Forward Industries, Inc. 10-Q

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, 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: · our liquidity, · expectations regarding the impact of the pandemic on our business, · expectations regarding the length of the pandemic’s business disruption, · expectations regarding revenues, · plans regarding the repayment of debt, and · beliefs regarding our capital resources 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. 21 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. 22 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: Main Components of Net Income/(Loss) (amounts in thousands) 2021 Quarter 2020 Quarter Increase (Decrease) Consolidated Distribution Design Consolidated Distribution Design Consolidated Net revenues $ 9,965 $ 5,720 $ 4,245 $ 9,549 $ 6,389 $ 3,160 $ 416 Gross profit $ 2,183 $ 781 $ 1,402 $ 1,775 $ 939 $ 836 $ 408 Sales and marketing expenses 621 521 100 464 364 100 157 General and administrative expenses 1,294 385 909 1,486 786 700 (192 ) Operating income/(loss) 268 (125 ) 393 (175 ) (211 ) 36 443 Other expense/(income), net 24 56 (32 ) 40 35 5 (16 ) Net income/(loss) $ 244 $ (181 ) $ 425 $ (215 ) $ (246 ) $ 31 $ 459 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. 23 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 the 2021 Quarter (amounts in thousands) Americas APAC EMEA Total Diabetic products $ 457 $ 1,502 $ 1,561 $ 3,520 Other products 1,673 413 114 2,200 Total net revenues $ 2,130 $ 1,915 $ 1,675 $ 5,720 Net Revenues for the 2020 Quarter (amounts in thousands) Americas APAC EMEA Total Diabetic products $ 1,317 $ 1,498 $ 2,079 $ 4,894 Other products 1,191 259 45 1,495 Total net revenues $ 2,508 $ 1,757 $ 2,124 $ 6,389 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: Diabetic Revenues (amounts in thousands) 2021 Quarter 2020 Quarter Increase (Decrease) Diabetic Products Customer A $ 641 $ 1,591 $ (950 ) Diabetic Products Customer B 991 1,010 (19 ) Diabetic Products Customer C 1,369 1,396 (27 ) Diabetic Products Customer D 499 576 (77 ) All other Diabetic Products Customers 20 321 (301 ) Total Diabetic Revenue $ 3,520 $ 4,894 $ (1,374 ) Revenues from diabetic products represented 62% of our distribution segment’s net revenues in the 2021 Quarter compared to 77% in the 2020 Quarter. 24 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: Design Revenues (amounts in thousands) 2021 Quarter 2020 Quarter Increase (Decrease) Design Segment Customer 1 $ 136 $ 922 $ (786 ) Design Segment Customer 2 462 454 8 Design Segment Customer 3 675 352 323 Design Segment Customer 4 427 – 427 Design Segment Customer 9 606 – 606 All other Design Segment Customers 1,938 1,432 506 Total design segment revenues $ 4,244 $ 3,160 $ 1,084 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. 25 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. 26 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: Main Components of Net Income/(Loss) (amounts in thousands) 2021 Period 2020 Period Increase (Decrease) Consolidated Distribution Design Consolidated Distribution Design Consolidated Net revenues $ 28,077 $ 15,808 $ 12,269 $ 25,873 $ 15,709 $ 10,164 $ 2,204 Gross profit $ 6,189 $ 2,078 $ 4,111 $ 4,948 $ 2,103 $ 2,845 $ 1,241 Sales and marketing expenses 1,802 1,488 314 1,479 1,106 373 323 General and administrative expenses 5,102 1,586 3,516 4,325 2,029 2,296 777 Goodwill impairment – – – 1,015 – 1,015 (1,015 ) Operating (loss)/income (715 ) (996 ) 281 (1,871 ) (1,032 ) (839 ) 1,156 Other (income)/expense, net (1,323 ) 100 (1,423 ) (203 ) (239 ) 36 (1,120 ) Net income/(loss) $ 608 $ (1,096 ) $ 1,704 $ (1,668 ) $ (793 ) $ (875 ) $ 2,276 Basic and diluted earnings/(loss) per share were $0.06 and $(0.18), respectively, for the 2021 Period and the 2020 Period. 27 Net Revenues Distribution Segment Net revenues in the distribution segment increased $99,000, or 0.6%, to $15,808,000 in the 2021 Period from $15,709,000 in the 2020 Period, primarily due to an increase in other product revenue. Revenues from other products increased $1,436,000, which was partially offset by a decline in revenue from diabetic products of $1,337,000. In future periods, we believe other product sales will continue to increase while diabetic product sales will continue to decline. 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 the 2021 Period (amounts in thousands) Americas APAC EMEA Total Diabetic products $ 3,009 $ 4,316 $ 4,500 $ 11,825 Other products 2,989 834 160 3,983 Total net revenues $ 5,998 $ 5,150 $ 4,660 $ 15,808 Net Revenues for the 2020 Period (amounts in thousands) Americas APAC EMEA Total Diabetic products $ 3,984 $ 3,958 $ 5,220 $ 13,162 Other products 1,826 580 141 2,547 Total net revenues $ 5,810 $ 4,538 $ 5,361 $ 15,709 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 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 $1,337,000, or 10.2%, to $11,825,000 in the 2021 Period from $13,162,000 in the 2020 Period. This decrease was primarily due to lower revenues from one major diabetic products customer (Diabetic Products Customer A), which was partially offset by a net increase in revenue from all other diabetic products customers, of which no changes were individually significant. As mentioned above, management believes that revenues from diabetic products customers will continue to decline in future periods. 28 The following table sets forth our distribution segment net revenues by diabetic products customer for the periods indicated: Diabetic Revenues (amounts in thousands) 2021 Period 2020 Period Increase (Decrease) Diabetic Products Customer A $ 3,490 $ 4,906 $ (1,416 ) Diabetic Products Customer B 2,761 2,586 175 Diabetic Products Customer C 3,892 3,597 295 Diabetic Products Customer D 1,451 1,345 106 All other Diabetic Products Customers 231 728 (497 ) Total Diabetic Revenue $ 11,825 $ 13,162 $ (1,337 ) Revenues from diabetic products represented 75% of our distribution segment’s net revenues in the 2021 Period compared to 84% in the 2020 Period. 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 $1,436,000, or 56.4%, to $3,983,000 in the 2021 Period from $2,547,000 in the 2020 Period. The increase was driven by sales to one new customer, which comprised $947,000 of our total distribution revenue for the 2021 Period. The increase in sales of non-medical cases and protective solutions, both driven by an increase in customers and higher sales volume, comprised the remainder of the increase. 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 25% of our distribution segment’s net revenues in the 2021 Period compared to 16% in the 2020 Period. Design Segment Net revenues in the design segment increased $2,105,000, or 20.7%, to $12,269,000 in the 2021 Period from $10,164,000 in the 2020 Period, primarily driven by revenues generated by Kablooe, which was acquired in August 2020. The remaining variance was driven by an increase in revenue from new business from both new and existing customers, partially offset by a decline in revenue from certain existing customers as projects were either completed or customer 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: Design Revenues (amounts in thousands) 2021 Period 2020 Period Increase (Decrease) Design Segment Customer 1 $ 825 $ 2,005 $ (1,180 ) Design Segment Customer 2 1,326 1,351 (25 ) Design Segment Customer 3 1,430 1,649 (219 ) Design Segment Customer 4 1,798 – 1,798 All other Design Segment Customers 6,890 5,159 1,731 Total design segment revenues $ 12,269 $ 10,164 $ 2,105 29 Gross Profit Distribution Segment Gross profit for the distribution segment decreased $25,000, or 1.2%, to $2,078,000 in the 2021 Period as compared to $2,103,000 in the 2020 Period, and gross margin declined from 13.4% to 13.1% 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 and 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 $1,266,000, or 44.5%, to $4,111,000 in the 2021 Period from $2,845,000 in the 2020 Period. Gross margin improved from 28.0% to 33.5% in the same period. The acquisition of Kablooe accounted for the majority of the increase in both gross profit and margin in the 2021 Period. Higher revenue and better utilization rates contributed to the remainder of the increase. Depreciation expense, which is allocated to cost of sales for the design segment, was $83,000 and $75,000 for the 2021 Period and 2020 Period, respectively. Sales and Marketing Expenses Distribution Segment Sales and marketing expenses for the distribution segment increased $382,000, or 34.5%, to $1,488 ,000 in the 2021 Period from $1,106,000 in the 2020 Period. The increase was primarily due to an increase in advertising costs 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 9.4% of revenues in the 2021 Period as compared to 7.0% of revenues in the 2020 Period. Design Segment Sales and marketing expenses for the design segment decreased $59,000, or 15.8%, to $314,000 in the 2021 Period from $373,000 in the 2020 Period. The decrease in sales and marketing expenses is primarily due to lower payroll costs and was partially offset by $32,000 of marketing expenses generated by Kablooe, which was acquired in August 2020. Sales and marketing expenses for the design segment decreased to 2.6% of revenues in the 2021 Period from 3.7% of revenues in the 2020 Period. General and Administrative Expenses Distribution Segment General and administrative expenses in the distribution segment decreased $443,000, or 21.8%, to $1,586,000 in the 2021 Period from $2,029,000 in the 2020 Period. The decrease was primarily driven by 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 10.0% of revenues in the 2021 Period as compared to 12.9% of revenues in the 2020 Period. Design Segment General and administrative expenses for the design segment increased $1,220,000, or 53.1%, to $3,516,000 in the 2021 Period from $2,296,000 in the 2020 Period. The increase is primarily driven by general and administrative costs of $762,000 generated by Kablooe, which was acquired in August 2020, a $623,000 increase in bad debt expense and a $266,000 increase in payroll related costs, partially offset by a decrease in impairment charges (see Note 4 of the condensed consolidated financial statements) and lower professional fees. General and administrative expenses for the design segment increased to 28.7% of revenues in the 2021 Period as compared to 22.6% of revenues in the 2020 Period. 30 Other Income / (Expense) Distribution Segment The distribution segment reported other expense of $100,000 in the 2021 Period as compared to other income of $239,000 in the 2020 Period. The variance is primarily due to the decrease in other income related to fair value adjustments associated with contingent earnout liabilities (see Note 4 of the condensed consolidated financial statements). Design Segment The design segment reported other income of $1,423,000 in the 2021 Period as compared to other expense of $36,000 in the 2020 Period. The primary component of other income in the 2021 Period was the $1,357,000 forgiveness of note payable related to the PPP loan. Other less significant factors contributing to the change were interest income on the note receivable from a customer which was fully reserved for in Fiscal 2019 and lower interest expense due to a reduction in the average amount of debt outstanding. Income Taxes For the 2021 Period, the Company generated net income of $608,000, primarily resulting from the $1,357,000 forgiveness of the PPP loan, which will not be recognized as taxable income per the CARES Act. 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 demands on our working capital have historically been (i) operating losses, (ii) repayment of debt obligations, and (iii) any increases in accounts receivable and inventories arising in the ordinary course of business. Historically, our sources of liquidity have been adequate to satisfy working capital requirements arising in the ordinary course of business. At June 30, 2021, our working capital was $5,571,000 compared to $3,396,000 at September 30, 2020. The improvement in working capital was primarily due to the extension of the note payable to Forward China. Our largest vendor is Forward China, a related entity, which is able to extend payment terms on outstanding liabilities when necessary (see Note 9 of the condensed consolidated financial statements). We can provide no assurances that any such extension will be given if requested. In an abundance of caution and to proactively conserve the Company’s cash flow, we implemented certain cost-cutting measures which became effective in April 2021. These cost-cutting measures included (i) our executive officers agreeing to a temporary pay cut and our Chief Executive Officer temporarily forgoing his base salary, (ii) a reduction in our head count and amounts paid to outside consultants and (iii) non-employee Board members agreeing to reduce their board fees. These cost-cutting measures ended in June 2021 and compensation was returned to pre-existing amounts in July 2021. The Company estimates that these pay cuts and other reductions resulted in approximately $200,000 of cash savings in the third quarter of Fiscal 2021. The Company will reevaluate any future need for these or similar cost-cutting measures as business conditions warrant. In light of these circumstances, the Compensation Committee of the Board of Directors deferred a recommendation for director equity compensation until such time as the Company’s performance improved. Therefore, in addition to cash savings, the resulting reduction in equity compensation lowered the Company’s non-cash expenses in the third quarter of Fiscal 2021 and will continue to lower the Company’s non-cash expenses in future periods until any new equity grants are awarded. At July 31, 2021, we had approximately $1,015,000 cash on hand and $1,300,000 available under our line of credit which matures May 31, 2022. Additionally, Forward China holds a $1,600,000 promissory note which matures December 31, 2022. Although this note has been extended on multiple occasions to assist us with our liquidity position, we plan on funding the repayment at maturity using existing cash balances and/or obtaining an additional credit facility as deemed necessary. We can provide no assurance that Forward China will extend the note again if we request an extension nor that any such credit facility will be available on terms acceptable to us or at all. 31 We anticipate that our liquidity and financial resources will be adequate to manage our operating and financial requirements until at least September 30, 2022. If we have the opportunity to make a strategic acquisition (as we have in the past with the acquisitions of IPS and Kablooe) or an investment in a product or partnership, we may require additional capital beyond our current cash balance to fund the opportunity. If we seek to raise additional capital, there is no assurance that we will be able to raise funds on terms that are acceptable to us or at all. Although we do not anticipate the need to purchase additional material capital assets in order to carry out our business, it may be necessary for us to purchase equipment and other capital assets in the future, depending on need. Cash Flows During the nine months ended June 30, 2021 and 2020, our sources and uses of cash were as follows: Operating Activities During the 2021 Period, cash used in operating activities of $338,000 primarily resulted from an operating loss of $715,000, an increase in inventories of $631,000, an increase in accounts receivable of $595,000, and the net change in other operating assets and liabilities of $72,000, partially offset by an increase of $855,000 in accounts payable and amounts due to Forward China and non-cash expenses of $820,000 relating to depreciation, amortization, share-based compensation and bad debt expense. During the 2020 Period, cash used in operating activities of $760,000 primarily resulted from an operating loss of $1,871,000, an increase in accounts receivable of $1,448,000, bad debt recoveries of $121,000, a decrease in accounts payable, amounts due to Forward China, accrued expenses and other liabilities of $105,000 and net changes in other operating assets and liabilities of $53,000, partially offset by a decline in inventories of $881,000, an increase in deferred income of $306,000, non-cash impairment charges of $1,342,000 and other non-cash expenses of $309,000 relating to depreciation, amortization, and share-based compensation. Investing Activities Cash used in investing activities in the 2021 Period and the 2020 Period of $61,000 and $56,000, respectively, resulted from purchases of property and equipment. Financing Activities In the 2021 Period, cash used in financing activities of $921,000 consisted of net repayments of the line of credit of $1,000,000 and repayments of notes payable and finance leases of $155,000, partially offset by proceeds from stock options exercised of $234,000. In the 2020 Period, cash provided by financing activities of $808,000 consisted of $1,357,000 proceeds from the PPP loan and $32,000 of proceeds from stock options exercised, partially offset by $300,000 in net repayments on the line of credit, $200,000 paid in deferred cash consideration and $81,000 in repayments of notes payable and finance 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. 32 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.