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, 2022. 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, 2022 was effective based on that criteria. 26 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. 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 2022 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. 27 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 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended September 30, 2022. 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) under “Investors”, "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 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended September 30, 2022. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS The information required by this item is incorporated by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended September 30, 2022. 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 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended September 30, 2022. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is incorporated by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended September 30, 2022. 28 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. 29 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, 2022 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, 2022 /s/ Terence Wise Terence Wise Principal Executive Officer and Director December 16, 2022 /s/ Anthony Camarda Anthony Camarda Principal Financial Officer and Chief Accounting Officer December 16, 2022 /s/ Sangita Shah Sangita Shah Director December 16, 2022 /s/ James Ziglar James Ziglar Director December 16, 2022 /s/ Sharon Hrynkow Sharon Hrynkow Director 30 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 dated August 17, 2020 - Kablooe, Inc.+ 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) Corporation (as amended and restated)  Filed 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 – Paul Severino*+ 8-K 1/18/18 10.1 10.4(a) Form of Employment Agreement dated May 26, 2021 - Paul Severino*$ 10-K 12/16/21 10.4(a) 10.5 Employment Agreement dated May 16, 2018 - Terence Wise*$ 10-Q 5/18/18 10.5 10.6 Employment Agreement dated June 26, 2020 – Anthony Camarda*$ 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 10.10 Consultancy Agreement dated March 1, 2022 - Justwise Group Ltd. 10-Q 5/12/22 10.1 10.11 Consultancy Agreement dated September 1, 2022 - Justwise Group Ltd. Filed 10.12 Employment Agreement dated January 18, 2018 - Robert Wild* Filed 10.13 Employment Agreement dated August 17, 2020 - Tom KraMer* Filed 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. $ As previously disclosed, this executive officer has received an increase to his annual Base Salary. 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. 31 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets at September 30, 2022 and 2021 F-3 Consolidated Statements of Operations for the Years Ended September 30, 2022 and 2021 F-4 Consolidated Statements of Shareholders' Equity for the Years Ended September 30, 2022 and 2021 F-5 Consolidated Statements of Cash Flows for the Years Ended September 30, 2022 and 2021 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, 2022 and 2021, 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, 2022 and 2021, 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 audits 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 (Note 1 to the Consolidated Financial Statements) Significant judgment is exercised by the Company in determining whether there is substantial doubt the Company will continue as a going concern. Specifically, the Company’s 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 residual effects of the global pandemic, and inflation. Given these factors, the related audit effort in evaluating management’s judgments in determining the Company’s ability to continue as a going concern was challenging, subjective, and complex and required a high degree of auditor judgment. How our Audit Addressed the Critical Audit Matter Our principal audit procedures related to the Company’s assessment of going concern 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 considering the appropriateness 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. /s/ CohnReznick LLP We have served as the Company’s auditor since 2011. Melville, New York December 16, 2022 (PCAOB No. 596 ) F- 2 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 2022 2021 Assets Current assets: Cash $ 2,575,522 $ 1,410,365 Accounts receivable, net 7,542,666 8,760,715 Inventories, net 3,801,030 2,062,557 Prepaid expenses and other current assets 417,605 561,072 Total current assets 14,336,823 12,794,709 Property and equipment, net 241,146 167,997 Intangible assets, net 1,105,901 1,318,658 Goodwill 1,758,682 1,758,682 Operating lease right of use assets, net 3,427,726 3,743,242 Other assets 68,737 72,251 Total assets $ 20,939,015 $ 19,855,539 Liabilities and shareholders' equity Current liabilities: Accounts payable $ 268,160 $ 391,992 Due to Forward China 7,713,880 5,733,708 Deferred income 438,878 187,695 Current portion of earnout consideration 25,000 25,000 Current portion of operating lease liability 