Forward Industries, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements, and the notes thereto, and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. The following discussion and analysis compares our consolidated results of operations for the three and nine months ended June 30, 2023 (the “2023 Quarter” and “2023 Period”, respectively) with those for the three and nine months ended June 30, 2022 (the “2022 Quarter” and “2022 Period”, respectively). All dollar amounts and percentages presented herein have been rounded to approximate values. Cautionary Note Regarding Forward-Looking Statements This report contains “forward-looking statements”, as such term is used within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, statements regarding our liquidity, plans on repaying outstanding debt obligations, expectations regarding the effect of the pandemic and inflation on our business, as well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forward-looking statements generally can be identified by words such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "projects," "will be," "will continue," "will likely result," and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially and adversely from those reflected in the forward-looking statements. These risks include the inability to expand our customer base, loss of additional customers, pricing pressures, lack of success of our sales people, continued supply chain issues, inability of our design division’s customers to pay for our services, unanticipated issues with our affiliated sourcing agent, and issues at Chinese factories that source our product. No assurance can be given that the actual results will be consistent with the forward-looking statements. Investors should read carefully the factors described in the “Risk Factors” section of the Company’s filings with the SEC, including the Company’s Form 10-K for the year ended September 30, 2022 for information regarding risk factors that could affect the Company’s results. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Business Overview Forward Industries, Inc. 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 operations (“Retail Exit”). The Retail Exit will have no effect on the operations of our other segments. The Company is currently working on a plan that will ensure the Retail Exit is made in an orderly manner. 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. Our design segment provides hardware and software product design and engineering services to customers predominantly located in the U.S. Our OEM distribution segment sources and sells carrying cases and other accessories for medical monitoring and diagnostic kits as well as a variety of other portable electronic and non-electronic devices to OEMs, or their contract manufacturers worldwide, that either package our products as accessories “in box” together with their branded product offerings or sell them through their retail distribution channels. Our retail distribution segment sources and sells smart-enabled furniture, hot tubs and saunas, and various other products through online retailer websites to customers predominately located in the U.S. and Canada. 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 fiscal 2023. 20 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; 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. Variability of Revenues and Results of Operations A significant portion of our revenue is concentrated with several large customers, some of which are the same and some of which change over time. Orders from some of these customers can be highly variable, with short lead times, which can cause our quarterly revenues, and consequently our results of operations, to vary over a relatively short period of time. Critical Accounting Policies and Estimates We discussed the material accounting policies that are critical in making the estimates and judgments in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, under the caption “Management’s Discussion and Analysis—Critical Accounting Policies and Estimates”. There has been no material change in critical accounting policies or estimates during the period covered by this report. Recent Accounting Pronouncements For information on recent accounting pronouncements and impacts, see Note 2 to the unaudited condensed consolidated financial statements. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2023 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2022 Consolidated Results The table below summarizes our consolidated results of operations for the 2023 Quarter as compared to the 2022 Quarter: Consolidated Results of Operations 2023 Quarter 2022 Quarter Change ($) Change (%) Revenues, net $ 10,127,000 $ 10,589,000 $ (462,000 ) (4.4% ) Cost of sales 8,304,000 8,671,000 (367,000 ) (4.2% ) Gross profit 1,823,000 1,918,000 (95,000 ) (5.0% ) Sales and marketing expenses 711,000 665,000 46,000 6.9% General and administrative expenses 1,634,000 1,639,000 (5,000 ) (0.3% ) Loss from operations (522,000 ) (386,000 ) (136,000 ) 35.2% Other expense, net 15,000 33,000 (18,000 ) (54.5% ) Provision for income taxes – – – – Net loss $ (537,000 ) $ (419,000 ) $ (118,000 ) 28.2% 21 The discussion that follows below provides further details about our results of operations for the 2023 Quarter as compared to the 2022 Quarter. Net revenues decreased in the OEM distribution segment, primarily related to the loss of a major diabetic customer in March 2023. Higher revenues in the design and retail distribution segments partially offset this decline. As a result of the Retail Exit, we expect consolidated revenues to decline in future periods. Our gross profit decreased, and our gross margin decreased slightly from 18.1% in the 2022 Quarter to 18.0% in the 2023 Quarter, driven by increased inventory reserves in the retail segment, partially offset by higher revenues, better utilization and higher billing rates in the design segment. The decrease was also offset by the loss of a major diabetic customer, which yielded lower margins, coupled with the placement of certain retail products in physical stores, which yielded higher margins. Management believes there will be continued volatility in OEM and retail distribution cost of sales for the remainder of fiscal 2023. Sales and marketing expenses increased in the 2023 Quarter primarily due to higher commission expense in the design segment due to increased sales and higher sales promotions in the retail segment, offset by decreases in the sales related salaries in the OEM distribution segment. Sales and marketing as a percentage of revenues increased to 7.0% in the 2023 Quarter from 6.3% in the 2022 Quarter. As a result of the Retail Exit, we expect that our sales and marketing expenses will decrease in fiscal 2024. General and administrative expenses decreased slightly in the 2023 Quarter. Lower corporate expenses, primarily driven by a reduction in bad debt expense and non-employee directors share-based compensation expense, were partially offset by higher personnel related costs. Management continues to monitor the various components of general and administrative expenses and how these costs are affected by inflationary and other factors. We intend to adjust these costs as needed based on the overall needs of the business. Higher interest income from improved treasury management, coupled with lower interest expense resulting from a reduction in the amount of debt outstanding, drove the change in net other expense. We generated a net loss of $537,000 and $419,000 in the 2023 Quarter and 2022 Quarter, respectively. We maintain significant net operating loss carryforwards and do not recognize a significant income tax expense or benefit as our deferred tax provision is typically offset by a full valuation allowance on our net deferred tax asset. Consolidated basic and diluted loss per share was $0.05 and $0.04 for the 2023 Quarter and the 2022 Quarter, respectively. Segment Results The discussion that follows below provides further details about the results of operations for each segment as compared to the prior year quarter. Segment Results of Operations OEM Distribution Retail Distribution Design Corporate Expenses Consolidated 2023 Quarter revenues $ 2,930,000 $ 1,420,000 $ 5,777,000 $ – $ 10,127,000 2022 Quarter revenues 4,775,000 878,000 4,936,000 – 10,589,000 Change $ (1,845,000 ) $ 542,000 $ 841,000 $ – $ (462,000 ) 2023 Quarter operating income/(loss) $ 163,000 $ (680,000 ) $ 576,000 $ (581,000 ) $ (522,000 ) 2022 Quarter operating income/(loss) 179,000 (397,000 ) 447,000 (615,000 ) (386,000 ) Change $ (16,000 ) $ (283,000 ) $ 129,000 $ 34,000 $ (136,000 ) 22 OEM Distribution Segment The decrease in net revenues in the OEM distribution segment resulted from lower sales from both diabetic customers and other OEM customers. As consumer demand increases for diabetic testing products which require no carrying case, we expect diabetic product sales to continue to represent a smaller portion of our OEM distribution revenue. In March 2023, a contract with one of our major diabetic customers expired. Due to increased pricing pressures, we did not extend our contract with this customer. Revenue from this customer represented approximately 12% of our consolidated net revenues in the 2022 Quarter. We expect the loss of this customer to cause a significant decline in OEM distribution segment revenues in future periods. The following tables set forth revenues by product line of our OEM distribution segment customers for the periods indicated: OEM Revenues by Product Line 2023 Quarter 2022 Quarter Change ($) Change (%) Diabetic products $ 2,402,000 $ 4,087,000 $ (1,685,000 ) (41.2% ) Other products 528,000 688,000 (160,000 ) (23.3% ) Total net revenues $ 2,930,000 $ 4,775,000 $ (1,845,000 ) (38.6% ) Diabetic Product Revenues Our OEM distribution segment manufactures to the order of, and sells carrying cases for, blood glucose diagnostic kits directly to OEMs (or their contract manufacturers). The OEM customer or its contract manufacturer packages our carry cases “in box” as a custom accessory for the OEM’s blood glucose testing and monitoring kits, or to a lesser extent, sells them through their retail distribution channels. Revenues from diabetic products decreased due to the loss of one major diabetic customer in March 2023, the loss of one product to a competitor and the net decrease in volume from other customers resulting from the timing of orders relative to the 2022 Quarter. As mentioned above, management believes that revenues from diabetic customers will decline in future periods. Revenues from diabetic products represented 82% of net revenues for the OEM distribution segment in the 2023 Quarter compared to 86% in the 2022 Quarter. Other Product Revenues Our OEM distribution segment also sources and sells cases and protective solutions for a diverse array of portable electronic and non-electronic products (such as sporting and recreational products, bar code scanners, GPS devices, tablets and firearms) on a made-to-order basis that are customized to fit the products sold by our OEM customers. Revenues from other products decreased due to lower sales volume with some existing customers, which was partially offset by higher sales volume from some other customers. We will continue to focus on our sales and sales support teams in our continued efforts to expand and diversify our other products customer base. Operating Income Operating income for the OEM distribution segment decreased but operating income margin increased from 3.7% in the 2022 Quarter to 5.6% in the 2023 Quarter. The loss of one major diabetic customer in March 2023, which yielded lower margins, reduced revenues and gross profit, but improved gross margin for this segment. Lower sales and marketing costs resulting from reduced OEM sales personnel also contributed to the improvement. The cost of importing all products from China has increased and both the diabetic and other OEM product lines have experienced pricing pressures from customers. 23 Considering the loss of a significant diabetic customer, 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 China, which is scheduled to expire on October 22, 2023 (see Note 8 to the condensed consolidated financial statements). 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 sourcing 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. 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. Retail Distribution Segment The increase in net revenues in the 2023 Quarter was driven by higher sales volumes and the placement of certain products in physical stores, which was partially offset by price reductions on certain other products. As inflation continues to increase the cost of products and constrain consumer spending, profitability continues to be challenging in the retail segment. The cost of importation, storage, and other logistics services, coupled with higher inventory reserves and price reductions on certain products, outpaced revenue leading to a negative gross profit and margin in the 2023 Quarter. However, margins on some products placed in physical retail stores slightly offset this. Higher sales and marketing expenses, driven by an increase in marketing promotions to support revenue growth, drove operating income down further. The operating loss margin increased from 45.2% in the 2022 Quarter to 47.9% in the 2023 Quarter. As mentioned above, the Company recently decided to implement the Retail Exit. Please see “Liquidity and Capital Resources”. Design Segment The increase in net revenues in the design segment was primarily driven by an increase in revenue from one major customer, coupled with an increase in projects from new and other existing customers, which was partially offset by declines in revenues from certain prior year customers. Operating income for the design segment increased and operating income margin increased from 9.1% in the 2022 Quarter to 10.0% in 2023 Quarter. The impact of better utilization and increased billing rates was partially offset by higher direct labor costs, driven by inflationary pressures, and slightly higher personnel related expenses. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 2023 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 2022 Consolidated Results The table below summarizes our consolidated results of operations for the 2023 Period as compared to the 2022 Period: Consolidated Results of Operations 2023 Period 2022 Period Change ($) Change (%) Revenues, net $ 31,595,000 $ 32,517,000 $ (922,000 ) (2.8% ) Cost of sales 26,341,000 25,728,000 613,000 2.4% Gross profit 5,254,000 6,789,000 (1,535,000 ) (22.6% ) Sales and marketing expenses 2,175,000 2,106,000 69,000 3.3% General and administrative expenses 4,912,000 5,177,000 (265,000 ) (5.1% ) Loss from operations (1,833,000 ) (494,000 ) (1,339,000 ) 271.1% Other expense, net 5,000 101,000 (96,000 ) (95.0% ) Provision for income taxes – – – – Net loss $ (1,838,000 ) $ (595,000 ) $ (1,243,000 ) 208.9% 24 The discussion that follows below provides further details about our results of operations for the 2023 Period as compared to the 2022 Period. Net revenues declined in the OEM distribution segment but were partially offset by higher revenues in the retail distribution and design segments. As a result of the Retail Exit, we expect consolidated revenues to decline in future periods. Our gross profit decreased in both our OEM and retail segments, partially offset by a slight increase in gross profit in the design segment. Gross margin declined from 20.9% in the 2022 Period to 16.6% in the 2023 Period, driven by continued pricing pressures from our customers, high product, importation and logistics costs, higher retail inventory reserves and inflation. Management believes there will be continued volatility in OEM and retail distribution cost of sales for the remainder of fiscal 2023. Sales and marketing expenses increased slightly primarily due to higher sales related expenses in the design segment, partially offset by lower commissions, travel and marketing overhead related to our retail segment and lower marketing related overhead in our OEM distribution segment. Sales and marketing as a percentage of revenues increased slightly from 6.5% in the 2022 Period to 6.9% in the 2023 Period. As a result of the Retail Exit, we expect that our sales and marketing expenses will decrease in fiscal 2024. General and administrative expenses decreased in the 2023 Period, primarily related to bad debt recoveries in the design segment and lower non-employee directors share-based compensation expense, partially offset by higher professional fees and personnel costs. Management continues to monitor the various components of general and administrative expenses and how these costs are affected by inflationary and other factors. We intend to adjust these costs as needed based on the overall needs of the business. We recorded net other expense of $5,000 in the 2023 Period compared to $101,000 in the 2022 Period. The variance is due to fair value adjustments of $40,000 in the 2023 Period to reduce to the fair value of the earnout consideration related to the Kablooe acquisition, $18,000 of net duty drawback income received in the 2023 Period, interest income from improved treasury management, foreign currency fluctuations and a decrease in interest expense resulting from a reduction in the amount of debt outstanding. We generated a net loss of $1,838,000 and $595,000 in the 2023 Period and 2022 Period, respectively. We maintain significant net operating loss carryforwards and do not recognize a significant income tax expense or benefit as our deferred tax provision is typically offset by a full valuation allowance on our net deferred tax asset. Consolidated basic and diluted loss per share was $0.18 and $0.06 for the 2023 Period and the 2022 Period, respectively. Segment Results The discussion that follows below provides further details about the results of operations for each segment as compared to the prior year period. Segment Results of Operations OEM Distribution Retail Distribution Design Corporate Expenses Consolidated 2023 Period revenues $ 11,364,000 $ 3,396,000 $ 16,835,000 $ – $ 31,595,000 2022 Period revenues 14,692,000 2,919,000 14,906,000 – 32,517,000 Change $ (3,328,000 ) $ 477,000 $ 1,929,000 $ – $ (922,000 ) 2023 Period operating income/(loss) $ 303,000 $ (1,742,000 ) $ 1,539,000 $ (1,933,000 ) $ (1,833,000 ) 2022 Period operating income/(loss) 1,002,000 (981,000 ) 1,422,000 (1,937,000 ) (494,000 ) Change $ (699,000 ) $ (761,000 ) $ 117,000 $ 4,000 $ (1,339,000 ) 25 OEM Distribution Segment Net revenues in the OEM distribution segment decreased from lower sales volume from both diabetic customers and other OEM customers. As consumer demand increases for diabetic testing products which require no carrying case, we expect diabetic product sales to continue to represent a smaller portion of our OEM distribution revenue. In March 2023, a contract with one of our major diabetic customers expired. Due to increased pricing pressures, we did not extend our contract with this customer. Revenue from this customer represented approximately 12% of our consolidated net revenues in the 2022 Period. We expect the loss of this customer to cause a significant decline in OEM distribution segment revenues in future periods. The following tables set forth revenues by product line of our OEM distribution segment customers for the periods indicated: OEM Revenues by Product Line 2023 Period 2022 Period Change ($) Change (%) Diabetic products $ 9,760,000 $ 12,480,000 $ (2,720,000 ) (21.8% ) Other products 1,604,000 2,212,000 (608,000 ) (27.5% ) Total net revenues $ 11,364,000 $ 14,692,000 $ (3,328,000 ) (22.7% ) Diabetic Product Revenues Our OEM distribution segment manufactures to the order of, and sells carrying cases for, blood glucose diagnostic kits directly to OEMs (or their contract manufacturers). The OEM customer or its contract manufacturer packages our carry cases “in box” as a custom accessory for the OEM’s blood glucose testing and monitoring kits, or to a lesser extent, sells them through their retail distribution channels. Revenues from diabetic products decreased due to the loss of a major customer in March 2023, lower demand from one major customer and the loss of one product to a competitor. These decreases were partially offset by an increase in demand from another customer, which was timing related. As mentioned above, management believes that revenues from diabetic customers will decline in future periods. Revenues from diabetic products represented 86% of net revenues for the OEM distribution segment in the 2023 Period compared to 85% in the 2022 Period. Other Product Revenues Our OEM distribution segment also sources and sells cases and protective solutions for a diverse array of portable electronic and non-electronic products (such as sporting and recreational products, bar code scanners, GPS devices, tablets and firearms) on a made-to-order basis that are customized to fit the products sold by our OEM customers. Revenues from other products decreased due to lower sales volume with some existing customers, partially driven by the delayed rollout of certain customer product lines and reduced demand from some customers. We will continue to focus on our sales and sales support teams in our continued efforts to expand and diversify our other products customer base. 26 Operating Income Operating income for the OEM distribution segment decreased and operating income margin decreased from 6.8% in the 2022 Period to 2.7% in the 2023 Period, driven by lower gross margins due to lower revenues and a shift in the mix of revenue. While revenues decreased in both diabetic and other products, the decrease in diabetic revenue was mostly from more profitable products, thus driving overall gross margins down. The cost of importing all products from China has increased and both the diabetic and other OEM product lines have experienced pricing pressures from customers. Considering the loss of a significant diabetic customer, 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 China, which is scheduled to expire on October 22, 2023 (See Note 8 to the condensed consolidated financial statements). 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 sourcing 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. 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. Retail Distribution Segment Net revenues increased in the 2023 Period due to an increase in sales volumes on some products with certain existing customers and the placement of certain products in physical stores, partially offset by price reductions on certain other products. As inflation continues to increase the cost of products and constrain consumer spending, profitability continues to be challenging in the retail segment. The cost of importation, storage, and other logistics services, coupled with higher inventory reserves and price reductions on certain products, outpaced revenue leading to a decline in gross margin from the 2022 Period to the 2023 Period. This was partially offset by lower sales and marketing expenses driven by a reduction in commission expense resulting from a change in the mix of revenue. The operating loss margin increased from 33.6% in the 2022 Period to 51.3% in the 2023 Period. As mentioned above, the Company recently decided to implement the Retail Exit. Please see “Liquidity and Capital Resources”. Design Segment The increase in net revenues in the design segment was driven by an increase in revenue from one major customer, coupled with an increase in projects from new and existing customers, which was partially offset by declines in revenues from certain prior year customers. Operating income for the design segment increased slightly but operating income margin decreased from 9.5% in the 2022 Period to 9.1% in 2023 Period. The impact of higher direct labor costs driven by inflationary pressures, coupled with higher sales and marketing expenses, was slightly offset by better utilization and increased billing rates and lower general and administrative expenses, driven by bad debt recoveries. 27 LIQUIDITY AND CAPITAL RESOURCES Our primary source of liquidity is our operations. The primary demand on our working capital has historically been (i) operating losses, (ii) repayment of debt obligations, and (iii) any increases in accounts receivable and inventories arising in the ordinary course of business. Historically, our sources of liquidity have been adequate to satisfy working capital requirements arising in the ordinary course of business. At June 30, 2023, our working capital was $2,476,000 compared to $4,359,000 at September 30, 2022, the decrease was primarily due to lower inventory balances. At July 31, 2023, we had approximately $3,000,000 cash on hand and $1,300,000 available under our line of credit with a bank which was renewed in March 2023 and matures May 31, 2024. Considering the loss of a significant OEM distribution segment customer (see Note 5 to the condensed consolidated financial statements), which led to the April 2023 reduction in the sourcing fee to Forward China, and the continued retail distribution segment operating losses, management reduced its OEM segment sales and marketing personnel in March 2023 and is planning to further evaluate the Company’s OEM cost structure and implement additional cost cutting initiatives as deemed necessary. Additionally, in July 2023, the Company decided to implement the Retail Exit. 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 this time, the Company does not know the extent, or a range, of the costs that it will incur as a result of the exit. Forward China, our largest vendor and an entity owned by our Chairman of the Board and Chief Executive Officer, holds a $1,600,000 promissory note (the “FC Note”) issued by us which matures on December 31, 2024 (see Note 8 to the condensed consolidated financial statements). The balance of the FC Note was reduced to $1,200,000 after we made principal payments of $400,000 through June 30, 2023. Although the FC Note has been extended on multiple occasions to assist us with our liquidity position, we plan on funding the repayment at maturity using existing cash balances and/or obtaining an additional credit facility as deemed necessary. Additionally, Forward China has extended payment terms on our outstanding payables due to them when necessary. At June 30, 2023, our accounts payable due to Forward China was approximately $8,000,000. We can provide no assurance that (i) Forward China will extend the FC Note again if we request an extension, (ii) Forward China will continue to extend payment terms on outstanding payables when we need them, or (iii) any additional credit facility will be available on terms acceptable to us or at all. We anticipate that our liquidity and financial resources for the 12 months following the date of this report will be adequate to manage our operating and financial requirements. If we have the opportunity to make a strategic acquisition (as we have in the past with the acquisitions of IPS and Kablooe) or an investment in a product or partnership, we may require additional capital beyond our current cash balance to fund the opportunity. If we seek to raise additional capital, there is no assurance that we will be able to raise funds on terms that are acceptable to us or at all. In the current environment of rising interest rates, any future borrowing is expected to result in higher interest expense. Although we do not anticipate the need to purchase additional material capital assets in order to carry out our business, it may be necessary for us to purchase equipment and other capital assets in the future, depending on need. Cash Flows During the 2023 Period and 2022 Period, our sources and uses of cash were as follows: Operating Activities During the 2023 Period, cash provided by operating activities of $562,000 resulted from a decrease in inventories of $1,908,000, an increase in accounts payable and amounts due to Forward China of $651,000, non-cash expenses of $271,000 related to fair value adjustments, depreciation, amortization, share-based compensation and bad debt expense, an increase in accrued expenses and other current liabilities of $129,000 and the net change in other operating assets and liabilities of $24,000, partially offset by a net loss of $1,838,000, an increase in prepaid expenses and other current assets of $272,000, a decrease in deferred income of $174,000 and an increase in accounts receivable of $137,000. 28 During the 2022 Period, cash provided by operating activities of $1,158,000 resulted from an increase in accounts payable and amounts due to Forward China of $3,064,000, an increase in accrued expenses and other liabilities of $546,000, an increase in deferred revenue of $436,000, non-cash expenses of $442,000 related to depreciation, amortization, share-based compensation and bad debt expense and the net change in other operating assets and liabilities of $74,000, partially offset by a $2,809,000 increase in inventories and a net loss of $595,000. Investing Activities Cash used in investing activities in the 2023 Period and the 2022 Period of $117,000 and $140,000, respectively, resulted from purchases of property and equipment. Financing Activities Cash used in financing activities in the 2023 Period and the 2022 Period of $200,000 and $150,000, respectively, consisted of principal payments on the promissory note held by Forward China. Related Party Transactions For information on related party transactions and their financial impact, see Note 8 to the unaudited condensed consolidated financial statements contained herein. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.