Forward Industries, Inc. 10-K

ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our management carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on their evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2021. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our internal control over financial reporting as of the end of the period covered by this report. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework as issued in 2013. Based on that evaluation, our management concluded that our internal control over financial reporting as of September 30, 2021 was effective based on that criteria. Our internal control over financial reporting is a process designed under the supervision of our Principal Executive Officer and Principal Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with U.S. GAAP. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate. 28 Changes in Internal Control There were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the fourth quarter of Fiscal 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not Applicable. 29 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by this item is incorporated by reference to our Proxy Statement for the 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended September 30, 2021. Our Board has adopted a Code of Business Conduct and Ethics applicable to all officers, directors and employees, which is available on our website (https://forwardindustries.com/investors/governance/) under "Corporate Governance." We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of our Code of Conduct and by posting such information on the website address and location specified above. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to our Proxy Statement for the 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended September 30, 2021. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to our Proxy Statement for the 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended September 30, 2021. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE The information required by this item is incorporated by reference to our Proxy Statement for the 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended September 30, 2021. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is incorporated by reference to our Proxy Statement for the 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended September 30, 2021. 30 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Documents filed as part of the report. (1) Financial Statements. See Index to Consolidated Financial Statements, which appears on page F-1 hereof. The financial statements listed in the accompanying Index to Consolidated Financial Statements are filed herewith in response to this Item. (2) Financial Statements Schedules. All schedules are omitted because they are not applicable or because the required information is contained in the consolidated financial statements or notes included in this report. (3) Exhibits. See the Exhibit Index. 31 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: December 16, 2021 FORWARD INDUSTRIES, INC. By: /s/ Terence Wise Terence Wise Chief Executive Officer (Principal Executive Officer) In accordance with the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: December 16, 2021 /s/ Terence Wise Terence Wise Principal Executive Officer and Director December 16, 2021 /s/ Anthony Camarda Anthony Camarda Principal Financial Officer and Chief Accounting Officer December 16, 2021 /s/ Howard Morgan Howard Morgan Director December 16, 2021 /s/ Sangita Shah Sangita Shah Director December 16, 2021 /s/ James Ziglar James Ziglar Director 32 EXHIBIT INDEX Incorporated by Reference Exhibit No. Exhibit Description Form Date Number Filed or Furnished Herewith 2.1 Stock Purchase Agreement dated January 18, 2018 - Intelligent Product Solutions, Inc.+ 8-K 1/18/18 2.1 2.2 Asset Purchase Agreement by and among Forward Industries, Inc., Kablooe, Inc., Kablooe Design, Inc. and Tom KraMer dated August 17, 2020+ 8-K 8/17/20 2.1 3.1 Restated Certificate of Incorporation 10-K 12/8/10 3(i) 3.2 Certificate of Amendment of the Certificate of Incorporation, April 26, 2013 8-K 4/26/13 3.1 3.3 Certificate of Amendment of the Certificate of Incorporation, June 28, 2013 8-K 7/3/13 3.1 3.4 Third Amended and Restated Bylaws, as of May 28, 2014 10-K 12/10/14 3(ii) 4.1 Description of securities registered under Section 12 of the Exchange Act of 1934 10-K 12/27/19 4.1 4.2 Promissory Note dated January 18, 2018 – Forward Industries (Asia-Pacific) (as amended and restated) 10-Q 5/13/21 4.1   10.1 2011 Long Term Incentive Plan, as amended 10-Q 2/14/19 4.3 10.2 2021 Equity Incentive Plan 8-K 12/23/20 4.1 10.3 Buying Agency and Supply Agreement - Forward Industries (Asia-Pacific) Corporation 10-K 12/16/15 10.7 10.3(a) Amendment No. 1 to Buying Agency and Supply Agreement - Forward Industries (Asia-Pacific) Corporation 10-Q 8/14/17 10.2 10.3(b) Amendment No. 2 to Buying Agency and Supply Agreement - Forward Industries (Asia-Pacific) Corporation 8-K 9/22/17 10.1 10.3(c) Amendment No. 3 to Buying Agency and Supply Agreement – Forward Industries (Asia-Pacific) Corporation 10-Q 5/15/19 10.1(c) 10.3(d) Amendment No. 4 to Buying Agency and Supply Agreement – Forward Industries (Asia-Pacific) Corporation 10-K 12/27/19 10.3(d) 10.3(e) Amendment No. 5 to Buying Agency and Supply Agreement – Forward Industries (Asia-Pacific) Corporation 10-K 12/17/20 10.2(e) 10.4 Form of Employment Agreement dated January 18, 2018+ 8-K 1/18/18 10.1 10.4(a) Form of Employment Agreement dated May 26, 2021 * Filed 10.5 Employment Agreement dated May 16, 2018 - Terence Wise* 10-Q 5/18/18 10.5 10.6 Employment Agreement between Forward Industries, Inc. and Anthony Camarda, dated June 26, 2020* 8-K 7/2/20 10.1 10.7 Paycheck Protection Program Term Note payable to TD Bank, N.A. dated April 18, 2020 8-K 4/22/20 10.1 10.8 Amended and Restated TD Bank Revolving Term Note dated September 28, 2018 8-K 10/2/18 10.1 10.9 TD Bank Modification Agreement dated September 28, 2018 8-K 10/2/18 10.2 21.1 List of Subsidiaries 10-K 12/17/20 21.1 23.1 Consent of Independent Registered Public Accounting Firm Filed 31.1 CEO Certifications (302) Filed 31.2 CFO Certification (302) Filed 32.1 CEO and CFO Certifications (906) Furnished 101.INS Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) Filed 101.SCH Inline XBRL Taxonomy Extension Schema Document Filed 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document Filed 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document Filed 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document Filed 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document Filed 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) ______________________ * Management compensatory agreement or arrangement. + Certain schedules, appendices and exhibits to this agreement have been omitted in accordance with Item 601 of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished supplementally to the Securities and Exchange Commission staff upon request. Copies of this filing (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our shareholders who make a written request to Forward Industries, Inc.; 700 Veterans Memorial Hwy, Suite 100, Hauppauge, NY 11788; Attention: Corporate Secretary. 33 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets at September 30, 2021 and 2020 F-3 Consolidated Statements of Operations for the Years Ended September 30, 2021 and 2020 F-4 Consolidated Statements of Shareholders' Equity for the Years Ended September 30, 2021 and 2020 F-5 Consolidated Statements of Cash Flows for the Years Ended September 30, 2021 and 2020 F-6 Notes to Consolidated Financial Statements F-7 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of Forward Industries, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Forward Industries, Inc. and Subsidiaries (the “Company”) as of September 30, 2021 and 2020, and the related consolidated statements of operations, shareholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of the internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (i) related to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate. Assessment of Going Concern We identified the Company’s assessment of going concern as a critical audit matter. Auditing the Company’s assessment of going concern was complex and subjective due to the significant estimation and judgment used in forecasted cash flows. Specifically, the forecasted cash flows are sensitive to significant assumptions such as projected revenue and projected operating results, all of which are affected by the expected future market or economic conditions, including the effects of the global pandemic. In addition, the Company’s largest vendor and lender is a related entity, as disclosed in Note 14. This related entity has a history of extending payment terms to the Company, when necessary. The primary procedures we performed to address this critical matter included the following: · Obtaining an understanding of and evaluating the Company’s process to develop forecasted cash flows, including significant assumptions used in developing forecasted cash flows as well as testing the completeness and accuracy of the underlying data used by the Company in its analyses. · Evaluating the reasonableness of the Company’s forecasted revenue, operating results, and cash flows by comparing those forecasts to underlying business strategies, including customer relationships and the Company’s ability to obtain new customers, and to historical results. In addition, we performed sensitivity analyses related to the key inputs used in the Company’s forecasted cash flows, including evaluating whether the changes in the assumptions would result in a material change in forecasted cash flows. · Evaluating management’s ability to accurately forecast future cash flows by comparing the Company’s historical forecasted sales, operating results and cash flow forecasts to actual results. · Obtaining written confirmation from the related entity regarding extension of payment terms of the related promissory note payable. /s/ CohnReznick LLP We have served as the Company’s auditor since 2011. Melville, New York December 16, 2021 F- 2 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30 2021 2020 Assets Current assets: Cash $ 1,410,365 $ 2,924,627 Accounts receivable, net 8,760,715 7,602,316 Inventories, net 2,062,557 1,275,694 Prepaid expenses and other current assets 561,072 419,472 Total current assets 12,794,709 12,222,109 Property and equipment, net 167,997 215,323 Intangible assets, net 1,318,658 1,531,415 Goodwill 1,758,682 1,758,682 Operating lease right of use assets, net 3,743,242 3,512,042 Other assets 72,251 116,697 Total assets $ 19,855,539 $ 19,356,268 Liabilities and shareholders' equity Current liabilities: Line of credit $ – $ 1,000,000 Note payable to Forward China – 1,600,000 Accounts payable 391,992 197,022 Due to Forward China 5,733,708 3,622,401 Deferred income 187,695 485,078 Current portion of notes payable – 983,395 Current portion of finance lease liability 1,523 18,411 Current portion of earnout consideration 25,000 45,000 Current portion of operating lease liability 340,151 259,658 Accrued expenses and other current liabilities 527,974 615,401 Total current liabilities 7,208,043 8,826,366 Other liabilities: Note payable to Forward China 1,600,000 – Notes payable, less current portion – 529,973 Operating lease liability, less current portion 3,559,053 3,359,088 Finance lease liability, less current portion – 12,769 Earnout consideration, less current portion 45,000 45,000 Total other liabilities 5,204,053 3,946,830 Total liabilities 12,412,096 12,773,196 Commitments and contingencies – – Shareholders' equity: Common stock, par value $ 0.01 per share; 40,000,000 shares authorized; 10,061,185 and 9,883,851 shares issued and outstanding at September 30, 2021 and 2020, respectively 100,612 98,838 Additional paid-in capital 19,914,476 19,579,684 Accumulated deficit ( 12,571,645 ) ( 13,095,450 ) Total shareholders' equity 7,443,443 6,583,072 Total liabilities and shareholders' equity $ 19,855,539 $ 19,356,268 The accompanying notes are an integral part of the consolidated financial statements. F- 3 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Fiscal Years Ended September 30, 2021 2020 Revenues, net $ 39,021,996 $ 34,478,358 Cost of sales 30,887,577 27,839,851 Gross profit 8,134,419 6,638,507 Sales and marketing expenses 2,503,518 1,950,704 General and administrative expenses 6,395,900 5,655,186 Goodwill impairment – 1,015,000 Loss from operations ( 764,999 ) ( 1,982,383 ) Gain on forgiveness of note payable ( 1,356,570 ) – Fair value adjustment of earnout consideration ( 20,000 ) ( 350,000 ) Fair value adjustment of deferred cash consideration – 16,000 Interest income ( 88,760 ) ( 60,932 ) Interest expense 171,957 174,962 Other expense, net 4,569 3,701 Income/(loss) before income taxes 523,805 ( 1,766,114 ) Provision for income taxes – 9,167 Net income/(loss) $ 523,805 $ ( 1,775,281 ) Earnings/(loss) per share: Basic $ 0.05 $ ( 0.19 ) Diluted $ 0.05 $ ( 0.19 ) Weighted average common shares outstanding: Basic 9,950,094 9,583,441 Diluted 10,443,018 9,583,441 The accompanying notes are an integral part of the consolidated financial statements. F- 4 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Fiscal Year Ended September 30, 2021 Additional Common Stock Paid-In Accumulated Shares Amount Capital Deficit Total Balance at September 30, 2020 9,883,851 $ 98,838 $ 19,579,684 $ ( 13,095,450 ) $ 6,583,072 Share-based compensation – – 68,855 – 68,855 Stock options exercised 177,334 1,774 265,937 – 267,711 Net income – – – 523,805 523,805 Balance at September 30, 2021 10,061,185 $ 100,612 $ 19,914,476 $ ( 12,571,645 ) $ 7,443,443 For the Fiscal Year Ended September 30, 2020 Additional Common Stock Paid-In Accumulated Shares Amount Capital Deficit Total Balance at September 30, 2019 9,533,851 $ 95,338 $ 18,936,130 $ ( 11,320,169 ) $ 7,711,299 Share-based compensation – – 245,154 – 245,154 Shares issued for Kablooe acquisition 300,000 3,000 366,900 – 369,900 Stock options exercised 50,000 500 31,500 – 32,000 Net loss – – – ( 1,775,281 ) ( 1,775,281 ) Balance at September 30, 2020 9,883,851 $ 98,838 $ 19,579,684 $ ( 13,095,450 ) $ 6,583,072 The accompanying notes are an integral part of the consolidated financial statements. F- 5 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Fiscal Years Ended September 30, 2021 2020 Operating Activities: Net income/(loss) $ 523,805 $ ( 1,775,281 ) Adjustments to reconcile net income/(loss) to net cash used in operating activities: Share-based compensation 68,855 245,154 Depreciation and amortization 327,290 271,973 Bad debt expense/(recovery) 506,469 ( 78,278 ) Gain on forgiveness of note payable ( 1,356,570 ) – Change in fair value of earn-out consideration ( 20,000 ) ( 350,000 ) Change in fair value of deferred cash consideration – 16,000 Goodwill impairment – 1,015,000 Impairment of investment – 326,941 Changes in operating assets and liabilities: Accounts receivable ( 1,664,868 ) ( 733,228 ) Inventories ( 786,863 ) 333,133 Prepaid expenses and other current assets ( 141,600 ) 30,542 Other assets 44,446 138,311 Accounts payable and due to Forward China 2,306,277 245,679 Deferred income ( 297,383 ) 219,713 Net changes in operating lease liabilities 49,258 25,945 Accrued expenses and other current liabilities ( 87,427 ) ( 194,550 ) Net cash used in operating activities ( 528,311 ) ( 262,946 ) Investing Activities: Purchases of property and equipment ( 67,207 ) ( 68,456 ) Cash used in acquisition of Kablooe, Inc. – ( 352,628 ) Cash acquired in acquisition of Kablooe, Inc. – 31,024 Net cash used in investing activities ( 67,207 ) ( 390,060 ) Financing Activities: Proceeds from line of credit borrowings 150,000 900,000 Repayment of line of credit borrowings ( 1,150,000 ) ( 1,200,000 ) Repayment of notes payable ( 156,798 ) ( 68,551 ) Proceeds from note payable – 1,356,570 Proceeds from stock options exercised 267,711 32,000 Repayments of finance leases ( 29,657 ) ( 35,199 ) Payment of deferred cash consideration – ( 500,000 ) Net cash (used in)/provided by financing activities ( 918,744 ) 484,820 Net decrease in cash ( 1,514,262 ) ( 168,186 ) Cash at beginning of year 2,924,627 3,092,813 Cash at end of year $ 1,410,365 $ 2,924,627 Supplemental Disclosures of Cash Flow Information: Cash paid for interest $ 154,510 $ 178,114 Cash paid for taxes $ 8,389 $ 4,854 Supplemental Disclosures of Non-Cash Information: Lease assets recorded $ 565,590 $ 3,825,632 Lease liabilities recorded $ 565,590 $ 3,906,391 Common stock issued in Kablooe acquisition $ – $ 369,900 Fair value of Kablooe contingent earnout consideration $ – $ 90,000 The accompanying notes are an integral part of the consolidated financial statements. F- 6 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 OVERVIEW Business Forward Industries, Inc. (“Forward”, “we”, “our”, or the “Company”), is a fully integrated design, development and manufacturing solution provider for top tier medical and technology customers worldwide. Through its acquisitions of IPS and Kablooe, the Company has expanded its ability to design and develop solutions for our existing multinational client base and expand beyond the diabetic product line into a variety of industries with a full spectrum of hardware and software product design and engineering services. In addition to our existing design and distribution of carry and protective solutions, primarily for handheld electronic devices, the Company is now a one-stop shop for design, development and manufacturing solutions serving a wide range of clients in the industrial, commercial and consumer industries. The Company’s previous principal customer market has been original equipment manufacturers, or “OEMs” (or the contract manufacturing firms of these OEM customers), that either package our products as accessories “in box” together with their branded product offerings or sell them through their retail distribution channels. The Company’s OEM products include carrying cases and other accessories for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic products (such as sporting and recreational products, bar code scanners, smartphones, GPS location devices, tablets and firearms). The Company’s OEM customers are located in: (i) the Asia-Pacific region, which we refer to as the “APAC Region”; (ii) Europe, the Middle East, and Africa, which we refer to as the “EMEA Region”; and (iii) the geographic area encompassing North America, Central America and South America, which we refer to as the “Americas”. The Company does not manufacture any of its OEM products and sources substantially all of its OEM products from independent suppliers in China, through Forward Industries Asia-Pacific Corporation, a British Virgin Islands corporation (“Forward China”). See Note 14. As a result of the expansion of the design development capabilities through its wholly-owned subsidiaries, IPS and Kablooe, the Company is now able to introduce proprietary products to the market from concepts brought to it from a number of different sources, both inside and outside the Company. Liquidity In Fiscal 2021, the Company generated net income of $524,000 523,805 and negative cash flow from operations of $528,000 528,311 . We believe our existing cash balance and working capital will be sufficient to meet our liquidity needs through at least December 31, 2022. Our largest vendor is Forward China, a related entity, which is able to extend payment terms on outstanding liabilities when necessary (see Note 14). We can provide no assurances that any such extension will be given if requested. Impact of COVID-19 The outbreak of the COVID-19 virus continues to impact our results of operations. While the most significant impact was 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. The risk of collecting accounts receivable is also enhanced as a result of the economic impact of COVID-19. While revenues for Fiscal 2021 increased as compared to Fiscal 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. 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 I, Item 1A — Risk Factors” for a description of the material risks that the Company currently faces in connection with COVID-19. F- 7 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 including reducing executive pay and Board of Directors compensation for the three months ended June 30, 2021. See “Liquidity and Capital Resources” section of Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further description of these cost-cutting measures. NOTE 2 ACCOUNTING POLICIES Use of Estimates The preparation of the Company’s 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 financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions. Within this report, certain dollar amounts and percentages have been rounded to their approximate values. The extent to which COVID-19 may impact our financial condition or results of operations is uncertain. As of the date of issuance of this report, we are not aware of any specific events or circumstances that would require us to update our estimates or judgments or adjust the carrying amount of our assets or liabilities. Basis of Presentation The accompanying consolidated financial statements include the accounts of Forward Industries, Inc. and its wholly-owned subsidiaries (Forward US, Forward Switzerland, Forward UK, IPS and Kablooe). All significant intercompany transactions and balances have been eliminated in consolidation. The acquisition of Kablooe took place in August 2020 and its results of operations have been included in our consolidated financial statements since the acquisition date. Accordingly, our results of operations for Fiscal 2021 include Kablooe’s results of operations for 12 months, while our results of operations for Fiscal 2020 include Kablooe’s results of operations for approximately six weeks. Key terms of the acquisition are described in Note 3. Segment Reporting The Company has three reportable segments: OEM distribution, retail distribution and design. The OEM distribution segment sources and distributes carrying cases and other accessories for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic devices directly to OEMs or their contract manufacturers. The retail distribution segment sources and sells smart-enabled furniture and a variety of other products through agreements with various retailers, both in stores and through online retailer websites. The design segment consists of two operating segments (IPS and Kablooe, which have been aggregated into one reportable segment) that provide a full spectrum of hardware and software product design and engineering services. See Note 16 for more information on segments. F- 8 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Goodwill 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 amount, no impairment charge is recognized. If the fair value of the reporting unit is less than its carrying amount, an impairment charge will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value. A significant amount of judgment is required in performing goodwill impairment tests including estimating the fair value of a reporting unit. See Note 4. Intangible Assets Intangible assets include trademarks and customer relationships, which were acquired as part of the acquisitions of IPS in Fiscal 2018 and Kablooe in Fiscal 2020 (see Note 3) and are recorded based on their estimated fair value determined in conjunction with the purchase price allocation. 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 also 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 indications of impairment of intangible assets at September 30, 2021 or 2020. Cash The Company maintains its cash in bank and financial institution deposits in the United States (that at times may exceed federally insured limits of $ 250,000 per financial institution) and Switzerland. At September 30, 2021 and 2020, there were deposits totaling $ 805,000 (which includes $436,000 in a foreign bank) and $ 2,300,000 (which includes $770,000 in a foreign bank), respectively, held in excess of federally insured limits. Historically, we have not experienced any losses due to such cash concentrations. 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 consolidated balance sheets. 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 September 30, 2021, the Company had allowances for doubtful accounts of $ 90,000 and $ 706,000 related to its OEM distribution segment and design segment accounts receivable, respectively. At September 30, 2020, the Company had allowances for doubtful accounts of $ 249,000 and $ 347,000 related to its OEM distribution segment and design segment accounts receivable, respectively. The Company did not have any allowance for doubtful accounts related to its retail distribution segment at September 30, 2021 or 2020. F- 9 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Inventories Inventories consist primarily of finished goods and are stated at the lower of cost (determined by the first-in, first-out method) or net realizable value. Based on management’s estimates, an allowance is made to reduce excess, obsolete, or otherwise unsellable inventories to net realizable value. The allowance is established through charges to cost of sales in the Company’s consolidated statements of operations. As reserved inventory is disposed, the Company charges off the associated allowance. In determining the adequacy of the allowance, management’s estimates are based upon several factors, including analyses of inventory levels, historical loss trends, sales history and projections of future sales demand. The Company’s estimates of the allowance may change from time to time based on management’s assessments, and such changes could be material. At September 30, 2021 and 2020, the allowance for slow-moving inventory was $ 50,000 and $ 0 , respectively. Property and Equipment Property and equipment consist of computer hardware and software, furniture, fixtures and equipment and are recorded at cost. Expenditures for major additions and improvements are capitalized, and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method. The estimated useful lives for all property and equipment ranges from three to five years. Leases The Company adopted Accounting Standards Codification (“ASC”) 842, "Leases", effective October 1, 2019 using the modified retrospective transition method and elected to apply the available practical expedients to enable the preparation of financial information on adoption. The practical expedients applied under the new standard allow the Company to carry forward the historical lease classification and not reassess its prior conclusions about lease identification or initial direct costs. In accordance with this guidance, lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term, using the Company’s incremental borrowing rate commensurate with the lease term, since the Company’s lessors do not provide an implicit rate, nor is one readily available. The Company has certain leases that may include an option to renew and when it is reasonably probable to exercise such option, the Company will include the renewal option terms in determining the lease asset and lease liability. Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Operating lease assets are shown as right of use assets and financing lease assets are a component of property and equipment on the consolidated balance sheets. The current and long-term portions of operating and financing lease liabilities are shown separately as such on the consolidated balance sheets. Upon adoption of ASC 842, the Company recognized right of use assets of $3,649,000 and corresponding lease liabilities of $3,729,000 pertaining to its operating leases on its consolidated balance sheets. 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 September 30, 2021, there was no change to our assessment that a full valuation allowance was required against all net deferred tax assets. Accordingly, any deferred tax provision or benefit was offset by an equal and opposite change to the valuation allowance. Our income tax provision or benefit is generally not significant due to the existence of significant net operating loss carryforwards. F- 10 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Revenue Recognition OEM and Retail Distribution Segments The Company generally recognizes revenue in its OEM and retail distribution segments when: (i) finished goods are shipped to its customers (in general, these conditions occur at either point of shipment or point of destination, depending on the terms of sale and transfer of control); (ii) there are no other deliverables or performance obligations; and (iii) there are no further obligations to the customer after the title of the goods has transferred. When the Company receives consideration before achieving the criteria previously mentioned, it records a contract liability, which is classified as a component of deferred income in the accompanying consolidated balance sheets. The retail distribution segment had contract liabilities of $ 0 , $ 75,000 and $ 0 at September 30, 2021, 2020 and 2019, respectively. The OEM distribution segment had no contract liabilities at September 30, 2021, 2020 or 2019. 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. Recognized revenues that will not be billed until a later date, or contract assets, are recorded as an asset and classified as a component of accounts receivable in the accompanying consolidated balance sheets. The design segment had contract assets of $ 693,000 , $ 649,000 and $ 611,000 at September 30, 2021, 2020 and 2019, respectively. Contracts where collections to date have exceeded recognized revenues, or contract liabilities, are recorded as a liability and classified as a component of deferred income in the accompanying consolidated balance sheets. The design segment had contract liabilities at of $ 188,000 , $ 410,000 and $ 220,000 at September 30, 2021, 2020 and 2019, respectively. Shipping and Handling Fees The Company includes shipping and handling fees billed to customers in net revenues and the related transportation costs in cost of sales. Foreign Currency Transactions The Company’s functional currency is the U.S. dollar. Foreign currency transactions may generate receivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid. Fluctuations in exchange rates between such foreign currency and the functional currency increase or decrease the expected amount of functional currency cash flows upon settlement of the transaction. These increases or decreases in expected functional currency cash flows are foreign currency transaction gains or losses that are included in other expense in the accompanying consolidated statements of operations. The approximate net losses from foreign currency transactions were $ 5,000 and $ 3,000 for Fiscal 2021 and 2020, respectively. Such foreign currency transaction losses were primarily the result of euro denominated revenues from certain customers. Fair Value Measurements We perform fair value measurements in accordance with the guidance provided by 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. F- 11 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset's or liability's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value: · Level 1: quoted prices in active markets for identical assets or liabilities; · Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or · Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities. Share-Based Compensation Expense The Company estimates the fair value of employee and non-employee director share-based compensation on the date of grant using the Black-Scholes option pricing model, which includes variables such as the expected volatility of the Company’s share price, the exercise behavior of its grantees, interest rates, and dividend yields. These variables are projected based on the Company’s historical data, experience, and other factors. The fair value of employee and non-employee director share-based compensation is recognized in the consolidated statements of operations over the related service or vesting period of each grant. In the case of awards with multiple vesting periods, the Company has elected to use the graded vesting attribution method, which recognizes compensation cost on a straight-line basis over each separately vesting portion of the award as if the award was, in substance, multiple awards (see Note 9). 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. Reclassifications Certain amounts in the accompanying Fiscal 2020 financial statements have been reclassified to conform to the Fiscal 2021 presentation. Recent Accounting Pronouncements In August 2018, the FASB issued 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 consolidated financial statements. F- 12 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO 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 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 the Company 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 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 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 this pronouncement on its consolidated financial statements. NOTE 3 ACQUISITION On August 17, 2020, in order to further diversify its customer base and the industries in which it sells its products, the Company and Kablooe, Inc. (a newly formed wholly-owned subsidiary of the Company) entered into an Asset Purchase Agreement (the “Agreement”) with Kablooe Design, Inc. (“Kablooe Design”) and its sole shareholder. Kablooe Design is an innovative medical and consumer design and development company whose clients include leading brands in medical devices. In consideration for the acquisition of substantially all of the assets of Kablooe Design, the Company: (i) paid $ 353,000 in cash; (ii) issued 300,000 shares of its common stock; (iii) agreed to pay up to an aggregate $ 500,000 in contingent earnout payments based on Kablooe meeting certain earnings milestones (as defined in the Agreement) over a five-year period; and (iv) agreed to make two additional $50,000 retention payments to Kablooe’s Chief Executive Officer on the fourth and fifth anniversaries of the acquisition based on his continued employment with Kablooe and the achievement of the earnings milestones (as defined in the Agreement). Additionally, in conjunction with this acquisition, the Company entered into a five-year employment agreement with Kablooe’s Chief Executive Officer and agreed to pay him a salary of $250,000 per year. At the date of acquisition, the consideration transferred consisted of cash, shares of Forward’s common stock, and contingent consideration based on the earnings performance of Kablooe over a five-year period. The acquisition date fair value of consideration transferred consisted of the following: Total purchase consideration Cash at closing (1) $ 353,000 Value of Forward's common stock (2) 370,000 Fair value of contingent earnout consideration (3) 90,000 Total Purchase Consideration $ 813,000 _________________ (1) Cash paid by Forward at closing. (2) Forward issued 300,000 shares of its common stock valued at $1.23 per share, which represents the August 17, 2020 closing price of $1.37 per share, less an estimated 10% reduction in fair value related to restrictions that limit their marketability for a period of six months. (3) Fair value of the contingent consideration is measured using the Black-Scholes option pricing method. Contingent consideration is to be paid in cash only upon Kablooe meeting certain earnings milestones over a five-year period. F- 13 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the estimated fair values of the assets acquired and liabilities assumed on the acquisition date: Assets acquired and liabilities assumed Cash $ 31,000 Accounts receivable 96,000 Customer relationships (8 yr life) 340,000 Trademark (15 yr life) 110,000 Property and equipment 9,000 Other assets 9,000 Total identifiable assets acquired 595,000 Accounts payable ( 22,000 ) Accrued liabilities ( 135,000 ) Deferred revenue ( 46,000 ) Debt ( 170,000 ) Total liabilities assumed ( 373,000 ) Net identifiable assets acquired 222,000 Goodwill 591,000 Net assets acquired $ 813,000 In relation to our acquisition of Kablooe, we incurred $ 78,000 of acquisition related costs in Fiscal 2020, including legal and valuation costs. These costs were expensed as incurred and included as a component of general and administrative expenses on the consolidated statement of operations. Kablooe’s results of operations have been included in the consolidated financial statements since the acquisition date. Our consolidated statement of operations for Fiscal 2020 includes revenue of $ 172,000 for Kablooe. NOTE 4 INTANGIBLE ASSETS AND GOODWILL Intangible Assets The Company’s intangible assets consist of the following: Schedule of intangible assets September 30, 2021 September 30, 2020 Trademark Customer Relationships Total Intangible Assets Trademark Customer Relationships Total Intangible Assets Gross carrying amount $ 585,000 $ 1,390,000 $ 1,975,000 $ 585,000 $ 1,390,000 $ 1,975,000 Less accumulated amortization ( 125,000 ) ( 531,000 ) ( 656,000 ) ( 86,000 ) ( 358,000 ) ( 444,000 ) Net carrying amount $ 460,000 $ 859,000 $ 1,319,000 $ 499,000 $ 1,032,000 $ 1,531,000 The Company’s intangible assets were acquired as a result of the acquisitions of Kablooe and IPS in Fiscal 2020 and Fiscal 2018, respectively, and relate to the design segment of our business. Intangible assets are amortized over their