,338   $18,936,130   $(11,320,169)  $7,711,299 
                          
Share-based compensation           33,179        33,179 
Net loss               (81,657)   (81,657)
                          
Balance - December 31, 2019   9,533,851    95,338    18,969,309    (11,401,826)   7,662,821 
                          
Share-based compensation           36,260        36,260 
Net loss               (1,371,614)   (1,371,614)
                          
Balance - March 31, 2020   9,533,851    95,338    19,005,569    (12,773,440)   6,327,467 
                          
Share-based compensation           37,678        37,678 
Stock options exercised   50,000    500    31,500        32,000 
Net loss               (215,202)   (215,202)
                          
Balance - June 30, 2020   9,583,851   $95,838   $19,074,747   $(12,988,642)  $6,181,943 
                          
Balance - September 30, 2018   9,533,851   $95,338   $18,720,396   $(7,716,139)  $11,099,595 
                          
Share-based compensation           11,794        11,794 
Net loss               (530,527)   (530,527)
                          
Balance - December 31, 2018   9,533,851    95,338    18,732,190    (8,246,666)   10,580,862 
                          
Share-based compensation           136,096        136,096 
Net loss               (1,130,905)   (1,130,905)
                          
Balance - March 31, 2019   9,533,851    95,338    18,868,286    (9,377,571)   9,586,053 
                          
Share-based compensation           33,290        33,290 
Net loss               (104,062)   (104,062)
                          
Balance - June 30, 2019   9,533,851   $95,338   $18,901,576   $(9,481,633)  $9,515,281 

 

 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 

 

 

 5 

 

 

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

             

 

   For the Nine Months Ended
June 30,
 
   2020   2019 
Operating Activities:          
Net loss  $(1,668,473)  $(1,765,494)
Adjustments to reconcile net loss to net cash used in operating activities:          
Share-based compensation   107,117    181,180 
Depreciation and amortization   201,778    234,676 
Bad debt expense (recovery)   (121,431)   416,857 
Deferred rent       13,845 
Change in fair value of earn-out consideration   (350,000)    
Change in fair value of deferred cash consideration   12,000     
Goodwill impairment   1,015,000     
Fair value of cost method investment for services provided       (326,941)
Impairment of investment   326,941     
Changes in operating assets and liabilities:          
Accounts receivable   (1,448,384)   142,698 
Inventories   881,408    264,550 
Prepaid expenses and other current assets   (61,391)   (282,437)
Other assets   117,006    (220,518)
Accounts payable and due to Forward China   (55,165)   (947,200)
Deferred income   305,932    22,565 
Operating lease liabilities   27,303     
Accrued expenses and other current liabilities   (49,608)   65,025 
Net cash used in operating activities   (759,967)   (2,201,194)
           
Investing Activities:          
Purchases of property and equipment   (55,738)   (29,579)
Net cash used in investing activities   (55,738)   (29,579)
           
Financing Activities:          
Proceeds from line of credit borrowings   900,000    1,250,000 
Repayment of line of credit borrowings   (1,200,000)   (500,000)
Repayment of notes payable   (54,799)   (145,112)
Proceeds from PPP loan   1,356,570     
Cash proceeds from stock options exercised   32,000     
Repayments of capital leases   (26,244)   (34,455)
Payment of deferred cash consideration   (200,000)    
Net cash provided by financing activities   807,527    570,433 
           
Net decrease in cash   (8,178)   (1,660,340)
Cash at beginning of period   3,092,813    4,369,866 
Cash at end of period  $3,084,635   $2,709,526 
           
Supplemental Disclosures of Cash Flow Information:          
Cash paid for interest  $126,791   $66,087 
Cash paid for taxes  $1,524   $37,859 
           
Supplemental Disclosures of Non-Cash Information:          
ROU assets from the adoption of ASC 842  $3,648,582   $ 
Lease liabilities arising from obtaining ROU assets  $3,729,341   $ 

 

 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 

 

 

 6 

 

 

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1 OVERVIEW

 

Business

 

Forward Industries, Inc. (“Forward”, “we” or the “Company”) is a fully integrated design, development and manufacturing solution provider for top tier medical and technology customers worldwide. Through its acquisition of Intelligent Product Solutions, Inc. (“IPS”), the Company has expanded its ability to design and develop solutions for our existing multinational client base and 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”; (ii) Europe, the Middle East, and Africa, which we refer to as the “EMEA Region”; and (iii) the geographic area encompassing North America, Central America and South America, which we refer to as the “Americas”. The Company does not manufacture any of its OEM products and sources substantially all of its OEM products from independent suppliers in China, through Forward Industries Asia-Pacific Corporation, a British Virgin Islands corporation (“Forward China”).

 

As a result of the expansion of the design development capabilities through its wholly owned subsidiary, IPS (acquired in January 2018), the Company 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.

 

In the opinion of management, the accompanying condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q reflect all normal recurring adjustments necessary to present fairly the financial position and results of operations and cash flows for the interim periods presented herein, but are not necessarily indicative of the results of operations for the year ending September 30, 2020. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2019, and with the disclosures and risk factors presented therein. The September 30, 2019 condensed consolidated balance sheet has been derived from the audited consolidated financial statements. Certain dollar amounts and percentages have been rounded to their approximate value.

 

Impact of COVID-19

 

In December 2019, a novel strain of coronavirus known as COVID-19 was reported to have surfaced in China, and by March 2020 the spread of the virus had resulted in a worldwide pandemic. To date, the pandemic has surfaced in nearly all regions around the world and resulted in business slowdowns and shutdowns, as well as global travel restrictions and government mandated stay at home orders. These restrictions have required substantially all our employees to work from home for most of the three months ended June 30, 2020 (the “2020 Quarter”). Employees are starting to return to the office in August of 2020 with minimal operational challenges. While the COVID-19 pandemic had a minimal impact on our financial results in the second quarter of fiscal 2020, the impact during the 2020 Quarter was somewhat more significant. Business shutdowns have disrupted our supply chain and the manufacture or shipment of our products and have delayed the rollout of our smart enabled retail products to big box retail stores, causing our revenues in the 2020 Quarter to be less than anticipated. Additionally, our design segment reported lower revenues as demand for its design and development services were reduced or delayed. The impact from lower revenue was partially offset by a reduction from the second quarter of fiscal 2020 in certain selling and travel related expenses resulting from government mandated stay at home orders and travel restrictions as well as revenues derived from sales and sourcing of personal protective equipment. The pandemic had temporarily impacted our liquidity in the 2020 Quarter, as collection of accounts receivable were somewhat delayed in the early part of the 2020 Quarter. The Company received funding under the Paycheck Protection Program in the amount of $1,357,000 (see Note 12).

 

 

 

 7 

 

 

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

While the economy has started to open in certain jurisdictions, the future impacts of the 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 require our services. The long-term financial impact on our business cannot be reasonably estimated at this time. As a result, the effects of COVID-19 may not be fully reflected in our financial results until future periods. Refer to “Part II, Item 1A — Risk Factors” in this Quarterly Report for a description of the material risks that the Company currently faces in connection with COVID-19. The impact of the COVID-19 pandemic may also exacerbate other risks discussed in “Part I, Item 1A — Risk Factors” included in the Company’s Annual Report for the year ended September 30, 2019.

 

As a result of revenue and earnings shortfalls for the 2020 Quarter, due in part to the impact of COVID-19 and the related future uncertainty, in the second quarter of fiscal 2020, the Company revised the outlook for the design reporting unit for the remainder of the year and its long-term outlook. This new outlook has impacted the Company’s carrying value of goodwill (see Note 4). Looking ahead to the remainder of 2020, our visibility is limited due to the uncertainty surrounding the duration and ultimate impact of COVID-19 and the mitigation measures that are implemented by governmental authorities. We also 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; and pursuing further improvements in the productivity and effectiveness of our development, selling and administrative activities.

 

NOTE 2 ACCOUNTING POLICIES

 

Accounting Estimates

 

The preparation of the Company’s condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.

 

The worldwide spread of COVID-19 has resulted in a global slowdown of economic activity which is likely to decrease demand for a broad variety of goods and services, while also disrupting sales channels, marketing activities and general business operations for an unknown period of time until the disease is contained. At this point, the extent to which COVID-19 may impact our financial condition or results of operations is uncertain, and as of the date of issuance of these condensed consolidated financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates, judgments or adjust the carrying value of our assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to our condensed consolidated financial statements.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements include the accounts of Forward Industries, Inc. and its wholly owned subsidiaries: Forward Industries (IN), Inc., (“Forward US”), Forward Industries (Switzerland) GmbH, (“Forward Switzerland”), Forward Industries UK Limited, (“Forward UK”) and IPS. All significant intercompany transactions and balances have been eliminated in consolidation. Intercompany revenues of $17,000 and $44,000, respectively, for the three and nine months ended June 30, 2020 and $9,000 and $215,000, respectively, for the three and nine months ended June 30, 2019, related to design and marketing work performed by IPS for Forward US have been eliminated in consolidation.

 

 

 

 

 8 

 

 

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

For the nine months ended June 30, 2020, the Company incurred a net loss of $1,668,000, and used $760,000 of cash flow in operating activities. The Company has an accumulated deficit of $12,989,000 at June 30, 2020. We believe our existing cash balance and working capital will be sufficient to meet our liquidity needs at least through September 30, 2021.

 

Segment Reporting

 

Operating segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated by a chief operating decision maker, or Forward management, in deciding how to allocate resources and in assessing performance. As a result of the acquisition of IPS in January 2018, management conducts business through two distinct operating segments, which are also our reportable segments: distribution and design. Forward US, Forward Switzerland and Forward UK comprise the distribution operating segment and IPS is the design operating segment.

 

Organizing our business through two operating segments allows us to align our resources and manage our operations. Our management team regularly reviews operating segment revenue and profitability when assessing financial results of operating segments and allocating resources.

 

We measure the performance of our operating segments based upon operating segment revenue and operating income or loss. Segment operating income or loss includes revenue and expenses incurred directly by the operating segment, including cost of sales and selling, marketing, and general and administrative expenses.

 

Goodwill

 

Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill was recognized as a result of the acquisition of IPS in January 2018.

 

Goodwill is reviewed for impairment at least annually, and when triggering events occur, in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, “Intangibles – Goodwill and Other.” The Company has two reporting units for purposes of evaluating goodwill impairment and management performs our annual goodwill impairment test on September 30, the end of the fiscal year, or upon the occurrence of a triggering event. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company would not need to perform the impairment test for the reporting unit. If the Company cannot support such a conclusion or does not elect to perform the qualitative assessment, then the Company will compare the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying value, no impairment charge is recognized. If the fair value of the reporting unit is less than its carrying value, an impairment charge will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value. A significant amount of judgment is required in performing goodwill impairment tests including estimating the fair value of a reporting unit and the implied fair value of goodwill. During the three months ended March 31, 2020, the Company recorded an impairment charge related to goodwill (see Note 4).

 

Intangible Assets

 

Intangible assets include trademark and customer relationships, which were acquired as part of the acquisition of IPS in January 2018 and are recorded based on their estimated fair value determined in conjunction with the purchase price allocation. The intangible assets are amortized over their estimated useful lives, which are periodically evaluated for reasonableness.

 

 

 

 

 9 

 

 

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Our intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In assessing the recoverability of our intangible assets, we must make estimates and assumptions regarding future cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and the magnitude of any such charge. Fair value estimates are made at a specific point in time, based on relevant information. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. If these estimates or material related assumptions change in the future, we may be required to record impairment charges related to our intangible assets. Management evaluated and concluded that there were no impairments of intangible assets at June 30, 2020.

 

Income Taxes

 

The Company recognizes future tax benefits and liabilities measured at enacted rates attributable to temporary differences between financial statement and income tax bases of assets and liabilities and to net tax operating loss carryforwards to the extent that realization of these benefits is more likely than not. At June 30, 2020, there was no change to our assessment that a full valuation allowance was required against all net deferred tax assets as it is not probable that such deferred tax assets will be realized. Accordingly, any deferred tax provision or benefit was offset by an equal and opposite change to the valuation allowance. No current book income tax provision was recorded against book net income due to the existence of significant net operating loss carryforwards.

 

Revenue Recognition

 

Distribution Segment

 

The Company adopted ASC 606, “Revenue Recognition” effective October 1, 2018. In accordance with this guidance, the Company generally recognizes revenue in its distribution segment when: (i) finished goods are shipped to our distribution customers (in general, these conditions occur at either point of shipment or point of destination, depending on the terms of sale, i.e., transfer of control); (ii) there are no other deliverables or performance obligations; and (iii) there are no further obligations to the customer after the title of the goods has transferred. When the Company receives consideration before achieving the criteria previously mentioned, it records a contract liability, which is classified as a component of deferred income in the accompanying condensed consolidated balance sheets. At June 30, 2020 and September 30, 2019, there were no contract liabilities relating to the distribution segment.

 

Design Segment

 

Under ASC 606, the Company applies the “cost to cost” and “right to invoice” methods of revenue recognition to the contracts with customers in the design segment. The design segment typically engages in two types of contracts: (i) time and material and (ii) fixed price contracts. The Company recognizes revenue over time on its time and material contracts utilizing a “right to invoice” method. Revenues from fixed price contracts that require performance of services that are not related to the production of tangible assets are recognized by using cost inputs to measure progress toward the completion of its performance obligations, or the “cost to cost” method. Revenues from fixed price contracts that contain specific deliverables are recognized when the performance obligation has been satisfied or the transfer of goods to the customer has been completed and accepted.

 

Recognized revenues that will not be billed until a later date, or contract assets, are recorded as an asset and classified as a component of accounts receivable in the accompanying condensed consolidated balance sheets. Contract assets at June 30, 2020 and September 30, 2019 were $899,000 and $611,000, respectively. Contracts where collections to date have exceeded recognized revenues, or contract liabilities, are recorded as a liability and classified as a component of deferred income in the accompanying condensed consolidated balance sheets. Contract liabilities at June 30, 2020 and September 30, 2019 were $526,000 and $220,000, respectively.

 

 

 

 

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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Share-Based Compensation Expense

 

The Company estimates the fair value of employee and non-employee director share-based compensation on the date of grant using the Black-Scholes option pricing model, which includes variables such as the expected volatility of the Company’s share price, the exercise behavior of its grantees, interest rates, and dividend yields. These variables are projected based on the Company’s historical data, experience, and other factors. The fair value of employee and non-employee director share-based compensation is recognized in the condensed consolidated statements of operations over the related vesting period of each grant. In the case of awards with multiple vesting periods, the Company has elected to use the graded vesting attribution method, which recognizes compensation cost on a straight-line basis over each separately vesting portion of the award as if the award was, in substance, multiple awards (see Note 6).

 

Leases

 

The Company adopted ASC 842, "Leases", effective October 1, 2019. In accordance with this guidance, lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term, using the Company’s incremental borrowing rate commensurate with the lease term, since the Company’s lessors do not provide an implicit rate, nor is one readily available. The Company has certain leases that may include an option to renew and when it is reasonably probable to exercise such option, the Company will include the renewal option terms in determining the lease asset and lease liability. Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Operating lease assets are shown as right of use assets and financing lease assets are a component of property and equipment on the condensed consolidated balance sheets. The current and long-term portions of operating and financing lease liabilities are shown separately as such on the condensed consolidated balance sheets.

 

Business Combinations

 

The Company allocates the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, the Company makes significant estimates and assumptions, especially with respect to intangible assets.

 

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.

 

 

 

 

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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Recent Accounting Pronouncements

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement - Disclosure Framework (Topic 820).” The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the timing and impact of adopting the updated provisions.

 

In November 2019, the FASB issued ASU 2019-08, “Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606).” ASU 2019-08 is an accounting pronouncement which expands the scope of Topic 718 to provide guidance for share-based payment awards granted to a customer in conjunction with selling goods or services accounted for under Topic 606. The pronouncement is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company is currently evaluating the effects of this pronouncement on its condensed consolidated financial statements along with the effects of ASU 2018-07 noted above.

 

In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” ASU 2019-11 is an accounting pronouncement that amends ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU 2019-11 amendment provides clarity and improves the codification to ASU 2016-03. The pronouncement would be effective concurrently with the adoption of ASU 2016-03. The pronouncement is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company is currently evaluating the effects of this pronouncement on its condensed consolidated financial statements.

 

NOTE 3 FAIR VALUE MEASUREMENTS

 

We perform fair value measurements in accordance with the guidance provided by ASC 820. ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at their fair values, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the assets or liabilities, such as inherent risk, transfer restrictions, and risk of nonperformance.

 

ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset’s or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value:

 

·Level 1: quoted prices in active markets for identical assets or liabilities;

 

·Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or

 

·Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities.

 

 

 

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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The deferred consideration of $296,000 on our condensed consolidated balance sheets as of June 30, 2020 is the present value of a $300,000 payment due on September 30, 2020 per the Stock Purchase Agreement as part of the acquisition price of IPS. The separate contingent earn-out consideration portion of the IPS purchase price was adjusted down in the second quarter of fiscal 2020 from a fair value of $350,000 to $0 due to the low likelihood of reaching the EBITDA targets as outlined in the Stock Purchase Agreement.

 

The following table presents the placement in the fair value hierarchy and summarizes the changes in fair value of the aforementioned consideration payments for the three and nine months ended June 30, 2020:

 

       Fair value measurement at reporting date using 
       Quoted prices in active markets for identical assets   Significant other observable inputs   Significant unobservable inputs 
   Balance   (Level 1)   (Level 2)   (Level 3) 
                 
September 30, 2019  $834,000   $   $   $834,000 
                     
Payout of deferred cash consideration   (200,000)           (200,000)
                     
December 31, 2019   634,000            634,000 
                     
Decrease in fair value of earn-out consideration   (350,000)           (350,000)
Increase in fair value of deferred cash consideration   9,000            9,000 
                     
March 31, 2020   293,000            293,000 
                     
Increase in fair value of deferred cash consideration   3,000            3,000 
                     
June 30, 2020  $296,000   $   $   $296,000 

 

The cost method investment of $327,000 on our condensed consolidated balance sheet at September 30, 2019 is common stock received from a customer as compensation for product design services provided by the Company. The shares represent less than a 2% ownership in the customer. We estimated the initial fair value of the investment based on a private placement round of common stock issued to third party private investors of the customer at a time close to the valuation date. The Company determined that the inputs used to value the common stock, at the date of the initial valuation, are observable, either directly or indirectly, and therefore classified as a Level 2 valuation.

 

On January 21, 2020, the Company executed a non-negotiable promissory note with a principal amount of $1,626,000 with the same design segment customer in which we are invested to recover accounts receivable which had been reserved as bad debt in fiscal 2019. Beginning on April 1, 2020, monthly interest and principal payments, based on a one-year amortization schedule, were due and payable in arrears on the first day of the month until March 1, 2021. Interest accrues at a rate of 8% per annum. Since no payments were received through June 30, 2020, the note receivable is fully reserved on the Company’s condensed consolidated balance sheet. In August 2020, the Company received $98,000 from this customer, which was applied to past due interest, penalties and principal.

 

During the three months ended March 31, 2020, as a result of the customer’s default on the promissory note, the impact of COVID-19, and performance of the business in which the Company is invested, including its inability to generate revenue, management concluded the investment was also impaired and it is fully reserved on the Company’s condensed consolidated balance sheet at June 30, 2020. The impairment charge of $327,000 was recorded in the second quarter of fiscal 2020 and is included in the general & administrative expenses of the condensed consolidated statement of operations for the nine months ended June 30, 2020 (the “2020 Period”).

 

 

 

 

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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 4 GOODWILL

 

The Company has recorded intangible assets, such as goodwill, trademark, and customer relationships on the IPS reporting unit’s books and accounts for these in accordance with ASC 350, which requires an annual test of goodwill and indefinite-lived assets for impairment, unless circumstances dictate more frequent assessments.

 

During the three months ended March 31, 2020, the Company experienced triggering events that prompted the testing of its goodwill for impairment. Those triggering events include the reduction in fair value of the contingent earn-out consideration discussed in Note 3 and revised revenue and operational projections for IPS for the remainder of the fiscal year and future periods. Based on these factors, we concluded that it was more likely than not that the fair value of the IPS reporting unit had declined below its carrying amount. The Company then calculated the fair value of this reporting unit using Level 3 inputs, which is a combination of asset-based, income and market approaches. These estimates and assumptions include discount rate, terminal growth rate, selection of peer group companies and control premium applied as well as forecasts of revenue growth rates, gross margins, operating margins, and working capital requirements. Any changes in the judgments, estimates, or assumptions used could produce significantly different results. We concluded the reporting unit’s fair value was below its carrying value by $1,015,000 and an impairment charge was recognized for this amount in the three months ended March 31, 2020.

 

Below is the rollforward of goodwill for IPS, the only reporting unit with goodwill.

 

   IPS   Consolidated 
         
September 30, 2019  $2,182,427   $2,182,427 
           
Goodwill impairment   (1,015,000)   (1,015,000)
           
June 30, 2020  $1,167,427   $1,167,427 

 

NOTE 5 SEGMENT INFORMATION

 

The Company, post IPS acquisition, conducts its business through two operating segments, which are also its reportable segments:

 

• Distribution and

 

• Design

 

 

 

 

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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

   For the Three Months Ended
June 30,
   For the Nine Months Ended
June 30,
 
   2020   2019   2020   2019 
Revenues, net                    
Distribution  $6,388,740   $6,021,843   $15,708,878   $17,072,127 
Design   3,159,992    3,887,609    10,164,085    11,193,075 
Total revenues, net   9,548,732    9,909,452    25,872,963    28,265,202 
                     
Cost of sales                    
Distribution   5,450,199    5,100,314    13,606,381    14,412,632 
Design   2,323,745    2,914,684    7,318,636    9,344,230 
Total cost of sales   7,773,944    8,014,998    20,925,017    23,756,862 
                     
(Loss) / income from operations                    
Distribution   (228,100)   (269,520)   (1,032,496)   (880,307)
Design   53,194    219,653    (838,236)   (725,148)
Total loss from operations   (174,906)   (49,867)   (1,870,732)   (1,605,455)
                     
Other (expense) / income, net                    
Distribution   (35,148)   (33,980)   238,534    (105,738)
Design   (5,148)   (20,215)   (36,275)   (54,301)
Total other (expense) / income, net   (40,296)   (54,195)   202,259    (160,039)
                     
Net (loss) / income                    
Distribution   (263,248)   (303,500)   (793,962)   (986,045)
Design   48,046    199,438    (874,511)   (779,449)
Total net loss  $(215,202)  $(104,062)  $(1,668,473)  $(1,765,494)

 

The following table presents total assets by operating segment:

 

   June 30,   September 30, 
   2020   2019 
         
Distribution  $8,433,756   $9,554,465 
Design   10,206,488    6,539,887 
Total assets  $18,640,244   $16,094,352 

 

 

 

 

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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 6 SHARE-BASED COMPENSATION

 

Stock Options

 

On February 11, 2020, the Company granted options to non-employee directors to purchase an aggregate of 248,019 shares of its common stock at an exercise price of $1.13 per share. The options vest one year from the date of grant, expire five years from the date of grant and had an aggregate grant date fair value of $145,000, which is being recognized ratably over the vesting period.

 

There were no options granted during the three months ended June 30, 2020. The options granted during the nine months ended June 30, 2020 had a weighted average grant date fair value of $0.58 per share.

 

During the three months ended June 30, 2020, the Company issued 50,000 shares of its common stock pursuant to the exercise of stock options at an exercise price of $0.64 per share for aggregate cash proceeds of $32,000

 

On February 5, 2019, the Company granted options to three non-employee directors to purchase an aggregate of 150,021 shares of its common stock at an exercise price of $1.54 per share. The options vested one year from the date of grant, expire five years from the date of grant and had an aggregate grant date fair value of $120,000, which was recognized ratably over the vesting period.

 

On February 5, 2019, the Company granted options to two non-employee directors to purchase an aggregate of 140,460 shares of its common stock at an exercise price of $1.54 per share. The options vested immediately, expire five years from the date of grant and had an aggregate grant date fair value of $108,000, which was fully recognized on the date of grant.

 

There were no options granted during the three months ended June 30, 2019. The options granted during the nine months ended June 30, 2019 had a weighted average grant date fair value of $0.78 per share.

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions in the following table. The expected term represents the period over which the stock option awards are expected to be outstanding. The Company utilizes the “simplified” method to develop an estimate of the expected term of “plain vanilla” employee option grants. The expected volatility used is based on the historical price of the Company’s stock over the most recent period commensurate with the expected term of the award. The risk-free interest rate used is based on the implied yield of U.S. Treasury zero-coupon issues with a remaining term equivalent to the award’s expected term. The Company historically has not paid any dividends on its common stock and had no intention to do so on the date the share-based awards were granted. The estimated annual forfeiture rate is based on management’s expectations and will reduce expense ratably over the vesting period. The forfeiture rate will be adjusted periodically based on the extent to which actual option forfeitures differ, or are expected to differ, from the previous estimate, when it is material.

 

In applying the Black-Scholes option pricing model to options granted, the Company used the following assumptions:

 

   For the Three Months Ended   For the Nine Months Ended 
   June 30,   June 30, 
   2020   2019   2020   2019 
Expected term (years)    n/a      n/a     3.00    2.50-2.75 
Expected volatility    n/a      n/a     79.0%    82.0% 
Risk-free interest rate    n/a      n/a     1.39%    2.53% 
Expected dividends    n/a      n/a     0%    0% 
Estimated annual forfeiture rate    n/a      n/a     0%    0% 

 

 

 

 

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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The following table summarizes stock option activity during the nine months ended June 30, 2020:

 

           Weighted     
       Weighted   Average     
       Average   Remaining     
   Number of   Exercise   Life   Intrinsic 
   Options   Price   In Years   Value 
Outstanding, September 30, 2019   812,879   $1.69           
Granted   248,019   $1.13           
Exercised   (50,000)  $0.64           
Forfeited   (1,751)  $1.67           
Expired   (55,000)  $2.43           
Outstanding, June 30, 2020   954,147   $1.56    3.6    $ 48,288 
                    
Exercisable, June 30, 2020   686,522   $1.76    3.2    $   6,125 

 

The following table provides additional information regarding stock option awards that were outstanding and exercisable at June 30, 2020:

 

Options Outstanding  Options Exercisable
   Weighted      Weighted  Weighted     
   Average  Outstanding   Average  Average   Exercisable 
Exercise  Exercise  Number of   Exercise  Remaining Life   Number of 
Price  Price  Options   Price  In Years   Options 
$0.64 to $1.23  $1.12   275,519   $1.08   3.1    27,500 
$1.44 to $1.67  $1.51   605,128   $1.51   3.5    585,522 
$2.73 to $2.73  $2.73   11,000   $2.73   1.1    11,000 
$3.73 to $3.79  $3.74   62,500   $3.74   0.6    62,500 
   $1.56   954,147   $1.76   3.2    686,522 

 

The Company recognized compensation expense for stock option awards of $38,000 and $33,000 during the three months ended June 30, 2020 and 2019, respectively, and $107,000 and $178,000 during the nine months ended June 30, 2020 and 2019, respectively, in its condensed consolidated statements of operations.

 

At June 30, 2020, there was $95,000 of total unrecognized compensation cost related to nonvested stock option awards that is expected to be recognized over a weighted average period of 0.6 years.

 

 

 

 

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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Restricted Stock Awards

 

The Company recognized no compensation expense during the three months ended June 30, 2020 and 2019, and $0 and $3,000 during the nine months ended June 30, 2020 and 2019, respectively, for restricted stock awards in its condensed consolidated statements of operations. At June 30, 2020, there was no unrecognized compensation expense related to nonvested restricted stock awards.

 

NOTE 7 LOSS PER SHARE

 

Basic loss per share data for each period presented is computed using the weighted average number of shares of common stock outstanding during each such period. Diluted loss per share data is computed using the weighted average number of common and dilutive common equivalent shares outstanding during each period. Dilutive common-equivalent shares consist of shares that would be issued upon the exercise of stock options and warrants, computed using the treasury stock method.

 

The following securities were excluded from the calculation of diluted earnings per share in each period because their inclusion would have been anti-dilutive:

 

   For the Three Months Ended   For the Nine Months Ended 
   June 30,   June 30, 
   2020   2019   2020   2019 
Options   954,147    812,879    954,147    812,879 
Warrants   151,335    151,335    151,335    151,335 
Total potentially dilutive shares   1,105,482    964,214    1,105,482    964,214 

 

NOTE 8 CONCENTRATIONS

 

Concentration of Revenues and Accounts Receivable

 

For the three and nine months ended June 30, 2020 and 2019, the Company had significant customers whose individual percentage of the Company’s total revenues was 10% or greater. The risk of collecting accounts receivable from all customers is enhanced as a result of the economic impact of the COVID-19 pandemic. The concentrations of revenues and accounts receivable for each reporting segment are as follows:

 

Distribution Segment Revenues Concentration

 

   For the Three Months Ended  For the Nine Months Ended
   June 30,  June 30,
   2020  2019  2020  2019
Customer 1  24.9%  26.8%  31.2%  28.9%
Customer 2  21.9%  27.0%  22.9%  28.1%
Customer 3  15.8%  27.3%  16.5%  19.6%
             
Totals  62.6%  81.1%  70.6%  76.6%

 

 

 

 

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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Design Segment Revenues Concentration

 

   For the Three Months Ended  For the Nine Months Ended
   June 30,  June 30,
   2020  2019  2020  2019
Customer 1  11.1%  23.0%  16.2%  20.5%
Customer 2  1.1%  22.2%  0.5%  13.9%
Customer 3  14.3%  8.6%  13.3%  10.0%
Customer 4  29.0%  0.0%  19.7%  0.0%
Totals  55.5%  53.8%  49.7%  44.4%

 

At June 30, 2020 and September 30, 2019, concentrations of accounts receivable with significant customers representing 10% or greater of segment accounts receivable were as follows:

 

Distribution Segment Accounts Receivable Concentration

 

  

June 30,

2020

 

September 30,

2019

Customer 2  20.1%  21.2%
Customer 1  23.7%  29.0%
Customer 3  24.5%  23.6%
Customer 4  14.5%  15.7%
Totals  82.8%  89.5%

 

Design Segment Accounts Receivable Concentration

 

  

June 30,

2020

 

September 30,

2019

Customer 4  39.9%  5.9%
Customer 5  13.2%  8.8%
Customer 6  10.5%  5.9%
Customer 1  6.3%  33.7%
Totals  69.9%  54.3%

 

 

 

 

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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 9 RELATED PARTY TRANSACTIONS

 

Buying Agency and Supply Agreement

 

On March 12, 2012, the Company entered into a Buying Agency and Supply Agreement (the “Supply Agreement”) with Forward China. The Supply Agreement, as amended, provides that, upon the terms and subject to the conditions set forth therein, Forward China will act as the Company’s exclusive buying agent and supplier of Products (as defined in the Supply Agreement) in the Asia-Pacific region.  The Company purchases products at Forward China’s cost and also pays to Forward China a monthly service fee equal to the sum of: (i) $100,000; and (ii) 4% of “Adjusted Gross Profit”, which is defined as the selling price less the cost from Forward China. The amended Supply Agreement expires October 22, 2020. Terence Wise, Chief Executive Officer and Chairman of the Company, is the owner of Forward China. In addition, Jenny P. Yu, a Managing Director of Forward China, beneficially owns more than 5% of the Company’s shares of common stock. The Company recorded service fees to Forward China of $346,000 and $353,000 during the three months ended June 30, 2020 and 2019, respectively, and $1,022,000 and $1,056,000 during the nine months ended June 30, 2020 and 2019, respectively, which are included as a component of cost of sales when revenue is recognized on sales of the related products.

 

Promissory Note

 

On January 18, 2018, the Company issued a $1,600,000 promissory note payable to Forward China in order to fund the acquisition of IPS. The promissory note bears an interest rate of 8% per annum. Monthly interest payments commenced on February 18, 2018. The original maturity date was January 18, 2019 and has been extended to September 30, 2020. The maturity date of the note has been extended on several occasions to assist the Company with liquidity. For the three months ended June 30, 2020 and 2019, the Company incurred and paid $32,000, and for the nine months ended June 30, 2020 and 2019, the Company incurred and paid $96,000, in interest payments associated with the note. The entire note payable is classified as a current liability and included as a component of notes payable on the accompanying condensed consolidated balance sheets.

 

Related Party Sales

 

The Company’s design division provided services to a customer whose Chief Operating and Financial Officer and equity owner is an immediate family member of a director on the Company’s Board of Directors and a member of the Board’s Audit and Compensation committee. The Company sold design services to this customer of $0 and $80,000 in for the three months ended June 30, 2020 and 2019, respectively, and $44,000 and $140,000 for the nine months ended June 30, 2020 and 2019, respectively. At June 30, 2020 and September 30, 2019, there were outstanding receivables of $0 and $9,000, respectively, from this customer.

 

NOTE 10 LEGAL PROCEEDINGS

 

From time to time, the Company may become a party to legal actions or proceedings in the ordinary course of its business. At June 30, 2020, there were no such actions or proceedings, either individually or in the aggregate, that, if decided adversely to the Company’s interests, the Company believes would be material to its business.

 

 

 

 

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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 11 LINE OF CREDIT

 

The Company, specifically IPS, has a $1,300,000 revolving line of credit which was renewed at the discretion of the lender on August 5, 2020. The maturity date has been extended to May 31, 2021. The line of credit is guaranteed by the Company and is secured by all of IPS’ assets. The interest rate on the line of credit is 0.75% above The Wall Street Journal prime rate. The effective interest rate at June 30, 2020 and September 30, 2019 was 4.0% and 5.75%, respectively. At September 30, 2019, the Company was in violation of the required debt-service ratio covenants. The Company was granted a waiver of the violation from the lender. At June 30, 2020, the Company had $300,000 available under the line of credit. The Company is subject to certain debt-service ratio requirements which are measured annually. With a net loss for the nine months ended June 30, 2020 of $875,000 for IPS, there is a likely risk of failing the annual covenant testing at September 30, 2020. As such, the lender may demand payment in full upon default.

 

NOTE 12 DEBT

 

On April 1, 2016, IPS entered into a term loan with a lender in the amount of $325,000. The loan matured on April 1, 2020 and bore interest at a rate of 4.215% per annum. Interest and principal of $7,378 were paid on a monthly basis through maturity. This loan was secured by all of IPS’ assets and was guaranteed by the Company. The outstanding balance at September 30, 2019 was $52,000. The loan was paid off in April 2020 per the agreement and therefore there is no remaining balance for this loan on the balance sheet at June 30, 2020.

 

On December 11, 2017, IPS entered into an installment payment financing arrangement with a lender in the amount of $23,000. IPS made monthly payments of $1,035, which included an implied interest rate of 9.5%, for 24 months. The last payment was made in December 2019. The loan balance was $0 and $3,000 at June 30, 2020 and September 30, 2019, respectively.

 

On April 18, 2020, the Company entered into a loan in an aggregate principal amount of $1,357,000 under the Paycheck Protection Program (the “PPP Loan”) pursuant to the recently enacted U.S. Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The loan matures on April 18, 2022 and bears an interest rate of 1.00% per annum. The Company must pay monthly principal and interest payments on the outstanding principal balance of the PPP Loan amortized over the term of the loan beginning November 18, 2020 until maturity when the entire principal balance remaining unpaid, along with all accrued and unpaid interest, shall be due and payable in full. This loan is unsecured, and subject to forgiveness in accordance with the terms of the CARES Act. The application is subject to review by the Small Business Administration. We have accounted for these proceeds as a loan and the current and long- term portions of $597,000 and $760,000, respectively, are included in the corresponding categories of notes payable on the condensed consolidated balance sheets.

 

NOTE 13 MOONI AGREEMENT

 

On January 29, 2019, the Company entered into a three-year Distribution Agreement (the “Agreement”) with Mooni International AB (“Mooni”) and its owner, Staffan Bern (the “Owner”). In accordance with the Agreement, the Company: (i) was appointed as the exclusive distributor of Mooni's current and future products (including future products developed or offered by Mooni and/or the Owner) in North America, (ii) subject to certain repayment requirements, paid $400,000 to Mooni, and (iii) was granted an option to purchase a controlling interest of Mooni at a valuation not to exceed $5 million which, if exercised, would have been effective on the 12-month anniversary of the effective date of the Agreement. This option was not exercised and therefore expired. Additionally, Forward China, a company owned by Terence Wise, the Company's Chairman and Chief Executive Officer, was named the designated supplier under the Agreement. At June 30, 2020, the unamortized fee of $211,000 is included in prepaid expenses and other current assets and other assets for the short-term and long-term components, respectively, in the accompanying condensed consolidated balance sheets. Amortization of the cost for the three and nine months ended June 30, 2020 of $33,000 and $100,000, respectively, and for both the three and nine months ended June 30, 2019 of $56,000, is included in the sales and marketing expenses in the accompanying condensed consolidated statement of operations.

 

 

 

 

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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 14 LEASES

 

Operating Leases

 

The Company leases office space in West Palm Beach, Florida under a 90-month agreement expiring in September 2020. The operating lease granted six initial months of free rent and escalated at 3% per year. The monthly rent payment was $7,700, which included common area maintenance costs.

 

In June 2020, the Company signed a lease for new office space in West Palm Beach, Florida. This lease is for a 24-month term commencing in October 2020 and expiring in September 2022. Rent payments under the new operating lease escalate 4% each year and the agreement contains two annual renewal options. The monthly rent payment is $3,500, which includes taxes and operating expenses as defined in the agreement.

 

The Company leases office space for its distribution segment sales and administrative office in Cham, Switzerland on a month-to-month basis. The monthly rent payment is 1,599 Swiss Francs, which is approximately $1,600. 

 

IPS leases office space in Hauppauge, New York under a non-cancelable lease agreement expiring in February 2027. The monthly rent payment is $29,000, which includes power utilities, and the Company has the option to renew the lease for an additional five years in accordance with the terms of the lease. 

 

IPS leases office space in Ronkonkoma, New York under a three-year agreement expiring in January 2022. The monthly rent payment is $4,400.

 

At June 30, 2020, other than the aforementioned new lease in West Palm Beach, Florida, the Company did not have additional operating and financing leases that have not yet commenced.

 

Total operating lease expense was $127,000 and $117,000 for the three months ended June 30, 2020 and 2019, respectively, and $382,000 and $366,000, for the nine months ended June 30, 2020 and 2019, respectively, and is recorded in general and administrative expenses on the condensed consolidated statements of operations.

 

Finance Leases

 

The Company, specifically IPS, leases computer equipment through various finance lease agreements expiring through January 2022. Amortization expense related to assets under finance leases were $5,500 and $28,500 for the three and nine months ended June 30, 2020, respectively. Interest expense related to assets under finance leases were $650 and $2,500 for the three and nine months ended June 30, 2020, respectively.

 

At June 30, 2020, additional information related to operating and finance leases was as follows:

 

Weighted Average Remaining Lease Term:     
Operating leases   11.4 years
Finance leases   1.1 years
      
Weighted Average Discount Rate:     
Operating leases   5.75%
Finance leases   5.75%

 

 

 

 

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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Future minimum payments under non-cancellable operating and finance leases as of June 30, 2020 were as follows:

 

For the Years Ending September 30, 

Operating

Leases

  

Finance

Leases

 
Remainder of 2020  $125,825   $13,621 
2021   413,332    24,214 
2022   380,389    5,606 
2023   375,732     
2024   385,640     
Thereafter   3,200,192     
Total future minimum lease payments  $4,881,110   $43,441 
           
Less: amount representing imputed interest   (1,363,789)   (3,306)
           
Total  $3,517,321   $40,135 

 

NOTE 15 SUBSEQUENT EVENT

 

The Company has entered into a non-binding letter of intent to acquire all of the assets of a design-development company focused on products in the medical industry for consideration of cash and stock, and assumption of liabilities in an aggregate amount of approximately $1,500,000.

 

 

 

 

 

 

 

 

 

 

 

 

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements, and the notes thereto, and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.  The following discussion and analysis compares our consolidated results of operations for the three and nine months ended June 30, 2020 (the “2020 Quarter” and “2020 Period”, respectively) with those for the three and nine months ended June 30, 2019 (the “2019 Quarter” and “2019 Period”, respectively).  All dollar amounts and percentages presented herein have been rounded to approximate values.

 

Business Overview

 

Forward Industries, Inc. (“Forward”, “we” or the “Company) is a fully integrated design, development and manufacturing solution provider for top tier medical and technology customers worldwide. Through our acquisition of IPS, we have expanded our 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, we are now a one-stop shop for design, development and manufacturing solutions serving a wide range of clients in the industrial, commercial and consumer industries. Our 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. Our 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). Our OEM customers are located in (i) the Asia-Pacific Region, which we refer to as the “APAC Region”; (ii) Europe, the Middle East, and Africa, which we refer to as the “EMEA Region”; and (iii) the Americas. We do not manufacture any of our OEM products and we source substantially all of our OEM products from independent suppliers in China, through Forward China.

 

As a result of the expansion of the design development capabilities through our wholly owned subsidiary, IPS, 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.

 

By virtue of our strategic collaboration and distribution agreements, we have secured a portfolio of smart enabled products which we have begun distributing to retail outlets in the United States. The rollout of these products has been delayed by COVID-19 as discussed below. As a result of this collaboration and other product initiatives, we invested in and began to build out a retail distribution network responsible for getting products into big box retailers for retail consumption. This build out is a continuation of our strategy to be a one-stop shop for product development, manufacture and distribution and represents a significant achievement in completing the strategic process of taking a product from concept to the consumer.

 

Through the manufacture representative agreements we currently have in place, we expect to gain sales coverage to retailers such as Best Buy, Target, Walmart, Costco, CVS, Walgreens, Staples, Office Depot and many others. The manufacture representative model allows us to engage and support a large sales team and cover a lot of territory with a variable cost model as these representatives work on commission only.