377,940 340,151 Accrued expenses and other current liabilities 1,153,906 529,497 Total current liabilities 9,977,764 7,208,043 Other liabilities: Note payable to Forward China 1,400,000 1,600,000 Operating lease liability, less current portion 3,249,824 3,559,053 Earnout consideration, less current portion 45,000 45,000 Total liabilities 14,672,588 12,412,096 Commitments and contingencies (Note 11) – – Shareholders' equity: Common stock, par value $ 0.01 per share; 40,000,000 shares authorized; 10,061,185 shares issued and outstanding at September 30, 2022 and 2021 100,612 100,612 Additional paid-in capital 20,115,711 19,914,476 Accumulated deficit ( 13,949,896 ) ( 12,571,645 ) Total shareholders' equity 6,266,427 7,443,443 Total liabilities and shareholders' equity $ 20,939,015 $ 19,855,539 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, 2022 2021 Revenues, net $ 42,337,385 $ 39,021,996 Cost of sales 33,969,115 30,887,577 Gross profit 8,368,270 8,134,419 Sales and marketing expenses 2,854,664 2,503,518 General and administrative expenses 6,753,280 6,395,900 Loss from operations ( 1,239,674 ) ( 764,999 ) Gain on forgiveness of note payable – ( 1,356,570 ) Fair value adjustment of earnout consideration – ( 20,000 ) Interest income – ( 88,760 ) Interest expense 123,411 171,957 Other expense, net 12,612 4,569 (Loss)/income before income taxes ( 1,375,697 ) 523,805 Provision for income taxes 2,554 – Net (loss)/income $ ( 1,378,251 ) $ 523,805 (Loss)/earnings per share: Basic $ ( 0.14 ) $ 0.05 Diluted $ ( 0.14 ) $ 0.05 Weighted average common shares outstanding: Basic 10,061,185 9,950,094 Diluted 10,061,185 10,443,018 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, 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 – – 201,235 – 201,235 Net loss – – – ( 1,378,251 ) ( 1,378,251 ) Balance at September 30, 2022 10,061,185 $ 100,612 $ 20,115,711 $ ( 13,949,896 ) $ 6,266,427 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 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, 2022 2021 Operating Activities: Net (loss)/income $ ( 1,378,251 ) $ 523,805 Adjustments to reconcile net (loss)/income to net cash provided by/(used in) operating activities: Share-based compensation 201,235 68,855 Depreciation and amortization 309,239 327,290 Bad debt expense 264,912 506,469 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 953,137 ( 1,664,868 ) Inventories ( 1,738,473 ) ( 786,863 ) Prepaid expenses and other current assets 143,467 ( 141,600 ) Other assets 3,514 44,446 Accounts payable and due to Forward China 1,856,340 2,306,277 Deferred income 251,183 ( 297,383 ) Net changes in operating lease liabilities 44,076 49,258 Accrued expenses and other current liabilities 624,409 ( 87,427 ) Net cash provided by/(used in) operating activities 1,534,788 ( 528,311 ) Investing Activities: Purchases of property and equipment ( 169,631 ) ( 67,207 ) Net cash used in investing activities ( 169,631 ) ( 67,207 ) Financing Activities: Proceeds from line of credit borrowings – 150,000 Repayment of line of credit borrowings – ( 1,150,000 ) Repayment of notes payable – ( 156,798 ) Repayment of note payable to Forward China ( 200,000 ) – Proceeds from stock options exercised – 267,711 Repayments of finance leases – ( 29,657 ) Net cash used in financing activities ( 200,000 ) ( 918,744 ) Net increase/(decrease) in cash 1,165,157 ( 1,514,262 ) Cash at beginning of year 1,410,365 2,924,627 Cash at end of year $ 2,575,522 $ 1,410,365 Supplemental Disclosures of Cash Flow Information: Cash paid for interest $ 123,411 $ 154,510 Cash paid for taxes $ 10,856 $ 8,389 Supplemental Disclosures of Non-Cash Information: Operating lease assets obtained in exchange for operating lease liabilities $ 204,881 $ 565,590 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 global design, manufacturing, sourcing and distribution group serving top tier medical and technology customers worldwide. As a result of the continued expansion of our design development capabilities through our wholly-owned subsidiaries, IPS and Kablooe, the Company is 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. The Company’s design division provides hardware and software product design and engineering services to customers predominantly located in the U.S. The Company’s OEM distribution division sources and sells carrying cases and other accessories for medical monitoring and diagnostic kits as well as a variety of other portable electronic and non-electronic devices to original equipment manufacturers (“OEM”s), or their contract manufacturers worldwide, 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 retail distribution division sources and sells smart-enabled furniture, hot tubs and various other products through various online retailer websites to customers predominantly located in the U.S. The Company does not manufacture any of its OEM or retail products and sources substantially all of these products from independent suppliers in China, through Forward Industries Asia-Pacific Corporation, a British Virgin Islands corporation (“Forward China”). See Note 13. Liquidity In Fiscal 2022, the Company generated a net loss of $ 1,378,000 and $ 1,535,000 of cash flows from operating activities. Based on our forecasted cash flows, we believe our existing cash balance and working capital will be sufficient to meet our liquidity needs through at least December 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 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 retaining our employees, particularly in the second half of Fiscal 2022. The timing and extent of future inflation is difficult to predict, but we expect these rising costs to continue into Fiscal 2023. The effects of COVID-19 may further impact our business in ways we cannot predict, and such impacts could be significant. The current economic conditions 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 products and services and to choose to allocate their budgets to new or existing projects which may or may not require our products and 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. F- 7 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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. Segment Reporting The Company has three reportable segments: OEM distribution, retail distribution and design. The OEM distribution segment sources and sells carrying cases and other accessories for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic devices (such as sporting and recreational products, bar code scanners, GPS location devices, tablets and firearms) on a made-to-order basis that are customized to fit the products sold by our OEM customers worldwide. The retail distribution segment sources and sells smart-enabled furniture, hot tubs 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 15 for more information on segments. 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 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. Management evaluated and concluded there were no indications of impairment of goodwill in Fiscal 2022 or 2021. F- 8 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO 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 indications of impairments of intangible assets at September 30, 2022 or 2021. Cash The Company maintains cash deposits in banks with financial institutions in the United States (that at times may exceed federally insured limits of $250,000 per financial institution) and Switzerland. At September 30, 2022 and 2021, there were deposits totaling $ 2,037,000 (which includes $ 467,000 in a foreign bank) and $ 805,000 (which includes $ 436,000 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 in amounts that have been invoiced ($ 7,861,000 and $ 8,864,000 at September 30, 2022 and 2021, respectively) and contract assets as described further below under the heading “Revenue Recognition.” 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, 2022 and 2021, the Company had allowances for doubtful accounts of $ 0 and $ 90,000 , respectively, for the OEM distribution segment, $ 20,000 and $ 0 , respectively, for the retail segment and $ 852,000 and $ 706,000 , respectively, for the design segment. The Company has agreements with various retailers which contain different terms for trade discounts, promotional and other sales allowances. At September 30, 2022, 2021 and 2020, the Company recorded accounts receivable allowances of $ 55,000 , $ 0 and $ 0 , respectively, for the retail distribution segment. In Fiscal 2019, the Company recorded bad debt expense of $ 1,626,000 to fully reserve accounts receivable deemed uncollectible from a customer. 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 from this customer in Fiscal 2021, of which $ 89,000 was applied to past due interest and penalties and recorded as interest income, and $ 12,000 was applied to principal and recorded as a recovery of bad debt expense as a reduction of general and administrative expense. No payments were received from this customer in Fiscal 2022. 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. 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, 2022 and 2021, the allowance for slow-moving inventory, which relates entirely to our retail segment, was $ 535,000 and $ 50,000 , 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 Lease assets and liabilities are recognized at lease 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. 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, 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. Our income tax provision or benefit is generally not significant due to the existence of significant net operating loss carryforwards. Revenue Recognition OEM Distribution Segment The OEM distribution segment recognizes revenue 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. If 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 OEM distribution segment had no contract liabilities at September 30, 2022, 2021 or 2020. F- 10 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Retail Distribution Segment The retail distribution segment sells products primarily through online websites operated by authorized third-party retailers. Revenue is recognized when control (as defined in ASC 606, “Revenue from Contracts with Customers”) of the related goods is transferred to the retailer, which generally occurs upon shipment to the end customer. Other than product delivery, the retail distribution segment does not typically have other deliverables or performance obligations associated with its products. Revenue is measured as the amount of consideration expected to be received in exchange for the products provided, net of allowances taken by retailers for product returns 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 consolidated balance sheets. The retail distribution segment had contract liabilities of $ 0 , $ 0 and $ 75,000 at September 30, 2022, 2021 and 2020, respectively. Design Segment The Company applies the “cost to cost” and “right to invoice” methods of revenue recognition to the contracts with customers in the design segment. The design segment typically engages in two types of contracts: (i) time and material and (ii) fixed price. The Company recognizes revenue over time on its time and material contracts utilizing a “right to invoice” method. Revenues from fixed price contracts that require performance of services that are not related to the production of tangible assets are recognized by using cost inputs to measure progress toward the completion of its performance obligations, or the “cost to cost” method. Revenues from fixed price contracts that contain specific deliverables are recognized when the performance obligation has been satisfied or the transfer of goods to the customer has been completed and accepted. 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 $ 609,000 , $ 693,000 , $ 649,000 at September 30, 2022, 2021 and 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 consolidated balance sheets. The design segment had contract liabilities at of $ 439,000 , $ 188,000 , $ 410,000 at September 30, 2022, 2021 and 2020, 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 income or expense in the accompanying consolidated statements of operations. The approximate net losses from foreign currency transactions were $ 13,000 and $ 5,000 for Fiscal 2022 and 2021, 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 8). Business Combinations The Company allocates the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, the Company makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from customer relationships and developed technology, discount rates and terminal values. Our estimates of fair value are based upon assumptions believed to be reasonable, but actual results may differ from estimates. Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed. Recent Accounting Pronouncements In 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 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 consolidated financial statements. F- 12 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 INTANGIBLE ASSETS AND GOODWILL Intangible Assets The Company’s intangible assets consist of the following: Schedule of intangible assets September 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 ( 164,000 ) ( 705,000 ) ( 869,000 ) ( 125,000 ) ( 531,000 ) ( 656,000 ) Net carrying amount $ 421,000 $ 685,000 $ 1,106,000 $ 460,000 $ 859,000 $ 1,319,000 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 2022 and Fiscal 2021, the Company recorded amortization expense related to intangible assets of $ 213,000 , which is included in general and administrative expenses in the Company’s consolidated statements of operations. At September 30, 2022, estimated amortization expense for the Company’s intangible assets for each of the next five years and thereafter is as follows: Estimated amortization expense Fiscal 2023 $ 213,000 Fiscal 2024 213,000 Fiscal 2025 213,000 Fiscal 2026 121,000 Fiscal 2027 81,000 Thereafter 265,000 Total $ 1,106,000 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. F- 13 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 PROPERTY AND EQUIPMENT Property and equipment and related accumulated depreciation and amortization are summarized in the table below: Schedule of property and equipment September 30, 2022 2021 Computer hardware and software $ 473,000 $ 483,000 Furniture and fixtures 67,000 159,000 Equipment 74,000 52,000 Property and equipment, cost 614,000 694,000 Less accumulated depreciation and amortization ( 373,000 ) ( 526,000 ) Property and equipment, net $ 241,000 $ 168,000 Depreciation expense was $ 96,000 and $ 115,000 for Fiscal 2022 and Fiscal 2021, respectively. NOTE 5 FAIR VALUE MEASUREMENTS The earnout consideration of $ 70,000 at September 30, 2022 and 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 current and non-current portions of this liability are shown in the corresponding categories on the consolidated balance sheets in each period presented. The fair value of the earnout liability is measured on a recurring basis at each reporting date using a Black-Scholes valuation model with the following inputs and assumptions, which are categorized within level three of the fair value hierarchy: Fair value assumptions September 30, 2022 2021 Volatility 40% 40% Risk-free interest rate 4.1% 0.3% Expected term in years 0.4 - 2.4 0.5 - 3.4 Dividend yield - - In Fiscal 2022, there were no changes to the total fair value of this earnout liability. In 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. NOTE 6 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities at September 30, 2022 and 2021 are as follows: Schedule of accrued expenses and other accrued liabilities September 30, 2022 2021 Accrued commissions/bonuses $ 722,000 $ 127,000 Paid time off 228,000 241,000 Other 201,000 161,000 Total $ 1,151,000 $ 529,000 F- 14 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 SHAREHOLDERS’ EQUITY “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, 2022 or 2021. Warrants At September 30, 2022, 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, 2022, 76,000 of these warrants have a remaining life of 0.9 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 2021, the Company issued 177,000 shares of its common stock pursuant to the exercise of stock options (see Note 8). NOTE 8 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, 2022, there were 1,014,000 shares of common stock available for grants under the 2021 Plan. 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. Upon approval of the 2021 Plan, no additional awards were granted under the 2011 Plan, which expired according to its terms in March 2021. F- 15 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock Options The fair value of option awards 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 2022 Fiscal 2021 Expected term (years) 2.5 - 5.0 – Expected volatility 68.8 % - 78.6 % – Risk free interest rate 0.4 % - 3.1 % – Expected dividends – – The Company made no grants of stock options or other equity awards in Fiscal 2021. In Fiscal 2022, the Company made the following option grants: · Options to current and former non-employee directors to purchase an aggregate of 297,000 shares of its common stock. The options were granted throughout Fiscal 2022, expire five to ten years from the date of grant, 145,000 vested immediately, 129,000 vest one year from the date of grant and 23,000 were forfeited prior to vesting. These options had an aggregate grant date fair value of $ 245,000 , which is being recognized ratably over the vesting period. · Options to an employee to purchase 27,000 shares of its common stock. These options were granted in January and July of 2022, 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 2022 had a weighted average grant date fair value of $ 0.82 per share. The Company recognized compensation expense for stock option awards of $ 201,000 and $ 69,000 during Fiscal 2022 and Fiscal 2021, respectively, which was recorded as a component of general and administrative expenses in its consolidated statements of operations. No options were exercised during Fiscal 2022. During Fiscal 2021, the Company issued 177,000 shares of its common stock pursuant to the exercise of stock options for aggregate cash proceeds of $ 268,000 , which had an aggregate intrinsic value of $ 306,000 . At September 30, 2022, there was $ 48,000 of unrecognized compensation cost related to nonvested stock option awards that is expected to be recognized over a weighted average period of 0.6 years. F- 16 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes stock option activity during Fiscal 2022: Schedule of stock option activity Weighted Weighted Average Average Aggregate Number of Exercise Remaining Intrinsic Options Price Life (Yrs.) Value Outstanding at September 30, 2021 928,000 $ 1.43 Granted 324,000 $ 1.73 Exercised – $ – Forfeited ( 23,000 ) $ 1.90 Expired ( 144,000 ) $ 1.60 Outstanding at September 30, 2022 1,085,000 $ 1.48 2.6 $ 26,920 Exercisable at September 30, 2022 938,000 $ 1.45 2.3 $ 26,920 Options outstanding at September 30, 2022 have an exercise price between $ 1.13 and $ 2.39 per share. NOTE 9 INCOME TAXES The following table summarizes the Company’s consolidated provision for U.S. federal, state and foreign taxes on income: Schedule of income tax provision Fiscal 2022 Fiscal 2021 Current: Federal $ – $ – State 3,000 – Foreign – – Deferred: Federal ( 224,000 ) ( 506,000 ) State 6,000 ( 47,000 ) Foreign ( 22,000 ) ( 146,000 ) Deferred Income Tax Expense (Benefit) ( 237,000 ) ( 699,000 ) Change in valuation allowance 240,000 699,000 Income tax provision $ 3,000 $ – F- 17 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, 2022 2021 Deferred tax assets Net operating losses $ 2,006,000 $ 2,093,000 Share-based compensation 220,000 175,000 Excess tax over book basis in inventory 101,000 43,000 Reserves and other allowances 649,000 569,000 Accrued compensation 70,000 15,000 Interest expense limitation 48,000 40,000 Other items 18,000 16,000 Total deferred tax assets 3,112,000 2,951,000 Deferred tax liabilities Depreciation ( 12,000 ) ( 18,000 ) Prepaid expenses ( 96,000 ) ( 131,000 ) Intangible assets ( 178,000 ) ( 216,000 ) Total deferred tax liabilities ( 286,000 ) ( 365,000 ) Valuation allowance ( 2,826,000 ) ( 2,586,000 ) Net deferred tax assets $ – $ – The Company recorded a provision for income taxes which includes net expense of $3,000 and $0 in Fiscal 2022 and 2021, respectively. The Fiscal 2022 expense of $3,000 is for state income tax expenses in states where net operating loss carryforwards (“NOLs”) were not available. At September 30, 2022, the Company had available net NOLs for U.S. federal income tax purposes of $ 6,940,000 and NOLs for state income tax purposes of $ 978,000 . 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 of $ 1,680,000 with respect to U.S. federal income taxes and $ 40,000 with respect to state income taxes. In addition, at September 30, 2022, the Company had available NOLs for foreign income tax purposes of $ 1,569,000 , resulting in a deferred tax asset of $ 283,000 , expiring through 2028. Total net deferred tax assets, before valuation allowance, were $ 2,826,000 and $ 2,586,000 at September 30, 2022 and 2021, 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 or state income taxes would result. In Fiscal 2022, Forward Switzerland had a net loss for tax purposes of $ 45,000 and Forward UK had net income for tax purposes of $ 150,000 . At September 30, 2022, 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, 2022 and 2021, the valuation allowance was $2,826,000 and $2,586,000, 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. F- 18 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 2022 Fiscal 2021 U.S. federal statutory rate 21.0 % 21.0 % State tax rate, net of federal benefit 3.0 % ( 8.3 % ) Foreign rate differential 2.9 % ( 2.6 % ) Tax return to provision adjustments ( 1.9 % ) ( 78.8 % ) Effect of state tax rate change ( 3.8 % ) ( 7.8 % ) Change in valuation allowance ( 20.3 % ) 129.9 % Permanent differences ( 1.1 % ) ( 53.4 % ) Effective tax rate ( 0.2 % ) 0.0 % 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 was not 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, 2022 and 2021, 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, 2019 are closed to federal and state examination. NOTE 10 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/loss per share is as follows: Schedule of earnings (loss) per share For the Fiscal Years Ended September 30, 2022 2021 Numerator: Net (loss)/income $ ( 1,378,000 ) $ 524,000 Denominator: Weighted average common shares outstanding 10,061,000 9,950,000 Dilutive common share equivalents – 493,000 Weighted average dilutive shares outstanding 10,061,000 10,443,000 (Loss)/earnings per share: Basic $ ( 0.14 ) $ 0.05 Diluted $ ( 0.14 ) $ 0.05 F- 19 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 2022 because their inclusion would have been anti-dilutive: Schedule of anti dilutive securities excluded Fiscal 2022 Options 1,085,000 Warrants 151,000 Total potentially dilutive shares 1,236,000 NOTE 11 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 $77,000 at September 30, 2022) 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. 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 $467,000 at September 30, 2022). At September 30, 2022, the Company had not incurred a liability in connection with this guarantee. 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 September 30, 2022, 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. F- 20 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 LEASES The Company’s operating leases are primarily for corporate, engineering and administrative office space. Total operating lease expense in Fiscal 2022 was $ 631,000 , of which $57,000 was recorded in sales and marketing expenses and $574,000 was recorded in general and administrative expenses on the consolidated statements of operations. 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. Cash paid for amounts included in operating lease liabilities in Fiscal 2022 and Fiscal 2021, which have been included in cash flows from operating activities, was $ 601,000 and $ 489,000 , respectively. At September 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 %. Future minimum payments under non-cancellable operating leases are as follows: Schedule of Future Minimum Rental Payments for Operating Leases Fiscal 2023 $ 575,000 Fiscal 2024 592,000 Fiscal 2025 556,000 Fiscal 2026 510,000 Fiscal 2027 419,000 Thereafter 1,979,000 Total future minimum lease payments 4,631,000 Less imputed interest ( 1,003,000 ) Total $ 3,628,000 NOTE 13 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 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 $ 1,398,000 and $ 1,404,000 during Fiscal 2022 and Fiscal 2021, 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 2022. The Company made prepayments to Forward China for inventory purchases of $ 20,000 and $ 317,000 at September 30, 2022 and 2021, respectively, which are included in prepaid expenses and other current assets on the consolidated balance sheets. F- 21 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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, with the principal due at maturity. The Company incurred and paid interest associated with this note of $ 122,000 and $ 128,000 in Fiscal 2022 and Fiscal 2021, respectively. The maturity date of this note was extended to December 31, 2024. The maturity date of the note has been extended on several occasions to assist the Company with liquidity. The Company made principal payments of $ 200,000 on this note during Fiscal 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 $ 1,741,000 and $ 1,493,000 in Fiscal 2022 and Fiscal 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, 2023, may 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 $ 90,000 under this agreement for Fiscal 2022, of which $ 84,000 was included in selling and marketing expenses and $ 6,000 is included as a component of cost of sales upon sales of the related products. The Company had accounts payable to Justwise of $ 15,000 and $ 1,000 at September 30, 2022 and 2021, respectively. The Company recorded revenue from a customer whose principal owner is an immediate family member of Jenny P. Yu, a shareholder of the Company and managing director of Forward China. The Company recognized revenues from this customer of $ 780,000 and $ 418,000 in Fiscal 2022 and Fiscal 2021, respectively. The Company had no accounts receivable from this customer at September 30, 2022 or 2021. 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 $ 13,000 and $ 63,000 from the sale of such products during Fiscal 2022 and 2021, respectively. NOTE 14 401(k) PLAN The Company maintains a 401(k) benefit plan allowing eligible employees to make pre-tax and/or after-tax contributions of a portion of their salary in amounts subject to IRS limitations. The Company made immediately vested contributions of $ 379,000 during Fiscal 2022, of which $313,000 was recorded to cost of sales, $16,000 was recorded to sales and marketing expense and $50,000 was recorded to general and administrative expense on the consolidated statement of operations. 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. F- 22 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 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. 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. Information by segment and related reconciliations are shown in tables below: Segment operating income (loss) Revenues Fiscal 2022 Fiscal 2021 OEM distribution $ 18,036,000 $ 19,290,000 Retail distribution 4,130,000 3,183,000 Design 20,171,000 16,549,000 Total segment revenues $ 42,337,000 $ 39,022,000 Operating Income/(Loss) Fiscal 2022 Fiscal 2021 OEM distribution $ 905,000 $ 1,479,000 Retail distribution ( 1,809,000 ) ( 779,000 ) Design 2,148,000 603,000 Total segment operating income 1,244,000 1,303,000 General corporate expenses ( 2,484,000 ) ( 2,068,000 ) Total loss from operations ( 1,240,000 ) ( 765,000 ) Other expense/(income), net 136,000 ( 1,289,000 ) (Loss)/income before income taxes $ ( 1,376,000 ) $ 524,000 Depreciation and Amortization Fiscal 2022 Fiscal 2021 OEM distribution $ 8,000 $ 7,000 Retail distribution – 1,000 Design 301,000 319,000 Total $ 309,000 $ 327,000 F- 23 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Balance Sheet Segment Assets September 30, 2022 2021 OEM distribution $ 4,276,000 $ 5,898,000 Retail distribution 3,816,000 2,178,000 Design 6,116,000 5,824,000 Total segment assets 14,208,000 13,900,000 General corporate assets 6,731,000 5,956,000 Total assets $ 20,939,000 $ 19,856,000 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 2022 and Fiscal 2021: Revenues from External Customers Revenues Fiscal 2022 Fiscal 2021 United States $ 29,490,000 $ 25,670,000 China 5,325,000 5,640,000 Germany 2,976,000 2,787,000 Poland 2,643,000 3,111,000 Other foreign countries 1,903,000 1,814,000 Total $ 42,337,000 $ 39,022,000 Customer Concentrations In Fiscal 2022 and Fiscal 2021, 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 of these customers or their affiliates or contract manufacturers represented 23.0 % of the Company’s consolidated net revenues in Fiscal 2022 and revenues from three of these customers or their affiliates or contract manufacturers represented 36.8 % of the Company’s consolidated net revenues in Fiscal 2021. In Fiscal 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 10.6 % of the Company’s consolidated net revenues in Fiscal 2022. There were no customers in the design segment whose individual percentage of the Company’s consolidated net revenues was 10% or greater in Fiscal 2021. At September 30, 2022 and 2021, the Company had customers in the OEM distribution segment whose accounts receivable balances accounted for 10% or more of the Company’s consolidated accounts receivable. Accounts receivable from two customers or their affiliates or contract manufacturers represented 28.1 % of the Company’s consolidated accounts receivable at September 30, 2022 and accounts receivable from three customers or their affiliates or contract manufacturers represented 44.0 % of the Company’s consolidated accounts receivable at September 30, 2021. F- 24 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 16 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 7.0 % and 4.0 % at September 30, 2022 and 2021, respectively. In March 2021, the Company paid down the outstanding balance on the line of credit and $ 1,300,000 was available at September 30, 2022 and 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, 2022. NOTE 17 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 . 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 consolidated statement of operations for Fiscal 2021. There is a six-year period during which the SBA can review the Company’s forgiveness. F- 25