Forward Industries, Inc. - Quarter Report: 2021 June (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2021

OR

For the transition period from ________________ to ________________

Commission file number 001-34780

FORWARD INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

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

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

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  ☒     No  ☐

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  ☒     No  ☐

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.

If an emerging growth company, indicate by check mark 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  ☐     No  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 10,031,185 shares as of July 31, 2021.

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

PART I.  FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

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

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(UNAUDITED)

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

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

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

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

NOTE 1                  OVERVIEW

Business

Forward Industries, Inc. (“Forward”, “we” or the “Company”) is a fully integrated design, development and manufacturing solution provider for top tier medical and technology customers worldwide. As a result of the continued expansion of our design and development capabilities through our wholly-owned subsidiaries, we are now able to introduce proprietary products to the market from concepts brought to us from a number of different sources, both inside and outside the Company.

Impact of COVID-19

The outbreak of the COVID-19 virus continues to impact our results of operations. While the most significant impact was realized in Fiscal 2020, the virus continued to impact our results of operations in Fiscal 2021. The business shutdowns resulting from the pandemic disrupted our supply chain and the manufacture or shipment of our products and delayed the rollout of our retail products. Additionally, demand for our design and development services was reduced or delayed as a result of the pandemic as certain customers reduced discretionary spending. While revenues for the three and nine months ended June 30, 2021 increased as compared to the three and nine months ended June 30, 2020, they were lower than anticipated due in part to the impact of COVID-19 and the resulting economic conditions. The impact of lower than anticipated revenue was further complicated by a significant increase in freight costs due to the global shipping container shortage caused in part by the pandemic. These challenges were partially offset by a reduction in certain selling and travel related expenses.

Many government restrictions have been relaxed and the economy has continued to open in more jurisdictions. However, the emergence of new and transmittable variants of COVID-19 could lead to a possible resurgence of the virus, particularly in populations with low vaccination rates and has resulted in new restrictions in certain geographies and among certain businesses. The long-term financial impact on our business cannot be reasonably estimated at this time. As a result, the effects of COVID-19 may not be fully reflected in our financial results until future periods. Refer to “Part II, Item 1A — Risk Factors” for a description of the material risks that the Company currently faces in connection with COVID-19.

Until the pandemic is fully controlled, we expect business conditions to remain challenging.  In response to these challenges, we will continue to focus on those factors that we can control: closely managing and controlling our expenses; aligning our design and development schedules with demand in a proactive manner as there are changes in market conditions to minimize our cash operating costs; pursuing further improvements in the productivity and effectiveness of our development, selling and administrative activities and, where appropriate, taking advantage of opportunities to enhance our business growth and strategy. To help mitigate the impact of these challenging business conditions, we implemented cost-cutting initiatives and reduced executive pay and Board of Directors compensation for the three months ended June 30, 2021. See “Liquidity and Capital Resources” section of Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further description of these cost-cutting measures.

NOTE 2                  ACCOUNTING POLICIES

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of Forward Industries, Inc. and all of its subsidiaries: Forward Industries (IN), Inc. (“Forward US”), Forward Industries (Switzerland) GmbH (“Forward Switzerland”), Forward Industries UK Limited (“Forward UK”), Intelligent Product Solutions, Inc. (“IPS”) and Kablooe, Inc. (“Kablooe”). The terms “Forward”, “we” or the “Company” as used throughout this document are used to indicate Forward Industries, Inc. and all of its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

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

The acquisition of Kablooe took place in August 2020 and its results of operations have been included in our condensed consolidated financial statements since the acquisition date. Accordingly, our results of operations for the three and nine months ended June 30, 2021 include Kablooe’s results of operations, while our results of operations for the three and nine months ended June 30, 2020 do not. Key terms of the acquisition are contained in our Form 10-K filed with the Securities and Exchange Commission on December 17, 2020.

In the opinion of management, the accompanying condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q reflect all normal recurring adjustments necessary to present fairly the financial position and results of operations and cash flows for the interim periods presented herein, but are not necessarily indicative of the results of operations for the year ending September 30, 2021. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2020, and with the disclosures and risk factors presented therein. The September 30, 2020 condensed consolidated balance sheet has been derived from the audited consolidated financial statements.

For the nine months ended June 30, 2021, the Company generated net income of $608,000, which includes $1,357,000 of forgiveness of note payable (see Note 12), and used $338,000 of cash flows in operating activities. The Company has an accumulated deficit of $12,488,000 at June 30, 2021. We believe our existing cash balance and working capital will be sufficient to meet our liquidity needs through at least September 30, 2022. Our largest vendor is Forward China, a related entity, which is able to extend payment terms on outstanding liabilities when necessary (see Note 9). We can provide no assurances that any such extension will be given if requested.

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.

Throughout this document, certain dollar amounts and percentages have been rounded to their approximate values.

Revenue Recognition

Distribution Segment

The Company generally recognizes revenue in its distribution segment when: (i) finished goods are shipped to our customers (in general, these conditions occur at either point of shipment or point of destination, depending on the terms of sale, i.e., transfer of control); (ii) there are no other deliverables or performance obligations; and (iii) there are no further obligations to the customer after title to the goods has transferred. When the Company receives consideration before achieving the criteria previously mentioned, it records a contract liability, which is classified as a component of deferred income in the accompanying condensed consolidated balance sheets. The distribution segment had contract liabilities of $139,000, $75,000 and $0 at June 30, 2021, September 30, 2020 and September 30, 2019, respectively.

Design Segment

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

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

Recognized revenues that will not be billed until a later date, or contract assets, are recorded as an asset and classified as a component of accounts receivable in the accompanying condensed consolidated balance sheets. The design segment had contract assets of $939,000, $649,000 and $611,000 at June 30, 2021, September 30, 2020 and September 30, 2019, respectively. Contracts where collections to date have exceeded recognized revenues, or contract liabilities, are recorded as a liability and classified as a component of deferred income in the accompanying condensed consolidated balance sheets. The design segment had contract liabilities of $305,000, $410,000 and $220,000 at June 30, 2021, September 30, 2020 and September 30, 2019, respectively.

Accounts Receivable

Accounts receivable consist of unsecured trade accounts with customers. The Company maintains an allowance for doubtful accounts, which is recorded as a reduction to accounts receivable on the condensed consolidated financial statements. Collectability of accounts receivable is estimated by evaluating the number of days accounts are outstanding, customer payment history, recent payment trends and perceived creditworthiness, adjusted as necessary based on specific customer situations. At June 30, 2021, September 30, 2020 and September 30, 2019, the Company had allowances for doubtful accounts of $249,000, $249,000 and $159,000, respectively, for the distribution segment and $861,000, $347,000 and $2,033,000, respectively, for the design segment. At June 30, 2021, September 30, 2020 and September 30, 2019, the Company had net accounts receivable of $5,282,000, $4,243,000 and $4,618,000, respectively, for the distribution segment and $2,402,000, $3,359,000, and $2,077,000, respectively, for the design segment.

Goodwill

Goodwill represents the future economic benefits of assets acquired in a business combination that are not individually identified or separately recognized. The Company’s goodwill resulted from its acquisitions of IPS in January 2018 and Kablooe in August 2020.

The Company reviews goodwill for impairment at least annually, or more often if triggering events occur. The Company has two reporting units with goodwill (IPS and Kablooe) and we perform our annual goodwill impairment test on September 30, the end of the fiscal year, or upon the occurrence of a triggering event. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company would not need to perform a quantitative impairment test for the reporting unit. If the Company cannot support such a conclusion or does not elect to perform the qualitative assessment, then the Company will perform the quantitative impairment test by comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying value, no impairment charge is recognized. If the fair value of the reporting unit is less than its carrying value, an impairment charge will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value. A significant amount of judgment is required in performing goodwill impairment tests including estimating the fair value of a reporting unit. See Note 3.

Intangible Assets

Intangible assets include trademarks and customer relationships, which resulted from the acquisitions of IPS in January 2018 and Kablooe in August 2020 and are recorded based on their estimated fair value determined in conjunction with the purchase price allocations. These intangible assets are amortized over their estimated useful lives, which are periodically evaluated for reasonableness.

Our intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In assessing the recoverability of our intangible assets, we must make estimates and assumptions regarding future cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and the magnitude of any such charge. Fair value estimates are made at a specific point in time, based on relevant information. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. If these estimates or material related assumptions change in the future, we may be required to record impairment charges related to our intangible assets. Management evaluated and concluded that there were no impairments of intangible assets during the nine months ended June 30, 2021 or 2020.

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

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, 2021, there was no change to our assessment that a full valuation allowance was required against all net deferred tax assets as it is not probable that such deferred tax assets will be realized. Accordingly, any deferred tax provision or benefit was offset by an equal and opposite change to the valuation allowance. No current book income tax provision was recorded against book net income due to the existence of significant net operating loss carryforwards.

In December 2020, the Company’s application for forgiveness of its loan received as part of the Payroll Protection Program (“PPP loan”) pursuant to the U.S. Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was approved. The aggregate loan principal amount forgiven was $1,357,000. The total amount forgiven will not be recognized as taxable income pursuant to the CARES Act. Pursuant to the Consolidated Appropriations Act, 2021, which was enacted by Congress and signed into law by the President on December 27, 2020, all expenses utilizing funds from PPP loans will be deductible against taxable income.

Fair Value Measurements

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

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

Leases

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

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

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 estimates of fair value are based upon assumptions believed to be reasonable, but actual results may differ from estimates. Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed.

Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, “Fair Value Measurement - Disclosure Framework (Topic 820)” to improve the disclosure requirements on fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company adopted this guidance in the first quarter of Fiscal 2021 with no material impact to its condensed consolidated financial statements.