 

In December 2019, a novel strain of coronavirus known as COVID-19 was reported to have surfaced in China, and by March 2020 the spread of the virus had resulted in a world-wide pandemic. The U.S. economy has been largely shut down by mass quarantines and government mandated stay-in-place orders (the “Orders”) to halt the spread of the virus. These Orders have required substantially all of our employees to work from home for most of the 2020 Quarter. Employees have begun returning to the office in August of 2020 with minimal operating challenges. While the COVID-19 pandemic had a minimal impact on our financial results for second quarter of fiscal 2020, the impact during the 2020 Quarter was somewhat more significant. Business shutdowns have disrupted our supply chain and the manufacture or shipment of our products and have delayed the rollout of our smart enabled retail products to big box retail stores, causing our revenues in the 2020 Quarter to be less than anticipated. Additionally, our design segment reported lower revenues as demand for its design and development services were reduced or delayed. The impact from lower revenue was partially offset by a reduction from the second quarter of fiscal 2020 in certain selling and travel related expenses resulting from government mandated stay at home orders and travel restrictions as well as revenues derived from sales and sourcing of personal protective equipment. The pandemic had temporarily impacted our liquidity in the 2020 Quarter, as collection of accounts receivable were somewhat delayed in the early part of the 2020 Quarter. The Company received funding under the Paycheck Protection Program in the amount of $1,357,000 (see Note 12 to the condensed consolidated financial statements).

 

 

 

 

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While the economy has started to open in certain jurisdictions, the future impacts of the 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 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.

 

As a result of revenue and earnings shortfalls for the 2020 Quarter, due in part to the impact of COVID-19 and the related future uncertainty, in the second quarter of fiscal 2020, the Company revised the outlook for the design reporting unit for the remainder of the year and its long-term outlook. This new outlook has impacted the carrying value of our goodwill (see Note 4). Looking ahead to the remainder of 2020, our visibility is limited due to the uncertainty surrounding the duration and ultimate impact of COVID-19 and the mitigation measures that are implemented by governmental authorities. We also 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; and pursuing further improvements in the productivity and effectiveness of our development, selling and administrative activities.

 

Variability of Revenues and Results of Operations

 

Because a high percentage of our net revenues is highly concentrated in a few large customers, and because the volumes of these customers’ order flows to us are highly variable, with short lead times, our quarterly revenues, and consequently our results of operations, are susceptible to significant variability over a relatively short period of time. Since the acquisition of IPS, the variability has diminished partially.

 

Critical Accounting Policies and Estimates

 

We discuss the material accounting policies that are critical in making the estimates and judgments in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, under the caption “Management’s Discussion and Analysis—Critical Accounting Policies and Estimates”. There has been no material change in critical accounting policies or estimates during the period covered by this report.

 

Recent Accounting Pronouncements

 

For information on recent accounting pronouncements and impacts, see Note 2 to the unaudited condensed consolidated financial statements.

 

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2020 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2019

 

The results of operations disclosed below presents Forward’s distribution business and IPS’ design segments as distinct operating units. Management continues to expand our retail efforts for the distribution segment in an attempt to improve profitability. Management believes the profitability for the design segment will continue to improve as the Company streamlines operating expenses.

 

Net (Loss) / Income

 

Distribution Segment

 

Distribution segment net loss was $246,000 in the 2020 Quarter compared to $304,000 in the 2019 Quarter. The decrease to the net loss in the 2020 Quarter was primarily due to lower sales and marketing expenses, coupled with higher gross profit as reflected in the table below.

 

 

 

 

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Design Segment

 

Design segment net income was $31,000 in the 2020 Quarter compared to $200,000 in the 2019 Quarter. The decrease in net income in the 2020 Quarter was primarily driven by lower gross profit and higher general and administrative expenses, partially offset by lower sales and marketing expenses and a decrease in other expense, as reflected in the table below.

 

   Main Components of Net (Loss) / Income 
   (amounts in thousands) 
   2020
Quarter
   2019
Quarter
   Increase (Decrease) 
   Consolidated   Distribution   Design   Consolidated   Distribution   Design   Consolidated 
Net revenues  $9,549   $6,389   $3,160   $9,909   $6,022   $3,887   $(360)
Gross profit  $1,775   $939   $836   $1,894   $921   $973   $(119)
Less:                                   
Sales and marketing expenses   464    364    100    539    410    129    (75)
General and administrative expenses   1,486    786    700    1,405    781    624    81 
Operating (loss)/income   (175)   (211)   36    (50)   (270)   220    (125)
Other income (expenses)   (40)   (35)   (5)   (54)   (34)   (20)   14 
Net loss / (income)  $(215)  $(246)  $31   $(104)  $(304)  $200   $(111)

 

Consolidated basic and diluted loss per share was $0.02 for the 2020 Quarter and $0.01 for the 2019 Quarter.

 

Net Revenues

 

Distribution Segment

 

Net revenues in the distribution segment increased $367,000, or 6.1%, to $6,389,000 in the 2020 Quarter from $6,022,000 in the 2019 Quarter as a result of an increase in other product revenue, partially offset by a decline in our diabetic product line revenue. The following tables set forth revenues by channel, product line and geographic location of our distribution segment customers for the periods indicated:

 

   Net Revenues for 2020 Quarter 
   (amounts in thousands) 
   EMEA   APAC   Americas   Total 
Diabetic products  $2,079   $1,498   $1,317   $4,894 
Other products   45    259    1,191    1,495 
Total net revenues  $2,124   $1,757   $2,508   $6,389 

 

   Net Revenues for 2019 Quarter 
   (amounts in thousands) 
   EMEA   APAC   Americas   Total 
Diabetic products  $2,382   $1,807   $1,253   $5,442 
Other products   32    259    289    580 
Total net revenues  $2,414   $2,066   $1,542   $6,022 

 

 

 

 

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Diabetic Product Revenues

 

Our distribution segment manufactures to the order of, and sells carrying cases for, blood glucose diagnostic kits directly to OEMs (or their contract manufacturers). The OEM customer or its contract manufacturer packages our 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 $548,000, or 10.1%, to $4,894,000 in the 2020 Quarter from $5,442,000 in the 2019 Quarter. This decline was due to reduced demand and pricing pressures from most of our major diabetic product customers. Management believes that revenues from diabetic customers will continue to decline.

 

The following table sets forth our distribution segment net revenues by diabetic products customer for the periods indicated:

 

   (amounts in thousands) 
   2020
Quarter
   2019
Quarter
   Increase (Decrease) 
Diabetic Products Customer A  $1,396   $1,624   $(228)
Diabetic Products Customer B   1,591    1,613    (22)
Diabetic Products Customer C   1,010    1,641    (631)
Diabetic Products Customer D   576    486    90 
All other Diabetic Products Customers   321    78    243 
    Totals  $4,894   $5,442   $(548)

 

Revenues from diabetic products represented 77% of our distribution segment’s net revenues in the 2020 Quarter compared to 90% in the 2019 Quarter.

 

Other Product Revenues

 

Our distribution segment also designs and sells cases and protective solutions to OEMs for a diverse array of portable electronic and non-electronic products (such as sporting and recreational products, bar code scanners, smart phones, GPS location 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 $915,000 to $1,495,000 in the 2020 Quarter from $580,000 in the 2019 Quarter, primarily due to the sale of certain personal protective equipment sourced by the Company in the amount of $758,000. We will continue to focus on our sales and sales support teams in our continued efforts to expand and diversify our other products customer base as well as take advantage of opportunities that arise for which we can source products.

 

Revenues from other products represented 23% of our net revenues in the 2020 Quarter compared to 10% of our net revenues in the 2019 Quarter.

 

Design Segment

 

Net revenues in the design segment declined $727,000, or 18.7%, to $3,160,000 in the 2020 Quarter from $3,887,000 in the 2019 Quarter. The decline in revenues was due to the reduction or delay in demand for design and development projects, partially related to COVID-19. The following table sets forth our design segment net revenues by major customers for the 2020 Quarter:

 

   (amounts in thousands) 
   2020
Quarter
   2019
Quarter
   Increase (Decrease) 
Design Segment Customer A  $352   $895   $(543)
Design Segment Customer B   454    333    121 
Design Segment Customer C       863    (863)
Design Segment Customer D   922        922 
All other Design Segment Customers   1,432    1,796    (364)
    Totals  $3,160   $3,887   $(727)

 

 

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Gross Profit

 

Distribution Segment

 

While gross profit for the distribution segment increased $18,000, or 2.0%, to $939,000 in the 2020 Quarter as compared to $921,000 in the 2019 Quarter, gross margin declined from 15.3% to 14.7% in the same period. The decrease in gross margin was due to a shift to lower margin cases and pricing pressures on diabetic products from customers. The decline in gross margin from our diabetic products was partially offset by higher gross margins on the sale of personal protective equipment during the 2020 Quarter. We continue to work on expanding our product offering to include higher margin products as well as enhancing our sales efforts to raise top side gross sales and total gross profit.

 

Design Segment

 

While gross profit for the design segment decreased $137,000, or 14.1%, to $836,000 in the 2020 Quarter from $973,000 in the 2019 Quarter, gross margin improved from 25.0% to 26.5% in the same period. Gross margin in the 2020 Quarter has improved due to the continued efficient management of projects. Depreciation expense, which is allocated to cost of sales for the design segment, was $21,000 and $35,000 for the 2020 Quarter and 2019 Quarter, respectively.

 

Sales and Marketing Expenses

 

Distribution Segment

 

Sales and marketing expenses for the distribution segment decreased $46,000, or 11.2%, to $364,000 in the 2020 Quarter from $410,000 in the 2019 Quarter. The decrease was primarily due to a drop in sampling and prototype related expenses. Sales and marketing expenses for the distribution segment decreased to 5.7% of revenues in the 2020 Quarter as compared to 6.8% in the 2019 Quarter.

 

Design Segment

 

Sales and marketing expenses for the design segment decreased $29,000, or 22.5%, to $100,000 in the 2020 Quarter from $129,000 in the 2019 Quarter. The decrease in sales and marketing expenses is due to a $15,000 reduction in payroll related costs as we shifted some sales resources from external consultants to internal employees, an $8,000 reduction in entertainment related expenses, and a $6,000 decrease in various other marketing related expenses. Sales and marketing expenses for the design segment decreased slightly to 3.2% of revenues in the 2020 Quarter from 3.3% of revenues in the 2019 Quarter.

 

General and Administrative Expenses

 

Distribution Segment

 

General and administrative expenses in the distribution segment increased $5,000, or 0.6%, to $786,000 in the 2020 Quarter from $781,000 in the 2019 Quarter. During the 2020 Quarter we incurred $120,000 in severance costs, partially offset by a $79,000 decrease in professional fees (expenses related to responding to an SEC subpoena decreased $182,000 while other professional fees increased $103,000) and a decrease in travel expenses of $47,000. Other fluctuations were not material individually or in the aggregate. General and administrative expenses for the distribution segment decreased to 12.3% of revenues in the 2020 Quarter as compared to 13.0% in the 2019 Quarter.

 

Design Segment

 

General and administrative expenses for the design segment increased $76,000, or 12.2%, to $700,000 in the 2020 Quarter from $624,000 in the 2019 Quarter. The increase is primarily driven by additional payroll related costs of $75,000, additional professional fees of $11,000, partially offset by a reduction in bad debt expense of $21,000. Other fluctuations were not material individually or in the aggregate. General and administrative expenses for the design segment increased to 22.2% of revenues in the 2020 Quarter as compared to 16.1% in the 2019 Quarter.

 

 

 

 

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Other Income / (Expense)

 

Distribution Segment

 

Other expense for the distribution segment remained steady at $35,000 in the 2020 Quarter as compared to $34,000 in the 2019 Quarter. Other expense consists primarily of interest expense on the note payable to Forward China.

 

Design Segment

 

Other expense in the design segment decreased $15,000 from $20,000 in the 2019 Quarter to $5,000 in the 2020 Quarter. The decline is due to lower interest expense resulting from a decrease in the average amount of debt outstanding in each respective period.

 

Income Taxes

 

For the three months ended June 30, 2020, the Company generated a net loss of $215,000. The U.S. statutory tax rate for the fiscal year ending September 30, 2020 is 21%. The Company maintains significant net operating loss carryforwards and does not recognize income tax expense / (benefit) as its deferred tax provision is typically offset by a full valuation allowance on its net deferred tax asset.

 

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 2020 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 2019

 

Net Income / (Loss)

 

Distribution Segment

 

Distribution segment net loss was $793,000 in the 2020 Period compared to $987,000 in the 2019 Period. The decrease to the net loss in the 2020 Period was primarily driven by a reduction in general and administrative expenses, other income resulting from the fair value adjustment to the contingent earn-out consideration portion of the IPS purchase price, partially offset by lower gross profit, as reflected in the table below.

 

Design Segment

 

Design segment net loss was $875,000 in the 2020 Period compared to $779,000 in the 2019 Period. The increase to the net loss in the 2020 Period was primarily due to the goodwill impairment of $1,015,000 discussed in Note 4 of the Notes to the Condensed Consolidated Financial Statements, an increase in general and administrative expenses, partially offset by an improvement in gross profit, as reflected in the table below.

 

   Main Components of Net Loss 
   (amounts in thousands) 
   2020
Period
   2019
Period
   Increase (Decrease) 
   Consolidated   Distribution   Design   Consolidated   Distribution   Design   Consolidated 
Net revenues  $25,873   $15,709   $10,164   $28,265   $17,072   $11,193   $(2,392)
                                    
Gross profit  $4,948   $2,103   $2,845   $4,508   $2,659   $1,849   $440 
Less:                                   
Sales and marketing expenses   1,479    1,106    373    1,437    1,050    387    42 
General and administrative expenses   4,325    2,029    2,296    4,677    2,490    2,187    (352)
Goodwill impairment   1,015        1,015                1,015 
                                    
Operating loss   (1,871)   (1,032)   (839)   (1,606)   (881)   (725)   (265)
                                    
Other income (expenses)   203    239    (36)   (160)   (106)   (54)   363 
                                    
Net loss  $(1,668)  $(793)  $(875)  $(1,766)  $(987)  $(779)  $98 

 

Consolidated basic and diluted loss per share was $0.18 for the 2020 Period and $0.19 for the 2019 Period.

 

 

 

 

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Net Revenues

 

Distribution Segment

 

Net revenues in the distribution segment declined $1,363,000, or 8.0%, to $15,709,000 in the 2020 Period from $17,072,000 in the 2019 Period primarily as a result of decreased diabetic product line revenue partially offset by a $530,000 increase in other product revenue. The following tables set forth revenues by channel, product line and geographic location of our distribution segment customers for the periods indicated:

 

   Net Revenues for 2020 Period 
   (amounts in thousands) 
   EMEA   APAC   Americas   Total 
Diabetic products  $5,220   $3,958   $3,984   $13,162 
Other products   141    580    1,826    2,547 
Total net revenues  $5,361   $4,538   $5,810   $15,709 
                     

 

   Net Revenues for 2019 Period 
   (amounts in thousands) 
   EMEA   APAC   Americas   Total 
Diabetic products  $6,020   $5,117   $3,918   $15,055 
Other products   112    991    914    2,017 
Total net revenues  $6,132   $6,108   $4,832   $17,072 

 

Diabetic Product Revenues

 

Our distribution segment manufactures to the order of, and sells carrying cases for, blood glucose diagnostic kits directly to OEMs (or their contract manufacturers). The OEM customer or its contract manufacturer packages our 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 $1,893,000, or 12.6%, to $13,162,000 in the 2020 Period from $15,055,000 in the 2019 Period. This decline was primarily due to lower revenues from two major diabetic products customers (Diabetic Products customers B and C). Revenues from other major diabetic customers were less significant and were offset by an increase in revenue from all other diabetic products customers. Management believes that revenues from diabetic customers will continue to decline.

 

The following table sets forth our distribution segment net revenues by diabetic products customer for the periods indicated:

 

   (amounts in thousands) 
   2020
Period
   2019
Period
   Increase (Decrease) 
Diabetic Products Customer A  $4,906   $4,931   $(25)
Diabetic Products Customer B   3,597    4,796    (1,199)
Diabetic Products Customer C   2,586    3,344    (758)
Diabetic Products Customer D   1,345    1,623    (278)
All other Diabetic Products Customers   728    361    367 
    Totals  $13,162   $15,055   $(1,893)

 

Revenues from Diabetic Products represented 84% of our net revenues in the 2020 Period compared to 88% of our net revenues in the 2019 Period.

 

 

 

 

 30 

 

 

Other Product Revenues

 

Our distribution segment also designs and sells cases and protective solutions to OEMs for a diverse array of portable electronic and non-electronic products (such as sporting and recreational products, bar code scanners, smart phones, GPS location 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 $530,000 to $2,547,000 in the 2020 Period from $2,017,000 in the 2019 Period. Sales of personal protective equipment increased $758,000, partially offset by a net reduction in sales from various other customers of $228,000.

 

Revenues from Other Products represented 16% of our net revenues in the 2020 Period compared to 12% of our net revenues in the 2019 Period.

 

Design Segment

 

Net revenues in the design segment declined $1,029,000, or 9.2%, to $10,164,000 in the 2020 Period from $11,193,000 in the 2019 Period. The decline in revenues was due to the reduction or delay in demand for design and development projects, partially related to COVID-19. The following table sets forth our design segment net revenues by major customers for periods indicated:

 

   (amounts in thousands) 
   2020
Period
   2019
Period
   Increase (Decrease) 
Design Segment Customer A  $1,649   $2,290   $(641)
Design Segment Customer B   1,351    1,124    227 
Design Segment Customer C       1,553    (1,553)
Design Segment Customer D   2,005        2,005 
All other Design Segment Customers   5,159    6,226    (1,067)
   Totals  $10,164   $11,193   $(1,029)

 

Gross Profit

 

Distribution Segment

 

Gross profit for the distribution segment declined $556,000, or 20.9%, to $2,103,000 in the 2020 Period from $2,659,000 in the 2019 Period. Gross margin also declined, to 13.4% in the 2020 Period from 15.6% in the 2019 Period. These declines are due to lower sales revenue and a shift to lower-margin cases and pricing pressures on diabetic products from customers. The decline in gross margin from our diabetic products was partially offset by higher gross margins on the sale of personal protective equipment during the 2020 Period. We are working on expanding our product offering to include higher margin products as well as enhancing our sales efforts to raise top side gross sales to raise total gross profit.

 

Design Segment

 

Gross profit for the design segment increased $996,000, or 53.9%, from $1,849,000 in the 2019 Period to $2,845,000 in the 2020 Period. Gross margin improved from 16.5% in the 2019 Period to 28.0% in the 2020 Period. Gross margin for the 2019 Quarter is significantly lower than historical performance for the design segment of our business. The decline was the result of project overruns on two significant customers in the 2019 Period. Depreciation expense, which is allocated to cost of sales for the design segment, was $75,000 in the 2020 Period and $105,000 for the 2019 Period.

 

 

 

 

 31 

 

 

Sales and Marketing Expenses

 

Distribution Segment

 

Sales and marketing expenses for the distribution segment increased $56,000, or 5.3%, to $1,106,000 in the 2020 Period from $1,050,000 in the 2019 Period. The increase was primarily due to an additional $44,000 of amortization on the cost of the Mooni Agreement (see Note 13 to the condensed consolidated financial statements). Sales and marketing expenses for the distribution segment increased to 7.0% of revenues in the 2020 Period from 6.2% in the 2019 Period.

 

Design Segment

 

Sales and marketing expenses for the design segment decreased $14,000, or 3.6%, from $387,000 in the 2019 Period to $373,000 in the 2020 Period. This decrease was primarily due to declines in sales promotions and entertainment expenses. Sales and marketing expenses for the design segment increased to 3.7% of revenues in the 2020 Period from 3.5% in the 2019 Period.

 

General and Administrative Expenses

 

Distribution Segment

 

General and administrative expenses in the distribution segment declined $461,000, or 18.5%, to $2,029,000 in the 2020 Period from $2,490,000 in the 2019 Period. This decline resulted primarily from a $433,000 reduction in legal fees related to responding to an SEC subpoena in the 2019 Period (which includes an $80,000 insurance settlement received in the 2020 Period) a $159,000 reduction in bad debt expense, a $57,000 reduction in directors share based compensation, partially offset by $120,000 of severance costs and an increase in professional fees of $74,000 related to internal software implementation projects. Fluctuations in other components of general and administrative expenses were not material individually or in the aggregate. General and administrative expenses as a percentage of revenue for the distribution segment decreased to 12.9% in the 2020 Period from 14.6% in the 2019 Period.

 

Design Segment

 

General and administrative expenses for the design segment increased $109,000, or 5.0%, to $2,296,000 in the 2020 Period from $2,187,000 in the 2019 Period. The increase is a mix of fluctuations including the investment impairment discussed in Note 3 of the Notes to Condensed Consolidated Financial Statements of $327,000, additional payroll related expenses of $163,000, and an increase in professional fees of $97,000 related to internal software implementation projects. These increases were partially offset by a reduction in bad debt expense of $379,000 and a $47,000 reduction in legal fees. Fluctuations in other components of general and administrative expenses were not material individually or in the aggregate. General and administrative expenses as a percentage of revenue for the design segment increased to 22.6% in the 2020 Period from 19.5% in the 2019 Period.

 

Other Income / (Expense)

 

Distribution Segment

 

The Distribution segment reported other income of $239,000 in the 2020 Quarter as compared to other expense of $106,000 in the 2019 Quarter. The variance results primarily from the $350,000 fair value adjustment to the contingent earn-out consideration portion of the IPS purchase price discussed in Note 3 of the Notes to Condensed Consolidated Financial Statements.

 

 

 

 

 32 

 

 

Design Segment

 

Other expense in the design segment decreased $18,000, or 33.3%, from $54,000 for the 2019 Period to $36,000 in the 2020 Period. This decrease relates to a reduction in interest expense resulting from a decrease in the average amount of debt outstanding in each respective period.

 

Income Taxes

 

For the nine months ended June 30, 2020, the Company generated a net loss of $1,668,000. The U.S. statutory tax rate for the fiscal year ended September 30, 2020 is 21%. The Company maintains significant net operating loss carryforwards and does not recognize income tax expense / (benefit) as its deferred tax provision is typically offset by a full valuation allowance on its net deferred tax asset.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our primary source of liquidity is our operations. The primary demand on our working capital has historically been (i) operating losses, (ii) repayment of debt obligations, and (iii) any increases in accounts receivable and inventories arising in the ordinary course of business. Historically, our sources of liquidity have been adequate to satisfy working capital requirements arising in the ordinary course of business.

 

As of the filing date of this report, we had $300,000 available under our $1,300,000 line of credit which matures May 31, 2021. The Company has paid down the line of credit using available cash from operations. Recently, the maturity date on the $1,600,000 Forward China promissory note was extended to September 30, 2020 (see Note 9 – Related Party Transactions). 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.

 

As discussed in Note 12 - Debt, on April 18, 2020, the Company entered into a loan in an aggregate principal amount of $1,357,000 under the Paycheck Protection Program (the “PPP Loan”) pursuant to the recently enacted U.S. Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). This loan is unsecured, and we intend to apply for forgiveness of the PPP Loan as soon as reasonably practical and in accordance with the terms of the CARES Act when the forgiveness process becomes available by the bank and the Small Business Administration. We can provide no assurance that we will be successful in obtaining forgiveness for the PPP Loan.

 

We anticipate that our liquidity and financial resources for the 12 months following the date of the filing of this Form 10-Q will be adequate to manage our operating and financial requirements. If we have the opportunity to make a strategic acquisition or an investment in a product or partnership, we may require additional capital beyond our current cash balance to fund the opportunity. If we seek to raise additional capital, there is no assurance that we will be able to raise funds on terms that are acceptable to us or at all.

 

At June 30, 2020, our current ratio (current assets divided by current liabilities) was 1.5 compared to 1.4 at September 30, 2019. At June 30, 2020, our quick ratio (current assets less inventories divided by current liabilities) was 1.4 compared to 1.2 at September 30, 2019. At June 30, 2020, our working capital (current assets less current liabilities) was $4,176,000 compared to $3,543,000 at September 30, 2019. At July 31, 2020, we had $3,023,000 of cash on hand.

 

Although we do not anticipate the need to purchase additional material capital assets in order to carry out our business, it may be necessary for us to purchase equipment and other capital assets in the future, depending on need.

 

During the nine months ended June 30, 2020 and 2019, our sources and uses of cash were as follows:

 

 

 

 

 33 

 

 

Cash Flows from Operating Activities

 

During the 2020 Period, cash used in operating activities of $760,000 primarily resulted from a net loss of $1,668,000, an increase in accounts receivable of $1,448,000, the $350,000 non-cash reduction in the contingent earnout liability associated with the IPS acquisition and net other activity of $25,000, offset by the $1,015,000 non-cash goodwill impairment charge, a decrease in inventory of $881,000, the impairment of the investment of $327,000, an increase in deferred income of $306,000 and depreciation and amortization expense of $202,000.

 

During the 2019 Period, cash used in operating activities of $2,201,000 resulted primarily from a net loss of $1,765,000, a decrease of Accounts Payable (including due to Forward China) of $947,000, an increase in prepaid expenses and other assets of $503,000 and a net loss reconciling adjustment of $327,000 for the fair value of cost method investment for services provided, partially offset by a decline in accounts receivable of $143,000, a reduction of inventory of $265,000, an increase in accrued expenses of $65,000, an increase of deferred income of $23,000, in addition to the add-backs for bad debt expense of $417,000, share-based compensation of $181,000, depreciation and amortization of $235,000, and the add-back of deferred rent of $14,000.

 

Cash Flows from Investing Activities

 

Cash used in investing activities in the 2020 Period and the 2019 Period of $56,000 and $30,000, respectively, resulted from purchases of property and equipment.

 

Cash Flows from Financing Activities

 

In the 2020 Period, cash provided by financing activities of $808,000 consisted of $1,357,000 proceeds from the PPP loan, borrowings of $900,000 under the line of credit and $32,000 of proceeds from stock options exercised, partially offset by $1,200,000 in repayments on the line of credit, $200,000 paid out on the deferred cash consideration, and $81,000 in repayments on notes payable and capital leases.

 

In the 2019 Period, cash provided by financing activities of $570,000 consisted of $1,250,000 in borrowings on the line of credit, offset by $500,000 in repayments on the line of credit, $145,000 in repayments on notes payable and $34,000 in repayments on capital leases.

 

Related Party Transactions

 

For information on related party transactions and their financial impact, see Note 9 to the unaudited condensed consolidated financial statements contained herein.


Cautionary Note Regarding Forward-Looking Statements

 

This report contains “forward-looking statements”, as such term is used within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our liquidity, expectations regarding the impact of the pandemic on our business, expectations regarding the length of the pandemic’s business disruption, expectations regarding the forgiveness of the PPP Loan, beliefs regarding the design segments future results of operations, anticipated distribution of products from the Mooni distribution agreement, plans regarding the repayment of debt and beliefs regarding our capital. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include the failure to receive material orders, our ability to successfully market and sell products that we develop, the effects of the COVID-19 outbreak, including levels of consumer, business and economic confidence generally, the duration of the COVID-19 outbreak and severity of such outbreak, the pace of recovery following the COVID-19 outbreak, the effect on our supply chain, our ability to implement cost containment; and the adverse effects of the COVID-19 outbreak on our business or the market price of our common stock,  failure to diversify the industries in which we sell our products, potential imposed tariffs or other restrictions placed on imports by the U.S. government, and continued pricing pressure on our products. Further information on our risk factors is contained in our filings with the SEC, including our Form 10-K for the year ended September 30, 2019. Any forward-looking statement made by us speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

 

 

 

 34 

 

 

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4.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, required by Rule 13a-15 and Rule 15d-15 of the Securities Exchange Act of 1934 (the “Exchange Act”) of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act. Based on their evaluation, our management has concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting. Except for the Company’s design and implementation of certain controls related to the adoption of the new lease standard (ASC 842), there were no changes in our internal control over financial reporting as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations of the Effectiveness of Controls and Procedures. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations of any control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 35 

 

 

PART II. OTHER INFORMATION

 

ITEM 1.LEGAL PROCEEDINGS

 

From time to time, the Company may become a party to legal actions or proceedings in the ordinary course of its business. At June 30, 2020, there were no such actions or proceedings, either individually or in the aggregate, that, if decided adversely to the Company’s interests, the Company believes would be material to its business.

 

ITEM 1A.RISK FACTORS

 

Our results of operations have been negatively impacted by the coronavirus pandemic. 

 

The COVID-19 pandemic has spread across the globe and continues to negatively impact worldwide economic activity. COVID-19 has increased the risk that the Company or its employees, suppliers, customers and other commercial partners may be prevented from conducting business for an indefinite period of time, including due to the spread of the disease or shutdowns requested or mandated by governmental authorities. Specifically, COVID-19 has increased the risk of customers’ inability to pay for our design services and has the potential to impact collections on the distribution side of the business.  

 

The Company has also transitioned most of its New York employees to working remotely, which subjects the Company to increased cybersecurity risks and may reduce workplace efficiency. Additionally, the full extent of COVID-19’s negative impact on our business remains uncertain and it is not possible at this time to estimate the full impact that COVID-19 will have on our business. Business shutdowns have disrupted our supply chain and the manufacture or shipment of our products and have delayed the rollout of our smart enabled retail products to big box retail stores. This could have a material adverse effect on our business if this continues for an extended period of time. If we incur significant declines in customer orders, increased aging of accounts receivables or other negative consequences due to COVID-19, the extent of which remains highly uncertain, it will have a material adverse effect on our business, financial condition and results of operations.

 

We may not be entitled to forgiveness of our recently received PPP Loans, and our application for the PPP Loans could in the future be determined to have been impermissible.

 

In April 2020, we received proceeds of $1,357,000 from a loan under the PPP of the CARES Act, which we are using to retain current employees, maintain payroll and make lease and utility payments. The PPP Loan matures in April 2022 and bears annual interest at a rate of 1.0%.

 

We must pay monthly principal and interest payments on the outstanding principal balance of the PPP Loan amortized over the term of the loan beginning in November 2020 until maturity when the entire principal balance remaining unpaid, along with all accrued and unpaid interest, shall be due and payable in full. Under the CARES Act, loan forgiveness is generally available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered utilities paid during a period of time specified by SBA guidelines. We will be required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest, and we cannot provide any assurance that we will be eligible for loan forgiveness, that we will ultimately apply for forgiveness equally among all business entities, or that any amount of the PPP Loan will ultimately be forgiven by the SBA.

 

If it is determined that we were ineligible to receive the PPP Loan, we may be required to repay the PPP Loan in its entirety and/or be subject to additional penalties, which could also result in adverse publicity and damage to our reputation. In addition, if these events were to transpire, they could have a material adverse effect on our business, results of operations and financial condition.

 

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

 

 

 

 36 

 

 

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.MINE SAFETY DISCLOSURES

 

Not Applicable.

 

ITEM 5.OTHER INFORMATION

 

None.

 

ITEM 6.EXHIBITS

 

The exhibits listed in the accompanying “Index to Exhibits” are filed or incorporated by reference as part of this Form 10-Q.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 37 

 

 

Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

 

Dated:  August 14, 2020

 

  FORWARD INDUSTRIES, INC.
     
     
  By:

/s/ Terence Wise

    Terence Wise
    Chief Executive Officer
    (Principal Executive Officer)
     
     
  By: /s/ Anthony Camarda
    Anthony Camarda
    Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

 

 

 

 

 

 

 

 

 

 38 

 

 
EXHIBIT INDEX

 

 

      Incorporated by 
Reference
 
 
Exhibit
No.
  Exhibit Description  Form Date Number Filed or 
Furnished 
Herewith
 
2.1   Stock Purchase Agreement with Intelligent Product Solutions, Inc. 8-K 1/18/18 2.1  
3.1   Restated Certificate of Incorporation  10-K 12/08/10 3(i)  
3.2   Certificate of Amendment of the Certificate of Incorporation, April 26, 2013 8-K 4/26/13 3.1  
3.3   Certificate of Amendment of the Certificate of Incorporation, June 28, 2013 8-K 7/03/13 3.1  
3.4   Third Amended and Restated Bylaws, as of May 28, 2014 10-K 12/10/14 3(ii)  
4.1   Promissory Note dated January 18, 2018 – Forward Industries (Asia-Pacific) (as amended and restated)       Filed 
10.1   Buying Agency and Supply Agreement - Forward Industries (Asia-Pacific) Corporation dated September 9, 2015 10-K 12/16/15 10.7  
10.1(a)   Amendment No. 1 to Buying Agency and Supply Agreement – Forward Industries (Asia-Pacific) Corporation  10-Q 8/14/17 10.2  
10.1(b)   Amendment No. 2 to Buying Agency and Supply Agreement – Forward Industries (Asia-Pacific) Corporation  8-K 9/22/17 10.1  
10.1(c)   Amendment No. 3 to Buying Agency and Supply Agreement – Forward Industries (Asia-Pacific) Corporation 10-Q 5/15/19 10.1(c)  
10.1(d)   Amendment No. 4 to Buying Agency and Supply Agreement – Forward Industries (Asia-Pacific) Corporation 10-K 12/27/19 10.1(d)  
10.2   Paycheck Protection Program Term Note payable to TD Bank, N.A. dated April 18, 2020 8-K 4/22/20 10.1  
10.3   Employment Agreement between Forward Industries, Inc. and Anthony Camarda, dated June 26, 2020 8-K 7/2/20 10.1  
31.1   Certification of Principal Executive Officer (Section 302)       Filed 
31.2   Certification of Principal Financial Officer (Section 302)       Filed 
32.1   Certification of Principal Executive Officer and Principal Financial Officer (Section 906)       Furnished* 
101 .INS  XBRL Instance Document        Filed 
101 .SCH XBRL Taxonomy Extension Schema Document        Filed 
101 .CAL XBRL Taxonomy Extension Calculation Linkbase Document        Filed 
101 .DEF  XBRL Taxonomy Extension Definition Linkbase Document        Filed 
101 .LAB XBRL Taxonomy Extension Label Linkbase Document        Filed 
101 .PRE  XBRL Taxonomy Extension Presentation Linkbase Document        Filed 

 

*       This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.

 

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.

 

 

 

 

 39 

 

Exhibit 4.1

 

Amended and restated Promissory Note

 

U.S. $1,600,000 January 18, 2018

 

The undersigned maker, Forward Industries Inc, a New York Corporation (“Borrower”) promises to pay to the order of Forward Industries (Asia-Pacific) Corporation (“Lender”), at 101, Building 13, Bishui Laintian,, New Century Villas, Dongguan City, Guandong Province, China, 523123, the principal sum of one million six hundred thousand Dollars (U.S. $1,600,000), together with interest accruing thereon from the date hereof at the rate and time hereinafter provided.

 

Interest (computed on the basis of a 360-day year for the actual number of days elapsed) on the outstanding balance of principal evidenced by this Note shall accrue at a rate per annum (the “Applicable Interest Rate”) equal to eight percent (8%).

 

Interest only shall be due and payable on February 18, 2018, and on the 18th day (or 17th on the maturity date) of each month thereafter until September 30, 2020, at which time the entire principal and all accrued interest hereunder shall be immediately due and payable in full.

 

The failure of Borrower to pay to Lender promptly within five (5) days after written notice from Lender that amounts are due and payable under this Note shall constitute an event or default under this Note. At any time after the occurrence of any such event of default, the indebtedness evidenced by this Note and/or any note(s) or other obligation(s) which may be taken in renewal, extension, substitution or modification of all or any part of the indebtedness evidenced thereby and all other obligations of Borrower to Lender howsoever created and existing shall, at the option of the Lender in its sole discretion, immediately become due and payable without demand upon or notice to Borrower, and Lender shall be entitled to exercise all remedies as provided by law and/or equity.

 

Borrower hereby waives presentment for payment, demand, notice of dishonor and protest and agrees that (i) any collateral, lien or right of setoff securing any indebtedness evidenced by this Note may, from time to time, in whole or in part, be exchanged or released, and any person liable on or with respect to this Note may be released, all without notice to or further reservations of rights against Borrower, any endorser, surety or guarantor and all without in any way affecting or releasing the liability of Borrower, any endorser, surety or guarantor, and (ii) none of the terms or provisions hereof may be waived, altered, modified or amended except as Lender may consent thereto in writing.

 

Borrower hereby agrees to pay all out-of-pocket costs and expenses, including reasonable attorneys’ fees, incurred by Lender in the collection of the indebtedness evidenced by this Note, in enforcing any of the rights, powers, remedies and privileges of Lender hereunder, or in connection with any further negotiations, modifications, releases, or otherwise incurred by Lender in connection with this Note. As used in this Note, the term “attorneys’ fees” shall mean reasonable charges and expenses for legal services rendered to or on behalf of Lender in connection with the collection of the indebtedness evidenced by this Note at any time whether prior to the commencement of judicial proceedings and/or thereafter at the trial and/or appellate level and/or in pre-judgment and post-judgment or bankruptcy proceedings.

 

In no event shall the rate of interest charged under this Note exceed the rate that may legally be charged to Borrower for obligations of this nature under the laws of the State of Florida, and any interest that may be paid in excess of the legal limit shall, at the option of Lender, be refunded to Borrower or shall be applied towards payment of the principal obligation under this Note.

 

If any installment of interest, principal or principal and interest shall become overdue for a period in excess of ten (10) days, in addition to such payment, a “late charge” in the amount of five percent (5%) of such overdue payment shall be paid by Borrower to Lender on demand for the purpose of defraying the expenses incident to handling such delinquent payments.

 

 

 

 

 1 

 

 

During the continuation of any default by Borrower in the payment of any installment of interest, principal or principal and interest under this Note, the interest rate provided herein shall be increased to a rate which shall be equal to the maximum rate of interest allowable under the laws of the State of Florida. Venue of any litigation arising in connection with this Note shall be in Palm Beach County, Florida.

 

To the extent that Lender receives any payment on account of any of Borrower’s obligations, and any such payment(s) or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, subordinate and/or required to be repaid to a trustee, receiver or any other person or entity under any bankruptcy act, state or federal law, common law or equitable cause, then, to the extent of such payment(s) received, Borrower’s obligations or part thereof intended to be satisfied shall be revived and continue in full force and effect, as if such payment(s) had not been received by Lender and applied on account of Borrower’s obligations.

 

Borrower agrees that this Note shall be deemed to have been made under and shall be governed by the laws of the State of Florida in all respects, including matters of construction, validity and performance. If any provisions of this Note shall be deemed unenforceable under applicable law, such provision shall be ineffective, but only to the extent of such unenforceability, without invalidating the remainder of such provision or the remaining provisions of this Note. All of the terms and provisions of this Note shall be applicable to and be binding upon each and every maker, endorser, surety, guarantor, all other persons who are or may become liable for the payment hereof and their heirs, personal representatives, successors or assigns.

 

BORROWER AND LENDER (BY ACCEPTING THIS NOTE) HEREBY MUTUALLY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER BORROWER OR LENDER AGAINST THE OTHER AND BASED UPON, ARISING OUT OF, OR IN CONNECTION WITH, THIS NOTE OR OTHER DOCUMENTS EXECUTED IN CONNECTION WITH THE LOAN EVIDENCED BY THIS NOTE.

 

 

 

 

 

 

 

 

 

 

 

 2 

 

 

 

FORWARD INDUSTRIES, INC.

 

 

 

By: ___________________________

Name: Michael Matte

Its: Chief Financial Officer

 

 

STATE OF _________________  )

                                                        ) SS:

COUNTY OF _______________  )

 

The foregoing Promissory Note was acknowledged before me this _____ day of _______________, 20__, by ____________________, the _______________ of _______________

____________________________________, a ____________________, on behalf of the _______________, (    ) who is personally known to me OR (    ) who produced ____________________________________________________________ as identification.

 

 

____________________________________

Notary Signature

 

____________________________________

Print Notary Name

 

NOTARY PUBLIC

State of _______________ at Large

 

My Commission Expires:

 

 

 

 

 

 

 

 

 

 

Promissory Note Signature Page

   

 

Exhibit 31.1

 

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

 

I, Terence Wise, certify that:

 

1.       I have reviewed this quarterly report on Form 10-Q of Forward Industries, Inc.;

 

2.       Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.       Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.       The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)       Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)       Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)       Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)       Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.       The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)       All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)       Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 14, 2020

 

/s/ Terence Wise

Terence Wise

Chief Executive Officer

(Principal Executive Officer)

Exhibit 31.2

 

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

 

I, Anthony Camarda, certify that:

 

1.       I have reviewed this quarterly report on Form 10-Q of Forward Industries, Inc.;

 

2.       Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.       Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.       The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)       Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)       Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)       Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)       Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.       The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)       All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)       Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 14, 2020

 

/s/ Anthony Camarda

Anthony Camarda

Chief Financial Officer

(Principal Financial Officer)

Exhibit 32.1

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the quarterly report of Forward Industries, Inc. (the “Company”) on Form 10-Q for the quarterly period ended June 30, 2020, as filed with the Securities and Exchange Commission on the date hereof, I, Terence Wise, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

 

1.The quarterly report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and

 

2.The information contained in the quarterly report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

/s/ Terence Wise

Terence Wise

Chief Executive Officer

(Principal Executive Officer)

Dated: August 14, 2020

 

 

 

In connection with the quarterly report of Forward Industries, Inc. (the “Company”) on Form 10-Q for the quarterly period ended June 30, 2020, as filed with the Securities and Exchange Commission on the date hereof, I, Anthony Camarda, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

 

1.The quarterly report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and

 

2.The information contained in the quarterly report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ Anthony Camarda

Anthony Camarda

Chief Financial Officer

(Principal Financial Officer)

Dated: August 14, 2020

v3.20.2
Document And Entity Information - shares
9 Months Ended
Jun. 30, 2020
Aug. 07, 2020
Cover [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Jun. 30, 2020  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q3  
Entity Registrant Name Forward Industries, Inc.  
Entity Central Index Key 0000038264  
Current Fiscal Year End Date --09-30  
Entity Filer Category Non-accelerated Filer  
Entity Common Stock, Shares Outstanding   9,583,851
Entity Current Reporting Status Yes  
Entity Small Business true  
Entity Emerging Growth false  
Entity Interactive data current Yes  
Entity File Number 001-34780  
Entity Incorporation State Code NY  
Entity Shell Company false  
v3.20.2
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) - USD ($)
Jun. 30, 2020
Sep. 30, 2019
Current assets:    
Cash $ 3,084,635 $ 3,092,813
Accounts receivable, net 8,264,935 6,695,120
Inventories 727,419 1,608,827
Prepaid expenses and other current assets 502,893 441,502
Total current assets 12,579,882 11,838,262
Property and equipment, net 219,375 243,002
Intangible assets, net 1,126,299 1,248,712
Goodwill 1,167,427 2,182,427
Investment 0 326,941
Operating lease right of use assets, net 3,409,259 0
Other assets 138,002 255,008
Total Assets 18,640,244 16,094,352
Current liabilities:    
Line of credit 1,000,000 1,300,000
Accounts payable 297,098 315,444
Due to Forward China 3,199,874 3,236,693
Deferred Income 525,763 219,831
Current portion of notes payable 2,196,621 1,654,799
Current portion of capital leases payable 24,733 39,941
Deferred consideration 296,000 834,000
Current portion of operating lease liability 238,413 0
Accrued expenses and other current liabilities 625,540 694,972
Total current liabilities 8,404,042 8,295,680
Other liabilities    
Capital leases payable, less current portion 15,402 26,438
Deferred rent 0 60,935
Operating lease liability, less current portion 3,278,908 0
Notes payable, less current portion 759,949 0
Total other liabilities 4,054,259 87,373
Total Liabilities 12,458,301 8,383,053
Shareholders' equity:    
Common stock, par value $0.01 per share; 40,000,000 shares authorized; 9,583,851 and 9,533,851 shares issued and outstanding at June 30, 2020 and September 30, 2019, respectively 95,838 95,338
Additional paid-in capital 19,074,747 18,936,130
Accumulated deficit (12,988,642) (11,320,169)
Total shareholders' equity 6,181,943 7,711,299
Total liabilities and shareholders' equity $ 18,640,244 $ 16,094,352
v3.20.2
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) - $ / shares
Jun. 30, 2020
Sep. 30, 2019
Statement of Financial Position [Abstract]    
Common stock, par or stated value per share (in dollars per share) $ 0.01 $ 0.01
Common stock, shares authorized (in shares) 40,000,000 40,000,000
Common stock, shares issued (in shares) 9,583,851 9,533,851
Common stock, shares outstanding (in shares) 9,583,851 9,533,851
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Unaudited) - USD ($)
3 Months Ended 9 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Income Statement [Abstract]        
Revenues, net $ 9,548,732 $ 9,909,452 $ 25,872,963 $ 28,265,202
Cost of sales 7,773,944 8,014,998 20,925,017 23,756,862
Gross profit 1,774,788 1,894,454 4,947,946 4,508,340
Operating expenses        
Sales and marketing 464,247 539,072 1,478,880 1,437,047
General and administrative 1,485,447 1,405,249 4,324,798 4,676,748
Goodwill impairment 0 0 1,015,000 0
Loss from operations (174,906) (49,867) (1,870,732) (1,605,455)
Other income (expenses):        
Fair value adjustment of earn-out consideration 0 0 350,000 0
Fair value adjustment of deferred cash consideration (3,000) 0 (12,000) 0
Interest expense (37,148) (52,216) (132,275) (150,304)
Other expense, net (148) (1,979) (3,466) (9,735)
Net loss $ (215,202) $ (104,062) $ (1,668,473) $ (1,765,494)
Net loss per basic common share $ (0.02) $ (0.01) $ (0.18) $ (0.19)
Net loss per diluted common share $ (0.02) $ (0.01) $ (0.18) $ (0.19)
Weighted average number of common and common equivalent shares outstanding        
Basic 9,534,407 9,533,851 9,534,034 9,531,422
Diluted 9,534,407 9,533,851 9,534,034 9,531,422
v3.20.2
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited) - USD ($)
Common Stock
Additional Paid-In Capital
Accumulated Deficit
Total
Beginning balance, shares at Sep. 30, 2018 9,533,851      
Beginning balance, value at Sep. 30, 2018 $ 95,338 $ 18,720,396 $ (7,716,139) $ 11,099,595
Share-based compensation 11,794 11,794
Net loss (530,527) (530,527)
Ending balance, shares at Dec. 31, 2018 9,533,851      
Ending balance, value at Dec. 31, 2018 $ 95,338 18,732,190 (8,246,666) 10,580,862
Share-based compensation 136,096 136,096
Net loss (1,130,905) (1,130,905)
Ending balance, shares at Mar. 31, 2019 9,533,851      
Ending balance, value at Mar. 31, 2019 $ 95,338 18,868,286 (9,377,571) 9,586,053
Share-based compensation 33,290 33,290
Net loss (104,062) (104,062)
Ending balance, shares at Jun. 30, 2019 9,533,851      
Ending balance, value at Jun. 30, 2019 $ 95,338 18,901,576 (9,481,633) 9,515,281
Beginning balance, shares at Sep. 30, 2019 9,533,851      
Beginning balance, value at Sep. 30, 2019 $ 95,338 18,936,130 (11,320,169) 7,711,299
Share-based compensation 33,179 33,179
Net loss (81,657) (81,657)
Ending balance, shares at Dec. 31, 2019 9,533,851      
Ending balance, value at Dec. 31, 2019 $ 95,338 18,969,309 (11,401,826) 7,662,821
Share-based compensation 36,260 36,260
Net loss (1,371,614) (1,371,614)
Ending balance, shares at Mar. 31, 2020 9,533,851      
Ending balance, value at Mar. 31, 2020 $ 95,338 19,005,569 (12,773,440) 6,327,467
Share-based compensation 37,678 37,678
Stock options exercised, shares 50,000      
Stock options exercised, value $ 500 31,500 32,000
Net loss (215,202) (215,202)
Ending balance, shares at Jun. 30, 2020 9,583,851      
Ending balance, value at Jun. 30, 2020 $ 95,838 $ 19,074,747 $ (12,988,642) $ 6,181,943
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($)
9 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Operating Activities:    
Net loss $ (1,668,473) $ (1,765,494)
Adjustments to reconcile net loss to net cash used in operating activities:    
Share-based compensation 107,117 181,180
Depreciation and amortization 201,778 234,676
Bad debt expense (recovery) (121,431) 416,857
Deferred rent 0 13,845
Change in fair value of earn-out consideration (350,000) 0
Change in fair value of deferred cash consideration 12,000 0
Goodwill impairment 1,015,000 0
Fair value of cost method investment for services provided 0 (326,941)
Impairment of investment 326,941 0
Changes in operating assets and liabilities:    
Accounts receivable (1,448,384) 142,698
Inventories 881,408 264,550
Prepaid expenses and other current assets (61,391) (282,437)
Other assets 117,006 (220,518)
Accounts payable and due to Forward China (55,165) (947,200)
Deferred income 305,932 22,565
Operating lease liabilities 27,303 0
Accrued expenses and other current liabilities (49,608) 65,025
Net cash used in operating activities (759,967) (2,201,194)
Investing Activities:    
Purchases of property and equipment (55,738) (29,579)
Net cash used in investing activities (55,738) (29,579)
Financing Activities:    
Proceeds from line of credit borrowings 900,000 1,250,000
Repayment of line of credit borrowings (1,200,000) (500,000)
Repayment of notes payable (54,799) (145,112)
Proceeds from PPP loan 1,356,570 0
Cash proceeds from stock options exercised 32,000 0
Repayments of capital leases (26,244) (34,455)
Payment of deferred cash consideration (200,000) 0
Net cash provided by financing activities 807,527 570,433
Net decrease in cash (8,178) (1,660,340)
Cash at beginning of period 3,092,813 4,369,866
Cash at end of period 3,084,635 2,709,526
Supplemental Disclosure of Cash Flow Information:    
Cash paid for interest 126,791 66,087
Cash paid for taxes 1,524 37,859
Supplemental Disclosure of Non-Cash Information:    
ROU assets from the adoption of ASC 842 3,648,582 0
Lease liabilities arising from obtaining ROU assets $ 3,729,341 $ 0
v3.20.2
1. OVERVIEW
9 Months Ended
Jun. 30, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
OVERVIEW
NOTE 1 OVERVIEW

 

Business

 

Forward Industries, Inc. (“Forward”, “we” or the “Company”) is a fully integrated design, development and manufacturing solution provider for top tier medical and technology customers worldwide. Through its acquisition of Intelligent Product Solutions, Inc. (“IPS”), the Company has expanded its ability to design and develop solutions for our existing multinational client base and 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”; (ii) Europe, the Middle East, and Africa, which we refer to as the “EMEA Region”; and (iii) the geographic area encompassing North America, Central America and South America, which we refer to as the “Americas”. The Company does not manufacture any of its OEM products and sources substantially all of its OEM products from independent suppliers in China, through Forward Industries Asia-Pacific Corporation, a British Virgin Islands corporation (“Forward China”).

 

As a result of the expansion of the design development capabilities through its wholly owned subsidiary, IPS (acquired in January 2018), the Company 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.

 

In the opinion of management, the accompanying condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q reflect all normal recurring adjustments necessary to present fairly the financial position and results of operations and cash flows for the interim periods presented herein, but are not necessarily indicative of the results of operations for the year ending September 30, 2020. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2019, and with the disclosures and risk factors presented therein. The September 30, 2019 condensed consolidated balance sheet has been derived from the audited consolidated financial statements. Certain dollar amounts and percentages have been rounded to their approximate value.

 

Impact of COVID-19

 

In December 2019, a novel strain of coronavirus known as COVID-19 was reported to have surfaced in China, and by March 2020 the spread of the virus had resulted in a worldwide pandemic. To date, the pandemic has surfaced in nearly all regions around the world and resulted in business slowdowns and shutdowns, as well as global travel restrictions and government mandated stay at home orders. These restrictions have required substantially all our employees to work from home for most of the three months ended June 30, 2020 (the “2020 Quarter”). Employees are starting to return to the office in August of 2020 with minimal operational challenges. While the COVID-19 pandemic had a minimal impact on our financial results in the second quarter of fiscal 2020, the impact during the 2020 Quarter was somewhat more significant. Business shutdowns have disrupted our supply chain and the manufacture or shipment of our products and have delayed the rollout of our smart enabled retail products to big box retail stores, causing our revenues in the 2020 Quarter to be less than anticipated. Additionally, our design segment reported lower revenues as demand for its design and development services were reduced or delayed. The impact from lower revenue was partially offset by a reduction from the second quarter of fiscal 2020 in certain selling and travel related expenses resulting from government mandated stay at home orders and travel restrictions as well as revenues derived from sales and sourcing of personal protective equipment. The pandemic had temporarily impacted our liquidity in the 2020 Quarter, as collection of accounts receivable were somewhat delayed in the early part of the 2020 Quarter. The Company received funding under the Paycheck Protection Program in the amount of $1,357,000 (see Note 12).

 

While the economy has started to open in certain jurisdictions, the future impacts of the 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 require our services. The long-term financial impact on our business cannot be reasonably estimated at this time. As a result, the effects of COVID-19 may not be fully reflected in our financial results until future periods. Refer to “Part II, Item 1A — Risk Factors” in this Quarterly Report for a description of the material risks that the Company currently faces in connection with COVID-19. The impact of the COVID-19 pandemic may also exacerbate other risks discussed in “Part I, Item 1A — Risk Factors” included in the Company’s Annual Report for the year ended September 30, 2019.

 

As a result of revenue and earnings shortfalls for the 2020 Quarter, due in part to the impact of COVID-19 and the related future uncertainty, in the second quarter of fiscal 2020, the Company revised the outlook for the design reporting unit for the remainder of the year and its long-term outlook. This new outlook has impacted the Company’s carrying value of goodwill (see Note 4). Looking ahead to the remainder of 2020, our visibility is limited due to the uncertainty surrounding the duration and ultimate impact of COVID-19 and the mitigation measures that are implemented by governmental authorities. We also 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; and pursuing further improvements in the productivity and effectiveness of our development, selling and administrative activities.

v3.20.2
2. ACCOUNTING POLICIES
9 Months Ended
Jun. 30, 2020
Accounting Policies [Abstract]  
ACCOUNTING POLICIES
NOTE 2 ACCOUNTING POLICIES

 

Accounting Estimates

 

The preparation of the Company’s condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.

 

The worldwide spread of COVID-19 has resulted in a global slowdown of economic activity which is likely to decrease demand for a broad variety of goods and services, while also disrupting sales channels, marketing activities and general business operations for an unknown period of time until the disease is contained. At this point, the extent to which COVID-19 may impact our financial condition or results of operations is uncertain, and as of the date of issuance of these condensed consolidated financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates, judgments or adjust the carrying value of our assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to our condensed consolidated financial statements.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements include the accounts of Forward Industries, Inc. and its wholly owned subsidiaries: Forward Industries (IN), Inc., (“Forward US”), Forward Industries (Switzerland) GmbH, (“Forward Switzerland”), Forward Industries UK Limited, (“Forward UK”) and IPS. All significant intercompany transactions and balances have been eliminated in consolidation. Intercompany revenues of $17,000 and $44,000, respectively, for the three and nine months ended June 30, 2020 and $9,000 and $215,000, respectively, for the three and nine months ended June 30, 2019, related to design and marketing work performed by IPS for Forward US have been eliminated in consolidation.

 

For the nine months ended June 30, 2020, the Company incurred a net loss of $1,668,000, and used $760,000 of cash flow in operating activities. The Company has an accumulated deficit of $12,989,000 at June 30, 2020. We believe our existing cash balance and working capital will be sufficient to meet our liquidity needs at least through September 30, 2021.

 

Segment Reporting

 

Operating segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated by a chief operating decision maker, or Forward management, in deciding how to allocate resources and in assessing performance. As a result of the acquisition of IPS in January 2018, management conducts business through two distinct operating segments, which are also our reportable segments: distribution and design. Forward US, Forward Switzerland and Forward UK comprise the distribution operating segment and IPS is the design operating segment.

 

Organizing our business through two operating segments allows us to align our resources and manage our operations. Our management team regularly reviews operating segment revenue and profitability when assessing financial results of operating segments and allocating resources.

 

We measure the performance of our operating segments based upon operating segment revenue and operating income or loss. Segment operating income or loss includes revenue and expenses incurred directly by the operating segment, including cost of sales and selling, marketing, and general and administrative expenses.

 

Goodwill

 

Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill was recognized as a result of the acquisition of IPS in January 2018.

 

Goodwill is reviewed for impairment at least annually, and when triggering events occur, in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, “Intangibles – Goodwill and Other.” The Company has two reporting units for purposes of evaluating goodwill impairment and management performs our annual goodwill impairment test on September 30, the end of the fiscal year, or upon the occurrence of a triggering event. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company would not need to perform the impairment test for the reporting unit. If the Company cannot support such a conclusion or does not elect to perform the qualitative assessment, then the Company will compare the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying value, no impairment charge is recognized. If the fair value of the reporting unit is less than its carrying value, an impairment charge will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value. A significant amount of judgment is required in performing goodwill impairment tests including estimating the fair value of a reporting unit and the implied fair value of goodwill. During the three months ended March 31, 2020, the Company recorded an impairment charge related to goodwill (see Note 4).

 

Intangible Assets

 

Intangible assets include trademark and customer relationships, which were acquired as part of the acquisition of IPS in January 2018 and are recorded based on their estimated fair value determined in conjunction with the purchase price allocation. The intangible assets are amortized over their estimated useful lives, which are periodically evaluated for reasonableness.

 

Our intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In assessing the recoverability of our intangible assets, we must make estimates and assumptions regarding future cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and the magnitude of any such charge. Fair value estimates are made at a specific point in time, based on relevant information. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. If these estimates or material related assumptions change in the future, we may be required to record impairment charges related to our intangible assets. Management evaluated and concluded that there were no impairments of intangible assets at June 30, 2020.

 

Income Taxes

 

The Company recognizes future tax benefits and liabilities measured at enacted rates attributable to temporary differences between financial statement and income tax bases of assets and liabilities and to net tax operating loss carryforwards to the extent that realization of these benefits is more likely than not. At June 30, 2020, there was no change to our assessment that a full valuation allowance was required against all net deferred tax assets as it is not probable that such deferred tax assets will be realized. Accordingly, any deferred tax provision or benefit was offset by an equal and opposite change to the valuation allowance. No current book income tax provision was recorded against book net income due to the existence of significant net operating loss carryforwards.

 

Revenue Recognition

 

Distribution Segment

 

The Company adopted ASC 606, “Revenue Recognition” effective October 1, 2018. In accordance with this guidance, the Company generally recognizes revenue in its distribution segment when: (i) finished goods are shipped to our distribution customers (in general, these conditions occur at either point of shipment or point of destination, depending on the terms of sale, i.e., transfer of control); (ii) there are no other deliverables or performance obligations; and (iii) there are no further obligations to the customer after the title of the goods has transferred. When the Company receives consideration before achieving the criteria previously mentioned, it records a contract liability, which is classified as a component of deferred income in the accompanying condensed consolidated balance sheets. At June 30, 2020 and September 30, 2019, there were no contract liabilities relating to the distribution segment.

 

Design Segment

 

Under ASC 606, the Company applies the “cost to cost” and “right to invoice” methods of revenue recognition to the contracts with customers in the design segment. The design segment typically engages in two types of contracts: (i) time and material and (ii) fixed price contracts. The Company recognizes revenue over time on its time and material contracts utilizing a “right to invoice” method. Revenues from fixed price contracts that require performance of services that are not related to the production of tangible assets are recognized by using cost inputs to measure progress toward the completion of its performance obligations, or the “cost to cost” method. Revenues from fixed price contracts that contain specific deliverables are recognized when the performance obligation has been satisfied or the transfer of goods to the customer has been completed and accepted.

 

Recognized revenues that will not be billed until a later date, or contract assets, are recorded as an asset and classified as a component of accounts receivable in the accompanying condensed consolidated balance sheets. Contract assets at June 30, 2020 and September 30, 2019 were $899,000 and $611,000, respectively. Contracts where collections to date have exceeded recognized revenues, or contract liabilities, are recorded as a liability and classified as a component of deferred income in the accompanying condensed consolidated balance sheets. Contract liabilities at June 30, 2020 and September 30, 2019 were $526,000 and $220,000, respectively.

 

Share-Based Compensation Expense

 

The Company estimates the fair value of employee and non-employee director share-based compensation on the date of grant using the Black-Scholes option pricing model, which includes variables such as the expected volatility of the Company’s share price, the exercise behavior of its grantees, interest rates, and dividend yields. These variables are projected based on the Company’s historical data, experience, and other factors. The fair value of employee and non-employee director share-based compensation is recognized in the condensed consolidated statements of operations over the related vesting period of each grant. In the case of awards with multiple vesting periods, the Company has elected to use the graded vesting attribution method, which recognizes compensation cost on a straight-line basis over each separately vesting portion of the award as if the award was, in substance, multiple awards (see Note 6).

 

Leases

 

The Company adopted ASC 842, "Leases", effective October 1, 2019. In accordance with this guidance, lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term, using the Company’s incremental borrowing rate commensurate with the lease term, since the Company’s lessors do not provide an implicit rate, nor is one readily available. The Company has certain leases that may include an option to renew and when it is reasonably probable to exercise such option, the Company will include the renewal option terms in determining the lease asset and lease liability. Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Operating lease assets are shown as right of use assets and financing lease assets are a component of property and equipment on the condensed consolidated balance sheets. The current and long-term portions of operating and financing lease liabilities are shown separately as such on the condensed consolidated balance sheets.

 

Business Combinations

 

The Company allocates the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, the Company makes significant estimates and assumptions, especially with respect to intangible assets.

 

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.

 

 

Recent Accounting Pronouncements

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement - Disclosure Framework (Topic 820).” The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the timing and impact of adopting the updated provisions.

 

In November 2019, the FASB issued ASU 2019-08, “Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606).” ASU 2019-08 is an accounting pronouncement which expands the scope of Topic 718 to provide guidance for share-based payment awards granted to a customer in conjunction with selling goods or services accounted for under Topic 606. The pronouncement is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company is currently evaluating the effects of this pronouncement on its condensed consolidated financial statements along with the effects of ASU 2018-07 noted above.

 

In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” ASU 2019-11 is an accounting pronouncement that amends ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU 2019-11 amendment provides clarity and improves the codification to ASU 2016-03. The pronouncement would be effective concurrently with the adoption of ASU 2016-03. The pronouncement is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company is currently evaluating the effects of this pronouncement on its condensed consolidated financial statements.

v3.20.2
3. FAIR VALUE MEASUREMENTS
9 Months Ended
Jun. 30, 2020
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENTS
NOTE 3 FAIR VALUE MEASUREMENTS

 

We perform fair value measurements in accordance with the guidance provided by ASC 820. ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at their fair values, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the assets or liabilities, such as inherent risk, transfer restrictions, and risk of nonperformance.

 

ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset’s or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value:

 

  · Level 1: quoted prices in active markets for identical assets or liabilities;

 

  · Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or

 

  · Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities.

