Forward Industries, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS   December 31, September 30, 2021 2021 Assets (Unaudited) Current assets: Cash $ 2,432,225 $ 1,410,365 Accounts receivable, net 8,788,041 8,760,715 Inventories, net 2,972,134 2,062,557 Prepaid expenses and other current assets 630,649 561,072 Total current assets 14,823,049 12,794,709 Property and equipment, net 213,826 167,997 Intangible assets, net 1,265,469 1,318,658 Goodwill 1,758,682 1,758,682 Operating lease right of use assets, net 3,844,425 3,743,242 Other assets 72,251 72,251 Total assets $ 21,977,702 $ 19,855,539 Liabilities and shareholders' equity Current liabilities: Note payable to Forward China $ 1,550,000 $ – Accounts payable 307,508 391,992 Due to Forward China 6,961,599 5,733,708 Deferred income 752,878 187,695 Current portion of earnout consideration 25,000 25,000 Current portion of operating lease liability 334,126 340,151 Accrued expenses and other current liabilities 662,519 529,497 Total current liabilities 10,593,630 7,208,043 Other liabilities: Note payable to Forward China – 1,600,000 Operating lease liability, less current portion 3,676,805 3,559,053 Earnout consideration, less current portion 45,000 45,000 Total other liabilities 3,721,805 5,204,053 Total liabilities 14,315,435 12,412,096 Commitments and contingencies – – Shareholders' equity: Common stock, par value $ 0.01 per share; 40,000,000 shares authorized; 10,061,185 shares issued and outstanding at December 31, 2021 and September 30, 2021 100,612 100,612 Additional paid-in capital 19,953,276 19,914,476 Accumulated deficit ( 12,391,621 ) ( 12,571,645 ) Total shareholders' equity 7,662,267 7,443,443 Total liabilities and shareholders' equity $ 21,977,702 $ 19,855,539 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 3 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the Three Months Ended December 31, 2021 2020 Revenues, net $ 11,613,741 $ 9,717,603 Cost of sales 8,994,973 7,454,717 Gross profit 2,618,768 2,262,886 Sales and marketing expenses 737,677 602,961 General and administrative expenses 1,666,877 1,827,418 Income/(loss) from operations 214,214 ( 167,493 ) Gain on forgiveness of note payable – ( 1,356,570 ) Fair value adjustment of earn-out consideration – ( 30,000 ) Interest income – ( 22,747 ) Interest expense 32,828 46,392 Other expense/(income), net 1,362 ( 3,604 ) Income before income taxes 180,024 1,199,036 Provision for income taxes – – Net income $ 180,024 $ 1,199,036 Earnings per share: Basic $ 0.02 $ 0.12 Diluted $ 0.02 $ 0.12 Weighted average common shares outstanding: Basic 10,061,185 9,885,563 Diluted 10,337,113 10,039,799 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 4 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) For the Three Month Ended December 31, 2021 Additional Common Stock Paid-In Accumulated Shares Amount Capital Deficit Total Balance at September 30, 2021 10,061,185 $ 100,612 $ 19,914,476 $ ( 12,571,645 ) $ 7,443,443 Share-based compensation – – 38,800 – 38,800 Net income – – – 180,024 180,024 Balance at December 31, 2021 10,061,185 $ 100,612 $ 19,953,276 $ ( 12,391,621 ) $ 7,662,267 For the Three Month Ended December 31, 2020 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 – – 41,457 – 41,457 Stock options exercised 2,500 25 1,650 – 1,675 Net income – – – 1,199,036 1,199,036 Balance at December 31, 2020 9,886,351 $ 98,863 $ 19,622,791 $ ( 11,896,414 ) $ 7,825,240 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 5 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Three Months Ended December 31, 2021 2020 Operating Activities: Net income $ 180,024 $ 1,199,036 Adjustments to reconcile net income to net cash provided by/(used in) operating activities: Share-based compensation 38,800 41,457 Depreciation and amortization 73,384 93,937 Bad debt expense 393 77,400 Gain on forgiveness of note payable – ( 1,356,570 ) Change in fair value of earn-out consideration – ( 30,000 ) Changes in operating assets and liabilities: Accounts receivable ( 27,719 ) ( 204,224 ) Inventories ( 909,577 ) 18,297 Prepaid expenses and other current assets ( 69,577 ) 80,180 Other assets – 44,446 Accounts payable and due to Forward China 1,143,407 ( 154,771 ) Deferred income 565,183 ( 315,309 ) Net changes in operating lease liabilities 10,544 15,673 Accrued expenses and other current liabilities 133,022 ( 20,755 ) Net cash provided by/(used in) operating activities 1,137,884 ( 511,203 ) Investing Activities: Purchases of property and equipment ( 66,024 ) ( 30,482 ) Net cash used in investing activities ( 66,024 ) ( 30,482 ) Financing Activities: Repayment of notes payable – ( 41,904 ) Repayment of note payable to Forward China ( 50,000 ) – Proceeds from stock options exercised – 1,675 Repayments of finance leases – ( 10,389 ) Net cash used in financing activities ( 50,000 ) ( 50,618 ) Net increase/(decrease) in cash 1,021,860 ( 592,303 ) Cash at beginning of period 1,410,365 2,924,627 Cash at end of period $ 2,432,225 $ 2,332,324 Supplemental Disclosures of Cash Flow Information: Cash paid for interest $ 32,828 $ 46,281 Cash paid for taxes $ – $ 50 Supplemental Disclosures of Non-Cash Information: Lease assets recorded $ 204,881 $ – Lease liabilities recorded $ 204,881 $ – The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 6 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 OVERVIEW Business Forward Industries, Inc. (“Forward”, “we”, “our” or the “Company”) is a fully integrated design, development and manufacturing solution provider for top tier medical and technology customers worldwide. As a result of the continued expansion of our design and development capabilities through our wholly-owned subsidiaries, we are now able to introduce proprietary products to the market from concepts brought to us from a number of different sources, both inside and outside the Company. Liquidity For the three months ended December 31, 2021, the Company generated net income of $ 180,000 , and $ 1,138,000 of cash flows from operating activities. We believe our existing cash balance and working capital will be sufficient to meet our liquidity needs through at least February 28, 2023. Impact of COVID-19 The COVID-19 pandemic continues to impact our business. The increase in global consumer demand, coupled with the global shipping container shortage, dramatically increased demand for both ocean freight and ground transportation. These factors led to a significant increase in freight costs, particularly from the Asia-Pacific region. Labor shortages at US ports and in ground transportation services caused container ships to spend a significant amount of time waiting to be unloaded and to arrive at our warehouses. These factors caused an increase in the demand and cost of ground transportation and delayed consumer availability for many of our products in the first quarter of fiscal 2022. The timing and extent of these COVID-19 related transportation disruptions is still largely unknown but are expected to continue throughout fiscal 2022. COVID-19 may further impact our business in ways we cannot predict, and such impacts could be significant. The current and economic impact may continue to negatively impact our results of operations, cash flows and financial position in future periods as well as that of our customers, including their ability to pay for our services and to choose to allocate their budgets to new or existing projects which may or may not require our services. The long-term financial impact on our business cannot be reasonably estimated at this time. As a result, the effects of COVID-19 may not be fully reflected in our financial results until future periods. Until the pandemic is fully controlled, we expect business conditions to remain challenging. In response to these challenges, we will continue to focus on those factors that we can control: closely managing and controlling our expenses; aligning our design and development schedules with demand in a proactive manner as there are changes in market conditions to minimize our cash operating costs; pursuing further improvements in the productivity and effectiveness of our development, selling and administrative activities and, where appropriate, taking advantage of opportunities to enhance our business growth and strategy. NOTE 2 ACCOUNTING POLICIES Basis of Presentation The accompanying condensed consolidated financial statements include the accounts of Forward Industries, Inc. and all of its subsidiaries: Forward Industries (IN), Inc., (“Forward US”), Forward Industries (Switzerland) GmbH, (“Forward Switzerland”), Forward Industries UK Limited, (“Forward UK”), Intelligent Product Solutions, Inc., (“IPS”) and Kablooe, Inc., (“Kablooe”). The terms “Forward”, “we”, “our” or the “Company” as used throughout this document are used to indicate Forward Industries, Inc. and all of its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. 7 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS In the opinion of management, the accompanying condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q reflect all normal recurring adjustments necessary to present fairly the financial position and results of operations and cash flows for the interim periods presented herein, but are not necessarily indicative of the results of operations for the year ending September 30, 2022. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2021, and with the disclosures and risk factors presented therein. The September 30, 2021 condensed consolidated balance sheet has been derived from the audited consolidated financial statements. Accounting Estimates The preparation of the Company’s condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions. Throughout this document, certain dollar amounts and percentages have been rounded to their approximate values. 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 worldwide. The retail distribution segment sources and sells smart-enabled furniture and a variety of other products to customers predominantly located in the U.S. 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 to customers predominantly located in the U.S. See Note 5 for more information on segments. Accounts Receivable Accounts receivable consist of unsecured trade accounts with customers. The Company maintains an allowance for doubtful accounts, which is recorded as a reduction to accounts receivable on the condensed consolidated financial statements. Collectability of accounts receivable is estimated by evaluating the number of days accounts are outstanding, customer payment history, recent payment trends and perceived creditworthiness, adjusted as necessary based on specific customer situations. At December 31, 2021, September 30, 2021 and September 30, 2020, the Company had allowances for doubtful accounts of $ 90,000 , $ 90,000 and $ 249,000 , respectively, for the OEM distribution segment and $ 706,000 , $ 706,000 and $ 347,000 , respectively, for the design segment. The Company did not have any allowances for doubtful accounts related to its retail distribution segment at December 31, 2021, September 30, 2021 or September 30, 2020. The Company has sales agreements with various retailers which contain different terms for trade discounts, promotional and other allowances. At December 31, 2021, September 30, 2021 and September 30, 2020, the Company recorded accounts receivable allowances of $ 47,000 , $ 0 and $ 0 , respectively, for the retail distribution segment. 8 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Revenue Recognition Distribution Segment 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 condensed consolidated balance sheets. The retail distribution segment had contract liabilities of $ 0 , $ 0 and $ 75,000 at December 31, 2021, September 30, 2021 and September 30, 2020, respectively. The OEM distribution segment had no contract liabilities at December 31, 2021, September 30, 2021 or September 30, 2020. 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 condensed consolidated balance sheets. The design segment had contract assets of $ 764,000 , $ 693,000 and $ 649,000 at December 31, 2021, September 30, 2021 and September 30, 2020, respectively. Contracts where collections to date have exceeded recognized revenues, or contract liabilities, are recorded as a liability and classified as a component of deferred income in the accompanying condensed consolidated balance sheets. The design segment had contract liabilities of $ 753,000 , $ 188,000 and $ 410,000 at December 31, 2021, September 30, 2021 and September 30, 2020, respectively. 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 (the IPS and Kablooe operating segments) and we perform our annual goodwill impairment test on September 30, the end of the fiscal year, or upon the occurrence of a triggering event. 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 assessment by comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying value, no impairment charge is recognized. If the fair value of the reporting unit is less than its carrying value, an impairment charge will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value. A significant amount of judgment is required in performing goodwill impairment tests including estimating the fair value of a reporting unit. Management evaluated and concluded that there were no indications goodwill was impaired at December 31, 2021. 9 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 and are amortized over their estimated useful lives, which are periodically evaluated for reasonableness. Our intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In assessing the recoverability of our intangible assets, we must make estimates and assumptions regarding future cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and the magnitude of any such charge. Fair value estimates are made at a specific point in time, based on relevant information. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. If these estimates or material related assumptions change in the future, we may be required to record impairment charges related to our intangible assets. Management evaluated and concluded that there were no impairments of intangible assets at December 31, 2021. 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 December 31, 2021, there was no change to our assessment that a full valuation allowance was required against all net deferred tax assets as it is not probable that such deferred tax assets will be realized. Accordingly, any deferred tax provision or benefit was offset by an equal and opposite change to the valuation allowance. No current book income tax provision was recorded against book net income due to the existence of significant net operating loss carryforwards. Fair Value Measurements We perform fair value measurements in accordance with the guidance provided by Accounting Standards Codification (“ASC”) 820, “Fair Value Measurement.” ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at their fair values, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the assets or liabilities, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset's or liability's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value: · 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. 10 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Leases Lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term, using the Company’s incremental borrowing rate commensurate with the lease term, since the Company’s lessors do not provide an implicit rate, nor is one readily available. The Company has certain leases that may include an option to renew and when it is reasonably probable to exercise such option, the Company will include the renewal option terms in determining the lease asset and lease liability. Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Operating lease assets are shown as right of use assets and financing lease assets are a component of property and equipment on the condensed consolidated balance sheets. The current and long-term portions of operating and financing lease liabilities are shown separately as such on the condensed consolidated balance sheets. Reclassifications Certain amounts in the accompanying financial statements at and for the three months ended December 31, 2020 have been reclassified to conform to the current year presentation. Recent Accounting Pronouncements In November 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” ASU 2019-11 is an accounting pronouncement that provides clarity to and amends earlier guidance on this topic and would be effective concurrently with the adoption of such earlier guidance. This pronouncement is effective for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years. The Company is currently evaluating the effects of this pronouncement on its condensed consolidated financial statements. In 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 adopted this guidance in the first quarter of fiscal 2022 with no material impact to its condensed consolidated financial statements. NOTE 3 INTANGIBLE ASSETS AND GOODWILL Intangible Assets The Company’s intangible assets consist of the following: Intangible Assets December 31, 2021 September 30, 2021 Trademarks Customer Relationships Total Intangible Assets Trademarks 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 ( 135,000 ) ( 575,000 ) ( 710,000 ) ( 125,000 ) ( 531,000 ) ( 656,000 ) Net carrying amount $ 450,000 $ 815,000 $ 1,265,000 $ 460,000 $ 859,000 $ 1,319,000 11 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 the three months ended December 31, 2021 and 2020, the Company recorded amortization expense related to intangible assets of $ 54,000 , which is included in general and administrative expenses in the Company’s condensedconsolidated statements of operations. At December 31, 2021, estimated amortization expense for the Company’s intangible assets for each of the next five years and thereafter is as follows: Estimated amortization expense Remainder of Fiscal 2022 $ 159,000 Fiscal 2023 213,000 Fiscal 2024 213,000 Fiscal 2025 213,000 Fiscal 2026 121,000 Thereafter 346,000 Total $ 1,265,000 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. NOTE 4 FAIR VALUE MEASUREMENTS The earnout consideration of $ 70,000 at December 31, 2021 and September 30, 2021 represents the fair value of the contingent earnout consideration related to the acquisition of Kablooe. The fair value of the earnout liability is measured on a recurring basis at each reporting date using a Black-Scholes valuation model with inputs categorized within level three of the fair value hierarchy. The current and non-current portions of this liability are shown in the corresponding categories on the condensed consolidated balance sheets in each period presented. During the three months ended December 31, 2021, there were no changes to the fair value of this earnout liability. NOTE 5 SEGMENTS AND CONCENTRATIONS 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. 12 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The results of operations for the three months ended December 31, 2020 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 period presentation. Information by segment and related reconciliations are shown in tables below: Segment operating income (loss) For the Three Months Ended December 31, 2021 2020 Revenues: OEM distribution $ 5,242,000 $ 5,214,000 Retail distribution 1,392,000 392,000 Design 4,980,000 4,112,000 Total segment revenues $ 11,614,000 $ 9,718,000 Operating Income/(Loss): OEM distribution $ 497,000 $ 417,000 Retail distribution ( 228,000 ) ( 179,000 ) Design 585,000 177,000 Total segment operating income 854,000 415,000 General corporate expenses ( 640,000 ) ( 582,000 ) Total income/(loss) from operations 214,000 ( 167,000 ) Other expense/(income), net 34,000 ( 1,366,000 ) Income before income taxes $ 180,000 $ 1,199,000 Depreciation and Amortization: OEM distribution $ 2,000 $ 2,000 Design 71,000 92,000 Total depreciation and amortization $ 73,000 $ 94,000 Schedule of Operating Assets and Liabilities December 31, 2021 September 30, 2021 Segment Assets: OEM distribution $ 5,218,000 $ 5,898,000 Retail distribution 3,217,000 2,178,000 Design 6,349,000 5,824,000 Total segment assets 14,784,000 13,900,000 General corporate assets 7,194,000 5,956,000 Total assets $ 21,978,000 $ 19,856,000 For the three months ended December 31, 2021 and 2020, the Company had two significant customers in the OEM distribution segment whose individual percentage of the Company’s consolidated revenues was 10 % or greater. Revenues from these customers or their affiliates or contract manufacturers were $ 1,566,000 and $ 1,357,000 for the three months ended December 31, 2021 and $ 1,574,000 and $ 1,280,000 for the three months ended December 31, 2020. At December 31, 2021 and September 30, 2021, the Company had customers in the OEM distribution segment whose accounts receivable balance accounted for 10% or more of the Company’s consolidated accounts receivable. Accounts receivable from these customers or their affiliates or contract manufacturers were $ 1,386,000 and $ 891,000 at December 31, 2021 and $ 1,454,000 , $ 1,259,000 and $ 1,138,000 at September 30, 2021. 13 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 SHARE-BASED COMPENSATION Stock Options In October 2021, the Company granted options to non-employee directors to purchase an aggregate of 58,000 shares of its common stock at an exercise price of $ 2.39 per share. The options expire five years from the date of grant, approximately half vested immediately and approximately half vest one year from the date of grant. The options have a weighted average grant-date fair value of $ 1.03 per share and an aggregate grant-date fair value of $ 60,000 , which will be recognized ratably over the vesting period. There were no options granted during the three months ended December 31, 2020. There were no options exercised during the three months ended December 31, 2021. During the three months ended December 31, 2020, the Company issued 2,500 shares of its common stock pursuant to the exercise of stock options for aggregate cash proceeds of $ 2,000 , which had an aggregate intrinsic value of $ 2,000 . The Company recognized compensation expense for stock option awards of $ 39,000 and $ 41,000 during the three months ended December 31, 2021 and 2020, respectively, in its condensed consolidated statements of operations. At December 31, 2021, there was $ 25,000 of total unrecognized compensation cost related to nonvested stock option awards that is expected to be recognized over a weighted average period of 0.7 years. NOTE 7 EARNINGS PER SHARE Basic earnings per share data for each period presented is computed using the weighted average number of shares of common stock outstanding during each such period. Diluted earnings per share data is computed using the weighted average number of common and dilutive common equivalent shares outstanding during each period. Dilutive common-equivalent shares consist of shares that would be issued upon the exercise of stock options and warrants, computed using the treasury stock method. A reconciliation of basic and diluted earnings per share is as follows: Schedule of Earnings Per Share, Basic and Diluted For the Three Months Ended December 31, 2021 2020 Numerator: Net income $ 180,000 $ 1,199,000 Denominator: Weighted average common shares outstanding 10,061,000 9,886,000 Dilutive common share equivalents 276,000 154,000 Weighted average diluted shares outstanding 10,337,000 10,040,000 Earnings per share: Basic $ 0.02 $ 0.12 Diluted $ 0.02 $ 0.12 14 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following securities were excluded from the calculation of diluted earnings per share in each period because their inclusion would have been anti-dilutive: Schedule of antidilutive securities excluded For the Three Months Ended December 31, 2021 2020 Options 58,000 136,000 Warrants – 151,000 Total potentially dilutive shares 58,000 287,000 NOTE 8 RELATED PARTY TRANSACTIONS Buying Agency and Supply Agreement The Company has a Buying Agency and Supply Agreement (the “Supply Agreement”) with Forward Industries Asia-Pacific Corporation, (“Forward China”). The Supply Agreement provides that, upon the terms and subject to the conditions set forth therein, Forward China will act as the Company’s exclusive buying agent and supplier of Products (as defined in the Supply Agreement) in the Asia-Pacific region. The Company purchases products at Forward China’s cost and pays 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 $ 362,000 and $ 343,000 during the three months ended December 31, 2021 and 2020, respectively, which are included as a component of cost of sales upon sales of the related products. The Company made prepayments to Forward China for inventory purchases of $ 327,000 and $ 317,000 at December 31, 2021 and September 30, 2021, respectively, which is included in prepaid expenses and other current assets on the condensed consolidated balance sheets. Promissory Note On January 18, 2018, the Company issued a $ 1,600,000 promissory note payable to Forward China to fund the acquisition of IPS. The promissory note bears an interest rate of 8 % per annum and had an original maturity date of January 18, 2019 . Monthly interest payments commenced on February 18, 2018 with the principal due at maturity. The Company incurred and paid $ 32,000 in interest expense associated with this note in the three months ended December 31, 2021 and 2020. The maturity date of this note was extended to December 31, 2022. The maturity date of this note has been extended on several occasions to assist the Company with liquidity. The Company made principal payments of $ 50,000 on this note during the three months ended December 31, 2021. Related Party Activity In October 2020, the Company began selling smart-enabled furniture, which is sourced by Forward China and sold in the U.S under the Koble brand name. The Koble brand is owned by The Justwise Group Ltd., a company owned by Terence Wise, Chief Executive Officer and Chairman of the Company. The Company recognized revenues from the sale of Koble products of $ 540,000 and $ 186,000 in the three months ended December 31, 2021 and 2020, respectively. 15 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 LEGAL PROCEEDINGS As previously disclosed, on August 21, 2020, IPS was named a third-party defendant in a patent dispute claim in the U.S. District Court for the Eastern District of New York. The complaint, which contains no specific amount of 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 was that IPS breached a non-disclosure agreement with a party to the case. In January 2022, all claims in this matter were dismissed without prejudice. From time to time, the Company may become a party to other legal actions or proceedings in the ordinary course of its business. At December 31, 2021, there were no such actions or proceedings, either individually or in the aggregate, that, if decided adversely to the Company’s interests, the Company believes would be material to its operation or cash flow. NOTE 10 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 December 31, 2021 and September 30, 2021. At December 31, 2021, the Company had $ 1,300,000 available under the line of credit. The Company is subject to certain debt-service ratio requirements which are measured annually. At September 30, 2021, the Company was in compliance with such covenants. NOTE 11 DEBT On April 18, 2020, the Company entered into a loan in an aggregate principal amount of $ 1,357,000 under the Paycheck Protection Program (the “PPP loan”) pursuant to the U.S. Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The loan was unsecured, bore interest at a rate of 1 % per annum, and was scheduled to mature on April 18, 2022 . In October 2020, the Company filed for forgiveness of this loan and in December 2020, the Small Business Administration (“SBA”) approved 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 condensed consolidated financial statements for the three months ended December 31, 2020. 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 made monthly until maturity. NOTE 12 LEASES The Company’s operating leases are primarily for corporate, sales and administrative office space. Total operating lease expense for the three months ended December 31, 2021 was $ 156,000 , of which $ 14,000 was recorded in sales and marketing expenses and $ 142,000 was recorded in general and administrative expenses on the condensed consolidated statements of operations. Total operating lease expense for the three months ended December 31, 2020 was $ 153,000 , of which $ 14,000 was recorded in sales and marketing expenses and $ 139,000 was recorded in general and administrative expenses on the condensed consolidated statements of operations. Cash paid for amounts included in operating lease liabilities for the three months ended December 31, 2021 and 2020, which have been included in cash flows from operating activities, was $ 149,000 and $ 111,000 , respectively. 16 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2021, the Company’s operating leases had a weighted average remaining lease term of 8.8 years and a weighted average discount rate of 5.6 %. At December 31, 2021, future minimum payments under non-cancellable operating leases were as follows: Schedule of future minimum payments under operating & financial leases Remainder of Fiscal 2022 $ 452,000 Fiscal 2023 626,000 Fiscal 2024 639,000 Fiscal 2025 556,000 Fiscal 2026 510,000 Thereafter 2,398,000 Total future minimum lease payments 5,181,000 Less imputed interest ( 1,170,000 ) Present value of lease liabilities $ 4,011,000 17