In November 2019, the FASB issued ASU 2019-08, “Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606)” to provide guidance for share-based payment awards granted to a customer in conjunction with selling goods or services accounted for under Topic 606. The pronouncement is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company adopted this guidance in the first quarter of Fiscal 2021 with no material impact to its condensed consolidated financial statements.

In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” ASU 2019-11 is an accounting pronouncement that provides clarity to and amends earlier guidance on this topic and would be effective concurrently with the adoption of such earlier guidance. This pronouncement is effective for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years. The Company is currently evaluating the effects of this pronouncement on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)” addressing customers’ accounting for implementation costs incurred in a cloud computing arrangement that is a service contract, which requires customers to apply internal-use software guidance to determine the implementation costs that are able to be capitalized. Capitalized implementation costs are required to be amortized over the term of the arrangement, beginning when the cloud computing arrangement is ready for its intended use. The effective date of the new guidance for public companies is for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company adopted this guidance in the first quarter of Fiscal 2021 with no material impact to its condensed consolidated financial statements. 

In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This guidance removes certain exceptions to the general principles in Topic 740 and provides consistent application of U.S. GAAP by clarifying and amending existing guidance. The effective date of the new guidance for public companies is for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effects of the pronouncement on its condensed consolidated financial statements.

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

NOTE 3                  INTANGIBLE ASSETS AND GOODWILL

The Company’s intangible assets are all held under the design segment of our business. Amortization expense related to intangible assets was $53,000 and $41,000 for the three months ended June 30, 2021 and 2020, respectively, and $160,000 and $122,000 for the nine months ended June 30, 2021 and 2020, respectively, which is included in general and administrative expenses on the condensed consolidated statements of operations.

The Company’s intangible assets consist of the following: 

At June 30, 2021, estimated amortization expense for the Company’s intangible assets for each of the next five years and thereafter is as follows:

In March 2020, the Company experienced triggering events that prompted the testing of its goodwill for impairment. Those triggering events included the reduction in fair value of the IPS contingent earnout consideration discussed in Note 4 and revised revenue and operational projections for IPS for the remainder of the 2020 fiscal year and future periods. Based on these factors, the Company concluded that it was more likely than not that the fair value of the IPS reporting unit had declined below its carrying amount. The Company then calculated the fair value of this reporting unit using Level 3 inputs, which is a combination of asset-based, income and market approaches. The estimates and assumptions utilized in the estimated fair value calculation included discount rate, terminal growth rate, selection of peer group companies and control premium applied as well as forecasts of revenue growth rates, gross margins, operating margins and working capital requirements. Any changes in the judgments, estimates or assumptions used could produce significantly different results. The Company concluded the IPS reporting unit’s fair value was below its carrying value by $1,015,000 and an impairment charge was recognized for this amount in March 2020. Based on management’s evaluation, there were no further impairments to goodwill at September 30, 2020 and there were no triggering events leading to an interim impairment analysis at June 30, 2021.

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

NOTE 4                  FAIR VALUE MEASUREMENTS

The earnout consideration of $70,000 and $90,000 at June 30, 2021 and September 30, 2020, respectively, represents the fair value of the contingent earnout consideration related to the acquisition of Kablooe. The current and non-current portions of this liability are shown in the corresponding categories on the condensed consolidated balance sheets in each period presented. In December 2020, the Company reduced this liability from $90,000 to $60,000 based on the low likelihood of Kablooe reaching the first year’s earnings target and in June 2021, it increased this liability from $60,000 to $70,000 based on the estimated increase in fair value of earnout payments in future periods.

In connection with the acquisition of IPS in January 2018, the Company agreed to pay deferred cash consideration and contingent earnout consideration to the selling shareholders of IPS and these liabilities were measured at fair value each reporting period. In March 2020, the fair value of the earnout consideration was reduced from $350,000 to $0 due to the low likelihood of IPS reaching the underlying earnings target. At September 30, 2020, the Company had no remaining obligation for consideration payments related to the acquisition of IPS.

The following table presents the placement in the fair value hierarchy and summarizes the changes in fair value of the earnout liability for the three and nine months ended June 30, 2021: 

During Fiscal 2019, the Company received common stock from a customer as compensation for services provided, which was recorded as a cost-method investment with an estimated fair value of $327,000. This initial fair value was based on a private placement round of common stock issued to third-party private investors of the customer at a time close to the valuation date. Management determined that the inputs used to value the investment were observable, either directly or indirectly, and therefore classified as a level 2 valuation measurement. In March 2020, due to the performance of the business in which the Company was invested, it concluded the investment was impaired and recorded an impairment charge of $327,000, which was recorded as a component of general and administrative expenses on the condensed consolidated statement of operations.