 

 

The deferred consideration of $296,000 on our condensed consolidated balance sheets as of June 30, 2020 is the present value of a $300,000 payment due on September 30, 2020 per the Stock Purchase Agreement as part of the acquisition price of IPS. The separate contingent earn-out consideration portion of the IPS purchase price was adjusted down in the second quarter of fiscal 2020 from a fair value of $350,000 to $0 due to the low likelihood of reaching the EBITDA targets as outlined in the Stock Purchase Agreement.

 

The following table presents the placement in the fair value hierarchy and summarizes the changes in fair value of the aforementioned consideration payments for the three and nine months ended June 30, 2020:

 

          Fair value measurement at reporting date using  
          Quoted prices in active markets for identical assets     Significant other observable inputs     Significant unobservable inputs  
    Balance     (Level 1)     (Level 2)     (Level 3)  
                         
September 30, 2019   $ 834,000     $     $     $ 834,000  
                                 
Payout of deferred cash consideration     (200,000 )                 (200,000 )
                                 
December 31, 2019     634,000                   634,000  
                                 
Decrease in fair value of earn-out consideration     (350,000 )                 (350,000 )
Increase in fair value of deferred cash consideration     9,000                   9,000  
                                 
March 31, 2020     293,000                   293,000  
                                 
Increase in fair value of deferred cash consideration     3,000                   3,000  
                                 
June 30, 2020   $ 296,000     $     $     $ 296,000  

 

The cost method investment of $327,000 on our condensed consolidated balance sheet at September 30, 2019 is common stock received from a customer as compensation for product design services provided by the Company. The shares represent less than a 2% ownership in the customer. We estimated the initial fair value of the investment based on a private placement round of common stock issued to third party private investors of the customer at a time close to the valuation date. The Company determined that the inputs used to value the common stock, at the date of the initial valuation, are observable, either directly or indirectly, and therefore classified as a Level 2 valuation.

 

On January 21, 2020, the Company executed a non-negotiable promissory note with a principal amount of $1,626,000 with the same design segment customer in which we are invested to recover accounts receivable which had been reserved as bad debt in fiscal 2019. Beginning on April 1, 2020, monthly interest and principal payments, based on a one-year amortization schedule, were due and payable in arrears on the first day of the month until March 1, 2021. Interest accrues at a rate of 8% per annum. Since no payments were received through June 30, 2020, the note receivable is fully reserved on the Company’s condensed consolidated balance sheet. In August 2020, the Company received $98,000 from this customer, which was applied to past due interest, penalties and principal.

 

During the three months ended March 31, 2020, as a result of the customer’s default on the promissory note, the impact of COVID-19, and performance of the business in which the Company is invested, including its inability to generate revenue, management concluded the investment was also impaired and it is fully reserved on the Company’s condensed consolidated balance sheet at June 30, 2020. The impairment charge of $327,000 was recorded in the second quarter of fiscal 2020 and is included in the general & administrative expenses of the condensed consolidated statement of operations for the nine months ended June 30, 2020 (the “2020 Period”).

v3.20.2
4. GOODWILL
9 Months Ended
Jun. 30, 2020
Goodwill and Intangible Assets Disclosure [Abstract]  
GOODWILL
NOTE 4 GOODWILL

 

The Company has recorded intangible assets, such as goodwill, trademark, and customer relationships on the IPS reporting unit’s books and accounts for these in accordance with ASC 350, which requires an annual test of goodwill and indefinite-lived assets for impairment, unless circumstances dictate more frequent assessments.

 

During the three months ended March 31, 2020, the Company experienced triggering events that prompted the testing of its goodwill for impairment. Those triggering events include the reduction in fair value of the contingent earn-out consideration discussed in Note 3 and revised revenue and operational projections for IPS for the remainder of the fiscal year and future periods. Based on these factors, we concluded that it was more likely than not that the fair value of the IPS reporting unit had declined below its carrying amount. The Company then calculated the fair value of this reporting unit using Level 3 inputs, which is a combination of asset-based, income and market approaches. These estimates and assumptions include discount rate, terminal growth rate, selection of peer group companies and control premium applied as well as forecasts of revenue growth rates, gross margins, operating margins, and working capital requirements. Any changes in the judgments, estimates, or assumptions used could produce significantly different results. We concluded the reporting unit’s fair value was below its carrying value by $1,015,000 and an impairment charge was recognized for this amount in the three months ended March 31, 2020.

 

Below is the rollforward of goodwill for IPS, the only reporting unit with goodwill.

 

    IPS     Consolidated  
             
September 30, 2019   $ 2,182,427     $ 2,182,427  
                 
Goodwill impairment     (1,015,000 )     (1,015,000 )
                 
June 30, 2020   $ 1,167,427     $ 1,167,427  
v3.20.2
5. SEGMENT INFORMATION
9 Months Ended
Jun. 30, 2020
Segment Reporting [Abstract]  
SEGMENT INFORMATION
NOTE 5 SEGMENT INFORMATION

 

The Company, post IPS acquisition, conducts its business through two operating segments, which are also its reportable segments:

 

• Distribution and

 

• Design

 

 

    For the Three Months Ended
June 30,
    For the Nine Months Ended
June 30,
 
    2020     2019     2020     2019  
Revenues, net                                
Distribution   $ 6,388,740     $ 6,021,843     $ 15,708,878     $ 17,072,127  
Design     3,159,992       3,887,609       10,164,085       11,193,075  
Total revenues, net     9,548,732       9,909,452       25,872,963       28,265,202  
                                 
Cost of sales                                
Distribution     5,450,199       5,100,314       13,606,381       14,412,632  
Design     2,323,745       2,914,684       7,318,636       9,344,230  
Total cost of sales     7,773,944       8,014,998       20,925,017       23,756,862  
                                 
(Loss) / income from operations                                
Distribution     (228,100 )     (269,520 )     (1,032,496 )     (880,307 )
Design     53,194       219,653       (838,236 )     (725,148 )
Total loss from operations     (174,906 )     (49,867 )     (1,870,732 )     (1,605,455 )
                                 
Other (expense) / income, net                                
Distribution     (35,148 )     (33,980 )     238,534       (105,738 )
Design     (5,148 )     (20,215 )     (36,275 )     (54,301 )
Total other (expense) / income, net     (40,296 )     (54,195 )     202,259       (160,039 )
                                 
Net (loss) / income                                
Distribution     (263,248 )     (303,500 )     (793,962 )     (986,045 )
Design     48,046       199,438       (874,511 )     (779,449 )
Total net loss   $ (215,202 )   $ (104,062 )   $ (1,668,473 )   $ (1,765,494 )

 

The following table presents total assets by operating segment:

 

    June 30,     September 30,  
    2020     2019  
             
Distribution   $ 8,433,756     $ 9,554,465  
Design     10,206,488       6,539,887  
Total assets   $ 18,640,244     $ 16,094,352  
v3.20.2
6. SHARE-BASED COMPENSATION
9 Months Ended
Jun. 30, 2020
Share-based Payment Arrangement [Abstract]  
SHARE-BASED COMPENSATION
NOTE 6 SHARE-BASED COMPENSATION

 

Stock Options

 

On February 11, 2020, the Company granted options to non-employee directors to purchase an aggregate of 248,019 shares of its common stock at an exercise price of $1.13 per share. The options vest one year from the date of grant, expire five years from the date of grant and had an aggregate grant date fair value of $145,000, which is being recognized ratably over the vesting period.

 

There were no options granted during the three months ended June 30, 2020. The options granted during the nine months ended June 30, 2020 had a weighted average grant date fair value of $0.58 per share.

 

During the three months ended June 30, 2020, the Company issued 50,000 shares of its common stock pursuant to the exercise of stock options at an exercise price of $0.64 per share for aggregate cash proceeds of $32,000

 

On February 5, 2019, the Company granted options to three non-employee directors to purchase an aggregate of 150,021 shares of its common stock at an exercise price of $1.54 per share. The options vested one year from the date of grant, expire five years from the date of grant and had an aggregate grant date fair value of $120,000, which was recognized ratably over the vesting period.

 

On February 5, 2019, the Company granted options to two non-employee directors to purchase an aggregate of 140,460 shares of its common stock at an exercise price of $1.54 per share. The options vested immediately, expire five years from the date of grant and had an aggregate grant date fair value of $108,000, which was fully recognized on the date of grant.

 

There were no options granted during the three months ended June 30, 2019. The options granted during the nine months ended June 30, 2019 had a weighted average grant date fair value of $0.78 per share.

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions in the following table. The expected term represents the period over which the stock option awards are expected to be outstanding. The Company utilizes the “simplified” method to develop an estimate of the expected term of “plain vanilla” employee option grants. The expected volatility used is based on the historical price of the Company’s stock over the most recent period commensurate with the expected term of the award. The risk-free interest rate used is based on the implied yield of U.S. Treasury zero-coupon issues with a remaining term equivalent to the award’s expected term. The Company historically has not paid any dividends on its common stock and had no intention to do so on the date the share-based awards were granted. The estimated annual forfeiture rate is based on management’s expectations and will reduce expense ratably over the vesting period. The forfeiture rate will be adjusted periodically based on the extent to which actual option forfeitures differ, or are expected to differ, from the previous estimate, when it is material.

 

In applying the Black-Scholes option pricing model to options granted, the Company used the following assumptions:

 

    For the Three Months Ended     For the Nine Months Ended  
    June 30,     June 30,  
    2020     2019     2020     2019  
Expected term (years)      n/a         n/a        3.00       2.50-2.75  
Expected volatility      n/a         n/a        79.0%       82.0%  
Risk-free interest rate      n/a         n/a        1.39%       2.53%  
Expected dividends      n/a         n/a        0%       0%  
Estimated annual forfeiture rate      n/a         n/a        0%       0%  

 

 

The following table summarizes stock option activity during the nine months ended June 30, 2020:

 

                Weighted        
          Weighted     Average        
          Average     Remaining        
    Number of     Exercise     Life     Intrinsic  
    Options     Price     In Years     Value  
Outstanding, September 30, 2019     812,879     $1.69                  
Granted     248,019     $1.13                  
Exercised     (50,000 )   $0.64                  
Forfeited     (1,751 )   $1.67                  
Expired     (55,000 )   $2.43                  
Outstanding, June 30, 2020     954,147     $1.56       3.6       $ 48,288  
                               
Exercisable, June 30, 2020     686,522     $1.76       3.2       $   6,125  

 

The following table provides additional information regarding stock option awards that were outstanding and exercisable at June 30, 2020:

 

Options Outstanding   Options Exercisable
    Weighted         Weighted   Weighted        
    Average   Outstanding     Average   Average     Exercisable  
Exercise   Exercise   Number of     Exercise   Remaining Life     Number of  
Price   Price   Options     Price   In Years     Options  
$0.64 to $1.23   $1.12     275,519     $1.08     3.1       27,500  
$1.44 to $1.67   $1.51     605,128     $1.51     3.5       585,522  
$2.73 to $2.73   $2.73     11,000     $2.73     1.1       11,000  
$3.73 to $3.79   $3.74     62,500     $3.74     0.6       62,500  
    $1.56     954,147     $1.76     3.2       686,522  

 

The Company recognized compensation expense for stock option awards of $38,000 and $33,000 during the three months ended June 30, 2020 and 2019, respectively, and $107,000 and $178,000 during the nine months ended June 30, 2020 and 2019, respectively, in its condensed consolidated statements of operations.

 

At June 30, 2020, there was $95,000 of total unrecognized compensation cost related to nonvested stock option awards that is expected to be recognized over a weighted average period of 0.6 years.

 

 

Restricted Stock Awards

 

The Company recognized no compensation expense during the three months ended June 30, 2020 and 2019, and $0 and $3,000 during the nine months ended June 30, 2020 and 2019, respectively, for restricted stock awards in its condensed consolidated statements of operations. At June 30, 2020, there was no unrecognized compensation expense related to nonvested restricted stock awards.

v3.20.2
7. LOSS PER SHARE
9 Months Ended
Jun. 30, 2020
Earnings Per Share [Abstract]  
LOSS PER SHARE
NOTE 7 LOSS PER SHARE

 

Basic loss per share data for each period presented is computed using the weighted average number of shares of common stock outstanding during each such period. Diluted loss per share data is computed using the weighted average number of common and dilutive common equivalent shares outstanding during each period. Dilutive common-equivalent shares consist of shares that would be issued upon the exercise of stock options and warrants, computed using the treasury stock method.

 

The following securities were excluded from the calculation of diluted earnings per share in each period because their inclusion would have been anti-dilutive:

 

    For the Three Months Ended     For the Nine Months Ended  
    June 30,     June 30,  
    2020     2019     2020     2019  
Options     954,147       812,879       954,147       812,879  
Warrants     151,335       151,335       151,335       151,335  
Total potentially dilutive shares     1,105,482       964,214       1,105,482       964,214  
v3.20.2
8. CONCENTRATIONS
9 Months Ended
Jun. 30, 2020
Risks and Uncertainties [Abstract]  
CONCENTRATIONS
NOTE 8 CONCENTRATIONS

 

Concentration of Revenues and Accounts Receivable

 

For the three and nine months ended June 30, 2020 and 2019, the Company had significant customers whose individual percentage of the Company’s total revenues was 10% or greater. The risk of collecting accounts receivable from all customers is enhanced as a result of the economic impact of the COVID-19 pandemic. The concentrations of revenues and accounts receivable for each reporting segment are as follows:

 

Distribution Segment Revenues Concentration

 

    For the Three Months Ended   For the Nine Months Ended
    June 30,   June 30,
    2020   2019   2020   2019
Customer 1   24.9%   26.8%   31.2%   28.9%
Customer 2   21.9%   27.0%   22.9%   28.1%
Customer 3   15.8%   27.3%   16.5%   19.6%
                 
Totals   62.6%   81.1%   70.6%   76.6%

 

  

Design Segment Revenues Concentration

 

    For the Three Months Ended   For the Nine Months Ended
    June 30,   June 30,
    2020   2019   2020   2019
Customer 1   11.1%   23.0%   16.2%   20.5%
Customer 2   1.1%   22.2%   0.5%   13.9%
Customer 3   14.3%   8.6%   13.3%   10.0%
Customer 4   29.0%   0.0%   19.7%   0.0%
Totals   55.5%   53.8%   49.7%   44.4%

 

At June 30, 2020 and September 30, 2019, concentrations of accounts receivable with significant customers representing 10% or greater of segment accounts receivable were as follows:

 

Distribution Segment Accounts Receivable Concentration

 

   

June 30,

2020

 

September 30,

2019

Customer 2   20.1%   21.2%
Customer 1   23.7%   29.0%
Customer 3   24.5%   23.6%
Customer 4   14.5%   15.7%
Totals   82.8%   89.5%

 

Design Segment Accounts Receivable Concentration

 

   

June 30,

2020

 

September 30,

2019

Customer 4   39.9%   5.9%
Customer 5   13.2%   8.8%
Customer 6   10.5%   5.9%
Customer 1   6.3%   33.7%
Totals   69.9%   54.3%
v3.20.2
9. RELATED PARTY TRANSACTIONS
9 Months Ended
Jun. 30, 2020
Related Party Transactions [Abstract]  
RELATED PARTY TRANSACTIONS
NOTE 9 RELATED PARTY TRANSACTIONS

 

Buying Agency and Supply Agreement

 

On March 12, 2012, the Company entered into a Buying Agency and Supply Agreement (the “Supply Agreement”) with Forward China. The Supply Agreement, as amended, provides that, upon the terms and subject to the conditions set forth therein, Forward China will act as the Company’s exclusive buying agent and supplier of Products (as defined in the Supply Agreement) in the Asia-Pacific region.  The Company purchases products at Forward China’s cost and also pays to Forward China a monthly service fee equal to the sum of: (i) $100,000; and (ii) 4% of “Adjusted Gross Profit”, which is defined as the selling price less the cost from Forward China. The amended Supply Agreement expires October 22, 2020. Terence Wise, Chief Executive Officer and Chairman of the Company, is the owner of Forward China. In addition, Jenny P. Yu, a Managing Director of Forward China, beneficially owns more than 5% of the Company’s shares of common stock. The Company recorded service fees to Forward China of $346,000 and $353,000 during the three months ended June 30, 2020 and 2019, respectively, and $1,022,000 and $1,056,000 during the nine months ended June 30, 2020 and 2019, respectively, which are included as a component of cost of sales when revenue is recognized on sales of the related products.

 

Promissory Note

 

On January 18, 2018, the Company issued a $1,600,000 promissory note payable to Forward China in order to fund the acquisition of IPS. The promissory note bears an interest rate of 8% per annum. Monthly interest payments commenced on February 18, 2018. The original maturity date was January 18, 2019 and has been extended to September 30, 2020. The maturity date of the note has been extended on several occasions to assist the Company with liquidity. For the three months ended June 30, 2020 and 2019, the Company incurred and paid $32,000, and for the nine months ended June 30, 2020 and 2019, the Company incurred and paid $96,000, in interest payments associated with the note. The entire note payable is classified as a current liability and included as a component of notes payable on the accompanying condensed consolidated balance sheets.

 

Related Party Sales

 

The Company’s design division provided services to a customer whose Chief Operating and Financial Officer and equity owner is an immediate family member of a director on the Company’s Board of Directors and a member of the Board’s Audit and Compensation committee. The Company sold design services to this customer of $0 and $80,000 in for the three months ended June 30, 2020 and 2019, respectively, and $44,000 and $140,000 for the nine months ended June 30, 2020 and 2019, respectively. At June 30, 2020 and September 30, 2019, there were outstanding receivables of $0 and $9,000, respectively, from this customer.

v3.20.2
10. LEGAL PROCEEDINGS
9 Months Ended
Jun. 30, 2020
Legal Matters and Contingencies [Abstract]  
LEGAL PROCEEDINGS
NOTE 10 LEGAL PROCEEDINGS

 

From time to time, the Company may become a party to legal actions or proceedings in the ordinary course of its business. At June 30, 2020, there were no such actions or proceedings, either individually or in the aggregate, that, if decided adversely to the Company’s interests, the Company believes would be material to its business.

v3.20.2
11. LINE OF CREDIT
9 Months Ended
Jun. 30, 2020
Debt Disclosure [Abstract]  
LINE OF CREDIT
NOTE 11 LINE OF CREDIT

 

The Company, specifically IPS, has a $1,300,000 revolving line of credit which was renewed at the discretion of the lender on August 5, 2020. The maturity date has been extended to May 31, 2021. The line of credit is guaranteed by the Company and is secured by all of IPS’ assets. The interest rate on the line of credit is 0.75% above The Wall Street Journal prime rate. The effective interest rate at June 30, 2020 and September 30, 2019 was 4.0% and 5.75%, respectively. At September 30, 2019, the Company was in violation of the required debt-service ratio covenants. The Company was granted a waiver of the violation from the lender. At June 30, 2020, the Company had $300,000 available under the line of credit. The Company is subject to certain debt-service ratio requirements which are measured annually. With a net loss for the nine months ended June 30, 2020 of $875,000 for IPS, there is a likely risk of failing the annual covenant testing at September 30, 2020. As such, the lender may demand payment in full upon default.

v3.20.2
12. DEBT
9 Months Ended
Jun. 30, 2020
Debt Disclosure [Abstract]  
DEBT
NOTE 12 DEBT

 

On April 1, 2016, IPS entered into a term loan with a lender in the amount of $325,000. The loan matured on April 1, 2020 and bore interest at a rate of 4.215% per annum. Interest and principal of $7,378 were paid on a monthly basis through maturity. This loan was secured by all of IPS’ assets and was guaranteed by the Company. The outstanding balance at September 30, 2019 was $52,000. The loan was paid off in April 2020 per the agreement and therefore there is no remaining balance for this loan on the balance sheet at June 30, 2020.

 

On December 11, 2017, IPS entered into an installment payment financing arrangement with a lender in the amount of $23,000. IPS made monthly payments of $1,035, which included an implied interest rate of 9.5%, for 24 months. The last payment was made in December 2019. The loan balance was $0 and $3,000 at June 30, 2020 and September 30, 2019, respectively.

 

On April 18, 2020, the Company entered into a loan in an aggregate principal amount of $1,357,000 under the Paycheck Protection Program (the “PPP Loan”) pursuant to the recently enacted U.S. Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The loan matures on April 18, 2022 and bears an interest rate of 1.00% per annum. The Company must pay monthly principal and interest payments on the outstanding principal balance of the PPP Loan amortized over the term of the loan beginning November 18, 2020 until maturity when the entire principal balance remaining unpaid, along with all accrued and unpaid interest, shall be due and payable in full. This loan is unsecured, and subject to forgiveness in accordance with the terms of the CARES Act. The application is subject to review by the Small Business Administration. We have accounted for these proceeds as a loan and the current and long- term portions of $597,000 and $760,000, respectively, are included in the corresponding categories of notes payable on the condensed consolidated balance sheets.

v3.20.2
13. MOONI AGREEMENT
9 Months Ended
Jun. 30, 2020
Mooni Agreement  
MOONI AGREEMENT
NOTE 13 MOONI AGREEMENT

 

On January 29, 2019, the Company entered into a three-year Distribution Agreement (the “Agreement”) with Mooni International AB (“Mooni”) and its owner, Staffan Bern (the “Owner”). In accordance with the Agreement, the Company: (i) was appointed as the exclusive distributor of Mooni's current and future products (including future products developed or offered by Mooni and/or the Owner) in North America, (ii) subject to certain repayment requirements, paid $400,000 to Mooni, and (iii) was granted an option to purchase a controlling interest of Mooni at a valuation not to exceed $5 million which, if exercised, would have been effective on the 12-month anniversary of the effective date of the Agreement. This option was not exercised and therefore expired. Additionally, Forward China, a company owned by Terence Wise, the Company's Chairman and Chief Executive Officer, was named the designated supplier under the Agreement. At June 30, 2020, the unamortized fee of $211,000 is included in prepaid expenses and other current assets and other assets for the short-term and long-term components, respectively, in the accompanying condensed consolidated balance sheets. Amortization of the cost for the three and nine months ended June 30, 2020 of $33,000 and $100,000, respectively, and for both the three and nine months ended June 30, 2019 of $56,000, is included in the sales and marketing expenses in the accompanying condensed consolidated statement of operations.

v3.20.2
14. LEASES
9 Months Ended
Jun. 30, 2020
Leases [Abstract]  
LEASES
NOTE 14 LEASES

 

Operating Leases

 

The Company leases office space in West Palm Beach, Florida under a 90-month agreement expiring in September 2020. The operating lease granted six initial months of free rent and escalated at 3% per year. The monthly rent payment was $7,700, which included common area maintenance costs.

 

In June 2020, the Company signed a lease for new office space in West Palm Beach, Florida. This lease is for a 24-month term commencing in October 2020 and expiring in September 2022. Rent payments under the new operating lease escalate 4% each year and the agreement contains two annual renewal options. The monthly rent payment is $3,500, which includes taxes and operating expenses as defined in the agreement.

 

The Company leases office space for its distribution segment sales and administrative office in Cham, Switzerland on a month-to-month basis. The monthly rent payment is 1,599 Swiss Francs, which is approximately $1,600. 

 

IPS leases office space in Hauppauge, New York under a non-cancelable lease agreement expiring in February 2027. The monthly rent payment is $29,000, which includes power utilities, and the Company has the option to renew the lease for an additional five years in accordance with the terms of the lease. 

 

IPS leases office space in Ronkonkoma, New York under a three-year agreement expiring in January 2022. The monthly rent payment is $4,400.

 

At June 30, 2020, other than the aforementioned new lease in West Palm Beach, Florida, the Company did not have additional operating and financing leases that have not yet commenced.

 

Total operating lease expense was $127,000 and $117,000 for the three months ended June 30, 2020 and 2019, respectively, and $382,000 and $366,000, for the nine months ended June 30, 2020 and 2019, respectively, and is recorded in general and administrative expenses on the condensed consolidated statements of operations.

 

Finance Leases

 

The Company, specifically IPS, leases computer equipment through various finance lease agreements expiring through January 2022. Amortization expense related to assets under finance leases were $5,500 and $28,500 for the three and nine months ended June 30, 2020, respectively. Interest expense related to assets under finance leases were $650 and $2,500 for the three and nine months ended June 30, 2020, respectively.

 

At June 30, 2020, additional information related to operating and finance leases was as follows:

 

Weighted Average Remaining Lease Term:        
Operating leases     11.4  years
Finance leases     1.1  years
         
Weighted Average Discount Rate:        
Operating leases     5.75 %
Finance leases     5.75 %

 

 Future minimum payments under non-cancellable operating and finance leases as of June 30, 2020 were as follows:

 

For the Years Ending September 30,  

Operating

Leases

   

Finance

Leases

 
Remainder of 2020   $ 125,825     $ 13,621  
2021     413,332       24,214  
2022     380,389       5,606  
2023     375,732        
2024     385,640        
Thereafter     3,200,192        
Total future minimum lease payments   $ 4,881,110     $ 43,441  
                 
Less: amount representing imputed interest     (1,363,789 )     (3,306 )
                 
Total   $ 3,517,321     $ 40,135  
v3.20.2
15. SUBSEQUENT EVENTS
9 Months Ended
Jun. 30, 2020
Subsequent Events [Abstract]  
SUBSEQUENT EVENTS

NOTE 15 SUBSEQUENT EVENT

 

The Company has entered into a non-binding letter of intent to acquire all of the assets of a design-development company focused on products in the medical industry for consideration of cash and stock, and assumption of liabilities in an aggregate amount of approximately $1,500,000.

 

 

v3.20.2
2. ACCOUNTING POLICIES (Policies)
9 Months Ended
Jun. 30, 2020
Accounting Policies [Abstract]  
Accounting Estimates

Accounting Estimates

 

The preparation of the Company’s condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.

 

The worldwide spread of COVID-19 has resulted in a global slowdown of economic activity which is likely to decrease demand for a broad variety of goods and services, while also disrupting sales channels, marketing activities and general business operations for an unknown period of time until the disease is contained. At this point, the extent to which COVID-19 may impact our financial condition or results of operations is uncertain, and as of the date of issuance of these condensed consolidated financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates, judgments or adjust the carrying value of our assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to our condensed consolidated financial statements.

Basis of Presentation

Basis of Presentation

 

The accompanying condensed consolidated financial statements include the accounts of Forward Industries, Inc. and its wholly owned subsidiaries: Forward Industries (IN), Inc., (“Forward US”), Forward Industries (Switzerland) GmbH, (“Forward Switzerland”), Forward Industries UK Limited, (“Forward UK”) and IPS. All significant intercompany transactions and balances have been eliminated in consolidation. Intercompany revenues of $17,000 and $44,000, respectively, for the three and nine months ended June 30, 2020 and $9,000 and $215,000, respectively, for the three and nine months ended June 30, 2019, related to design and marketing work performed by IPS for Forward US have been eliminated in consolidation.

   

For the nine months ended June 30, 2020, the Company incurred a net loss of $1,668,000, and used $760,000 of cash flow in operating activities. The Company has an accumulated deficit of $12,989,000 at June 30, 2020. We believe our existing cash balance and working capital will be sufficient to meet our liquidity needs at least through September 30, 2021.

Segment Reporting

Segment Reporting

 

Operating segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated by a chief operating decision maker, or Forward management, in deciding how to allocate resources and in assessing performance. As a result of the acquisition of IPS in January 2018, management conducts business through two distinct operating segments, which are also our reportable segments: distribution and design. Forward US, Forward Switzerland and Forward UK comprise the distribution operating segment and IPS is the design operating segment.

 

Organizing our business through two operating segments allows us to align our resources and manage our operations. Our management team regularly reviews operating segment revenue and profitability when assessing financial results of operating segments and allocating resources.

 

We measure the performance of our operating segments based upon operating segment revenue and operating income or loss. Segment operating income or loss includes revenue and expenses incurred directly by the operating segment, including cost of sales and selling, marketing, and general and administrative expenses.

Goodwill

Goodwill

 

Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill was recognized as a result of the acquisition of IPS in January 2018.

 

Goodwill is reviewed for impairment at least annually, and when triggering events occur, in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, “Intangibles – Goodwill and Other.” The Company has two reporting units for purposes of evaluating goodwill impairment and management performs our annual goodwill impairment test on September 30, the end of the fiscal year, or upon the occurrence of a triggering event. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company would not need to perform the impairment test for the reporting unit. If the Company cannot support such a conclusion or does not elect to perform the qualitative assessment, then the Company will compare the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying value, no impairment charge is recognized. If the fair value of the reporting unit is less than its carrying value, an impairment charge will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value. A significant amount of judgment is required in performing goodwill impairment tests including estimating the fair value of a reporting unit and the implied fair value of goodwill. During the three months ended March 31, 2020, the Company recorded an impairment charge related to goodwill (see Note 4).

Intangible Assets

Intangible Assets

 

Intangible assets include trademark and customer relationships, which were acquired as part of the acquisition of IPS in January 2018 and are recorded based on their estimated fair value determined in conjunction with the purchase price allocation. The intangible assets are amortized over their estimated useful lives, which are periodically evaluated for reasonableness.

   

Our intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In assessing the recoverability of our intangible assets, we must make estimates and assumptions regarding future cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and the magnitude of any such charge. Fair value estimates are made at a specific point in time, based on relevant information. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. If these estimates or material related assumptions change in the future, we may be required to record impairment charges related to our intangible assets. Management evaluated and concluded that there were no impairments of intangible assets at June 30, 2020.

Income Taxes

Income Taxes

 

The Company recognizes future tax benefits and liabilities measured at enacted rates attributable to temporary differences between financial statement and income tax bases of assets and liabilities and to net tax operating loss carryforwards to the extent that realization of these benefits is more likely than not. At June 30, 2020, there was no change to our assessment that a full valuation allowance was required against all net deferred tax assets as it is not probable that such deferred tax assets will be realized. Accordingly, any deferred tax provision or benefit was offset by an equal and opposite change to the valuation allowance. No current book income tax provision was recorded against book net income due to the existence of significant net operating loss carryforwards.

Revenue Recognition

Revenue Recognition

 

Distribution Segment

 

The Company adopted ASC 606, “Revenue Recognition” effective October 1, 2018. In accordance with this guidance, the Company generally recognizes revenue in its distribution segment when: (i) finished goods are shipped to our distribution customers (in general, these conditions occur at either point of shipment or point of destination, depending on the terms of sale, i.e., transfer of control); (ii) there are no other deliverables or performance obligations; and (iii) there are no further obligations to the customer after the title of the goods has transferred. When the Company receives consideration before achieving the criteria previously mentioned, it records a contract liability, which is classified as a component of deferred income in the accompanying condensed consolidated balance sheets. At June 30, 2020 and September 30, 2019, there were no contract liabilities relating to the distribution segment.

 

Design Segment

 

Under ASC 606, the Company applies the “cost to cost” and “right to invoice” methods of revenue recognition to the contracts with customers in the design segment. The design segment typically engages in two types of contracts: (i) time and material and (ii) fixed price contracts. The Company recognizes revenue over time on its time and material contracts utilizing a “right to invoice” method. Revenues from fixed price contracts that require performance of services that are not related to the production of tangible assets are recognized by using cost inputs to measure progress toward the completion of its performance obligations, or the “cost to cost” method. Revenues from fixed price contracts that contain specific deliverables are recognized when the performance obligation has been satisfied or the transfer of goods to the customer has been completed and accepted.

 

Recognized revenues that will not be billed until a later date, or contract assets, are recorded as an asset and classified as a component of accounts receivable in the accompanying condensed consolidated balance sheets. Contract assets at June 30, 2020 and September 30, 2019 were $899,000 and $611,000, respectively. Contracts where collections to date have exceeded recognized revenues, or contract liabilities, are recorded as a liability and classified as a component of deferred income in the accompanying condensed consolidated balance sheets. Contract liabilities at June 30, 2020 and September 30, 2019 were $526,000 and $220,000, respectively.

Share-Based Compensation Expense

Share-Based Compensation Expense

 

The Company estimates the fair value of employee and non-employee director share-based compensation on the date of grant using the Black-Scholes option pricing model, which includes variables such as the expected volatility of the Company’s share price, the exercise behavior of its grantees, interest rates, and dividend yields. These variables are projected based on the Company’s historical data, experience, and other factors. The fair value of employee and non-employee director share-based compensation is recognized in the condensed consolidated statements of operations over the related vesting period of each grant. In the case of awards with multiple vesting periods, the Company has elected to use the graded vesting attribution method, which recognizes compensation cost on a straight-line basis over each separately vesting portion of the award as if the award was, in substance, multiple awards (see Note 6).

Leases

Leases

 

The Company adopted ASC 842, "Leases", effective October 1, 2019. In accordance with this guidance, lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term, using the Company’s incremental borrowing rate commensurate with the lease term, since the Company’s lessors do not provide an implicit rate, nor is one readily available. The Company has certain leases that may include an option to renew and when it is reasonably probable to exercise such option, the Company will include the renewal option terms in determining the lease asset and lease liability. Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Operating lease assets are shown as right of use assets and financing lease assets are a component of property and equipment on the condensed consolidated balance sheets. The current and long-term portions of operating and financing lease liabilities are shown separately as such on the condensed consolidated balance sheets.

Business Combinations

Business Combinations

 

The Company allocates the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, the Company makes significant estimates and assumptions, especially with respect to intangible assets.

 

Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships and developed technology, discount rates and terminal values. Our estimate of fair value is based upon assumptions believed to be reasonable, but actual results may differ from estimates.

 

Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement - Disclosure Framework (Topic 820).” The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the timing and impact of adopting the updated provisions.

 

In November 2019, the FASB issued ASU 2019-08, “Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606).” ASU 2019-08 is an accounting pronouncement which expands the scope of Topic 718 to provide guidance for share-based payment awards granted to a customer in conjunction with selling goods or services accounted for under Topic 606. The pronouncement is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company is currently evaluating the effects of this pronouncement on its condensed consolidated financial statements along with the effects of ASU 2018-07 noted above.

 

In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” ASU 2019-11 is an accounting pronouncement that amends ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU 2019-11 amendment provides clarity and improves the codification to ASU 2016-03. The pronouncement would be effective concurrently with the adoption of ASU 2016-03. The pronouncement is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company is currently evaluating the effects of this pronouncement on its condensed consolidated financial statements.

v3.20.2
3. FAIR VALUE MEASUREMENTS (Tables)
9 Months Ended
Jun. 30, 2020
Fair Value Disclosures [Abstract]  
Schedule of fair value measurement
          Fair value measurement at reporting date using  
          Quoted prices in active markets for identical assets     Significant other observable inputs     Significant unobservable inputs  
    Balance     (Level 1)     (Level 2)     (Level 3)  
                         
September 30, 2019   $ 834,000     $     $     $ 834,000  
                                 
Payout of deferred cash consideration     (200,000 )                 (200,000 )
                                 
December 31, 2019     634,000                   634,000  
                                 
Decrease in fair value of earn-out consideration     (350,000 )                 (350,000 )
Increase in fair value of deferred cash consideration     9,000                   9,000  
                                 
March 31, 2020     293,000                   293,000  
                                 
Increase in fair value of deferred cash consideration     3,000                   3,000  
                                 
June 30, 2020   $ 296,000     $     $     $ 296,000  
v3.20.2
4. GOODWILL (Tables)
9 Months Ended
Jun. 30, 2020
Goodwill and Intangible Assets Disclosure [Abstract]  
Schedule of Goodwill

Below is the rollforward of goodwill for IPS, the only reporting unit with goodwill.

 

    IPS     Consolidated  
             
September 30, 2019   $ 2,182,427     $ 2,182,427  
                 
Goodwill impairment     (1,015,000 )     (1,015,000 )
                 
June 30, 2020   $ 1,167,427     $ 1,167,427  
v3.20.2
5. SEGMENT INFORMATION (Tables)
9 Months Ended
Jun. 30, 2020
Segment Reporting [Abstract]  
Segment financial information

   For the Three Months Ended
June 30,
   For the Nine Months Ended
June 30,
 
   2020   2019   2020   2019 
Revenues, net                    
Distribution  $6,388,740   $6,021,843   $15,708,878   $17,072,127 
Design   3,159,992    3,887,609    10,164,085    11,193,075 
Total revenues, net   9,548,732    9,909,452    25,872,963    28,265,202 
                     
Cost of sales                    
Distribution   5,450,199    5,100,314    13,606,381    14,412,632 
Design   2,323,745    2,914,684    7,318,636    9,344,230 
Total cost of sales   7,773,944    8,014,998    20,925,017    23,756,862 
                     
(Loss) / income from operations                    
Distribution   (228,100)   (269,520)   (1,032,496)   (880,307)
Design   53,194    219,653    (838,236)   (725,148)
Total loss from operations   (174,906)   (49,867)   (1,870,732)   (1,605,455)
                     
Other (expense) / income, net                    
Distribution   (35,148)   (33,980)   238,534    (105,738)
Design   (5,148)   (20,215)   (36,275)   (54,301)
Total other (expense) / income, net   (40,296)   (54,195)   202,259    (160,039)
                     
Net (loss) / income                    
Distribution   (263,248)   (303,500)   (793,962)   (986,045)
Design   48,046    199,438    (874,511)   (779,449)
Total net loss  $(215,202)  $(104,062)  $(1,668,473)  $(1,765,494)

 

The following table presents total assets by operating segment:

 

   June 30,   September 30, 
   2020   2019 
         
Distribution  $8,433,756   $9,554,465 
Design   10,206,488    6,539,887 
Total assets  $18,640,244   $16,094,352 

 

v3.20.2
6. SHARE-BASED COMPENSATION (Tables)
9 Months Ended
Jun. 30, 2020
Share-based Payment Arrangement [Abstract]  
Assumptions used

In applying the Black-Scholes option pricing model to options granted, the Company used the following assumptions:

 

    For the Three Months Ended     For the Nine Months Ended  
    June 30,     June 30,  
    2020     2019     2020     2019  
Expected term (years)      n/a         n/a        3.00       2.50-2.75  
Expected volatility      n/a         n/a        79.0%       82.0%  
Risk-free interest rate      n/a         n/a        1.39%       2.53%  
Expected dividends      n/a         n/a        0%       0%  
Estimated annual forfeiture rate      n/a         n/a        0%       0%  
Schedule of stock option activity

The following table summarizes stock option activity during the nine months ended June 30, 2020:

 

                Weighted        
          Weighted     Average        
          Average     Remaining        
    Number of     Exercise     Life     Intrinsic  
    Options     Price     In Years     Value  
Outstanding, September 30, 2019     812,879     $1.69                  
Granted     248,019     $1.13                  
Exercised     (50,000 )   $0.64                  
Forfeited     (1,751 )   $1.67                  
Expired     (55,000 )   $2.43                  
Outstanding, June 30, 2020     954,147     $1.56       3.6       $ 48,288  
                               
Exercisable, June 30, 2020     686,522     $1.76       3.2       $  6,125  
Schedule of option activity by exericse price

The following table provides additional information regarding stock option awards that were outstanding and exercisable at June 30, 2020:

 

Options Outstanding   Options Exercisable
    Weighted         Weighted   Weighted        
    Average   Outstanding     Average   Average     Exercisable  
Exercise   Exercise   Number of     Exercise   Remaining Life     Number of  
Price   Price   Options     Price   In Years     Options  
$0.64 to $1.23   $1.12     275,519     $1.08     3.1       27,500  
$1.44 to $1.67   $1.51     605,128     $1.51     3.5       585,522  
$2.73 to $2.73   $2.73     11,000     $2.73     1.1       11,000  
$3.73 to $3.79   $3.74     62,500     $3.74     0.6       62,500  
    $1.56     954,147     $1.76     3.2       686,522  
v3.20.2
7. LOSS PER SHARE (Tables)
9 Months Ended
Jun. 30, 2020
Earnings Per Share [Abstract]  
Schedule of antidilutive securities

The following securities were excluded from the calculation of diluted earnings per share in each period because their inclusion would have been anti-dilutive:

 

    For the Three Months Ended     For the Nine Months Ended  
    June 30,     June 30,  
    2020     2019     2020     2019  
Options     954,147       812,879       954,147       812,879  
Warrants     151,335       151,335       151,335       151,335  
Total potentially dilutive shares     1,105,482       964,214       1,105,482       964,214  
v3.20.2
8. CONCENTRATIONS (Tables)
9 Months Ended
Jun. 30, 2020
Risks and Uncertainties [Abstract]  
Significant customers with revenue concentrations

The concentrations of revenues and accounts receivable for each reporting segment are as follows:

 

Distribution Segment Revenues Concentration

 

    For the Three Months Ended   For the Nine Months Ended
    June 30,   June 30,
    2020   2019   2020   2019
Customer 1   24.9%   26.8%   31.2%   28.9%
Customer 2   21.9%   27.0%   22.9%   28.1%
Customer 3   15.8%   27.3%   16.5%   19.6%
                 
Totals   62.6%   81.1%   70.6%   76.6%

 

 

Design Segment Revenues Concentration

 

    For the Three Months Ended   For the Nine Months Ended
    June 30,   June 30,
    2020   2019   2020   2019
Customer 1   11.1%   23.0%   16.2%   20.5%
Customer 2   1.1%   22.2%   0.5%   13.9%
Customer 3   14.3%   8.6%   13.3%   10.0%
Customer 4   29.0%   0.0%   19.7%   0.0%
Totals   55.5%   53.8%   49.7%   44.4%

 

At June 30, 2020 and September 30, 2019, concentrations of accounts receivable with significant customers representing 10% or greater of segment accounts receivable were as follows:

 

Distribution Segment Accounts Receivable Concentration

 

   

June 30,

2020

 

September 30,

2019

Customer 2   20.1%   21.2%
Customer 1   23.7%   29.0%
Customer 3   24.5%   23.6%
Customer 4   14.5%   15.7%
Totals   82.8%   89.5%

 

Design Segment Accounts Receivable Concentration

 

   

June 30,

2020

 

September 30,

2019

Customer 4   39.9%   5.9%
Customer 5   13.2%   8.8%
Customer 6   10.5%   5.9%
Customer 1   6.3%   33.7%
Totals   69.9%   54.3%
v3.20.2
14. LEASES (Tables)
9 Months Ended
Jun. 30, 2020
Leases [Abstract]  
Supplemental Cashflow information related to leases

At June 30, 2020, additional information related to operating and finance leases was as follows:

 

Weighted Average Remaining Lease Term:        
Operating leases     11.4  years
Finance leases     1.1  years
         
Weighted Average Discount Rate:        
Operating leases     5.75 %
Finance leases     5.75 %
Schedule of future minimum payments under operating & financial leases

Future minimum payments under non-cancellable operating and finance leases as of June 30, 2020 were as follows:

 

For the Years Ending September 30,  

Operating

Leases

   

Finance

Leases

 
Remainder of 2020   $ 125,825     $ 13,621  
2021     413,332       24,214  
2022     380,389       5,606  
2023     375,732        
2024     385,640        
Thereafter     3,200,192        
Total future minimum lease payments   $ 4,881,110     $ 43,441  
                 
Less: amount representing imputed interest     (1,363,789 )     (3,306 )
                 
Total   $ 3,517,321     $ 40,135  
v3.20.2
1. OVERVIEW (Details Narrative)
9 Months Ended
Jun. 30, 2020
USD ($)
Paycheck Protection Program  
PPP loan received $ 1,357,000
v3.20.2
2. ACCOUNTING POLICIES (Details Narrative) - USD ($)
3 Months Ended 9 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Sep. 30, 2019
Revenues $ 9,548,732 $ 9,909,452 $ 25,872,963 $ 28,265,202  
Contract assets 899,000   899,000   $ 611,000
Contract liabilities 526,000   526,000   220,000
Net loss (215,202) (104,062) (1,668,473) (1,765,494)  
Net cash used in operations     (759,967) (2,201,194)  
Accumulated deficit (12,988,642)   (12,988,642)   $ (11,320,169)
Intersegment Elimination [Member]          
Revenues $ 17,000 $ 9,000 $ 44,000 $ 215,000  
v3.20.2
3. FAIR VALUE MEASUREMENTS (Details) - USD ($)
3 Months Ended 9 Months Ended
Jun. 30, 2020
Mar. 31, 2020
Dec. 31, 2019
Jun. 30, 2020
Jun. 30, 2019
Beginning balance $ 293,000 $ 634,000 $ 834,000 $ 834,000  
Payout of deferred consideration     (200,000) (200,000) $ 0
Decrease in fair value of earn-out consideration   (350,000)      
Increase in fair value of deferred cash consideration 3,000 9,000      
Ending balance 296,000 293,000 634,000 296,000  
Level 1 [Member]          
Beginning balance 0 0 0 0  
Payout of deferred consideration     0    
Decrease in fair value of earn-out consideration   0      
Increase in fair value of deferred cash consideration 0 0      
Ending balance 0 0 0 0  
Level 2 [Member]          
Beginning balance 0 0 0 0  
Payout of deferred consideration     0    
Decrease in fair value of earn-out consideration   0      
Increase in fair value of deferred cash consideration 0 0      
Ending balance 0 0 0 0  
Level 3 [Member]          
Beginning balance 293,000 634,000 834,000 834,000  
Payout of deferred consideration     (200,000)    
Decrease in fair value of earn-out consideration   (350,000)      
Increase in fair value of deferred cash consideration 3,000 9,000      
Ending balance $ 296,000 $ 293,000 $ 634,000 $ 296,000  
v3.20.2
3. FAIR VALUE MEASUREMENTS (Details Narrative) - USD ($)
9 Months Ended 11 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Aug. 31, 2020
Jan. 21, 2020
Sep. 30, 2019
Deferred compensation $ 296,000       $ 834,000
Cost method investment         $ 327,000
Impairment of investment 326,941 $ 0      
Non-negotiable Promissory Note [Member]          
Note receivable       $ 1,626,000  
Note receivable interest rate       8.00%  
Impairment of investment $ 327,000        
Non-negotiable Promissory Note [Member] | Subsequent Event [Member]          
Proceeds from note receivable     $ 98,000    
v3.20.2
4. GOODWILL (Details) - USD ($)
3 Months Ended 9 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Balance at beginning     $ 2,182,427  
Goodwill impairment $ 0 $ 0 (1,015,000) $ 0
Balance at end 1,167,427   1,167,427  
IPS [Member]        
Balance at beginning     2,182,427  
Goodwill impairment     (1,015,000)  
Balance at end $ 1,167,427   $ 1,167,427  
v3.20.2
5. SEGMENT INFORMATION (Details - Income Statement) - USD ($)
3 Months Ended 9 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Revenue $ 9,548,732 $ 9,909,452 $ 25,872,963 $ 28,265,202
Cost of Sales 7,773,944 8,014,998 20,925,017 23,756,862
(Loss) / income from operations (174,906) (49,867) (1,870,732) (1,605,455)
Other (expense) / income, net (40,296) (54,195) 202,259 (160,039)
Net (loss) / income (215,202) (104,062) (1,668,473) (1,765,494)
Distribution [Member]        
Revenue 6,388,740 6,021,843 15,708,878 17,072,127
Cost of Sales 5,450,199 5,100,314 13,606,381 14,412,632
(Loss) / income from operations (228,100) (269,520) (1,032,496) (880,307)
Other (expense) / income, net (35,148) (33,980) 238,534 (105,738)
Net (loss) / income (263,248) (303,500) (793,962) (986,045)
Design [Member]        
Revenue 3,159,992 3,887,609 10,164,085 11,193,075
Cost of Sales 2,323,745 2,914,684 7,318,636 9,344,230
(Loss) / income from operations 53,194 219,653 (838,236) (725,148)
Other (expense) / income, net (5,148) (20,215) (36,275) (54,301)
Net (loss) / income $ 48,046 $ 199,438 $ (874,511) $ (779,449)
v3.20.2
5. SEGMENT INFORMATION (Details - Segment assets) - USD ($)
Jun. 30, 2020
Sep. 30, 2019
Assets $ 18,640,244 $ 16,094,352
Distribution [Member]    
Assets 8,433,756 9,554,465
Design [Member]    
Assets $ 10,206,488 $ 6,539,887
v3.20.2
6. SHARE-BASED COMPENSATION (Details - Assumptions)
3 Months Ended 9 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Share-based Payment Arrangement [Abstract]        
Expected term (years)   3 years 2.50-2.75 years
Expected volatility 79.00% 82.00%
Risk free interest rate 1.39% 2.53%
Expected dividends 0.00% 0.00%
Estimated annual forfeiture rate 0.00% 0.00%
v3.20.2
6. SHARE-BASED COMPENSATION (Details - Option activity) - Options [Member] - USD ($)
3 Months Ended 9 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Number of Options      
Shares, Outstanding at Beginning     812,879
Shares, Granted 0 0 248,019
Shares, Exercised (50,000)    
Shares, Forfeited     (1,751)
Shares, Expired     (55,000)
Shares, Outstanding at Ending 954,147   954,147
Shares, Exercisable 686,522   686,522
Weighted Average Exercise Price      
Weighted average exercise price, Outstanding at Beginning     $ 1.69
Weighted average exercise price, Granted     1.13
Weighted average exercise price, Exercised $ 0.64    
Weighted average exercise price, Forfeited     1.67
Weighted average exercise price, Expired     2.43
Weighted average exercise price, Outstanding at Ending 1.56   1.56
Weighted average exercise price, Exercisable $ 1.76   $ 1.76
Weighted Average Remaining life In Years      
Weighted average remaining contractual term (Years), Outstanding     3 years 7 months 6 days
Weighted average remaining contractual term (Years), Exercisable     3 years 2 months 12 days
Intrinsic Value      
Aggregate intrinsic value, Outstanding $ 48,288   $ 48,288
Aggregate intrinsic value, Exercisable $ 6,125   $ 6,125
v3.20.2
6. SHARE-BASED COMPENSATION (Details - Options by exercise price) - $ / shares
9 Months Ended
Jun. 30, 2020
Sep. 30, 2019
Options [Member]    
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]    
Options Outstanding, Weighted average exercise price $ 1.56 $ 1.69
Options Outstanding, Outstanding Number of Options 954,147 812,879
Options Exercisable, Weighted average exercise price $ 1.76  
Options Exercisable, Weighted Average Remaining Life In Years 3 years 2 months 12 days  
Options Exercisable, Exercisable Number of Options 686,522  
$0.64 to $1.23 [Member]    
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]    
Exercise price lower limit $ 0.64  
Exercise price upper limit 1.23  
Options Outstanding, Weighted average exercise price $ 1.12  
Options Outstanding, Outstanding Number of Options 275,519  
Options Exercisable, Weighted average exercise price $ 1.08  
Options Exercisable, Weighted Average Remaining Life In Years 3 years 1 month 6 days  
Options Exercisable, Exercisable Number of Options 27,500  
$1.44 to $1.67 [Member]    
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]    
Exercise price lower limit $ 1.44  
Exercise price upper limit 1.67  
Options Outstanding, Weighted average exercise price $ 1.51  
Options Outstanding, Outstanding Number of Options 605,128  
Options Exercisable, Weighted average exercise price $ 1.51  
Options Exercisable, Weighted Average Remaining Life In Years 3 years 6 months  
Options Exercisable, Exercisable Number of Options 585,522  
$2.73 to $2.73 [Member]    
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]    
Exercise price lower limit $ 2.73  
Exercise price upper limit 2.73  
Options Outstanding, Weighted average exercise price $ 2.73  
Options Outstanding, Outstanding Number of Options 11,000  
Options Exercisable, Weighted average exercise price $ 2.73  
Options Exercisable, Weighted Average Remaining Life In Years 1 year 1 month 6 days  
Options Exercisable, Exercisable Number of Options 11,000  
$3.73 to $3.79 [Member]    
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]    
Exercise price lower limit $ 3.73  
Exercise price upper limit 3.79  
Options Outstanding, Weighted average exercise price $ 3.74  
Options Outstanding, Outstanding Number of Options 62,500  
Options Exercisable, Weighted average exercise price $ 3.74  
Options Exercisable, Weighted Average Remaining Life In Years 7 months 6 days  
Options Exercisable, Exercisable Number of Options 62,500  
v3.20.2
6. SHARE-BASED COMPENSATION (Details Narrative) - USD ($)
3 Months Ended 4 Months Ended 9 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Feb. 11, 2020
Feb. 05, 2019
Jun. 30, 2020
Jun. 30, 2019
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]            
Proceeds from options exercised         $ 32,000 $ 0
Share based compensation expense         $ 107,117 $ 181,180
Options [Member]            
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]            
Options granted 0 0     248,019  
Options granted exercise price         $ 1.13  
Stock issued from exercise of stock options 50,000          
Proceeds from options exercised $ 32,000          
Options exercised, price per share $ 0.64          
Weighted average grant date value per share         $ 0.58 $ 0.78
Options expired         55,000  
Share based compensation expense $ 38,000 $ 33,000     $ 107,000 $ 178,000
Unrecognized compensation cost 95,000       $ 95,000  
Unrecognized compensation cost weighted average vesting period         7 months 6 days  
Options [Member] | Non-employee Directors [Member]            
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]            
Options granted     248,019      
Options granted exercise price     $ 1.13      
Options vesting period     1 year      
Options granted, fair value on grant date     $ 145,000      
Options [Member] | Three Non-employee Directors [Member]            
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]            
Options granted       150,021    
Options granted exercise price       $ 1.54    
Options vesting period       1 year    
Options granted, fair value on grant date       $ 120,000    
Options [Member] | Ttwo Non-employee Directors [Member]            
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]            
Options granted       140,460    
Options granted exercise price       $ 1.54    
Options vesting period       0 years    
Options granted, fair value on grant date       $ 108,000    
Restricted Stock [Member]            
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]            
Share based compensation expense 0 $ 0     $ 0 $ 3,000
Unrecognized compensation cost $ 0       $ 0  
v3.20.2
7. EARNINGS PER SHARE (Details - Antidilutive shares) - shares
3 Months Ended 9 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]        
Total potentially dilutive shares 1,105,482 964,214 1,105,482 964,214
Options [Member]        
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]        
Total potentially dilutive shares 954,147 812,879 954,147 812,879
Warrants [Member]        
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]        
Total potentially dilutive shares 151,335 151,335 151,335 151,335
v3.20.2
8. CONCENTRATIONS (Details - Concentration sales)
3 Months Ended 9 Months Ended 12 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Sep. 30, 2019
Sales Revenue, Net [Member] | Distribution [Member]          
Revenue, Major Customer [Line Items]          
Concentration Risk 62.60% 81.10% 70.60% 76.60%  
Sales Revenue, Net [Member] | Design [Member]          
Revenue, Major Customer [Line Items]          
Concentration Risk 55.50% 53.80% 49.70% 44.40%  
Sales Revenue, Net [Member] | Customer 1 [Member] | Distribution [Member]          
Revenue, Major Customer [Line Items]          
Concentration Risk 24.90% 26.80% 31.20% 28.90%  
Sales Revenue, Net [Member] | Customer 1 [Member] | Design [Member]          
Revenue, Major Customer [Line Items]          
Concentration Risk 11.10% 23.00% 16.20% 20.50%  
Sales Revenue, Net [Member] | Customer 2 [Member] | Distribution [Member]          
Revenue, Major Customer [Line Items]          
Concentration Risk 21.90% 27.00% 22.90% 28.10%  
Sales Revenue, Net [Member] | Customer 2 [Member] | Design [Member]          
Revenue, Major Customer [Line Items]          
Concentration Risk 1.10% 22.20% 0.50% 13.90%  
Sales Revenue, Net [Member] | Customer 3 [Member] | Distribution [Member]          
Revenue, Major Customer [Line Items]          
Concentration Risk 15.80% 27.30% 16.50% 19.60%  
Sales Revenue, Net [Member] | Customer 3 [Member] | Design [Member]          
Revenue, Major Customer [Line Items]          
Concentration Risk 14.30% 8.60% 13.30% 10.00%  
Sales Revenue, Net [Member] | Customer 4 [Member] | Design [Member]          
Revenue, Major Customer [Line Items]          
Concentration Risk 29.00% 0.00% 19.70% 0.00%  
Accounts Receivable [Member] | Distribution [Member]          
Revenue, Major Customer [Line Items]          
Concentration Risk 82.80%       89.50%
Accounts Receivable [Member] | Design [Member]          
Revenue, Major Customer [Line Items]          
Concentration Risk 69.90%       54.30%
Accounts Receivable [Member] | Customer 1 [Member] | Distribution [Member]          
Revenue, Major Customer [Line Items]          
Concentration Risk 23.70%       29.00%
Accounts Receivable [Member] | Customer 1 [Member] | Design [Member]          
Revenue, Major Customer [Line Items]          
Concentration Risk 6.30%       33.70%
Accounts Receivable [Member] | Customer 2 [Member] | Distribution [Member]          
Revenue, Major Customer [Line Items]          
Concentration Risk 20.10%       21.20%
Accounts Receivable [Member] | Customer 3 [Member] | Distribution [Member]          
Revenue, Major Customer [Line Items]          
Concentration Risk 24.50%       23.60%
Accounts Receivable [Member] | Customer 4 [Member] | Distribution [Member]          
Revenue, Major Customer [Line Items]          
Concentration Risk 14.50%       15.70%
Accounts Receivable [Member] | Customer 4 [Member] | Design [Member]          
Revenue, Major Customer [Line Items]          
Concentration Risk 39.90%       5.90%
Accounts Receivable [Member] | Customer 5 [Member] | Design [Member]          
Revenue, Major Customer [Line Items]          
Concentration Risk 13.20%       8.80%
Accounts Receivable [Member] | Customer 6 [Member] | Design [Member]          
Revenue, Major Customer [Line Items]          
Concentration Risk 10.50%       5.90%
v3.20.2
9. RELATED PARTY TRANSACTIONS (Details Narrative) - USD ($)
3 Months Ended 4 Months Ended 9 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jan. 18, 2018
Jun. 30, 2020
Jun. 30, 2019
Sep. 30, 2019
Forward China [Member]            
Related Party Transaction [Line Items]            
Service fees paid $ 346,000 $ 353,000   $ 1,022,000 $ 1,056,000  
Forward China [Member] | Promissory Note [Member]            
Related Party Transaction [Line Items]            
Debt face amount     $ 1,600,000      
Debt maturity date     Jan. 18, 2019 Sep. 30, 2020    
Debt interest rate     8.00%      
Interest expense 32,000 32,000   $ 96,000 96,000  
Related To A Director [Member]            
Related Party Transaction [Line Items]            
Accrued receivables 0     0   $ 9,000
Related To A Director [Member] | Design [Member]            
Related Party Transaction [Line Items]            
Revenue from related party $ 0 $ 80,000   $ 44,000 $ 140,000  
v3.20.2
11. LINE OF CREDIT (Details Narrative) - USD ($)
3 Months Ended 9 Months Ended 12 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Sep. 30, 2019
Net Loss $ (215,202) $ (104,062) $ (1,668,473) $ (1,765,494)  
IPS [Member]          
Line of credit maximum amount 1,300,000   $ 1,300,000    
Line of credit expiration date     May 31, 2021    
Line of credit interest rate     0.75% above the Wall Street Journal prime rate    
Line of credit effective interest rate     4.00%   5.75%
Line of credit amount remaining $ 300,000   $ 300,000    
Net Loss     $ 875,000    
v3.20.2
12. DEBT (Details Narrative) - USD ($)
9 Months Ended
Jun. 30, 2020
Sep. 30, 2019
Note payable, current $ 2,196,621 $ 1,654,799
Note payable, noncurrent $ 759,949 $ 0
Paycheck Protection Program    
Debt interest rate 1.00%  
Note payable, current $ 597,000  
Note payable, noncurrent $ 760,000  
Paycheck Protection Program    
Debt issuance date Apr. 18, 2020  
Debt maturity date Apr. 18, 2022  
Loan received $ 1,357,000  
IPS [Member] | Term Loan [Member]    
Debt issuance date Apr. 01, 2016  
Debt face amount $ 325,000  
Debt maturity date Apr. 01, 2020  
Debt interest rate   4.215%
Note payable outstanding $ 0 $ 52,000
Payment frequency monthly  
Payment amount $ 7,378  
IPS [Member] | Financing Arrangement [Member]    
Debt issuance date Dec. 11, 2017  
Debt face amount $ 23,000  
Implied interest rate   9.50%
Note payable outstanding $ 0 $ 3,000
Payment frequency monthly  
Payment amount $ 1,035  
v3.20.2
13. MOONI AGREEMENT (Details Narrative) - USD ($)
1 Months Ended 3 Months Ended 9 Months Ended
Jan. 29, 2019
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Sep. 30, 2019
Prepaid deposit   $ 502,893   $ 502,893   $ 441,502
Mooni International [Member]            
Payment for distribution agreement $ 400,000          
Prepaid deposit   211,000   211,000    
Amortization of option   $ 33,000 $ 100,000 $ 33,000 $ 100,000  
v3.20.2
14. LEASES (Details - Supplemental cash flow info)
Jun. 30, 2020
Weighted Average Remaining Lease Term  
Operating leases 11 years 4 months 24 days
Finance leases 1 year 1 month 6 days
Weighted Average Discount Rate  
Operating leases 5.75%
Finance leases 5.75%
v3.20.2
14. LEASES (Details - Future minimum payments Operating lease)
Jun. 30, 2020
USD ($)
Operating lease future minimum payments  
Remainder of 2020 $ 125,825
2021 413,332
2022 380,389
2023 375,732
2024 385,640
Thereafter 3,200,192
Total future minimum lease payments 4,881,110
Less: amount representing imputed interest (1,363,789)
Total $ 3,517,321
v3.20.2
14. LEASES (Details - Future minimum payments Finance leases)
Jun. 30, 2020
USD ($)
Future minimum payments finance lease  
Remainder of 2020 $ 13,621
2021 24,214
2022 5,606
Total future minimum lease payments 43,441
Less: amount representing imputed interest (3,306)
Total $ 40,135
v3.20.2
14. LEASES (Details Narrative) - USD ($)
3 Months Ended 9 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Total operating expenses $ 127,000 $ 117,000 $ 382,000 $ 366,000
Finance Lease, Amortization expense 5,500   28,500  
Finance Lease, Interest Expense $ 650   $ 2,500  
Florida [Member]        
Rent frequency     Monthly  
Monthly rent payment     $ 7,700  
Lease Maturity Date     Sep. 30, 2020  
West Palm Beach Florida [Member]        
Rent frequency     Monthly  
Monthly rent payment     $ 3,500  
Lease Maturity Date     Sep. 30, 2022  
Cham Switzerland [Member]        
Rent frequency     Monthly  
Monthly rent payment     $ 1,600  
IPS office in Hauppauge NY [Member]        
Rent frequency     Monthly  
Monthly rent payment     $ 29,000  
Lease Maturity Date     Feb. 28, 2027  
IPS Ronkonkoma New York [Member]        
Rent frequency     Monthly  
Monthly rent payment     $ 4,400  
Lease Maturity Date     Jan. 31, 2022