Forward Industries, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS December 31, September 30, 2022 2022 Assets (Unaudited) Current assets: Cash $ 2,331,806 $ 2,575,522 Accounts receivable, net 8,523,079 7,542,666 Inventories, net 4,138,879 3,801,030 Prepaid expenses and other current assets 394,343 417,605 Total current assets 15,388,107 14,336,823 Property and equipment, net 261,917 241,146 Intangible assets, net 1,052,711 1,105,901 Goodwill 1,758,682 1,758,682 Operating lease right of use assets, net 3,328,047 3,427,726 Other assets 68,737 68,737 Total assets $ 21,858,201 $ 20,939,015 Liabilities and shareholders' equity Current liabilities: Accounts payable $ 576,449 $ 268,160 Due to Forward China 9,475,932 7,713,880 Deferred income 334,588 438,878 Current portion of earnout consideration – 25,000 Current portion of operating lease liability 387,222 377,940 Accrued expenses and other current liabilities 694,644 1,153,906 Total current liabilities 11,468,835 9,977,764 Other liabilities: Note payable to Forward China 1,350,000 1,400,000 Operating lease liability, less current portion 3,149,279 3,249,824 Earnout consideration, less current portion 30,000 45,000 Total other liabilities 4,529,279 4,694,824 Total liabilities 15,998,114 14,672,588 Commitments and contingencies – – Shareholders' equity: Common stock, par value $ 0.01 per share; 40,000,000 shares authorized; 10,061,185 shares issued and outstanding at December 31, 2022 and September 30, 2022 100,612 100,612 Additional paid-in capital 20,139,646 20,115,711 Accumulated deficit ( 14,380,171 ) ( 13,949,896 ) Total shareholders' equity 5,860,087 6,266,427 Total liabilities and shareholders' equity $ 21,858,201 $ 20,939,015 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 December 31, 2022 2021 Revenues, net $ 10,809,679 $ 11,613,741 Cost of sales 8,890,978 8,994,973 Gross profit 1,918,701 2,618,768 Sales and marketing expenses 690,300 737,677 General and administrative expenses 1,695,278 1,666,877 (Loss)/income from operations ( 466,877 ) 214,214 Fair value adjustment of earnout consideration ( 40,000 ) – Interest expense 27,958 32,828 Other (income)/expense, net ( 24,560 ) 1,362 (Loss)/income before income taxes ( 430,275 ) 180,024 Provision for income taxes – – Net (loss)/income $ ( 430,275 ) $ 180,024 (Loss)/earnings per share: Basic $ ( 0.04 ) $ 0.02 Diluted $ ( 0.04 ) $ 0.02 Weighted average common shares outstanding: Basic 10,061,185 10,061,185 Diluted 10,061,185 10,337,113 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 Months Ended December 31, 2022 Additional Common Stock Paid-In Accumulated Shares Amount Capital Deficit Total Balance at September 30, 2022 10,061,185 $ 100,612 $ 20,115,711 $ ( 13,949,896 ) $ 6,266,427 Share-based compensation – – 23,935 – 23,935 Net loss – – – ( 430,275 ) ( 430,275 ) Balance at December 31, 2022 10,061,185 $ 100,612 $ 20,139,646 $ ( 14,380,171 ) $ 5,860,087 For the Three Months Ended December 31, 2021 Additional Common Stock Paid-In Accumulated Shares Amount Capital Deficit Total Balance at September 30, 2021 10,061,185 $ 100,612 $ 19,914,476 $ ( 12,571,645 ) $ 7,443,443 Share-based compensation – – 38,800 – 38,800 Net income – – – 180,024 180,024 Balance at December 31, 2021 10,061,185 $ 100,612 $ 19,953,276 $ ( 12,391,621 ) $ 7,662,267 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 Three Months Ended December 31, 2022 2021 Operating Activities: Net (loss)/income $ ( 430,275 ) $ 180,024 Adjustments to reconcile net (loss)/income to net cash (used in)/provided by operating activities: Share-based compensation 23,935 38,800 Depreciation and amortization 77,530 73,384 Bad debt expense 13,109 393 Change in fair value of earnout consideration ( 40,000 ) – Changes in operating assets and liabilities: Accounts receivable ( 993,522 ) ( 27,719 ) Inventories ( 337,849 ) ( 909,577 ) Prepaid expenses and other current assets 23,262 ( 69,577 ) Other assets – – Accounts payable and due to Forward China 2,070,341 1,143,407 Deferred income ( 104,290 ) 565,183 Net changes in operating lease liabilities 8,416 10,544 Accrued expenses and other current liabilities ( 459,262 ) 133,022 Net cash (used in)/provided by operating activities ( 148,605 ) 1,137,884 Investing Activities: Purchases of property and equipment ( 45,111 ) ( 66,024 ) Net cash used in investing activities ( 45,111 ) ( 66,024 ) Financing Activities: Repayment of note payable to Forward China ( 50,000 ) ( 50,000 ) Net cash used in financing activities ( 50,000 ) ( 50,000 ) Net (decrease)/increase in cash ( 243,716 ) 1,021,860 Cash at beginning of period 2,575,522 1,410,365 Cash at end of period $ 2,331,806 $ 2,432,225 Supplemental Disclosures of Cash Flow Information: Cash paid for interest $ 27,958 $ 32,828 Supplemental Disclosures of Non-Cash Information: Operating lease assets obtained in exchange for operating lease liabilities $ – $ 204,881 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 global design, manufacturing, sourcing and distribution company 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, 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. Liquidity For the three months ended December 31, 2022, the Company generated a net loss of $ 430,000 , and used $ 149,000 of cash flows in 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 February 29, 2024. At December 31, 2022, the Company had $ 1,300,000 of borrowing available under its line of credit with a bank that has a maturity date of May 31, 2023 (see Note 10). As this line of credit has been renewed on multiple prior occasions, management expects it will be renewed again. Considering the loss of a significant OEM distribution segment customer (see Note 5) and the retail distribution segment operating losses, management is planning to evaluate the Company’s cost structure and implement cost cutting initiatives as deemed necessary. In light of these events, the Company is currently assessing the terms of its sourcing agreement with Forward Industries Asia-Pacific Corporation (“Forward China”), which is scheduled to expire on October 22, 2023 (See Note 8). The Company and Forward China have agreed to begin negotiations on a new sourcing agreement early in the third quarter of Fiscal 2023. While we believe a new agreement will be reached, we cannot provide any assurances that we will be successful. If an agreement cannot be reached, which could have a significant impact on the Company’s operations, we will look at other alternatives for our OEM and retail distribution businesses prior to the expiration of the agreement. Impact of COVID-19 The effects of the COVID-19 pandemic continue to impact our business with higher historical costs for ocean freight and ground transportation, particularly from the Asia-Pacific region. We expect to see the benefits of declining ocean freight costs in future periods. Inflation, in part associated with the pandemic, continues to increase the cost of acquiring and retaining our employees and acquiring inventory. The instability of transportation costs and future inflation are still largely unknown but are expected to continue throughout the fiscal year ended September 30, 2023 (“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 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 and associated inflationary impact 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 wholly-owned 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 wholly-owned 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, 2023. 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, 2022, and with the disclosures and risk factors presented therein. The September 30, 2022 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: Original Equipment Manufacturing (“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 directly to OEMs or their contract manufacturers 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 5 for more information on segments. 6 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Accounts Receivable Accounts receivable consist of unsecured trade accounts with customers in amounts that have been invoiced ($ 8,900,000 and $ 7,861,000 at December 31, 2022 and September 30, 2022, 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 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 December 31, 2022 and September 30, 2022, the Company had no allowances for doubtful accounts for the OEM distribution segment, allowances for doubtful accounts of $ 32,000 and $ 20,000 , respectively, for the retail distribution segment and $ 837,000 and $ 852,000 , 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 December 31, 2022 and September 30, 2022, the Company recorded accounts receivable allowances of $ 110,000 and $ 55,000 , respectively, for the retail distribution segment. 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 condensed 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 December 31, 2022 and September 30, 2022, the allowance for slow-moving inventory, which relates entirely to our retail segment, was $ 460,000 and $ 535,000 , respectively. 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 condensed consolidated balance sheets. The OEM distribution segment had no contract liabilities at December 31, 2022, September 30, 2022 or September 30, 2021. 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 Accounting Standards Codification, “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 condensed consolidated balance sheets. The retail distribution segment had no contract liabilities at December 31, 2022, September 30, 2022 or September 30, 2021. 7 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 $ 602,000 , $ 609,000 and $ 693,000 at December 31, 2022, September 30, 2022 and September 30, 2021, 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 $ 335,000 , $ 439,000 and $ 188,000 at December 31, 2022, September 30, 2022 and September 30, 2021, respectively. Goodwill The Company reviews goodwill for impairment at least annually, or more often if triggering events occur. The Company has two reporting units with goodwill (the IPS and Kablooe operating segments) and we perform our annual goodwill impairment test on September 30, the end of the fiscal year, or upon the occurrence of a triggering event. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company would not need to perform a quantitative impairment test for the reporting unit. If the Company cannot support such a conclusion or does not elect to perform the qualitative assessment, then the Company will perform the quantitative assessment by comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying value, no impairment charge is recognized. If the fair value of the reporting unit is less than its carrying value, an impairment charge will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value. A significant amount of judgment is required in performing goodwill impairment tests including estimating the fair value of a reporting unit. Management evaluated and concluded that there were no indications goodwill was impaired at December 31, 2022. 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 December 31, 2022. 8 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Income Taxes The Company recognizes future tax benefits and liabilities measured at enacted rates attributable to temporary differences between financial statement and income tax bases of assets and liabilities and to net tax operating loss carryforwards to the extent that realization of these benefits is more likely than not. At December 31, 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. 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. 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. Leases Lease assets and liabilities are recognized at the 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 on the condensed consolidated balance sheets. The current and long-term portions of operating lease liabilities are shown separately as such on the condensed consolidated balance sheets. Recent Accounting Pronouncements In November 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. 9 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 INTANGIBLE ASSETS AND GOODWILL Intangible Assets The Company’s intangible assets consist of the following: Intangible Assets December 31, 2022 September 30, 2022 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 ( 174,000 ) ( 748,000 ) ( 922,000 ) ( 164,000 ) ( 705,000 ) ( 869,000 ) Net carrying amount $ 411,000 $ 642,000 $ 1,053,000 $ 421,000 $ 685,000 $ 1,106,000 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 December 31, 2022 and 2021, which is included in general and administrative expenses on the condensed consolidated statements of operations. At December 31, 2022, estimated amortization expense for the Company’s intangible assets is as follows: Estimated amortization expense Remainder of Fiscal 2023 $ 160,000 Fiscal 2024 213,000 Fiscal 2025 213,000 Fiscal 2026 121,000 Fiscal 2027 82,000 Fiscal 2028 78,000 Thereafter 186,000 Total $ 1,053,000 10 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 $ 30,000 and $ 70,000 at December 31, 2022 and September 30, 2022, respectively, 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 months ended December 31, 2022, the Company reduced this liability from $70,000 to $30,000 based on changes to the expected likelihood of Kablooe reaching the specified earnings targets. The resulting gain has been recorded as a component of other income on the condensed consolidated statement of operations. 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. 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. 11 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Information by segment and related reconciliations are shown in the tables below: Segment operating income (loss) For the Three Months Ended December 31, 2022 2021 Revenues: OEM distribution $ 4,377,000 $ 5,242,000 Retail distribution 1,057,000 1,392,000 Design 5,376,000 4,980,000 Total segment revenues $ 10,810,000 $ 11,614,000 Operating income/(loss): OEM distribution $ 112,000 $ 497,000 Retail distribution ( 326,000 ) ( 228,000 ) Design 433,000 585,000 Total segment operating income 219,000 854,000 General corporate expenses ( 686,000 ) ( 640,000 ) Total (loss)/income from operations ( 467,000 ) 214,000 Other (income)/expense, net ( 37,000 ) 34,000 (Loss)/income before income taxes $ ( 430,000 ) $ 180,000 Depreciation and amortization: OEM distribution $ 2,000 $ 2,000 Design 76,000 71,000 Total depreciation and amortization $ 78,000 $ 73,000 Schedule of segment assets December 31, 2022 September 30, 2022 Segment Assets: OEM distribution $ 5,262,000 $ 4,276,000 Retail distribution 3,865,000 3,816,000 Design 6,346,000 6,116,000 Total segment assets 15,473,000 14,208,000 General corporate assets 6,385,000 6,731,000 Total assets $ 21,858,000 $ 20,939,000 12 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 25.0 % and 25.2 %, respectively, of the Company’s consolidated net revenues for the three months ended December 31, 2022 and 2021, respectively. For the three months ended December 31, 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 14.4 % of the Company’s consolidated net revenues for the three months ended December 31, 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 months ended December 31, 2021. At December 31, 2022 and September 30, 2022, 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 two customers or their affiliates or contract manufacturers represented 37.0 % and 28.1 %, respectively, of the Company’s consolidated accounts receivable at December 31, 2022 and September 30, 2022. At December 31, 2022, the Company had one customer in the design segment whose accounts receivable balance accounted for 10% or more of the Company’s consolidated accounts receivable. Accounts receivable from this customer represented 11.5 % of the Company’s consolidated accounts receivable at December 31, 2022. There were no customers in the design segment whose individual percentage of the Company’s consolidated accounts receivable was 10% or greater at September 30, 2022. In March 2023, the Company’s contract with one of its major diabetic customers in the OEM distribution segment will expire. Due to increased pricing pressures, the Company will not be extending its contract with this customer. Revenue from this customer represented 12 % of our consolidated net revenues for both the three months ended December 31, 2022 and 2021. The Company expects the loss of this customer to cause a significant decline in OEM distribution segment revenues in future periods. NOTE 6 SHARE-BASED COMPENSATION Stock Options No options were granted during the three months ended December 31, 2022. In October 2021, the Company granted options to non-employee directors to purchase an aggregate of 58,000 shares of its common stock at an exercise price of $ 2.39 per share. The options expire five years from the date of grant, approximately half vested immediately and approximately half vested one year from the date of grant. The options had a weighted average grant-date fair value of $ 1.03 per share and an aggregate grant-date fair value of $ 60,000 , which was be recognized ratably over the vesting period. There were no options exercised during the three months ended December 31, 2022 or 2021. The Company recognized compensation expense for stock option awards of $ 24,000 and $ 39,000 during the three months ended December 31, 2022 and 2021, respectively, which was recorded as a component of general and administrative expenses in its condensed consolidated statements of operations. At December 31, 2022, there was $ 24,000 of total unrecognized compensation cost related to nonvested stock option awards that is expected to be recognized over a weighted average period of 0.5 years. 13 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 December 31, 2022 2021 Numerator: Net (loss)/income $ ( 430,000 ) $ 180,000 Denominator: Weighted average common shares outstanding 10,061,000 10,061,000 Dilutive common share equivalents – 276,000 Weighted average diluted shares outstanding 10,061,000 10,337,000 (Loss)/earnings per share: Basic $ ( 0.04 ) $ 0.02 Diluted $ ( 0.04 ) $ 0.02 The following securities were excluded from the calculation of diluted earnings per share in each period because their inclusion would have been anti-dilutive: Schedule of antidilutive securities excluded For the Three Months Ended December 31, 2022 2021 Options 1,075,000 58,000 Warrants 151,000 – Total potentially dilutive shares 1,226,000 58,000 14 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 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 $ 362,000 during the three months ended December 31, 2022 and 2021, respectively, which are included as a component of cost of sales upon sales of the related products. The Company and Forward China have agreed to begin negotiations on a new sourcing agreement early in the third quarter of Fiscal 2023. While we believe a new agreement will be reached, we cannot provide any assurances that we will be successful. If an agreement cannot be reached, which could have a significant impact on the Company’s operations, we will look at other alternatives for our OEM and retail distribution businesses prior to the expiration of the agreement. The Company has prepayments to Forward China for inventory purchases of $ 20,000 at December 31, 2022 and September 30, 2022, 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 $ 28,000 and $ 32,000 , respectively, in the three months ended December 31, 2022 and 2021, respectively. The maturity date of this note was extended to December 31, 2024 . The maturity date of this note has been extended on several occasions to assist the Company with liquidity. The Company made principal payments of $ 50,000 on this note during the three months ended December 31, 2022, and this note has a remaining balance of $ 1,350,000 at December 31, 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 $ 497,000 and $ 540,000 in the three months ended December 31, 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, 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 $ 33,000 under this agreement for the three months ended December 31, 2022, of which $ 30,000 were included in selling and marketing expenses and $ 3,000 are included as a component of cost of sales upon sales of the related products. The Company had accounts payable to Justwise of $ 1,000 and $ 15,000 at December 31, 2022 and September 30, 2022, 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 revenue from this customer of $ 134,000 and $ 266,000 for the three months ended December 31, 2022 and 2021, respectively. The Company had no accounts receivable from this customer at December 31, 2022 or September 30, 2022. 15 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 December 31, 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 business. 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 8.25 % and 7.0 % at December 31, 2022 and September 30, 2022, respectively. At December 31, 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, 2022, the Company was in compliance with such covenants. NOTE 11 LEASES The Company’s operating leases are primarily for corporate, sales and administrative office space. Total operating lease expense for the three months ended December 31, 2022 was $ 148,000 , of which $1,000 was recorded in sales and marketing expenses and $147,000 was recorded in general and administrative expenses on the condensed consolidated statement of operations. Total operating lease expense for the three months ended December 31, 2021 was $ 156,000 , of which $14,000 was recorded in sales and marketing expenses and $142,000 was recorded in general and administrative expenses on the condensed consolidated statement of operations. Cash paid for amounts included in operating lease liabilities for the three months ended December 31, 2022 and 2021, which have been included in cash flows from operating activities, was $ 143,000 and $ 149,000 , respectively. At December 31, 2022, the Company’s operating leases had a weighted average remaining lease term of 8.2 years and a weighted average discount rate of 5.7 %. At December 31, 2022, future minimum payments under non-cancellable operating leases were as follows: Schedule of future minimum payments under operating leases Remainder of Fiscal 2023 $ 433,000 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 4,489,000 Less imputed interest ( 953,000 ) Present value of lease liabilities 3,536,000 Less current portion of lease liabilities ( 387,000 ) Long-term portion of lease liabilities $ 3,149,000 16 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities at December 31, 2022 and September 30, 2022 are as follows: Schedule of accrued expenses and other accrued liabilities December 31, September 30, 2022 2022 Accrued commissions/bonuses $ 258,000 $ 722,000 Paid time off 199,000 228,000 Other 238,000 204,000 Total $ 695,000 $ 1,154,000 17