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

NOTE 5                  SEGMENT INFORMATION

The Company has two reportable segments: distribution and design. The distribution segment sources and distributes carrying cases and other accessories for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic devices. It also distributes a variety of other products, including smart-enabled furniture, through its retail distribution network. The design segment provides a full spectrum of hardware and software product design and engineering services. We measure the performance of our operating segments based upon revenue and operating income or loss. Operating income/(loss) and net income/(loss) are shown in the table below: 

The following table presents total assets by operating segment: 

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

NOTE 6                  SHARE-BASED COMPENSATION

2021 Equity Incentive Plan

In February 2021, shareholders of the Company approved the 2021 Equity Incentive Plan (the “2021 Plan”), which is administered by the Compensation Committee of the Board of Directors and authorizes 1,291,000 shares of common stock for grants of various types of equity awards to officers, directors, employees and consultants. Upon approval of the 2021 Plan, no additional awards were granted under the 2011 Long Term Incentive Plan (the “2011 Plan”), which expired according to its terms in March 2021. Shares authorized under the 2021 Plan include 1,000,000 new shares and 291,000 shares that remained available under the 2011 Plan. Awards which are forfeited or expire are eligible for regrant under the 2021 Plan. The exercise prices of stock options granted may not be less than the fair market value of the common stock as quoted on the Nasdaq stock market on the grant date and the expiration date of option awards may not exceed 10 years.

Stock Options

No options were granted during the three or nine months ended June 30, 2021.

In February 2020, the Company granted options to non-employee directors to purchase an aggregate of 248,000 shares of its common stock at an exercise price of $1.13 per shares. The options vested one year from the date of grant, expire five years from the date of grant and had an aggregate grant date fair value of $145,000, which was recognized ratably over the vesting period. These options, which were the only options granted during the nine months ended June 30, 2020, had a grant-date fair value of $0.58 per share.

During the nine months ended June 30, 2021 and 2020, the Company issued 147,000 and 50,000 shares, respectively, of its common stock pursuant to the exercise of stock options for aggregate cash proceeds of $234,000 and $32,000, respectively, which had an aggregate intrinsic value of $265,000 and $33,000, respectively.

The Company recognized compensation expense for stock option awards of $4,000 and $38,000 during the three months ended June 30, 2021 and 2020, respectively, and $66,000 and $107,000 during the nine months ended June 30, 2021 and 2020, respectively, in its condensed consolidated statements of operations.

At June 30, 2021, there was $7,000 of total unrecognized compensation cost related to nonvested stock option awards that is expected to be recognized over a weighted average period of 0.9 years.

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

NOTE 7                  EARNINGS/(LOSS) PER SHARE

Basic earnings/(loss) per share data for each period presented is computed using the weighted average number of shares of common stock outstanding during each such period. Diluted earnings/(loss) per share data is computed using the weighted average number of common and dilutive common equivalent shares outstanding during each period. Dilutive common equivalent shares consist of shares that would be issued upon the exercise of stock options and warrants, computed using the treasury stock method. A reconciliation of basic and diluted earnings/(loss) per share is as follows: 

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

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

NOTE 8                  CONCENTRATIONS

Concentration of Revenues and Accounts Receivable

For the three and nine months ended June 30, 2021 and 2020, the Company had customers whose individual percentage of their respective segment’s revenues and accounts receivable was 10% or greater. The concentrations of revenues and accounts receivable for each reportable segment are as follows:

Distribution Segment Revenues Concentration 

Design Segment Revenues Concentration

Distribution Segment Accounts Receivable Concentration

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

Design Segment Accounts Receivable Concentration

NOTE 9                  RELATED PARTY TRANSACTIONS

Buying Agency and Supply Agreement

The Company has a Buying Agency and Supply Agreement (the “Supply Agreement”) with Forward Industries Asia-Pacific Corporation (“Forward China”). The Supply Agreement provides that, upon the terms and subject to the conditions set forth therein, Forward China will act as the Company’s exclusive buying agent and supplier of Products (as defined in the Supply Agreement) in the Asia-Pacific region.  The Company purchases products at Forward China’s cost and also pays to Forward China a monthly service fee equal to the sum of: (i) $100,000 and (ii) 4% of “Adjusted Gross Profit”, which is defined as the selling price less the cost from Forward China. The Supply Agreement expires October 22, 2023. Terence Wise, Chief Executive Officer and Chairman of the Company, is the owner of Forward China. In addition, Jenny P. Yu, a Managing Director of Forward China, beneficially owns more than 5% of the Company’s common stock. The Company recorded service fees to Forward China of $357,000 and $346,000 during the three months ended June 30, 2021 and 2020, respectively, and $1,040,000 and $1,022,000 during the nine months ended June 30, 2021 and 2020, respectively, which are included as a component of cost of sales upon sales of the related products.

The Company has a separate agreement with Forward China to address the potential impact of customers sourcing directly from Forward China. In the event a customer bypasses the services of the Company and does business directly with Forward China, Forward China will pay a commission of 50% of the net revenue, less direct costs, generated from the products or services sold. The Company recognized $12,000 of commissions related to this agreement during the nine months ended June 30, 2021. No commissions were recognized during the three months ended June 30, 2021 or the three or nine months ended June 30, 2020.

The Company had prepayments to Forward China for inventory purchases of $137,000 and $107,000 at June 30, 2021 and September 30, 2020, respectively, which are included in prepaid expenses and other current assets on the condensed consolidated balance sheets.

Promissory Note

On January 18, 2018, the Company issued a $1,600,000 promissory note payable to Forward China to fund the acquisition of IPS. The promissory note bears an interest rate of 8% per annum and had an original maturity date of January 18, 2019. Monthly interest payments commenced on February 18, 2018. The Company incurred and paid $32,000 for the three months ended June 30, 2021 and 2020 and $96,000 for the nine months ended June 30, 2021 and 2020 in interest expense associated with this note. The maturity date of this note was extended to December 31, 2022.

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

Related Party Sales

A member of the Company’s Audit, Governance and Compensation Committees of its Board of Directors is also a member of the Board of Directors of a company to whom the Company’s distribution division sold products. The Company recognized revenue of $63,000 from the sale of such products during the three and nine months ended June 30, 2021.

The Company’s design division provided services to a customer whose former Chief Operating and Financial Officer and equity owner is an immediate family member of a director on the Company’s Board of Directors. The director is a member of the Board’s Audit, Governance and Compensation Committees. The Company sold design services to this customer of $0 and $44,000 for the three and nine months ended June 30, 2020, respectively. There were no sales to this customer for the three or nine months ended June 30, 2021.

Related Party Activity

In October 2020, the Company began selling smart-enabled furniture, which is sourced by Forward China and sold in the U.S. under the Koble brand name. The Koble brand is owned by The Justwise Group Ltd., a company owned by Terrence Wise, Chief Executive Officer and Chairman of the Company. The Company recognized revenues from the sale of Koble products of $413,000 and $752,000 during the three and nine months ended June 30, 2021, respectively.

NOTE 10                LEGAL PROCEEDINGS

On August 21, 2020, IPS was named a third-party defendant in a patent dispute claim currently pending in the U.S. District Court for the Eastern District of New York. The complaint, which contains no specific amount of claimed monetary damages, asserts that certain intellectual property was misappropriated by IPS and one of its former employees.  IPS denies the allegations, believes the action is without merit and intends to vigorously defend it.  The Company filed a motion to dismiss the complaint on December 14, 2020. The court has not yet ruled on the Company’s motion.

From time to time, the Company may become a party to other legal actions or proceedings in the ordinary course of its business. At June 30, 2021, there were no such actions or proceedings, either individually or in the aggregate, that, if decided adversely to the Company’s interests, it believes would be material to its business.

NOTE 11                LINE OF CREDIT

The Company, specifically IPS, has a $1,300,000 revolving line of credit with a bank which was renewed at the discretion of the lender in May 2021. The line of credit has a maturity date of May 31, 2022, is guaranteed by the Company and is secured by all of IPS’ assets. The interest rate on the line of credit is 0.75% above The Wall Street Journal prime rate. The effective interest rate was 4.0% at both June 30, 2021 and September 30, 2020. In March 2021, the Company paid down the outstanding balance on the line of credit and $1,300,000 was available at June 30, 2021. The Company is subject to certain debt-service ratio requirements which are measured annually. At September 30, 2020, the Company was in violation of the required debt-service ratio covenants but was granted a waiver of the violation from the lender.

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

NOTE 12                DEBT

On April 18, 2020, the Company entered into a loan in an aggregate principal amount of $1,357,000 under the Paycheck Protection Program of the CARES Act. The loan was unsecured, bore interest at a rate of 1% per annum, and was scheduled to mature on April 18, 2022. In October 2020, the Company filed for forgiveness of this loan and in December 2020, the Small Business Administration (“SBA”) approved our forgiveness request for this loan. The forgiveness has been accounted for as an extinguishment of debt and the resulting gain has been recorded as forgiveness of note payable on the condensed consolidated statement of operations for the nine months ended June 30, 2021. There is a six-year period during which the SBA can review the Company’s forgiveness.

In connection with the acquisition of Kablooe, the Company assumed a loan payable with a principal amount of $170,000. The loan matures in August 2021, bears interest at a rate of 6.0% per annum and is secured by all of Kablooe’s assets. Interest and principal payments of $15,000 are payable monthly until maturity. The outstanding balance at June 30, 2021 and September 30, 2020 was $29,000 and $156,000, respectively.

NOTE 13                MOONI AGREEMENT

On January 29, 2019, the Company entered into a three-year Distribution Agreement (the “Agreement”) with Mooni International AB (“Mooni”) and its owner. In accordance with the Agreement, the Company (i) was appointed as the exclusive distributor of Mooni's current and future products (including future products developed or offered by Mooni and/or the owner) in North America, (ii) subject to certain repayment requirements, paid $400,000 to Mooni, and (iii) was granted an option to purchase a controlling interest of Mooni at a valuation not to exceed $5 million which, if exercised, would have been effective on the 12-month anniversary of the effective date of the Agreement. This option was not exercised and therefore expired. Additionally, Forward China, a company owned by Terence Wise, the Company's Chairman and Chief Executive Officer, was named the designated supplier under the Agreement.

The Company generated revenues from this agreement of $459,000 since it began selling Mooni products in Fiscal 2020. The current and long-term portions of the unamortized fee of $78,000 and $0, respectively, at June 30, 2021 and $133,000 and $45,000, respectively, at September 30, 2020, are included in prepaid expenses and other current assets and other assets, respectively, in the accompanying condensed consolidated financial statements. Amortization of the cost for the three and nine months ended June 30, 2021 of $33,000 and $100,000, respectively, and for the three and nine months ended June 30, 2020 of $33,000 and $100,000, respectively, is included in sales and marketing expenses in the accompanying condensed consolidated statements of operations.

NOTE 14                LEASES

The Company’s operating leases are primarily for corporate, sales and administrative office space. Total operating lease expense was $150,000 and $455,000 for the three and nine months ended June 30, 2021, respectively, and $127,000 and $382,000 for the three and nine months ended June 30, 2020, respectively, and is recorded in sales and marketing and general and administrative expenses on the condensed consolidated statements of operations.

The Company leases certain computer equipment through various finance lease agreements expiring through July 2022. The net book value of assets under finance leases was $16,000 and $23,000 at June 30, 2021 and September 30, 2020, respectively.

In March 2021, the Company signed a renewal to extend the term of its lease in Minnesota for an additional 60 months. Payments under this operating lease commence July 1, 2021 and escalate 2.75% per year. The monthly rent payment is $10,000 per month, which includes taxes and operating expenses as defined in the agreement.

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

Additional information related to operating and finance leases at June 30, 2021 and September 30, 2020 is as follows: 

At June 30, 2021, future minimum payments under non-cancellable operating and finance leases were as follows:

The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements, and the notes thereto, and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020.  The following discussion and analysis compares our consolidated results of operations for the three and nine months ended June 30, 2021 (the “2021 Quarter” and the “2021 Period”, respectively) with those for the three and nine months ended June 30, 2020 (the “2020 Quarter” and the “2020 Period”, respectively).  All dollar amounts and percentages presented herein have been rounded to approximate values.

Cautionary Note Regarding Forward-Looking Statements

This report contains “forward-looking statements”, as such term is used within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, statements regarding:

as well as other statements regarding our future operations, financial condition and prospects and business strategies. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects,” “predicts,” “projects,” “will be” and “will continue” and similar expressions. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include the failure to receive material orders, our ability to successfully market and sell products that we develop, the effects of the COVID-19 outbreak, including levels of consumer, business and economic confidence generally, the duration of the COVID-19 outbreak and severity of such outbreak, the pace of recovery following the COVID-19 outbreak, the effect on our supply chain, our ability to implement cost containment; and the adverse effects of the COVID-19 outbreak on our business or the market price of our common stock, failure to diversify the industries in which we sell our products, potential imposed tariffs or other restrictions placed on imports by the U.S. government, and continued pricing pressure on our products. Further information on our risk factors is contained in our filings with the SEC, including our Form 10-K for the year ended September 30, 2020. Any forward-looking statement made by us speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

Business Overview

Forward Industries, Inc. is a fully integrated design, development and manufacturing solution provider for top tier medical and technology customers worldwide. As a result of the continued expansion of our design and development capabilities through our wholly-owned subsidiaries, IPS and Kablooe, we are now able to introduce proprietary products to the market from concepts brought to us from a number of different sources, both inside and outside the Company.

The acquisition of Kablooe took place in August 2020 and its results of operations have been included in our condensed consolidated financial statements since the acquisition date. Accordingly, our results of operations for the 2021 Quarter and the 2021 Period include Kablooe’s results of operations, while our results of operations for the 2020 Quarter and the 2020 Period do not. Key terms of the acquisition are contained in our Form 10-K filed with the Securities and Exchange Commission on December 17, 2020.

The future impacts of the COVID-19 pandemic and any resulting economic impact are largely unknown and could be significant. It is possible that the COVID-19 pandemic, the measures taken by the governments of countries affected and the resulting economic impact may continue to negatively impact our results of operations, cash flows and financial position in future periods as well as that of our customers, including their ability to pay for our services and choosing to allocate their budgets to new or existing projects which may or may not require our services. The long-term financial impact on our business cannot be reasonably estimated at this time. As a result, the effects of COVID-19 may not be fully reflected in our financial results until future periods.

