Forward Industries, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 2022 September 30, 2021 (Unaudited) Assets Current assets: Cash $ 2,277,635 $ 1,410,365 Accounts receivable, net 8,738,264 8,760,715 Inventories, net 4,871,734 2,062,557 Prepaid expenses and other current assets 483,232 561,072 Total current assets 16,370,865 12,794,709 Property and equipment, net 234,401 167,997 Intangible assets, net 1,159,090 1,318,658 Goodwill 1,758,682 1,758,682 Operating lease right of use assets, net 3,633,267 3,743,242 Other assets 72,251 72,251 Total assets $ 23,228,556 $ 19,855,539 Liabilities and shareholders' equity Current liabilities: Accounts payable $ 433,412 $ 391,992 Due to Forward China 8,756,217 5,733,708 Deferred income 623,395 187,695 Current portion of earnout consideration – 25,000 Current portion of operating lease liability 415,494 340,151 Accrued expenses and other current liabilities 1,075,757 529,497 Total current liabilities 11,304,275 7,208,043 Other liabilities: Note payable to Forward China 1,450,000 1,600,000 Operating lease liability, less current portion 3,407,626 3,559,053 Earnout consideration, less current portion 70,000 45,000 Total other liabilities 4,927,626 5,204,053 Total liabilities 16,231,901 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 June 30, 2022 and September 30, 2021 100,612 100,612 Additional paid-in capital 20,062,912 19,914,476 Accumulated deficit ( 13,166,869 ) ( 12,571,645 ) Total shareholders' equity 6,996,655 7,443,443 Total liabilities and shareholders' equity $ 23,228,556 $ 19,855,539 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 1 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the Three Months Ended June 30, For the Nine Months Ended June 30, 2022 2021 2022 2021 Revenues, net $ 10,588,835 $ 9,964,514 $ 32,517,139 $ 28,077,496 Cost of sales 8,671,103 7,781,485 25,727,964 21,888,135 Gross profit 1,917,732 2,183,029 6,789,175 6,189,361 Sales and marketing expenses 664,484 620,737 2,106,263 1,802,134 General and administrative expenses 1,639,053 1,293,941 5,177,241 5,102,545 (Loss)/income from operations ( 385,805 ) 268,351 ( 494,329 ) ( 715,318 ) Gain on forgiveness of note payable – – – ( 1,356,570 ) Fair value adjustment of earn-out consideration – 10,000 – ( 20,000 ) Interest income – ( 32,459 ) – ( 88,760 ) Interest expense 30,424 45,802 94,115 138,908 Other expense, net 2,684 1,421 6,780 3,209 (Loss)/income before income taxes ( 418,913 ) 243,587 ( 595,224 ) 607,895 Provision for income taxes – – – – Net (loss)/income $ ( 418,913 ) $ 243,587 $ ( 595,224 ) $ 607,895 (Loss)/earnings per share: Basic $ ( 0.04 ) $ 0.02 $ ( 0.06 ) $ 0.06 Diluted $ ( 0.04 ) $ 0.02 $ ( 0.06 ) $ 0.06 Weighted average common shares outstanding: Basic 10,061,185 9,963,969 10,061,185 9,919,579 Diluted 10,061,185 10,512,893 10,061,185 10,423,108 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 2 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) For the Three and Nine Months Ended June 30, 2022 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 Share-based compensation – – 66,012 – 66,012 Net loss – – – ( 356,335 ) ( 356,335 ) Balance at March 31, 2022 10,061,185 100,612 20,019,288 ( 12,747,956 ) 7,371,944 Share-based compensation – – 43,624 – 43,624 Net loss – – – ( 418,913 ) ( 418,913 ) Balance at June 30, 2022 10,061,185 $ 100,612 $ 20,062,912 $ ( 13,166,869 ) $ 6,996,655 For the Three and Nine Months Ended June 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 – – 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 Share-based compensation – – 21,287 – 21,287 Stock options exercised 66,415 665 141,858 – 142,523 Net loss – – – ( 834,728 ) ( 834,728 ) Balance at March 31, 2021 9,952,766 99,528 19,785,936 ( 12,731,142 ) 7,154,322 Share-based compensation – – 3,732 – 3,732 Stock options exercised 78,419 784 88,829 – 89,613 Net income – – – 243,587 243,587 Balance at June 30, 2021 10,031,185 $ 100,312 $ 19,878,497 $ ( 12,487,555 ) $ 7,491,254 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 3 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Nine Months Ended June 30, 2022 2021 Operating Activities: Net (loss)/income $ ( 595,224 ) $ 607,895 Adjustments to reconcile net (loss)/income to net cash provided by/(used in) operating activities: Share-based compensation 148,436 66,476 Depreciation and amortization 233,506 252,317 Bad debt expense 59,918 513,691 Gain on forgiveness of note payable – ( 1,356,570 ) Change in fair value of earn-out consideration – ( 20,000 ) Changes in operating assets and liabilities: Accounts receivable ( 37,467 ) ( 595,034 ) Inventories ( 2,809,177 ) ( 631,443 ) Prepaid expenses and other current assets 77,840 ( 81,421 ) Other assets – 44,446 Accounts payable and due to Forward China 3,063,929 855,059 Deferred income 435,700 ( 40,633 ) Net changes in operating lease liabilities 33,891 38,437 Accrued expenses and other current liabilities 546,260 8,926 Net cash provided by/(used in) operating activities 1,157,612 ( 337,854 ) Investing Activities: Purchases of property and equipment ( 140,342 ) ( 61,166 ) Net cash used in investing activities ( 140,342 ) ( 61,166 ) Financing Activities: Proceeds from line of credit borrowings – 150,000 Repayment of line of credit borrowings – ( 1,150,000 ) Repayment of notes payable – ( 127,639 ) Repayment of note payable to Forward China ( 150,000 ) – Proceeds from stock options exercised – 233,811 Repayments of finance leases – ( 27,130 ) Net cash used in financing activities ( 150,000 ) ( 920,958 ) Net increase/(decrease) in cash 867,270 ( 1,319,978 ) Cash at beginning of period 1,410,365 2,924,627 Cash at end of period $ 2,277,635 $ 1,604,649 Supplemental Disclosures of Cash Flow Information: Cash paid for interest $ 94,115 $ 121,771 Cash paid for taxes $ 8,095 $ 7,336 Supplemental Disclosures of Non-Cash Information: Operating lease right of use assets recorded $ 204,881 $ 565,590 Operating lease liabilities recorded $ 204,881 $ 565,590 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 4 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 nine months ended June 30, 2022, the Company generated a net loss of $ 595,000 , and $ 1,158,000 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 August 31, 2023. Impact of COVID-19 The effects of the COVID-19 pandemic continue to impact the retail and OEM distribution segments of 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 and most notably in the second quarter of the fiscal year ending September 30, 2022 (“Fiscal 2022”). Labor shortages at U.S. ports and in ground transportation services caused container ships to spend a significant amount of time waiting for goods to be unloaded and to arrive at our warehouses. These factors caused an increase in the demand for and cost of ground transportation and delayed consumer availability for many of our products in Fiscal 2022. The timing and extent of these COVID-19 related transportation disruptions are still largely unknown but are expected to continue into Fiscal 2023. The effects of the pandemic had a lesser impact on the design segment of our business. Rising inflation caused an increase in the cost of acquiring and maintaining our employees. The timing and extent of future inflation is difficult to predict, but we expect these rising costs to have a more significant impact in the second half of Fiscal 2022. The effects of COVID-19 may further impact our business in ways we cannot predict, and such impacts could be significant. The current 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 effects of the pandemic have fully receded, 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 and inventory levels; aligning our design and development schedules with demand in a proactive manner 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. 5 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. 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 through various online retailer websites to customers predominantly located in the U.S. 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 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 June 30, 2022, 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, $ 20,000 , $ 0 and $ 0 , respectively, for the retail distribution segment and $ 927,000 , $ 706,000 and $ 347,000 , respectively, for the design segment. 6 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Company has agreements with various retailers which contain different terms for trade discounts, promotional and other sales allowances. At June 30, 2022, September 30, 2021 and September 30, 2020, the Company recorded accounts receivable allowances of $ 84,000 , $ 0 and $ 0 , respectively, for the retail distribution segment. Revenue Recognition 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. Revenue is measured as the amount of consideration expected to be received in exchange for the products provided, net of allowances for product returns, applicable variable consideration and any taxes collected from customers that will be remitted to governmental authorities. 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 $ 65,000 , $ 0 and $ 75,000 at June 30, 2022, September 30, 2021 and September 30, 2020, respectively. The OEM distribution segment had no contract liabilities at June 30, 2022, 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 $ 833,000 , $ 693,000 and $ 649,000 at June 30, 2022, 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 $ 558,000 , $ 188,000 and $ 410,000 at June 30, 2022, 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 June 30, 2022. 7 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 June 30, 2022. Income Taxes The Company recognizes future tax benefits and liabilities measured at enacted rates attributable to temporary differences between financial statement and income tax bases of assets and liabilities and to net tax operating loss carryforwards to the extent that realization of these benefits is more likely than not. At June 30, 2022, 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. 8 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 and nine months ended June 30, 2021 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 June 30, 2022 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 ( 154,000 ) ( 662,000 ) ( 816,000 ) ( 125,000 ) ( 531,000 ) ( 656,000 ) Net carrying amount $ 431,000 $ 728,000 $ 1,159,000 $ 460,000 $ 859,000 $ 1,319,000 9 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Company’s intangible assets resulted from 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. Amortization expense related to intangible assets was $ 53,000 for the three months ended June 30, 2022 and 2021 and $ 160,000 for the nine months ended June 30, 2022 and 2021, which is included in general and administrative expenses on the condensed consolidated statements of operations. At June 30, 2022, estimated amortization expense for the Company’s intangible assets is as follows: Estimated amortization expense Remainder of Fiscal 2022 $ 53,000 Fiscal 2023 213,000 Fiscal 2024 213,000 Fiscal 2025 213,000 Fiscal 2026 121,000 Fiscal 2027 81,000 Thereafter 265,000 Total $ 1,159,000 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 June 30, 2022 and September 30, 2021 represents the fair value of the contingent earnout consideration related to the acquisition of Kablooe, which provides annual contingent earnout payments based on results of operations through August 2025. 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 and nine months ended June 30, 2022, there were no changes to the total 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. 10 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The results of operations for the three and nine months ended June 30, 2021 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 June 30, For the Nine Months Ended June 30, 2022 2021 2022 2021 Revenues: OEM distribution $ 4,775,000 $ 4,443,000 $ 14,692,000 $ 13,910,000 Retail distribution 878,000 1,277,000 2,919,000 1,898,000 Design 4,936,000 4,245,000 14,906,000 12,269,000 Total segment revenues $ 10,589,000 $ 9,965,000 $ 32,517,000 $ 28,077,000 Operating income/(loss): OEM distribution $ 179,000 $ 361,000 $ 1,002,000 $ 1,080,000 Retail distribution ( 397,000 ) ( 101,000 ) ( 981,000 ) ( 490,000 ) Design 447,000 392,000 1,422,000 281,000 Total segment operating income 229,000 652,000 1,443,000 871,000 General corporate expenses ( 615,000 ) ( 384,000 ) ( 1,937,000 ) ( 1,586,000 ) Total (loss)/income from operations ( 386,000 ) 268,000 ( 494,000 ) ( 715,000 ) Other expense/(income), net 33,000 24,000 101,000 ( 1,323,000 ) (Loss)/income before income taxes $ ( 419,000 ) $ 244,000 $ ( 595,000 ) $ 608,000 Depreciation and amortization: OEM distribution $ 2,000 $ 2,000 $ 6,000 $ 6,000 Design 75,000 78,000 228,000 246,000 Total depreciation and amortization $ 77,000 $ 80,000 $ 234,000 $ 252,000 Schedule of segment assets June 30, 2022 September 30, 2021 Segment Assets: OEM distribution $ 5,557,000 $ 5,898,000 Retail distribution 4,966,000 2,178,000 Design 6,005,000 5,824,000 Total segment assets 16,528,000 13,900,000 General corporate assets 6,701,000 5,956,000 Total assets $ 23,229,000 $ 19,856,000 11 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Company had certain customers in the OEM distribution segment whose individual percentage of the Company’s consolidated revenues was 10% or greater. Revenues from two customers or their affiliates or contract manufacturers represented 24.2 % and 24.1 %, respectively, of the Company’s consolidated net revenues for the three and nine months ended June 30, 2022. Revenues from one customer or its affiliates or contract manufacturers represented 13.7 % of the Company’s consolidated net revenues for the three months ended June 30, 2021 and revenues from two customers or their affiliates or contract manufacturers represented 26.3 % of the Company’s consolidated net revenues for the nine months ended June 30, 2021. For the three and nine months ended June 30, 2022, the Company had one customer in the design segment whose individual percentage of the Company’s consolidated revenues was 10% or greater. Revenues from this customer represented 10.8 % and 10.4 %, respectively, of the Company’s consolidated net revenues for the three and nine months ended June 30, 2022. There were no customers in the design segment whose individual percentage of the Company’s consolidated revenues was 10% or greater during the three or nine months ended June 30, 2021. At June 30, 2022 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 three customers or their affiliates or contract manufacturers represented 40.4 % and 44.0 %, respectively, of the Company’s consolidated accounts receivable at June 30, 2022 and September 30, 2021. NOTE 6 SHARE-BASED COMPENSATION Stock Options In October 2021, January 2022 and April 2022, the Company granted options to non-employee directors to purchase an aggregate of 58,000 , 83,000 and 49,000 shares, respectively, of its common stock at an exercise price of $ 2.39 , $ 1.56 and $ 1.72 per share, respectively. 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 , $ 0.72 and $ 0.81 per share, respectively, and an aggregate grant date fair value of $ 60,000 , $ 60,000 and $ 40,000 , respectively, which will be recognized ratably over the vesting period. In January 2022, the Company granted options to one of its employees to purchase an aggregate of 14,000 shares of its common stock at an exercise price of $ 1.56 per share. The options expire five years from the date of grant, approximately one-third vested immediately, approximately one-third vest one year from the date of grant and approximately one-third vest two years from the date of grant. The options have a weighted average grant-date fair value of $ 0.73 per share and an aggregate grant-date fair value of $ 10,000 , which will be recognized ratably over the vesting period. In February 2022, the Company granted options to one of its non-employee directors to purchase an aggregate of 31,000 shares of its common stock at an exercise price of $ 1.68 per share. The options vest one year from the date of grant and expire five years from the date of grant. The options have a weighted average grant-date fair value of $ 0.80 per share and an aggregate grant-date fair value of $ 25,000 , which will be recognized ratably over the vesting period. In February 2022, the Company granted options to one of its former non-employee directors to purchase an aggregate of 19,000 shares of its common stock at an exercise price of $ 1.68 per share. The options vested immediately and expire ten years from the date of grant. The options have a grant-date fair value of $ 1.07 per share and an aggregate grant-date fair value of $ 20,000 , which was fully recognized on the grant date. 12 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS There were no options exercised during the nine months ended June 30, 2022. During the nine months ended June 30, 2021, the Company issued 147,000 shares of its common stock pursuant to the exercise of stock options for aggregate cash proceeds of $ 234,000 , which had an aggregate intrinsic value of $ 265,000 . The Company recognized compensation expense for stock option awards of $ 44,000 and $ 4,000 during the three months ended June 30, 2022 and 2021, respectively, and $ 148,000 and $ 66,000 during the nine months ended June 30, 2022 and 2021, respectively, which was recorded as a component of general and administrative expenses in its condensed consolidated statements of operations. At June 30, 2022, there was $ 51,000 of total unrecognized compensation cost related to nonvested stock option awards that is expected to be recognized over a weighted average period of 0.6 years. 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 (loss) per share For the Three Months Ended June 30, For the Nine Months Ended June 30, 2022 2021 2022 2021 Numerator: Net (loss)/income $ ( 419,000 ) $ 244,000 $ ( 595,000 ) $ 608,000 Denominator: Weighted average common shares outstanding 10,061,000 9,964,000 10,061,000 9,920,000 Dilutive common share equivalents – 549,000 – 503,000 Weighted average diluted shares outstanding 10,061,000 10,513,000 10,061,000 10,423,000 (Loss)/earnings per share: Basic $ ( 0.04 ) $ 0.02 $ ( 0.06 ) $ 0.06 Diluted $ ( 0.04 ) $ 0.02 $ ( 0.06 ) $ 0.06 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 June 30, For the Nine Months Ended June 30, 2022 2021 2022 2021 Options 1,039,000 10,000 1,039,000 10,000 Warrants 151,000 – 151,000 – Total potentially dilutive shares 1,190,000 10,000 1,190,000 10,000 13 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 $ 344,000 and $ 357,000 during the three months ended June 30, 2022 and 2021, respectively, and $ 1,056,000 and $ 1,040,000 during the nine months ended June 30, 2022 and 2021, 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 $ 20,000 and $ 317,000 at June 30, 2022 and September 30, 2021, respectively, which are included in prepaid expenses and other current assets on the condensed consolidated balance sheets. Promissory Note On January 18, 2018, the Company issued a $ 1,600,000 unsecured 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 interest associated with this note of $ 30,000 and $ 32,000 , respectively, in the three months ended June 30, 2022 and 2021 and $ 93,000 and $ 96,000 , respectively, in the nine months ended June 30, 2022 and 2021. The maturity date of this note was extended to December 31, 2023. The maturity date of this note has been extended on several occasions to assist the Company with liquidity. The Company made principal payments of $ 150,000 on this note during the nine months ended June 30, 2022. Other 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. (“JustWise”), 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 $ 356,000 and $ 413,000 in the three months ended June 30, 2022 and 2021, respectively, and $ 1,337,000 and $ 752,000 in the nine months ended June 30, 2022 and 2021, respectively. The Company entered into an agreement with JustWise effective March 1, 2022, under which (i) JustWise will perform design and marketing services related to the Koble products sold by the Company and (ii) the Company was granted a license to sell Koble products. In exchange for such services, the Company will pay JustWise $10,000 per month plus 1% of the cost of Koble products purchased from Forward China. This agreement is effective until August 31, 2022, will be extended thereafter for a mutually agreed upon term and can be terminated thereafter by either party giving three months’ notice. The Company incurred costs of $ 33,000 and $ 55,000 under this agreement for the three and nine months ended June 30, 2022, respectively, of which $ 28,000 and $ 38,000 , respectively, were included in selling and marketing expenses and $ 5,000 and $ 17,000 are included as a component of cost of sales upon sales of the related products. 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 division sold products. The Company recognized revenue of $ 63,000 from the sale of such products during the three and nine months ended June 30, 2021. 14 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 LEGAL PROCEEDINGS From time to time, the Company may become a party to legal actions or proceedings in the ordinary course of its business. At June 30, 2022, 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 operations or cash flows. NOTE 10 LINE OF CREDIT The Company, specifically IPS, has a $ 1,300,000 revolving line of credit with a bank which was renewed in February 2022. The line of credit has a maturity date of May 31, 2023 , 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 5.5 % and 4.0 % at June 30, 2022 and September 30, 2021, respectively. At June 30, 2022, 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 statement of operations for the nine months ended June 30, 2021. There is a six-year period during which the SBA can review the Company’s forgiveness. NOTE 12 LEASES The Company’s operating leases are primarily for corporate, sales and administrative office space. Cash paid for amounts included in operating lease liabilities for the nine months ended June 30, 2022 and 2021, which have been included in cash flows from operating activities, was $ 446,000 and $ 340,000 , respectively. Details of operating lease expense are as follows: Schedule of operating lease expense For the Three Months Ended June 30, For the Nine Months Ended June 30, 2022 2021 2022 2021 Operating lease expense included in: Sales and marketing expense $ 15,000 $ 14,000 $ 42,000 $ 42,000 General and administrative expense 145,000 136,000 428,000 412,000 Total $ 160,000 $ 150,000 $ 470,000 $ 454,000 At June 30, 2022, the Company’s operating leases had a weighted average remaining lease term of 8.4 years and a weighted average discount rate of 5.7 %. At June 30, 2022, future minimum payments under non-cancellable operating leases were as follows: Schedule of future minimum payments under operating & financial leases Remainder of Fiscal 2022 $ 155,000 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 4,884,000 Less imputed interest ( 1,061,000 ) Present value of lease liabilities $ 3,823,000 15