expected useful lives of 15 years for the trademarks and 8 years for the customer relationships. During Fiscal 2021 and Fiscal 2020, the Company recorded amortization expense related to intangible assets of $ 212,000 and $ 167,000 , respectively, which is included in general and administrative expenses in the Company’s consolidated statements of operations. F- 14 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At September 30, 2021, estimated amortization expense for the Company’s intangible assets for each of the next five years and thereafter is as follows: Estimated future amortization expense Fiscal 2022 $ 213,000 Fiscal 2023 213,000 Fiscal 2024 213,000 Fiscal 2025 213,000 Fiscal 2026 121,000 Thereafter 346,000 Total $ 1,319,000 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 the acquisitions of Kablooe and IPS in Fiscal 2020 and Fiscal 2018, respectively. The goodwill associated with the IPS acquisition is not deductible for tax purposes, but the goodwill associated with the Kablooe acquisition is deductible for tax purposes. All of the Company’s goodwill is held under the design segment of our business. During Fiscal 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 earn-out consideration discussed in Note 6 and revised revenue and operational projections for IPS for the later part of Fiscal 2020 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 amount by $ 1,015,000 and an impairment charge was recognized for this amount in Fiscal 2020. The Company performed the annual goodwill impairment test for Fiscal 2021 and determined there was no impairment. NOTE 5 PROPERTY AND EQUIPMENT Property and equipment and related accumulated depreciation and amortization are summarized in the table below: Schedule of property, plant and equipment September 30, 2021 2020 Computer hardware and software $ 483,000 $ 488,000 Furniture and fixtures 159,000 149,000 Equipment 52,000 61,000 Property and equipment, cost 694,000 698,000 Less: accumulated depreciation and amortization ( 526,000 ) ( 483,000 ) Property and equipment, net $ 168,000 $ 215,000 Depreciation expense was $ 115,000 and $ 105,000 for Fiscal 2021 and Fiscal 2020, respectively. F- 15 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 FAIR VALUE MEASUREMENTS The earnout consideration of $ 70,000 and $ 90,000 at September 30, 2021 and 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 consolidated balance sheets at September 30, 2021 and 2020. During Fiscal 2021, the Company reduced this liability from $ 90,000 to $ 70,000 based on changes in the expected likelihood of Kablooe reaching the specified earnings targets. The IPS earnout consideration was adjusted down to $ 0 in Fiscal 2020 due to the low likelihood of IPS reaching the underlying earnings targets. The following table presents the placement in the fair value hierarchy and summarizes the change in fair value of the earn-out consideration for Fiscal 2021 and Fiscal 2020: Schedule of fair value liability measured on recurring basis Fair value measurement at reporting date using Quoted prices in active markets for identical assets Significant other observable inputs Significant unobservable inputs Balance (Level 1) (Level 2) (Level 3) Balance at September 30, 2019 $ 834,000 $ – $ – $ 834,000 Increase in fair value of IPS deferred cash consideration 16,000 – – 16,000 Decrease in the fair value of IPS earnout consideration ( 350,000 ) – – ( 350,000 ) Payout of IPS deferred cash consideration ( 500,000 ) – – ( 500,000 ) Fair value of Kablooe earnout consideration 90,000 – – 90,000 Balance at September 30, 2020 90,000 – – 90,000 Decrease in fair value of Kablooe earnout consideration ( 20,000 ) – – ( 20,000 ) Balance at September 30, 2021 $ 70,000 $ – $ – $ 70,000 The fair value of the Kablooe contingent earn-out consideration is measured on a recurring basis at each reporting date. The following inputs and assumptions were used in the Black-Scholes valuation model to estimate the fair value of the Kablooe earn-out consideration at September 30, 2021 and 2020: Fair value assumptions September 30, 2021 2020 Volatility 40% 40% Risk-free interest rate 0.3% 1% Expected term in years 0.5-3.4 0.5-4.5 Dividend yield – – 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 Fiscal 2019, the Company recorded bad debt expense of $ 1,626,000 to fully reserve accounts receivable deemed uncollectible from the same customer in which it is invested. In Fiscal 2020, the Company converted the amount outstanding from this customer into a non-negotiable secured promissory note with interest that accrues at a rate of 8% per annum and reclassified the related allowance for doubtful account s to an allowance on the note receivable. The Company received $ 101,000 and $ 134,000 from this customer in Fiscal 2021 and Fiscal 2020, respectively, of which $ 89,000 and $ 61,000 , respectively, was applied to past due interest and penalties and recorded as interest income, and $ 12,000 and $ 73,000 , respectively, was applied to principal and recorded as a recovery of bad debt expense as a reduction of general and administrative expense. F- 16 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During Fiscal 2020, as a result of the customer’s default on the promissory note, the impact of COVID-19, and performance of the business in which the Company is invested, including its inability to generate revenue, management concluded the investment was also impaired and it recorded an impairment charge of $ 327,000 to fully reserve the investment on the Company’s consolidated balance sheet at September 30, 2020. The impairment charge is included in general and administrative expenses on the consolidated statement of operations for Fiscal 2020. The following table presents the placement in the fair value hierarchy and summarizes the change in fair value of the cost method investment during Fiscal 2020: Schedule of changes in fair value of the cost method investment Fair value measurement at reporting date using Quoted prices in active markets for identical assets Significant other observable inputs Significant unobservable inputs Balance (Level 1) (Level 2) (Level 3) September 30, 2019 $ 327,000 $ – $ 327,000 $ – Impairment of cost method investment ( 327,000 ) – ( 327,000 ) – September 30, 2020 $ – $ – $ – $ – NOTE 7 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities at September 30, 2021 and 2020 are as follows: Schedule of accrued expenses and other accrued liabilities September 30, 2021 2020 Paid time off $ 241,000 $ 296,000 Other payroll-related liabilities 199,000 178,000 Other 88,000 141,000 Total $ 528,000 $ 615,000 NOTE 8 SHAREHOLDERS’ EQUITY Anti-Takeover Provisions Shareholder Rights Plan On April 26, 2013, the Board of Directors (the "Board") adopted a Shareholder Rights Plan, as set forth in the Rights Agreement between the Company and American Stock Transfer & Trust Company, LLC, as Rights Agent. Pursuant to the Rights Agreement, the Board declared a dividend distribution of one Right (a "Right") for each outstanding share of Company Common Stock, par value $0.01 per share (the "Common Stock") to shareholders of record at the close of business on May 6, 2013, which date will be the record date, and for each share of Common Stock issued (including shares distributed from treasury) by the Company thereafter and prior to the Distribution Date (as described below and defined in the Rights Agreement). Each Right entitles the registered holder, subject to the terms of the Rights Agreement, to purchase from the Company one one-thousandth of a share of Series A Participating Preferred Stock, $0.01 par value per share (the "Series A Preferred Stock"), at an exercise price of $4.00 per one one-thousandth of a share of Series A Preferred Stock, subject to adjustment. F- 17 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Initially, no separate Rights certificates will be distributed and instead the Rights will attach to all certificates representing shares of outstanding Common Stock. Subject to certain exceptions specified in the Rights Agreement, the Rights will separate from the Common Stock and become exercisable on the distribution date (the "Distribution Date"), which will occur on the earlier of (i) the 10th business day (or such later date as may be determined by the Board) after the public announcement that an Acquiring Person (as defined in the Rights Agreement) has acquired beneficial ownership of 20% or more of the Common Stock then outstanding; or (ii) the 10th business day (or such later date as may be determined by the Board) after a person or group announces a tender or exchange offer that would result in a person or group of affiliated and associated persons beneficially owning 20% or more of the Common Stock then outstanding. “Blank Check” Preferred Stock The Company is authorized to issue up to 4,000,000 shares of "blank check" preferred stock. The Board has the authority and discretion, without shareholder approval, to issue preferred stock in one or more series for any consideration it deems appropriate, and to fix the relative rights and preferences thereof including their redemption, dividend and conversion rights. Of these shares, 100,000 shares have been authorized as the Series A Participating Preferred Stock. There were no shares of preferred stock issued or outstanding at September 30, 2021 or 2020. Warrants At September 30, 2021, the Company had 151,000 warrants outstanding and exercisable. The warrants have exercise prices ranging from $1.75 to $1.84 per share and have a weighted average exercise price of $1.80 per share. At September 30, 2021, 76,000 of these warrants have a remaining life of 2.3 years and 75,000 warrants have an expiration date 90 days after a registration statement registering common stock (other than pursuant to an employee benefit plan) is declared effective by the Securities and Exchange Commission. Other Activity In Fiscal 2020, the Company issued 300,000 shares of its common stock in connection with the Kablooe acquisition (see Note 3) and in Fiscal 2021 and Fiscal 2020, issued 177,000 and 50,000 shares, respectively, of its common stock pursuant to the exercise of stock options (see Note 9). NOTE 9 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. At September 30, 2021, there were 1,291,000 shares of common stock available for grants of equity awards under the 2021 Plan. F- 18 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2011 Long Term Incentive Plan In March 2011, shareholders of the Company approved the 2011 Plan, which originally authorized 850,000 shares of common stock for grants of various types of equity awards to officers, directors, employees, consultants, and independent contractors. In February 2018, the shareholders of the Company approved an amendment to the 2011 Plan to increase the aggregate number of shares of the Company's common stock authorized for issuance under the 2011 Plan by 1,000,000 shares of common stock, from 850,000 shares of common stock to 1,850,000 shares of common stock. Forfeited awards were eligible for re-grant under the 2011 Plan. The exercise prices of stock options granted may not be less than the fair market value of the common stock as quoted at the close on the Nasdaq Stock Market on the grant date. The Compensation Committee administered the 2011 Plan. Options generally expire five to ten years after the date of grant. Upon approval of the 2021 Plan, no additional awards were granted under the 2011 Plan, which expired according to its terms in March 2021. Stock Options The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions in the following table. The expected term represents the period over which the stock option awards are expected to be outstanding. The Company utilizes the simplified method to develop an estimate of the expected term of “plain vanilla” option grants. The expected volatility used is based on the historical price of the Company’s stock over the most recent period commensurate with the expected term of the award. The risk-free interest rate used is based on the implied yield of U.S. Treasury zero-coupon issues with a remaining term equivalent to the award’s expected term. The Company historically has not paid any dividends on its common stock and had no intention to do so on the date the share-based awards were granted. The Company accounts for forfeitures in the period they occur. In applying the Black-Scholes option pricing model to options granted, the Company used the following assumptions: Assumptions used for options Fiscal 2021 Fiscal 2020 Expected term (years) – 2.5-3.0 Expected volatility – 65 %- 79 % Risk free interest rate – 0.15 %- 1.39 % Expected dividends – – The Company made no grants of stock options or other equity awards in Fiscal 2021. In Fiscal 2020, the Company made the following option grants: · Options to non-employee directors to purchase an aggregate of 248,019 shares of its common stock at an exercise price of $ 1.13 per share. The options were granted in February 2020, 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. · Options to its Chief Executive Officer to purchase 180,395 shares of its common stock at an exercise price of $ 1.40 per share. These options were granted in September 2020, vested immediately, expire five years from the date of grant and had an aggregate grant date fair value of $ 100,000 , which was fully recognized on the date of grant. · Options to an employee to purchase 27,329 shares of its common stock at an exercise price of $ 1.42 per share. These options were granted in August 2020, vest ratably over two years , expire five years from the date of grant and had an aggregate grant date fair value of $ 20,000 , which is being recognized ratably over the vesting period. The options granted during Fiscal 2020 had a weighted average grant date fair value of $ 0.58 per share. The Company recognized compensation expense for stock option awards of $ 69,000 and $ 245,000 during Fiscal 2021 and Fiscal 2020, respectively, in its consolidated statements of operations. F- 19 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During Fiscal 2021 and 2020, respectively, the Company issued 177,000 and 50,000 shares of its common stock pursuant to the exercise of stock options for aggregate cash proceeds of $ 268,000 and $ 32,000 , which had an aggregate intrinsic value of $ 306,000 and $ 33,000 . At September 30, 2021, there was $ 4,000 of unrecognized compensation cost related to nonvested stock option awards that is expected to be recognized over a weighted average period of 0.9 years. The following table summarizes stock option activity during Fiscal 2021: Schedule of stock option activity Weighted Weighted Average Average Aggregate Number of Exercise Remaining Intrinsic Options Price Life (Yrs.) Value Outstanding at September 30, 2020 1,138,000 $ 1.49 Granted – $ – Exercised ( 177,000 ) $ 1.51 Forfeited ( 1,000 ) $ 1.67 Expired ( 32,000 ) $ 3.30 Outstanding at September 30, 2021 928,000 $ 1.43 2.8 $ 895,000 Exercisable at September 30, 2021 915,000 $ 1.43 2.8 $ 881,000 Options outstanding at September 30, 2021 have an exercise price between $ 1.13 and $ 1.67 per share. NOTE 10 INCOME TAXES The following table summarizes the Company’s consolidated provision/(benefit) for U.S. federal, state and foreign taxes on income: Schedule of income tax provision Fiscal 2021 Fiscal 2020 Current: Federal $ – $ ( 4,000 ) State – 13,000 Foreign – – Deferred: Federal ( 506,000 ) 414,000 State ( 47,000 ) 82,000 Foreign ( 146,000 ) 283,000 Total deferred income tax expense ( 699,000 ) 788,000 Change in valuation allowance 699,000 ( 779,000 ) Income tax provision/(benefit) $ – $ 9,000 F- 20 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The deferred tax provision/(benefit) is the change in the deferred tax assets and liabilities representing the tax consequences of changes in the amounts of temporary differences, net operating loss carryforwards and changes in tax rates during the fiscal year. The Company’s deferred tax assets and liabilities are comprised of the following: Schedule of deferred income taxes September 30, 2021 2020 Deferred tax assets Net operating losses $ 2,093,000 $ 1,812,000 Share-based compensation 175,000 180,000 Excess tax over book basis in inventory 43,000 20,000 Reserves and other allowances 569,000 155,000 Accrued compensation 15,000 70,000 Depreciation – 31,000 Interest expense limitation 40,000 – Other items 16,000 21,000 Total deferred tax assets 2,951,000 2,289,000 Deferred tax liabilities Depreciation ( 18,000 ) – Prepaid expenses ( 131,000 ) ( 58,000 ) Intangible assets ( 216,000 ) ( 245,000 ) 481 Election (IPS) – ( 99,000 ) Total deferred tax liabilities ( 365,000 ) ( 402,000 ) Valuation allowance ( 2,586,000 ) ( 1,887,000 ) Net deferred tax assets $ – $ – The Company recorded a provision for income taxes which includes net expense of $0 and $9,000 in Fiscal 2021 and 2020, respectively. The Fiscal 2020 net expense of $9,000 includes state income tax expenses of $13,000, partially offset by a $4,000 refund of the remaining unused balance of alternative minimum tax (“AMT”) credits. Under the Tax Cuts and Jobs Act of 2017, AMT was repealed. The tax code in turn provided for a refund of the tax credits that existed on December 31, 2017 at a 50% rate in tax years 2018, 2019 and 2020, with any remaining credits being fully refundable in 2021. The CARES Act allowed corporations to immediately claim unused AMT credits on their 2019 tax return. State income tax expense was the result of taxable income in states where net operating loss carryforwards (“NOLs”) were not available. At September 30, 2021, the Company had available net NOLs for U.S. federal income tax purposes of $ 7,220,000 and NOLs for state income tax purposes of $1,000,000 . NOLs generated prior to 2018 expire beginning in 2031 while NOLs generated after 2018 have an indefinite carryforward period. The NOLs result in a deferred tax asset with respect to U.S. federal income taxes of $ 1,790,000 . In addition, at September 30, 2021, the Company had available NOLs for foreign income tax purposes of $ 1,427,000 , resulting in a deferred tax asset of $ 260,000 , expiring through 2024. Total net deferred tax assets, before valuation allowance, were $2,586,000 and $1,887,000 at September 30, 2021 and 2020, respectively. Undistributed earnings of the Company's foreign subsidiaries are considered permanently reinvested; therefore, in accordance with U.S. GAAP, no provision for U.S. federal and state income taxes would result. In Fiscal 2021, Forward Switzerland had a net loss for tax purposes of $ 25,000 and Forward UK had net income for tax purposes of $ 10,000 . F- 21 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At September 30, 2021, as part of its periodic evaluation of the necessity to maintain a valuation allowance against its deferred tax assets, and after consideration of all factors, including, among others, projections of future taxable income, current year NOL utilization and the extent of the Company's cumulative losses in recent years, the Company determined that, on a more likely than not basis, it would not be able to use remaining deferred tax assets, except with respect to the U.S. federal income taxes in the event the Company elects to effect repatriation of certain foreign source income of Forward Switzerland, which income is currently considered to be permanently reinvested and for which no U.S. tax liability has been accrued. Accordingly, the Company has determined to maintain a full valuation allowance against its net deferred tax assets. At September 30, 2021 and 2020, the valuation allowance was $2,586,000 and $1,887,000, respectively. In the future, the utilization of the Company's NOLs may be subject to certain change of control limitations. If the Company determines that it will be able to use some or all of its deferred tax assets in a future reporting period, the adjustment to reduce or eliminate the valuation allowance would reduce its income tax expense and increase after-tax income. The significant elements contributing to the difference between the U.S. federal statutory tax rate and the Company’s effective tax rate are as follows: Reconciliation of effective tax rate Fiscal 2021 Fiscal 2020 U.S. federal statutory rate 21.0 % 21.0 % State tax rate, net of federal benefit ( 8.3 % ) ( 1.9 % ) Foreign rate differential ( 2.6 % ) ( 14.9 % ) Tax return to provision adjustments ( 78.8 % ) ( 12.7 % ) Effect of state tax rate change ( 7.8 % ) 1.5 % Change in valuation allowance 129.9 % 41.1 % State income taxes 0.0 % ( 0.7 % ) Permanent differences ( 53.4 % ) ( 33.9 % ) Effective tax rate 0.0 % ( 0.5 % ) In December 2020, the Company received approval of its application for forgiveness of its note payable related to the Paycheck Protection Program (the “PPP loan”) in the aggregate principal amount of $ 1,357,000 , which 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. At September 30, 2021 and 2020, the Company had not accrued any interest or penalties related to uncertain tax positions. It is the Company's policy to recognize interest and/or penalties, if any, related to income tax matters in income tax expense in the consolidated statements of operations. For the periods presented in the accompanying consolidated statements of operations, no material income tax related interest or penalties were assessed or recorded. All fiscal years prior to the fiscal year ended September 30, 2018 are closed to federal and state examination. NOTE 11 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 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. F- 22 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A reconciliation of basic and diluted earnings/loss per share is as follows: Schedule of earnings (loss) per share For the Fiscal Years Ended September 30, 2021 2020 Numerator: Net income/(loss) $ 524,000 $ ( 1,775,000 ) Denominator: Weighted average common shares outstanding 9,950,000 9,583,000 Dilutive common share equivalents 493,000 – Weighted average dilutive shares outstanding 10,443,000 9,583,000 Earnings/(loss) per share: Basic $ 0.05 $ ( 0.19 ) Diluted $ 0.05 $ ( 0.19 ) There were no anti-dilutive securities excluded from the calculation of diluted earnings per share in Fiscal 2021. The following securities were excluded from the calculation of diluted earnings per share in Fiscal 2020 because their inclusion would have been anti-dilutive: Schedule of antidilutive securities excluded Fiscal 2020 Options 1,138,000 Warrants 151,000 Total potentially dilutive shares 1,289,000 NOTE 12 COMMITMENTS AND CONTINGENCIES Guarantee Obligation In February 2010, Forward Switzerland and its European logistics provider (freight forwarding and customs agent) entered into a Representation Agreement (the “Representation Agreement”) whereby, among other things, the European logistics provider agreed to act as Forward Switzerland's fiscal representative in The Netherlands for the purpose of providing services in connection with any value added tax matters. As part of this agreement, Forward Switzerland agreed to provide an undertaking (in the form of a bank letter of guarantee) to the logistics provider with respect to any value added tax liability arising in The Netherlands that the logistics provider is required to pay to Dutch tax authorities on its behalf. In February 2010, Forward Switzerland entered into a guarantee agreement with a Swiss bank relating to the repayment of any amount up to €75,000 (equal to approximately $87,000 at September 30, 2021) paid by such bank to the logistics provider in order to satisfy such undertaking pursuant to the bank letter of guarantee. Forward Switzerland would be required to perform under the guarantee agreement only in the event that (i) a value added tax liability is imposed on the Company's revenues in The Netherlands; (ii) the logistics provider asserts that it has been called upon in its capacity as surety by the Dutch Receiver of Taxes to pay such taxes; (iii) Forward Switzerland or the Company on its behalf fails or refuses to remit the amount of value added tax due to the logistics provider upon its demand; and (iv) the logistics provider makes a drawing under the bank letter of guarantee. Under the Representation Agreement, Forward Switzerland agreed that the letter of guarantee would remain available for drawing for three years following the date that its relationship terminates with the logistics provider to satisfy any value added tax liability arising prior to expiration of the Representation Agreement but asserted by The Netherlands after expiration. F- 23 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The initial term of the bank letter of guarantee expired February 28, 2011, but it renews automatically for one-year periods on February 28 of each subsequent year unless Forward Switzerland provides the Swiss bank with written notice of termination at least 60 days prior to the renewal date. It is the intent of Forward Switzerland and the logistics provider that the bank letter of guarantee amount be adjusted annually. In consideration of the issuance of the letter of guarantee, Forward Switzerland has granted the Swiss bank a security interest in all of its assets on deposit with, held by, or credited to Forward Switzerland’s accounts with, the Swiss bank (approximately $436,000 at September 30, 2021). At September 30, 2021, the Company had not incurred a liability in connection with this guarantee. 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. In October 2021, the Court ruled that the misappropriation claim was invalid. The remaining allegation is that IPS breached a non-disclosure agreement with a party to the case. IPS denies the allegations, believes the action is without merit and intends to vigorously defend it. The Company has filed a motion to dismiss. From time to time, the Company may become a party to other legal actions or proceedings in the ordinary course of its business. At September 30, 2021, there were no such actions or proceedings, either individually or in the aggregate, that, if decided adversely to its interests, the Company believes would be material to its business. NOTE 13 LEASES The Company’s operating leases are primarily for corporate, sales and administrative office space. Total operating lease expense in Fiscal 2021 was $ 611,000 , of which $55,000 was recorded in sales and marketing expenses and $556,000 was recorded in general and administrative expenses on the consolidated statements of operations. Total operating lease expense in Fiscal 2020 was $ 562,000 , of which $7,000 was recorded in sales and marketing expenses and $555,000 was recorded in general and administrative expenses on the consolidated statements of operations. Cash paid for amounts included in operating lease liabilities in Fiscal 2021 and Fiscal 2020, which have been included in cash flows from operating activities, was $ 489,000 and $ 495,000 , respectively. The Company leases certain computer equipment through finance lease agreements expiring through July 2022. The net book value of assets under finance leases was $ 14,000 and $ 23,000 at September 30, 2021 and 2020, respectively. The remaining finance lease liability at September 30, 2021 was $ 2,000 and due to immateriality, no additional disclosures are made for finance leases. At September 30, 2021, the Company’s operating leases had a weighted average remaining lease term of 9.3 years and a weighted average discount rate of 5.7 %. Future minimum payments under non-cancellable operating leases are as follows: Schedule of Future Minimum Rental Payments for Operating Leases Fiscal 2022 $ 554,000 Fiscal 2023 554,000 Fiscal 2024 565,000 Fiscal 2025 531,000 Fiscal 2026 510,000 Thereafter 2,398,000 Total future minimum lease payments 5,112,000 Less imputed interest ( 1,213,000 ) Total $ 3,899,000 F- 24 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 RELATED PARTY TRANSACTIONS Buying Agency and Supply Agreement The Company has a Buying Agency and Supply Agreement (the “Supply Agreement”) with 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 $ 1,404,000 and $ 1,363,000 during Fiscal 2021 and Fiscal 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 revenue of $12,000 of commissions related to this agreement in Fiscal 2021. No commissions were recognized in Fiscal 2020. The Company had prepayments to Forward China for inventory purchases of $ 317,000 and $ 107,000 at September 30, 2021 and 2020, respectively, which are included in prepaid expenses and other current assets on the consolidated balance sheets. Promissory Note On January 18, 2018, the Company issued a $ 1,600,000 unsecured promissory note payable to Forward China in order to fund the acquisition of IPS. The promissory note bears interest at a 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 $ 128,000 in interest expense associated with this note in both Fiscal 2021 and Fiscal 2020. The maturity date of this note was extended to December 31, 2022. The maturity date of the note has been extended on several occasions to assist the Company with liquidity. 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 OEM distribution segment sold products during Fiscal 2021. The Company recognized revenue of $ 63,000 from the sale of such products during Fiscal 2021. During Fiscal 2020, 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 on the Board’s Audit, Governance and Compensation Committees. The Company sold design services to this customer of $ 44,000 in Fiscal 2020. There were no sales to this customer in Fiscal 2021 and no outstanding receivables from this customer at September 30, 2021 or 2020. 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 Terence Wise, Chief Executive Officer and Chairman of the Company. The Company recognized revenues from the sale of Koble products of $ 1,493,000 in Fiscal 2021. F- 25 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 401(k) PLAN The Company maintains a 401(k) benefit plan allowing eligible employees to make pre-tax contributions of a portion of their salary in amounts subject to IRS limitations. The Company made immediately vested matching contributions of $ 331,000 in Fiscal 2021, of which $260,000 was recorded to cost of sales and $71,000 was recorded to general and administrative expenses on the consolidated statement of operations. The Company made immediately vested matching contributions of $ 269,000 during Fiscal 2020, of which $223,000 was recorded to cost of sales and $46,000 was recorded to general and administrative expenses on the consolidated statement of operations. NOTE 16 SEGMENTS AND CONCENTRATIONS Segments The Company has three reportable segments: OEM distribution, retail distribution and design. See Note 2 for more information on the composition and accounting policies of our reportable segments. Our chief operating decision maker (“CODM”) regularly reviews revenue and operating income for each segment to assess financial results and allocate resources. In Fiscal 2021, due to the growth of our retail division, we determined it to be a separate reportable segment. For our OEM and retail distribution segments, we exclude general and administrative and general corporate expenses from their measure of profitability as these expenses are not allocated to the segments and therefore not included in the measure of profitability used by the CODM. For the design segment, general and administrative expenses directly attributable to that segment are included in its measure of profitability as these expenses are included in the measure of its profitability reviewed by the CODM. We do not include intercompany activity in our segment results shown below to be consistent with the information that is presented to the CODM. Segment assets consist of accounts receivable and inventory, which are regularly reviewed by the CODM, as well as goodwill and intangible assets resulting from design segment acquisitions. The Fiscal 2020 results of operations for each segment discussed below have been reformatted from what was previously disclosed to segregate the retail distribution segment and exclude general corporate expenses from segment operating income to show them as a reconciling item so that results are comparable to the current year presentation. Information by segment and related reconciliations are shown in tables below: Segment operating income (loss) Revenues Fiscal 2021 Fiscal 2020 OEM distribution $ 19,290,000 $ 19,726,000 Retail distribution 3,183,000 1,026,000 Design 16,549,000 13,726,000 Total segment revenues $ 39,022,000 $ 34,478,000 Operating Income/(Loss) Fiscal 2021 Fiscal 2020 OEM distribution $ 1,479,000 $ 1,616,000 Retail distribution ( 779,000 ) ( 337,000 ) Design 603,000 ( 378,000 ) Total segment operating income 1,303,000 901,000 General corporate expenses ( 2,068,000 ) ( 2,883,000 ) Total loss from operations ( 765,000 ) ( 1,982,000 ) Other income, net ( 1,289,000 ) ( 216,000 ) Income/(loss) before income taxes $ 524,000 $ ( 1,766,000 ) F- 26 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Balance Sheet Depreciation and Amortization Fiscal 2021 Fiscal 2020 OEM distribution $ 7,000 $ 7,000 Retail distribution 1,000 – Design 319,000 265,000 Total $ 327,000 $ 272,000 Segment Assets September 30, 2021 2020 OEM distribution $ 5,898,000 $ 5,103,000 Retail distribution 2,178,000 416,000 Design 5,824,000 6,649,000 Total segment assets 13,900,000 12,168,000 General corporate assets 5,956,000 7,188,000 Total assets $ 19,856,000 $ 19,356,000 Geographic Concentrations The Company’s long-lived assets consist of property and equipment and operating lease right of use assets, all of which are located in the United States. The following table sets forth our consolidated net revenues by country for Fiscal 2021 and Fiscal 2020: Revenues from External Customers Revenues Fiscal 2021 Fiscal 2020 United States $ 25,670,000 $ 21,017,000 China 5,640,000 5,093,000 Germany 2,787,000 3,375,000 Poland 3,111,000 2,675,000 Other foreign countries 1,814,000 2,318,000 Total $ 39,022,000 $ 34,478,000 Customer Concentrations In Fiscal 2021 and Fiscal 2020, the Company had significant customers in the OEM distribution segment whose individual percentage of the Company’s consolidated revenues and accounts receivable was 10% or greater. The following customers or their affiliates or contract manufacturers accounted for 10% or more of the Company’s consolidated net revenues for Fiscal 2021 and Fiscal 2020: Schedule of concentration percentages Fiscal 2021 Fiscal 2020 Customer A $ 5,343,000 $ 6,145,000 Customer B 3,913,000 3,448,000 Customer C 5,111,000 4,912,000 F- 27 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following customers or their affiliates or contract manufacturers accounted for 10% or more of the Company’s consolidated accounts receivable at September 30, 2021 and 2020: September 30, 2021 2020 Customer A $ 1,454,000 $ 977,000 Customer B 1,259,000 966,000 Customer C 1,138,000 843,000 Supplier Concentration The Company’s OEM and retail distribution segments procure substantially all their products through independent suppliers in China through Forward China. Depending on the product, Forward China may require several different suppliers to furnish component parts or pieces. NOTE 17 LINE OF CREDIT The Company, specifically IPS, has a $ 1,300,000 revolving line of credit which was renewed 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 September 30, 2021 and 2020. In March 2021, the Company paid down the outstanding balance on the line of credit and $ 1,300,000 was available at September 30, 2021. The Company is subject to certain debt-service ratio requirements which are measured annually. The Company was in compliance with such covenants at September 30, 2021. NOTE 18 DEBT On April 18, 2020 , the Company entered into a PPP loan in an aggregate principal amount of $ 1,357,000 . The loan was unsecured, bore interest at a rate of 1.0 % per annum and was scheduled to mature on April 18, 2022 . The Company accounted for the proceeds as a loan and the current and long-term portions of $ 827,000 and $ 530,000 , respectively, are included in the corresponding categories of notes payable on the consolidated balance sheet at September 30, 2020. In October 2020, the Company filed for forgiveness of this loan and in December 2020, the SBA approved its forgiveness request. 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 consolidated statement of operations for Fiscal 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 matured in August 2021, bore interest at a rate of 6.0 % per annum and was secured by all of Kablooe’s assets. Interest and principal payments of $ 15,000 were payable monthly until maturity. The outstanding balance at September 30, 2021 and 2020 was $ 0 and $156,000, respectively. NOTE 19 MOONI AGREEMENT On January 29, 2019, the Company entered into a three-year Distribution Agreement (the “Agreement”) with Mooni International AB 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 a fee of $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 be 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 $ 198,000 and $ 263,000 in Fiscal 2021 and 2020, respectively. The current and long-term portions of the unamortized fee of $ 44,000 and $ 0 , respectively, at September 30, 2021 and $ 133,000 and $ 45,000 , respectively, at September 30, 2020, are included in prepaid and other current assets and other assets, respectively, in the accompanying consolidated balance sheets. Amortization of the cost in Fiscal 2021 and Fiscal 2020 was $ 133,000 and is included in sales and marketing expenses in the accompanying consolidated statements of operations. F- 28