Until the pandemic is fully controlled, we expect business conditions to remain challenging. In response to these challenges, we will continue to focus on those factors that we can control: closely managing and controlling our expenses; aligning our design and development schedules with demand in a proactive manner as there are changes in market conditions to minimize our cash operating costs; pursuing further improvements in the productivity and effectiveness of our development, selling and administrative activities and, where appropriate, taking advantage of opportunities to enhance our business growth and strategy. To help mitigate the impact of these challenging business conditions, we implemented cost-cutting initiatives and reduced executive pay and Board of Directors compensation for the three months ended June 30, 2021. See “Liquidity and Capital Resources” section for further description of these cost-cutting measures.

Refer to “Part II, Item 1A — Risk Factors” for a description of the material risks that the Company currently faces in connection with COVID-19.

Variability of Revenues and Results of Operations

A significant portion of our revenue is concentrated with several large customers, some of which are the same and some of which change over time. Orders from some of these customers can be highly variable, with short lead times, which can cause our quarterly revenues, and consequently our results of operations, to vary over a relatively short period of time.

Critical Accounting Policies and Estimates

We discuss the material accounting policies that are critical in making the estimates and judgments in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, under the caption “Management’s Discussion and Analysis—Critical Accounting Policies and Estimates”. There has been no material change in critical accounting policies or estimates during the period covered by this report.

Recent Accounting Pronouncements

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

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2021 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2020

Net Income/(Loss)

Distribution Segment

Distribution segment net loss was $181,000 in the 2021 Quarter compared to 246,000 in the 2020 Quarter. The decrease to the net loss was due to various factors, including a reduction in general and administrative expenses, partially offset by lower revenue and gross profit, as reflected in the table below.

Design Segment

Design segment net income was $425,000 in the 2021 Quarter compared to $31,000 in the 2020 Quarter. The increase in net income was primarily due to higher revenue and gross profit, partially offset by higher general and administrative expenses, as reflected in the table below:

Basic and diluted earnings/(loss) per share were $0.02 and $(0.02), respectively, for the 2021 Quarter and the 2020 Quarter.

Net Revenues

Distribution Segment

Net revenues in the distribution segment decreased $669,000, or 10.5%, to $5,720,000 in the 2021 Quarter from $6,389,000 in the 2020 Quarter, the result of a decrease in diabetic product line revenue, partially offset by an increase in other product revenue. Revenues from diabetic products decreased $1,374,000 and revenue from other products increased $705,000. In future periods, as we continue to focus on expanding and diversifying our other product offerings, we believe other product sales will represent a larger portion of our total distribution revenue. As consumer demand increases for diabetic testing products which require no carrying case, we expect diabetic product sales to represent a smaller portion of our distribution revenue.

The following tables set forth revenues by channel, product line and geographic location of our distribution segment customers for the periods indicated:

Diabetic Product Revenues

Our distribution segment manufactures to the order of, and sells carrying cases for, blood glucose diagnostic kits directly to original equipment manufacturers (“OEM”s) or their contract manufacturers. The OEM customer or its contract manufacturer packages our carrying cases “in box” as a custom accessory for the OEM’s blood glucose testing and monitoring kits, or to a lesser extent, sells them through their retail distribution channels.

Revenues from diabetic products decreased $1,374,000, or 28.1%, to $3,520,000 in the 2021 Quarter from $4,894,000 in the 2020 Quarter. This decrease was primarily due to lower revenues from one major diabetic products customer (Diabetic Products Customer A), coupled with smaller decreases from all other diabetic products customers. As mentioned above, management believes that revenues from diabetic products customers will continue to decline in future periods.

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

Revenues from diabetic products represented 62% of our distribution segment’s net revenues in the 2021 Quarter compared to 77% in the 2020 Quarter.

Other Product Revenues

Other product revenues include cases and protective solutions sourced and sold to OEMs for a diverse array of portable electronic and non-electronic products (such as sporting and recreational products, bar code scanners, GPS location devices, tablets and firearms) on a made-to-order basis that are customized to fit the products sold by our OEM customers. Other product revenues also include sales of a variety of other products, such as smart-enabled furniture, sold through our retail distribution network.

Revenues from other products increased $705,000, or 47.2%, to $2,200,000 in the 2021 Quarter from $1,495,000 in the 2020 Quarter. The increase was driven by sales to one new customer, which comprised $868,000 of our total distribution revenue for the 2021 Quarter. Other factors contributing to the variance include an increase in sales of non-medical cases, partially offset by a decrease in sales of other products. We will continue to focus on our sales and sales support teams in our continued efforts to expand and diversify our other products customer base as well as take advantage of opportunities to source other products.

Revenues from other products represented 38% of our distribution segment’s net revenues in the 2021 Quarter compared to 23% in the 2020 Quarter.

Design Segment

Net revenues in the design segment increased $1,084,000, or 34.3%, to $4,244,000 in the 2021 Quarter from $3,160,000 in the 2020 Quarter, primarily driven by revenues generated by Kablooe, which was acquired in August 2020. The remaining increase was driven by revenue from new customers, an increase in revenue from existing customers, partially offset by a decline in revenue from certain other customers as projects were either completed or spending was reduced in response to COVID-19. The following table sets forth our design segment net revenues by major customers for the periods indicated:

Gross Profit

Distribution Segment

Gross profit for the distribution segment decreased $158,000, or 16.8%, to $781,000 in the 2021 Quarter as compared to $939,000 in the 2020 Quarter, and gross margin declined from 14.7% to 13.7% in the same period. The decrease in both gross profit and margin are driven by higher freight costs due to the global shipping container shortage caused in part by the pandemic. This decrease in profit margin was also impacted by the continued decline in gross margin on diabetic products due to a shift to lower margin cases and pricing pressures on diabetic products from customers. We continue to work on expanding our product offering to include higher margin products and enhancing our sales efforts to grow revenue and increase gross profit.

Design Segment

Gross profit for the design segment increased $566,000, or 67.7%, to $1,402,000 in the 2021 Quarter from $836,000 in the 2020 Quarter.  Gross margin improved from 26.5% to 33.0% in the same period.  The acquisition of Kablooe in August 2020 represented almost half of the improvement in both gross profit and margin in the 2021 Quarter, with the remaining increase driven by an increase in revenue and better utilization rates in the IPS business.  Depreciation expense, which is allocated to cost of sales for the design segment, was $22,000 and $21,000 for the 2021 Quarter and 2020 Quarter, respectively.

Sales and Marketing Expenses

Distribution Segment

Sales and marketing expenses for the distribution segment increased $157,000, or 43.1%, to $521,000 in the 2021 Quarter from $364,000 in the 2020 Quarter. The increase was primarily due to an increase in advertising expenses and sales commissions as we continue our efforts to expand and diversify our product offerings. Sales and marketing expenses for the distribution segment increased to 9.1% of revenues in the 2021 Quarter as compared to 5.7% of revenues in the 2020 Quarter.

Design Segment

Sales and marketing expenses for the design segment remained flat at $100,000 in the 2021 Quarter and the 2020 Quarter. The $12,000 of sales and marketing expenses generated by Kablooe, which was acquired in August 2020, were offset by lower payroll costs. Sales and marketing expenses for the design segment decreased to 2.4% of revenues in the 2021 Quarter from 3.2% of revenues in the 2020 Quarter.

General and Administrative Expenses

Distribution Segment

General and administrative expenses in the distribution segment decreased $401,000, or 51.0%, to $385,000 in the 2021 Quarter from $786,000 in the 2020 Quarter. The decrease primarily resulted from the salary reductions taken as part of our cost-cutting measures enacted in April 2021, the reduction in severance costs and a decrease in professional fees. General and administrative expenses for the distribution segment decreased to 6.7% of revenues in the 2021 Quarter as compared to 12.3% of revenues in the 2020 Quarter.

Design Segment

General and administrative expenses for the design segment increased $209,000, or 29.9%, to $909,000 in the 2021 Quarter from $700,000 in the 2020 Quarter. The increase is primarily driven by general and administrative costs of $255,000 generated by Kablooe, which was acquired in August 2020, partially offset by lower professional fees. General and administrative expenses for the design segment decreased to 21.4% of revenues in the 2021 Quarter as compared to 22.2% of revenues in the 2020 Quarter.

Other Income / (Expense)

Distribution Segment

The distribution segment reported other expense of $56,000 in the 2021 Quarter as compared to $35,000 in the 2020 Quarter. The increase in other expense relates to the increase in the fair value of the contingent earnout liability coupled with higher interest expense.

Design Segment

The design segment reported other income of $32,000 in the 2021 Quarter as compared to other expense of $5,000 in the 2020 Quarter, primarily related to interest income on the note receivable from a customer which was fully reserved in Fiscal 2019 and lower interest expense resulting from the paydown of the line of credit in March 2021.

Income Taxes

For the 2021 Quarter, the Company generated net income of $244,000. The Company maintains significant net operating loss carryforwards and does not recognize income tax expense / (benefit) as its deferred tax provision is typically offset by a full valuation allowance on its net deferred tax asset.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 2021 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 2020

Net Income/(Loss)

Distribution Segment

Distribution segment net loss was $1,096,000 in the 2021 Period compared to $793,000 in the 2020 Period. The increase to the net loss was primarily due to an increase in sales and marketing expenses, the reduction in other income resulting from non-cash fair value adjustments to acquisition related earnout liabilities (see Note 4 of the condensed consolidated financial statements), partially offset by lower general and administrative expenses, as reflected in the table below.

Design Segment

Design segment net income was $1,704,000 in the 2021 Period compared to a net loss of $875,000 in the 2020 Period. The net income generated in the 2021 Period primarily resulted from the $1,357,000 forgiveness of note payable associated with the PPP loan. A reduction in impairment charges (see Notes 3 and 4 of the condensed consolidated financial statements) and higher gross profit were partially offset by higher general and administrative expenses, as reflected in the table below: