What changed in this filing

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Item 1. Financial Statements

2023-08-14 compared with 2023-05-12 · 326 added, 296 removed, 440 unchanged (59% of the section changed)

31 unchanged sentences

40,000,000 shares authorized;

10,061,185 shares issued and outstanding at March 31, 2023 and September 30, 2022

10,061,185 shares issued and

outstanding at June 30, 2023 and September 30, 2022

Additional paid-in capital

8 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended March 31,

For the Six Months Ended March 31,

For the Three Months Ended

For the Nine Months Ended

Revenues, net

7 unchanged sentences

Interest income

Other expense/(income), net

Other (income)/expense, net

Loss before income taxes

11 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

For the Three and Six Months Ended March 31, 2023

For the Three and Nine Months Ended June 30, 2023

Balance at September 30, 2022

6 unchanged sentences

( 15,251,119 )

For the Three and Six Months Ended March 31, 2022

Share-based compensation

Balance at June 30, 2023

$ ( 15,787,863 )

For the Three and Nine Months Ended June 30, 2022

Balance at September 30, 2021

6 unchanged sentences

( 12,747,956 )

Share-based compensation

Balance at June 30, 2022

$ ( 13,166,869 )

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended March 31,

For the Nine Months Ended June 30,

Operating Activities:

1 unchanged sentence

$ ( 595,224 )

Adjustments to reconcile net loss to net cash (used in)/provided by operating activities:

Adjustments to reconcile net loss to net cash provided by operating

Share-based compensation

10 unchanged sentences

Accrued expenses and other current liabilities

Net cash (used in)/provided by operating activities

Net cash provided by operating activities

Investing Activities:

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Net cash used in financing activities

Net (decrease)/increase in cash

Net increase in cash

Cash at beginning of period

7 unchanged sentences

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 OVERVIEW

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.

Through the growth in our design segment, 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.

For the six months

ended March 31 2023, the Company generated a net loss of $1,301,000,

and used $50,000 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 May 31, 2024.

At March 31, 2023, the Company had $ 1,300,000 of

borrowing available under its line of credit with a bank that was renewed in March 2023 and has a maturity date of May 31, 2024 (see

Considering the loss of a significant OEM distribution segment customer (see Note 5), management reduced its OEM

distribution segment sales and marketing personnel in March 2023 and 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

Effective April 1, 2023, the Company and Forward China agreed to reduce the fixed portion of the sourcing fee from $100,000

to $83,333 per month for the remaining term of the agreement, which is expected to result in cash savings of $100,000 for the

remainder of the 2023 fiscal year.

(“Forward”, “we”, “our” or the “Company”) is a global design, sourcing and distribution

company serving top tier medical and technology customers worldwide.

In July 2023, the Company

decided to cease its retail distribution operations (“Retail Exit”).

The Retail Exit will have no effect on the operations

of the Company’s other segments.

The Company is working on a plan that will ensure the Retail Exit is made in an orderly manner

while also satisfying existing customer obligations.

At the time of this filing, the Company does not know the extent, or a range, of

the costs that it will incur as a result of the exit.

For the nine months ended

June 30, 2023, the Company generated a net loss of $1,838,000 and $562,000 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 August

At June 30, 2023, the Company had $ 1,300,000 of borrowing available under its line of credit with a bank that was renewed in

March 2023 and has a maturity date of May 31, 2024 (see Note 10).

Considering the loss of a significant Original Equipment Manufacturing

(“OEM”) distribution segment customer (see Note 5), management reduced its OEM distribution segment sales and marketing personnel

in March 2023 and 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).

Effective April 1, 2023, the Company and Forward China agreed

to reduce the fixed portion of the sourcing fee from $100,000 to $83,333 per month for the remaining term of the agreement, which resulted

in cash savings of $50,000 in the third quarter of fiscal 2023 and is expected to result in cash savings of $50,000 for the remainder

of the 2023 fiscal year.

The Company and Forward China have begun negotiations on a new sourcing agreement.

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.

In light of these events, and the continued retail

distribution segment operating losses, management is planning to further evaluate the Company’s OEM and retail distribution

segment cost structures and implement additional cost cutting initiatives as deemed necessary.

In light of the Retail Exit,

the Company plans to discuss a further reduction in the sourcing fee commensurate with the services provided.

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 distribution business prior to

the expiration of the agreement.

Management is planning to further evaluate the OEM distribution segment cost structure and implement

additional cost cutting initiatives as deemed necessary.

Impact of COVID-19

The effects of the COVID-19 pandemic

continue to impact our business with high capitalized inventory costs for inbound ocean freight, particularly from the Asia-Pacific region,

and expenses associated with outbound ground transportation.

We expect to see the benefits of declining ocean freight costs in future

Inflation, in part associated with the pandemic, continues to increase the cost of acquiring and retaining our employees and

acquiring inventory.

The effects of the COVID-19

pandemic continue to impact our business with high capitalized inventory costs for inbound ocean freight, particularly from the Asia-Pacific

region, and expenses associated with outbound ground transportation.

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.

throughout 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

aligning our design and development schedules with demand in a proactive manner to minimize our cash operating costs;

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.

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.

to these challenges, we will continue to focus on those factors that we can control:

closely managing and controlling our expenses;

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.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 ACCOUNTING

NOTE 2 ACCOUNTING POLICIES

Basis of Presentation

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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 Fiscal 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.

herein but are not necessarily indicative of the results of operations for the full year of fiscal 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.

The preparation of the Company’s

condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America

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.

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The Company has three reportable

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 saunas, 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.

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 saunas, and

a variety of other products through various online retailer websites to customers predominantly located in the U.S.

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.

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 ($ 8,430,000 and $ 7,861,000 at March 31, 2023 and September

Accounts receivable consist

of unsecured trade accounts with customers in amounts that have been invoiced ($ 8,064,000 and $ 7,861,000 at June 30, 2023 and September

30, 2022, respectively) and contract assets as described further below under the heading “Revenue Recognition.” The Company

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accounts of $ 39,000 and $ 20,000 , respectively, for the retail distribution segment and $ 837,000 and $ 852,000 , respectively, for the design

The Company has agreements with

various retailers which contain different terms for trade discounts, promotional and other sales allowances.

At March 31, 2023 and September

30, 2022, the Company recorded accounts receivable allowances of $ 153,000 and $ 55,000 , respectively, for the retail distribution segment.

The Company has agreements

with various retailers which contain different terms for trade discounts, promotional and other sales allowances.

At June 30, 2023 and

September 30, 2022, the Company recorded accounts receivable allowances of $ 161,000 and $ 55,000 , respectively, for the retail distribution

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.

management’s estimates, an allowance is made to reduce excess, obsolete, or otherwise unsellable inventories to net realizable value.

management’s estimates, an allowance is made to reduce excess, obsolete, or otherwise unsellable inventories to net realizable

The allowance is established through charges to cost of sales in the Company’s condensed consolidated statements of operations.

1 unchanged sentence

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 March 31, 2023 and September

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 June 30, 2023 and September

30, 2022, the allowance for slow-moving inventory, which relates entirely to our retail segment, was $ 779,000 and $ 535,000 , respectively.

11 unchanged sentences

The OEM distribution segment had no contract liabilities

at March 31, 2023, September 30, 2022 or September 30, 2021.

at June 30, 2023, September 30, 2022 or September 30, 2021.

Retail Distribution Segment

12 unchanged sentences

in the accompanying condensed consolidated balance sheets.

The retail distribution segment had no contract liabilities at March 31, 2023,

The retail distribution segment had no contract liabilities at June 30, 2023,

September 30, 2022 or September 30, 2021.

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

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.

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 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.

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

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The design segment had contract assets of $ 632,000 , $ 609,000 and $ 693,000 at

March 31, 2023, 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 $ 166,000 , $ 439,000 and $ 188,000 at March 31, 2023, September

30, 2022 and September 30, 2021, respectively.

June 30, 2023, 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 $ 265,000 , $ 439,000 and $ 188,000 at June 30, 2023, September 30, 2022 and

September 30, 2021, respectively.

The Company reviews goodwill

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the fair value of a reporting unit.

Management evaluated and concluded that there were no indications goodwill was impaired at March 31,

Management evaluated and concluded that there were no indications goodwill was impaired at June 30,

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.

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.

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 March 31, 2023.

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 June 30, 2023.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2 unchanged sentences

bases of assets and liabilities and to net tax operating loss carryforwards to the extent that realization of these benefits is more likely

At March 31, 2023, there was no change to our assessment that a full valuation allowance was required against all net deferred

At June 30, 2023, 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.

4 unchanged sentences

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

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

An asset's or liability's categorization within the fair value hierarchy is based upon the lowest level of input that is significant

4 unchanged sentences

unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities.

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.

Certain leases 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 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.

Certain leases 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.

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.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

12 unchanged sentences

assets consist of the following:

Intangible Assets

March 31, 2023

Schedule of intangible assets

June 30, 2023

September 30, 2022

5 unchanged sentences

Less accumulated amortization

( 1,029,000 )

Net carrying amount

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relationships.

Amortization expense related to intangible assets was $ 53,000 for the three months ended March 31, 2023 and 2022, and $ 106,000

for the six months ended March 31, 2023 and 2022, which is included in general and administrative expenses on the condensed consolidated

Amortization expense related to intangible assets was $ 53,000 for the three months ended June 30, 2023 and 2022, and $ 160,000

for the nine months ended June 30, 2023 and 2022, which is included in general and administrative expenses on the condensed consolidated

statements of operations.

At March 31, 2023, estimated

At June 30, 2023, estimated

amortization expense for the Company’s intangible assets is as follows:

Estimated amortization expense

Schedule of future amortization

Remainder of Fiscal 2023

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

represents the future economic benefits of assets acquired in a business combination that are not individually identified or separately

3 unchanged sentences

All of the Company’s goodwill is held under the design segment of our business.

NOTE 4 FAIR VALUE

earnout consideration of $ 30,000 and $ 70,000 at March 31, 2023 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.

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.

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 FAIR VALUE MEASUREMENTS

earnout consideration of $ 30,000 and $ 70,000 at June 30, 2023 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

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design segment acquisitions.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Information by segment and

related reconciliations are shown in tables below:

Segment operating income (loss)

For the Three Months Ended March 31,

For the Six Months Ended March 31,

Schedule of segment operating income (loss)

For the Three Months Ended

For the Nine Months Ended

OEM distribution

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( 1,937,000 )

Total (loss)/income from operations

Total loss from operations

( 1,833,000 )

Other (income)/expense, net

(Loss)/income before income taxes

Other expense, net

Loss before income taxes

$ ( 537,000 )

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Total depreciation and amortization

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Schedule of segment assets

September 30,

Segment Assets:

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General corporate assets

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 one customer or its affiliates or contract manufacturers represented 12.7 % of the Company’s consolidated net revenues

for the three months ended March 31, 2023 and revenues from two customers represented 26.2 % of the Company’s consolidated net revenues

for the three months ended March 31, 2022.

Revenues from two customers or their affiliates or contract manufacturers represented 22.6 %

and 25.7 % of the Company’s consolidated net revenues for the six months ended March 31, 2023 and 2022, respectively.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three and six months

ended March 31, 2023, the Company had one customer in the design segment whose individual percentage of the Company’s consolidated

The Company had certain customers

in the OEM distribution segment whose individual percentage of the Company’s consolidated revenues was 10% or greater.

from two customers or their affiliates or contract manufacturers represented 24.2 % and 24.1 % of the Company’s consolidated net revenues

for the three and nine months ended June 30, 2022, respectively.

There were no customers in the OEM distribution segment whose individual

percentage of the Company’s consolidated revenues was 10% or greater during the three or nine months ended June 30, 2023.

For the three and nine months

ended June 30, 2023, 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 30.1 % and 10.8 % of the Company’s consolidated net revenues

for the three months ended March 31, 2023 and 2022, respectively, and 19.2 % and 10.2 % of the Company’s consolidated net revenues

for the six months ended March 31, 2023 and 2022, respectively.

At March 31, 2023 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 31.3 % and 28.1 %, respectively, of the Company’s consolidated accounts receivable at March 31, 2023 and September 30,

At March 31, 2023, the

Company had one customer in the design segment whose accounts receivable balance accounted for 10% or more of the Company’s consolidated

for the three months ended June 30, 2023 and 2022, respectively, and 22.7 % and 10.4 % of the Company’s consolidated net revenues

for the nine months ended June 30, 2023 and 2022, respectively.

At June 30, 2023 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 one customer or their affiliates or contract manufacturers

represented 13.3 % of the Company’s consolidated accounts receivable at June 30, 2023 and accounts receivable from two customers

or their affiliates or contract manufacturers represented 28.1 % of the Company’s consolidated accounts receivable at September 30,

At June 30, 2023, 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 26.3 % of the Company’s consolidated accounts receivable

at March 31, 2023.

at June 30, 2023.

There were no customers in the design segment whose individual percentage of the Company’s consolidated accounts

5 unchanged sentences

Revenue from this customer represented approximately 12 % of our consolidated net revenues

for both the six months ended March 31, 2023 and 2022.

The Company expects the loss of this customer to cause a significant decline in

OEM distribution segment revenues in future periods.

for the nine months ended June 30, 2022.

The Company expects the loss of this customer to cause a significant decline in OEM distribution

segment revenues in future periods.

On July 21, 2023, the Company

decided to cease its retail distribution operations.

The exit from the retail distribution operations will have no effect on the operations

of the Company’s design or OEM distribution businesses.

The Company is working on a plan that will ensure the transition out of

the retail business is done in an orderly manner while also satisfying existing customer obligations.

At the time of this filing, the

Company does not know the extent, or a range, of the costs that it will incur as a result of the exit.

NOTE 6 SHARE-BASED COMPENSATION

Stock Options

No options were granted during

the six months ended March 31, 2023.

October 2021 and January 2022, the Company granted options to non-employee directors to purchase an aggregate of 58,000 and 83,000 shares,

respectively, of its common stock at an exercise price of $ 2.39 and $ 1.56 per share, respectively.

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 have

a weighted average grant-date fair value of $ 1.03 and $ 0.72 per share, respectively, and each grant has an aggregate grant-date fair value

of $ 60,000 , which was recognized ratably over the vesting period.

May 2023, the Company granted options to three of its non-employee directors to purchase an aggregate of 124,740 shares of its common

stock at an exercise price of $ 1.03 per share.

The options vest six months from the date of grant and expire five years from the date

The options have a weighted average grant-date fair value of $ 0.48 per share and an aggregate grant-date fair value of $ 60,000 ,

which will be recognized ratably over the vesting period.

October 2021, January 2022 and April 2022, the Company granted options to non-employee directors to purchase an aggregate of 58,000 , 83,000

and 49,000 shares, respectively, of its common stock at an exercise price of $ 2.39 , $ 1.56 and $ 1.72 per share, respectively.

expire five years from the date of grant, approximately half vested immediately and approximately half vested one year from the date of

The options have a weighted average grant-date fair value of $ 1.03 , $ 0.72 and $ 0.81 per share, respectively, and an aggregate grant-date

fair value of $ 60,000 , $ 60,000 and $ 40,000 , respectively, which were recognized ratably over the vesting period.

January 2022, the Company granted options to one of its employees to purchase an aggregate of 14,000 shares of its common stock at an

10 unchanged sentences

which was recognized ratably over the vesting period.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 2022, the Company granted options to one of its former non-employee directors to purchase an aggregate of 19,000 shares of its

3 unchanged sentences

fully recognized on the grant date.

were no options exercised during the six months ended March 31, 2023 or 2022.

Company recognized compensation expense for stock option awards of $ 15,000 and $ 66,000 during the three months ended March 31, 2023 and

2022, respectively, and $ 39,000 and $ 105,000 during the six months ended March 31, 2023, respectively, which was recorded as a component

of general and administrative expenses in its condensed consolidated statements of operations.

At March 31, 2023, there was $ 9,000 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.

were no options exercised during the nine months ended June 30, 2023 or 2022.

Company recognized compensation expense for stock option awards of $ 17,000 and $ 44,000 during the three months ended June 30, 2023 and

2022, respectively, and $ 56,000 and $ 148,000 during the nine months ended June 30, 2023 and 2022, respectively, which was recorded as

a component of general and administrative expenses in its condensed consolidated statements of operations.

At June 30, 2023, there was

$ 52,000 of total unrecognized compensation cost related to nonvested stock option awards that is expected to be recognized over a weighted

average period of 0.4 years.

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 EARNINGS

7 unchanged sentences

Schedule of earnings (loss) per share

For the Three Months Ended March 31,

For the Six Months Ended March 31,

For the Three Months Ended

For the Nine Months Ended

$ ( 537,000 )

6 unchanged sentences

Loss per share:

The following

securities were excluded from the calculation of diluted earnings per share in each period because their inclusion would have been anti-dilutive:

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 March 31,

For the Six Months Ended March 31,

For the Three Months Ended

For the Nine Months Ended

Total potentially dilutive shares

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 RELATED

PARTY TRANSACTIONS

NOTE 8 RELATED PARTY

Buying Agency and Supply

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:

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 through March 2023, paid Forward China a monthly service fee equal to the sum of:

(i) $100,000 and (ii) 4% of “Adjusted

3 unchanged sentences

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 $ 349,000

and $ 350,000

during the three months ended March 31, 2023 and 2022, respectively, and $ 694,000

and $ 712,000

during the six months ended March 31, 2023 and 2022, respectively, which are included as a component of cost of sales upon sales of

the related products.

Considering the loss of a significant OEM distribution customer (see Note 5), effective April 1, 2023, the

Company and Forward China agreed to reduce the fixed portion of the sourcing fee from $100,000

per month for the remaining term of the Supply Agreement, which is expected to result in cash savings of $100,000

for the remainder of Fiscal 2023.

The Company and Forward China have begun negotiations on a new sourcing agreement.

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.

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 $ 284,000 and $ 344,000 during the three months ended June 30, 2023 and 2022, respectively, and $ 978,000 and $ 1,056,000 during

the nine months ended June 30, 2023 and 2022, respectively, which are included as a component of cost of sales upon sales of the related

The Company had purchases from Forward China during the three and nine months ended June 30, 2023 of approximately $ 2,000,000

and $ 10,000,000 , respectively.

The Company had purchases from Forward China during the three and nine months ended June 30, 2022 of approximately

$ 5,000,000 and $ 15,000,000 , respectively.

Considering the loss of a significant OEM distribution customer (see Note 5), effective April

1, 2023, the Company and Forward China agreed to reduce the fixed portion of the sourcing fee from $100,000 to $83,333 per month for the

remaining term of the Supply Agreement, which resulted in cash savings of $50,000 in the third quarter of fiscal 2023 and is expected

to result in cash savings of $ 50,000 for the remainder of fiscal 2023.

The Company and Forward China have begun negotiations on a new

sourcing agreement.

In light of the Retail Exit, the Company plans to discuss a further reduction in the sourcing fee commensurate

with the services provided.

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 distribution business prior to the expiration of the agreement.

The Company has prepayments

to Forward China for inventory purchases of $ 20,000 at March 31, 2023 and September 30, 2022, which are included in prepaid expenses and

other current assets on the condensed consolidated balance sheets.

to Forward China for inventory purchases of $205,000 and $20,000 at June 30, 2023 and September 30, 2022, respectively, which are included

in prepaid expenses and other current assets on the condensed consolidated balance sheets.

Promissory Note

6 unchanged sentences

The Company incurred and paid interest associated with this note of $ 25,000 and $ 30,000

in the three months ended March 31, 2023 and 2022, respectively, and $ 54,000 and $ 63,000 in the six months ended March 31, 2023 and 2022,

in the three months ended June 30, 2023 and 2022, respectively, and $ 80,000 and $ 93,000 in the nine months ended June 30, 2023 and 2022,

respectively.

2 unchanged sentences

occasions to assist the Company with liquidity.

The Company made principal payments of $ 100,000 on this note during the six months ended

March 31, 2023, and this note has a remaining balance of $ 1,300,000 at March 31, 2023.

The Company made principal payments of $ 200,000 on this note during the nine months ended

June 30, 2023, and this note has a remaining balance of $ 1,200,000 at June 30, 2023.

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Other Related Party Activity

4 unchanged sentences

(“Justwise”), a company owned by Terence Wise, Chief Executive Officer and Chairman of the Company.

recognized revenues from the sale of Koble products of $ 543,000 and $ 441,000 in the three months ended March 31, 2023 and 2022, respectively,

and $ 1,041,000 and $ 981,000 in the six months ended March 31, 2023 and 2022, respectively.

recognized revenues from the sale of Koble products of $ 509,000 and $ 356,000 in the three months ended June 30, 2023 and 2022, respectively,

and $ 1,550,000 and $ 1,337,000 in the nine months ended June 30, 2023 and 2022, respectively.

The Company has an agreement with Justwise

4 unchanged sentences

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’

The Company incurred costs of $ 33,000 and $ 65,000 under this agreement for the three and six months ended March 31, 2023, respectively,

The Company incurred costs of $ 31,000 and $ 95,000 under this agreement for the three and nine months ended June 30, 2023, respectively,

of which $ 30,000 and $ 90,000 , respectively, were included in selling and marketing expenses and $ 1,000 and $ 5,000 , respectively, are included

as a component of cost of sales upon sales of the related products.

The Company incurred costs of $ 10,000 under this agreement for the

three and six months ended March 31, 2022, which were included in selling and marketing expenses.

The Company had accounts payable to

Justwise of $ 1,000 and $ 15,000 at March 31, 2023 and September 30, 2022, respectively.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company incurred costs of

$ 33,000 and $ 45,000 under this agreement for the three and nine months ended June 30, 2022, respectively, of which $ 29,000 and $ 39,000 ,

respectively, were included in selling and marketing expenses and $ 4,000 and $ 6,000 are included as a component of cost of sales upon

sales of the related products.

The Company had accounts payable to Justwise of $ 0 and $ 15,000 at June 30, 2023 and September

30, 2022, respectively.

The Company recorded revenue

2 unchanged sentences

of Forward China.

The Company recognized revenue from this customer of $ 251,000 and $ 135,000 for the three months ended March 31, 2023

and 2022, respectively, and $ 385,000 and $ 401,000 for the six months ended March 31, 2023 and 2022, respectively.

The Company recognized revenue from this customer of $ 122,000 and $ 260,000 for the three months ended June 30, 2023

and 2022, respectively, and $ 507,000 and $ 661,000 for the nine months ended June 30, 2023 and 2022, respectively.

The Company had no accounts

receivable from this customer at March 31, 2023 or September 30, 2022.

receivable from this customer at June 30, 2023 or September 30, 2022.

NOTE 9 LEGAL PROCEEDINGS

1 unchanged sentence

may become a party to legal actions or proceedings in the ordinary course of its business.

At March 31, 2023, there were no such actions

At June 30, 2023, 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

5 unchanged sentences

May 31, 2024 , 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 8.75 % and 7.0 % at March 31, 2023 and September 30, 2022,

The interest rate on the line of credit is 0.75% above The Wall Street Journal prime rate.

The effective interest rate was 9.0 % and 7.0 % at June 30, 2023 and September 30, 2022,

respectively.

At March 31, 2023, the Company had $ 1,300,000 available under the line of credit.

At June 30, 2023, the Company had $ 1,300,000 available under the line of credit.

The Company is subject to certain debt-service

5 unchanged sentences

Cash paid for amounts included in operating lease liabilities

for the six months ended March 31, 2023 and 2022, which have been included in cash flows from operating activities, was $ 286,000 and $ 294,000 ,

for the nine months ended June 30, 2023 and 2022, which have been included in cash flows from operating activities, was $ 429,000

and $ 446,000 ,

respectively.

1 unchanged sentence

Schedule of operating lease expense

For the Three Months Ended March 31,

For the Six Months Ended March 31,

For the Three Months Ended

For the Nine Months Ended

Operating lease expense included in:

1 unchanged sentence

General and administrative expense

At March 31, 2023, the Company’s

operating leases had a weighted average remaining lease term of 8.0 years and a weighted average discount rate of 5.7 %.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

At March 31, 2023, future minimum

payments under non-cancellable operating leases were as follows:

At June 30, 2023, the Company’s

operating leases had a weighted average remaining lease term of 7.8 years and a weighted average discount rate of 5.7 %.

At June 30, 2023, future

minimum payments under non-cancellable operating leases were as follows:

Schedule of future minimum payments under operating & financial leases

6 unchanged sentences

NOTE 12 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current

liabilities at March 31, 2023 and September 30, 2022 are as follows:

Accrued expenses and other

current liabilities at June 30, 2023 and September 30, 2022 are as follows:

Schedule of accrued expenses and other accrued liabilities

2 unchanged sentences

Paid time off

NOTE 13 SUBSEQUENT EVENT

On July 31, 2023, we were

notified by Nasdaq that we are not compliant with its closing bid price requirement because the closing bid price of our common stock

was below $1.00 per share for 30 consecutive trading days.

We have until January 29, 2024 (the “Deadline Date”) to become

We have since remained non-compliant with the closing bid price requirement as our stock price has remained below $1.00

since we received the notice.

We are assessing all options to regain compliance.

At our annual stockholders’ meeting, which

is customarily held in February, we have the option to ask our stockholders to approve a reverse stock split in an amount that would satisfy

Nasdaq listing requirements.

Because the Deadline Date is prior to our expected annual stockholders’ meeting date, we can request

an extension of time to obtain stockholder approval for a reverse stock split if we cannot regain compliance by other means.

Other Information, Item 1A.

Risk Factors, for further information.)

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements