Forward Industries, Inc. 10-K

ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our management carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on their evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2023. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our internal control over financial reporting as of the end of the period covered by this report. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework as issued in 2013. Based on that evaluation, our management concluded that our internal control over financial reporting as of September 30, 2023, was effective based on that criteria. Our internal control over financial reporting is a process designed under the supervision of our Principal Executive Officer and Principal Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with U.S. GAAP. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate. Changes in Internal Control There were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the fourth quarter of Fiscal 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION On December 14, 2023, the Board of Directors approved the following changes to the Fiscal 2024 non-employee director (“NED”) and Chief Executive Officer (“CEO”) compensation: • NED compensation was reduced by 25% (resulting in a cost savings of $50,000) • CEO compensation was reduced by 25% (resulting in a cost savings of $84,250) ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not Applicable. 24 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by this item is incorporated by reference to our Proxy Statement for the 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended September 30, 2023. Our Board has adopted a Code of Business Conduct and Ethics applicable to all officers, directors and employees, which is available on our website (https://forwardindustries.com) under “Investors”, "Governance." We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of our Code of Conduct and by posting such information on the website address and location specified above. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to our Proxy Statement for the 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended September 30, 2023. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS The information required by this item is incorporated by reference to our Proxy Statement for the 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended September 30, 2023. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE The information required by this item is incorporated by reference to our Proxy Statement for the 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended September 30, 2023. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is incorporated by reference to our Proxy Statement for the 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended September 30, 2023. 25 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Documents filed as part of the report. (1) Financial Statements. See Index to Consolidated Financial Statements, which appears on page F-1 hereof. The financial statements listed in the accompanying Index to Consolidated Financial Statements are filed herewith in response to this Item. (2) Financial Statements Schedules. All schedules are omitted because they are not applicable or because the required information is contained in the consolidated financial statements or notes included in this report. (3) Exhibits. See the Exhibit Index. ITEM 16. FORM 10-K SUMMARY Not Applicable. 26 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: December 21, 2023 FORWARD INDUSTRIES, INC. By: /s/ Terence Wise Terence Wise Chief Executive Officer (Principal Executive Officer) In accordance with the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: December 21, 2023 /s/ Terence Wise Terence Wise Principal Executive Officer and Director December 21, 2023 /s/ Kathleen Weisberg Kathleen Weisberg Chief Financial Officer Principal Financial Officer and Principal Accounting Officer December 21, 2023 /s/ Sangita Shah Sangita Shah Director December 21, 2023 /s/ James Ziglar James Ziglar Director December 21, 2023 /s/ Sharon Hrynkow Sharon Hrynkow Director 27 EXHIBIT INDEX Incorporated by Reference Exhibit No. Exhibit Description Form Date Number Filed or Furnished Herewith 2.1 Stock Purchase Agreement dated January 18, 2018 - Intelligent Product Solutions, Inc.+ 8-K 1/18/18 2.1 2.2 Asset Purchase Agreement dated August 17, 2020 - Kablooe, Inc.+ 8-K 8/17/20 2.1 3.1 Restated Certificate of Incorporation 10-K 12/8/10 3(i) 3.2 Certificate of Amendment of the Certificate of Incorporation, April 26, 2013 8-K 4/26/13 3.1 3.3 Certificate of Amendment of the Certificate of Incorporation, June 28, 2013 8-K 7/3/13 3.1 3.4 Third Amended and Restated Bylaws, as of May 28, 2014 10-K 12/10/14 3(ii) 4.1 Description of securities registered under Section 12 of the Exchange Act of 1934 10-K 12/27/19 4.1 4.2 Promissory Note dated January 18, 2018 – Forward Industries (Asia-Pacific) Corporation (as amended and restated) 10-K 12/16/22 4.2   10.1 2011 Long Term Incentive Plan, as amended 10-Q 2/14/19 4.3 10.2 2021 Equity Incentive Plan 8-K 12/23/20 4.1 10.3 Form of Employment Agreement dated May 26, 2021– Paul Severino *$ 10-K 12/16/21 10.4(a) 10.4 Summary of Employment Arrangement - Terence Wise * Filed 10.5 Employment Agreement dated July 1, 2023 – Kathleen Weisberg * 8-K 6/30/23 10.1 10.6 Paycheck Protection Program Term Note payable to TD Bank, N.A. dated April 18, 2020 8-K 4/22/20 10.1 10.7 Amended and Restated TD Bank Revolving Term Note dated September 28, 2018 8-K 10/2/18 10.1 10.8 TD Bank Modification Agreement dated September 28, 2018 8-K 10/2/18 10.2 10.9 Consultancy Agreement dated March 1, 2022 - Justwise Group Ltd. 10-Q 5/12/22 10.1 10.10 Consultancy Agreement dated September 1, 2022 - Justwise Group Ltd . 10-K 12/16/22 10.11 10.10(a) Extension to the Consultancy Agreement – Justwise Group Ltd. 8-K 11/8/23 10.4 10.11 Employment Agreement dated January 18, 2018 - Robert Wild * 10-K 12/16/22 10.12 10.12 Employment Agreement dated August 17, 2020 – Tom KraMer * 10-K 12/16/22 10.13 10.13 Buying Agency and Supply Agreement dated November 2, 2023 – Forward Industries (Asia-Pacific) Corporation + 8-K 11/8/23 10.1 10.14 Deferred Payment Agreement 8-K 11/8/23 10.2 21.1 List of Subsidiaries 10-K 12/17/20 21.1 23.1 Consent of Independent Registered Public Accounting Firm Filed 31.1 CEO Certifications (302) Filed 31.2 CFO Certification (302) Filed 32.1 CEO and CFO Certifications (906) Furnished 101.INS Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) Filed 101.SCH Inline XBRL Taxonomy Extension Schema Document Filed 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document Filed 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document Filed 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document Filed 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document Filed 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) ______________________ * Management compensatory agreement or arrangement. + Certain schedules, appendices and exhibits to this agreement have been omitted in accordance with Item 601 of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished supplementally to the Securities and Exchange Commission staff upon request. $ As previously disclosed, this executive officer has received an increase to his annual Base Salary. Copies of this filing (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our shareholders who make a written request to Forward Industries, Inc.; 700 Veterans Memorial Hwy, Suite 100, Hauppauge, NY 11788; Attention: Corporate Secretary. 28 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB # 596 ) F-2 Consolidated Balance Sheets at September 30, 2023 and 2022 F-4 Consolidated Statements of Operations for the Years Ended September 30, 2023 and 2022 F-5 Consolidated Statements of Shareholders' Equity for the Years Ended September 30, 2023 and 2022 F-6 Consolidated Statements of Cash Flows for the Years Ended September 30, 2023 and 2022 F-7 Notes to Consolidated Financial Statements F-8 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of Forward Industries, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Forward Industries, Inc. and Subsidiaries (the “Company”) as of September 30, 2023 and 2022, and the related consolidated statements of operations, shareholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2023 and 2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) related to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate. Assessment of Going Concern (Note 1 to the Consolidated Financial Statements) Significant judgment is exercised by the Company in determining whether there is substantial doubt the Company will continue as a going concern. Specifically, the Company’s forecasted cash flows are sensitive to significant assumptions such as projected revenue and projected operating results, all of which are affected by the expected future market or economic conditions, including the residual effects of the global pandemic, and inflation. Given these factors, the related audit effort in evaluating management’s judgments in determining the Company’s ability to continue as a going concern was challenging, subjective, and complex and required a high degree of auditor judgment. F- 2 How our Audit Addressed the Critical Audit Matter Our principal audit procedures related to the Company’s assessment of going concern included the following: · Obtaining an understanding of and evaluating the Company’s process to develop forecasted cash flows, including significant assumptions used in developing forecasted cash flows as well as considering the appropriateness of the underlying data used by the Company in its analyses. · Evaluating the reasonableness of the Company’s forecasted revenue, operating results, and cash flows by comparing those forecasts to underlying business strategies, including customer relationships and the Company’s ability to obtain new customers, and to historical results. In addition, we performed sensitivity analyses related to the key inputs used in the Company’s forecasted cash flows, including evaluating whether the changes in the assumptions would result in a material change in forecasted cash flows. · Evaluating management’s ability to accurately forecast future cash flows by comparing the Company’s historical forecasted sales, operating results and cash flow forecasts to actual results. /s/ CohnReznick LLP We have served as the Company’s auditor since 2011. Melville, New York December 21, 2023 F- 3 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 2023 2022 Assets Current assets: Cash $ 3,180,468 $ 2,575,522 Accounts receivable, net 6,968,778 7,542,666 Inventories, net 334,384 650,853 Discontinued assets held for sale 508,077 3,150,177 Prepaid expenses and other current assets 378,512 417,605 Total current assets 11,370,219 14,336,823 Property and equipment, net 274,046 241,146 Intangible assets, net 893,143 1,105,901 Goodwill 1,758,682 1,758,682 Operating lease right-of-use assets, net 3,021,315 3,427,726 Other assets 68,737 68,737 Total assets $ 17,386,142 $ 20,939,015 Liabilities and shareholders' equity Current liabilities: Accounts payable $ 518,892 $ 268,160 Due to Forward China 8,246,015 7,713,880 Deferred income 297,407 438,878 Current portion of earnout consideration – 25,000 Current portion of operating lease liability 416,042 377,940 Accrued expenses and other current liabilities 1,357,743 1,153,906 Total current liabilities 10,836,099 9,977,764 Other liabilities: Note payable to Forward China 1,100,000 1,400,000 Operating lease liability, less current portion 2,833,782 3,249,824 Earnout consideration, less current portion – 45,000 Total liabilities 14,769,881 14,672,588 Commitments and contingencies (Note 12) – – Shareholders' equity: Common stock, par value $ 0.01 per share; 40,000,000 shares authorized; 10,061,185 shares issued and outstanding at September 30, 2023 and 2022 100,612 100,612 Additional paid-in capital 20,202,202 20,115,711 Accumulated deficit ( 17,686,553 ) ( 13,949,896 ) Total shareholders' equity 2,616,261 6,266,427 Total liabilities and shareholders' equity $ 17,386,142 $ 20,939,015 The accompanying notes are an integral part of the consolidated financial statements. F- 4 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Fiscal Years Ended September 30, 2023 2022 Revenues, net $ 36,688,307 $ 38,206,958 Cost of sales 28,323,822 29,407,009 Gross profit 8,364,485 8,799,949 Sales and marketing expenses 1,663,791 1,477,936 General and administrative expenses 6,541,036 6,733,543 Operating income 159,658 588,470 Fair value adjustment of earnout consideration ( 70,000 ) – Interest income ( 23,188 ) – Interest expense 104,201 123,411 Other (income)/expense, net ( 30,019 ) 12,612 Income from continuing operations before income taxes 178,664 452,447 Provision for income taxes 20,006 2,554 Income from continuing operations 158,658 449,893 Loss from discontinued operations, net of tax ( 3,895,315 ) ( 1,828,144 ) Net loss $ ( 3,736,657 ) $ ( 1,378,251 ) Basic earnings/(loss) per share : Basic earnings per share from continuing operations $ 0.02 $ 0.04 Basic loss per share from discontinued operations ( 0.39 ) ( 0.18 ) Basic loss per share $ ( 0.37 ) $ ( 0.14 ) Diluted earnings/(loss) per share: Diluted earnings per share from continuing operations $ 0.02 $ 0.04 Diluted loss per share from discontinued operations ( 0.39 ) ( 0.18 ) Diluted loss per share $ ( 0.37 ) $ ( 0.14 ) Weighted average common shares outstanding: Basic 10,061,185 10,061,185 Diluted 10,061,185 10,200,792 The accompanying notes are an integral part of the consolidated financial statements. F- 5 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Fiscal Year Ended September 30, 2023 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 – – 86,491 – 86,491 Net loss – – – ( 3,736,657 ) ( 3,736,657 ) Balance at September 30, 2023 10,061,185 $ 100,612 $ 20,202,202 $ ( 17,686,553 ) $ 2,616,261 For the Fiscal Year Ended September 30, 2022 Additional Common Stock Paid-In Accumulated Shares Amount Capital Deficit Total Balance at September 30, 2021 10,061,185 $ 100,612 $ 19,914,476 $ ( 12,571,645 ) $ 7,443,443 Share-based compensation – – 201,235 – 201,235 Net loss – – – ( 1,378,251 ) ( 1,378,251 ) Balance at September 30, 2022 10,061,185 $ 100,612 $ 20,115,711 $ ( 13,949,896 ) $ 6,266,427 The accompanying notes are an integral part of the consolidated financial statements. F- 6 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Fiscal Years Ended September 30, 2023 2022 Operating Activities: Net loss $ ( 3,736,657 ) $ ( 1,378,251 ) Adjustments to reconcile net loss to net cash provided by operating activities: Share-based compensation 86,491 201,235 Depreciation and amortization 315,940 309,239 Bad debt expense 78,786 264,912 Change in fair value of earn-out consideration ( 70,000 ) – Changes in operating assets and liabilities: Accounts receivable 495,102 953,137 Inventories 316,469 108,223 Discontinued assets held for sale 2,642,100 ( 1,846,696 ) Prepaid expenses and other current assets 39,093 143,467 Other assets – 3,514 Accounts payable and due to Forward China 782,867 1,856,340 Deferred income ( 141,471 ) 251,183 Net changes in operating lease liabilities 28,471 44,076 Accrued expenses and other current liabilities 203,837 624,409 Net cash provided by operating activities 1,041,028 1,534,788 Investing Activities: Purchases of property and equipment ( 136,082 ) ( 169,631 ) Net cash used in investing activities ( 136,082 ) ( 169,631 ) Financing Activities: Repayment of note payable to Forward China ( 300,000 ) ( 200,000 ) Net cash used in financing activities ( 300,000 ) ( 200,000 ) Net increase in cash 604,946 1,165,157 Cash at beginning of year 2,575,522 1,410,365 Cash at end of year $ 3,180,468 $ 2,575,522 Supplemental Disclosures of Cash Flow Information: Cash paid for interest $ 104,201 $ 123,411 Cash paid for taxes $ 10,271 $ 10,856 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 consolidated financial statements. F- 7 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 OVERVIEW Business Forward Industries, Inc. (“Forward”, “we”, “our”, or the “Company”), is a global design, sourcing and distribution company serving top tier medical and technology customers worldwide. The Company’s design division provides hardware and software product design and engineering services to customers predominantly located in the U.S. The Company’s original equipment manufacturing (“OEM”) distribution division sources and sells carrying cases and other accessories for medical monitoring and diagnostic kits as well as a variety of other portable electronic and non-electronic devices to original equipment manufacturers (“OEM”s), or their contract manufacturers worldwide, that either package our products as accessories “in box” together with their branded product offerings or sell them through their retail distribution channels. The Company does not manufacture any of its OEM products and sources substantially all of these products from independent suppliers in China, through Forward Industries Asia-Pacific Corporation, a British Virgin Islands corporation (“Forward China”). See Note 14. Discontinued Operations In July 2023, the Company decided to cease operations of its retail distribution segment and is presenting the results of operations for this segment within discontinued operations in the current and prior periods presented herein. Our retail distribution business 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. and Canada. The inventory of the retail segment is presented as discontinued assets held for sale on the balance sheets at September 30, 2023 and 2022. Where applicable, certain footnotes exclude the discontinued operations unless otherwise noted. See Note 3 for additional information on discontinued operations. Liquidity In Fiscal 2023, the Company generated a net loss of $ 3,737,000 , income from continuing operations of $ 159,000 and cash flows from operating activities of $ 1,041,000 . At September 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 17). By discontinuing the retail segment, which incurred significant losses, the Company expects improvement in operating profitability and cash flows in future periods. The Company’s OEM distribution segment procures substantially all its products through independent suppliers in China through Forward China. In connection with the new sourcing agreement and in order to preserve future liquidity, in November 2023, the Company and Forward China entered into an agreement whereby Forward China agreed to limit the amount of outstanding payables it would seek to collect from the Company to $500,000 in any 12-month period, which the Company agreed to pay within 30 days of any such request (see Note 14). This agreement pertains only to payables that were outstanding at October 30, 2023 of approximately $7,365,000. Purchases from Forward China made after October 30, 2023 are not covered by this agreement and are expected to be paid according to normal payment terms. Based on our forecasted cash flows, discontinuing our retail segment and the agreement with Forward China, we believe our existing cash balance and working capital will be sufficient to meet our liquidity needs through at least December 31, 2024. The consolidated financial statements do not include any adjustments that might result if the Company is unable to continue as a going concern. Impact of COVID-19 On May 11, 2023, the U.S. Department of Health and Human Services declared the end of the Public Health Emergency for COVID-19; however, the effects of COVID-19 continue to linger throughout the global economy and our businesses. Though the severity of COVID-19 has subsided, new variants, or the outbreak of a new pathogen, could interrupt our business, cause renewed labor and supply chain disruptions, and negatively impact the global and US economy, which could materially and adversely impact our business. F- 8 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 ACCOUNTING POLICIES Use of Estimates The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions. Within this report, certain dollar amounts and percentages have been rounded to their approximate values. Basis of Presentation The accompanying consolidated financial statements include the accounts of Forward Industries, Inc. and its wholly-owned subsidiaries (Forward US, Forward Switzerland, Forward UK, IPS and Kablooe). All significant intercompany transactions and balances have been eliminated in consolidation. Segment Reporting As a result of the discontinued retail segment, as disclosed in Note 3, the Company now has two reportable segments: OEM distribution and design. The OEM distribution segment sources and sells carrying cases and other accessories for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic devices (such as sporting and recreational products, bar code scanners, GPS location devices, tablets and firearms) on a made-to-order basis that are customized to fit the products sold by our OEM customers worldwide. The 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 16 for more information on segments. Goodwill The Company reviews goodwill for impairment at least annually, or more often if triggering events occur. The Company has two reporting units with goodwill (the IPS and Kablooe operating segments) and we perform our annual goodwill impairment test on September 30, the end of the fiscal year, or upon the occurrence of a triggering event. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company would not need to perform a quantitative impairment test for the reporting unit. If the Company cannot support such a conclusion or does not elect to perform the qualitative assessment, then the Company will perform the quantitative impairment test by comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, no impairment charge is recognized. If the fair value of the reporting unit is less than its carrying amount, an impairment charge will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value. A significant amount of judgment is required in performing goodwill impairment tests including estimating the fair value of a reporting unit. Management evaluated and concluded there were no indications of impairment of goodwill in Fiscal 2023 or 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. F- 9 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Our intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In assessing the recoverability of our intangible assets, we must make estimates and assumptions regarding future cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and the magnitude of any such charge. Fair value estimates are made at a specific point in time, based on relevant information. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. If these estimates or material related assumptions change in the future, we may be required to record impairment charges related to our intangible assets. Management evaluated and concluded that there were no indications of impairments of intangible assets at September 30, 2023 or 2022. Cash The Company maintains cash deposits and a money market account in banks with financial institutions in the United States (that at times may exceed federally insured limits of $250,000 per financial institution) and Switzerland. At September 30, 2023 and 2022, there were deposits totaling $ 2,565,000 (which includes $ 358,000 in a foreign bank) and $ 2,037,000 (which includes $ 467,000 in a foreign bank), respectively, held in excess of federally insured limits. Historically, we have not experienced any losses due to such cash concentrations. Accounts Receivable Accounts receivable consist of unsecured trade accounts with customers in amounts that have been invoiced ($ 6,949,000 and $ 7,861,000 at September 30, 2023 and 2022, respectively) and contract assets as described further below under the heading “Revenue Recognition.” The Company maintains an allowance for doubtful accounts and customer allowances (for trade, promotional or other discounts), which is recorded as a reduction to accounts receivable on the consolidated balance sheets. Collectability of accounts receivable is estimated by evaluating the number of days accounts are outstanding, customer payment history, recent payment trends and perceived creditworthiness, adjusted as necessary based on specific customer situations. At September 30, 2023 and 2022, the Company had no allowances for the OEM distribution segment, allowances for doubtful accounts and customer allowances of $ 185,000 and $ 75,000 , respectively, for the discontinued retail distribution segment and $ 771,000 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 September 30, 2023, 2022 and 2021, the Company recorded accounts receivable allowances of $ 139,000 , $ 55,000 and $ 0 , 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 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. Property and Equipment Property and equipment consist of computer hardware and software, furniture, fixtures and equipment and are recorded at cost. Expenditures for major additions and improvements are capitalized, and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method. The estimated useful lives for all property and equipment ranges from three to five years. F- 10 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Leases Lease assets and liabilities are recognized at lease commencement date based on the present value of lease payments over the lease term, using the Company’s incremental borrowing rate commensurate with the lease term, since the Company’s lessors do not provide an implicit rate, nor is one readily available. The Company has certain leases that may include an option to renew and when it is reasonably probable to exercise such option, the Company will include the renewal option terms in determining the lease asset and lease liability. Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Operating lease assets are shown as right of use assets and financing lease assets are a component of property and equipment on the consolidated balance sheets. The current and long-term portions of operating and financing lease liabilities are shown separately as such on the consolidated balance sheets. Income Taxes The Company recognizes future tax benefits and liabilities measured at enacted rates attributable to temporary differences between financial statement and income tax bases of assets and liabilities and to net tax operating loss carryforwards to the extent that realization of these benefits is more likely than not. At September 30, 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. Accordingly, any deferred tax provision or benefit was offset by an equal and opposite change to the valuation allowance. Our income tax provision or benefit is generally not significant due to the existence of significant net operating loss carryforwards. Revenue Recognition OEM Distribution Segment The OEM distribution segment recognizes revenue when: (i) finished goods are shipped to its customers (in general, these conditions occur at either point of shipment or point of destination, depending on the terms of sale and transfer of control); (ii) there are no other deliverables or performance obligations; and (iii) there are no further obligations to the customer after the title of the goods has transferred. If the Company receives consideration before achieving the criteria previously mentioned, it records a contract liability, which is classified as a component of deferred income in the accompanying consolidated balance sheets. The OEM distribution segment had no contract liabilities at September 30, 2023, 2022 or 2021. Discontinued 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 consolidated balance sheets. The retail distribution segment had no contract liabilities at September 30, 2023, 2022 or 2021. The results of operations of the retail segment are reported as discontinued operations for Fiscal 2023 and 2022. See Note 3. 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. F- 11 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Recognized revenues that will not be billed until a later date, or contract assets, are recorded as an asset and classified as a component of accounts receivable in the accompanying consolidated balance sheets. The design segment had contract assets of $ 976,000 , $ 609,000 and $ 693,000 at September 30, 2023, 2022 and 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 consolidated balance sheets. The design segment had contract liabilities of $ 297,000 , $ 439,000 and $ 188,000 at September 30, 2023, 2022 and 2021, respectively. Shipping and Handling Fees The Company includes shipping and handling fees billed to customers in net revenues and the related transportation costs in cost of sales. Foreign Currency Transactions The Company’s functional currency is the U.S. dollar. Foreign currency transactions may generate receivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid. Fluctuations in exchange rates between such foreign currency and the functional currency increase or decrease the expected amount of functional currency cash flows upon settlement of the transaction. These increases or decreases in expected functional currency cash flows are foreign currency transaction gains or losses that are included in other income or expense in the accompanying consolidated statements of operations. The approximate net gains (losses) from foreign currency transactions were $2,000 and ($13,000) in Fiscal 2023 and 2022, respectively. 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. Share-Based Compensation Expense The Company estimates the fair value of employee and non-employee director share-based compensation on the date of grant using the Black-Scholes option pricing model, which includes variables such as the expected volatility of the Company’s share price, the exercise behavior of its grantees, interest rates, and dividend yields. These variables are projected based on the Company’s historical data, experience, and other factors. The fair value of employee and non-employee director share-based compensation is recognized in the consolidated statements of operations over the related service or vesting period of each grant. In the case of awards with multiple vesting periods, the Company has elected to use the graded vesting attribution method, which recognizes compensation cost on a straight-line basis over each separately vesting portion of the award as if the award was, in substance, multiple awards (see Note 9). F- 12 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Recent Accounting Pronouncements In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” ASU 2019-11 is an accounting pronouncement that provides clarity to and amends earlier guidance on this topic and would be effective concurrently with the adoption of such earlier guidance. This pronouncement is effective for the Company for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years and is not expected to have a material impact on our consolidated financial statements. NOTE 3 DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE Considering the recurring losses incurred by the retail segment, in July 2023, the Company decided to cease operations of its retail distribution segment (“Retail Exit”). The primary assets of the retail segment are inventory and accounts receivable. The Company expects to sell, liquidate, or otherwise dispose of remaining retail inventory by June 30, 2024, and to collect remaining retail accounts receivable by the end of Fiscal 2024. After this time, we expect to have no further significant continuing involvement with the retail distribution segment. The Retail Exit is considered a strategic shift that will have a significant impact on the Company’s operations and financial results. The inventory of the retail segment meets the criteria to be considered “held-for-sale” in accordance with ASC 205-20, “Discontinued Operations.” Accordingly, the retail inventory is classified on our consolidated balance sheet as “discontinued assets held for sale” at September 30, 2023 and 2022, and the results of operations for the retail segment have been classified as “Discontinued Operations” on the consolidated statements of operations for the years ended September 30, 2023 and 2022. The consolidated balance sheets and results of operations for comparable prior periods have been reclassified to conform to this presentation in accordance with the accounting guidance. Consistent with the Company's plan for the Retail Exit, the Company re-evaluated its retail inventory and recorded an increase in the reserve of approximately $ 685,000 relating to discounts deemed necessary to sell the remaining retail inventory. Additionally, on September 30, 2023, the Company had unfulfilled purchase orders for retail products totaling approximately $ 1,021,000 . As of September 30, 2023, the Company made prepayments on these orders of approximately $ 298,000 . Due to the Retail Exit, the Company and Forward China agreed to cancel the full amount of these orders. The unpaid balance on the purchase orders of approximately $ 723,000 , is accrued for as of September 30, 2023 and included in Due to Forward China on the consolidated balance sheets. Collectively, the additional inventory reserve, write off of the prepayments and accrual on the unfulfilled purchase orders represent the loss on classification of discontinued assets held for sale shown in the table below. The total amount related to the retail segment included in Due to Forward China on the consolidated balance sheets was approximately $ 1,002,000 (which includes the $723,000 due on canceled purchase orders) at September 30, 2023 and $ 238,000 at September 30, 2022. The following table presents the major classes of the “Net loss from discontinued operations, net of tax” in our consolidated statements of operations. Schedule of discontinued operations For the Fiscal Years Ended September 30, 2023 2022 Revenues, net $ 4,332,890 $ 4,130,427 Cost of sales 5,285,495 4,562,106 Gross profit ( 952,605 ) ( 431,679 ) Sales and marketing expenses 1,210,563 1,376,729 General and administrative expenses 26,762 19,736 Loss from operations ( 2,189,930 ) ( 1,828,144 ) Loss on classification as held for sale 1,705,385 – Net loss from discontinued operations before income taxes ( 3,895,315 ) ( 1,828,144 ) Provision for income taxes – – Loss from discontinued operations $ ( 3,895,315 ) $ ( 1,828,144 ) At September 30, 2023 and 2022, discontinued assets held for sale of $ 508,000 and $ 3,150,000 , respectively, consist of the net inventory of the retail segment. These numbers include an allowance of $ 1,464,000 and $ 535,000 , respectively to reduce excess or otherwise unsellable inventory to its estimated net realizable value. There was no depreciation, amortization, investing or financing cash flow activities, or other significant noncash operating cash flow activities for the retail segment in Fiscal 2023 or 2022. F- 13 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 INTANGIBLE ASSETS AND GOODWILL Intangible Assets The Company’s intangible assets consist of the following: Schedule of intangible assets September 30, 2023 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 ( 203,000 ) ( 879,000 ) ( 1,082,000 ) ( 164,000 ) ( 705,000 ) ( 869,000 ) Net carrying amount $ 382,000 $ 511,000 $ 893,000 $ 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 eight years for the customer relationships. During Fiscal 2023 and Fiscal 2022, the Company recorded amortization expense related to intangible assets of $ 213,000 , which is included in general and administrative expenses in the Company’s consolidated statements of operations. At September 30, 2023, estimated amortization expense for the Company’s intangible assets for each of the next five years and thereafter is as follows: Schedule of estimated amortization expense Fiscal 2024 $ 213,000 Fiscal 2025 213,000 Fiscal 2026 121,000 Fiscal 2027 81,000 Fiscal 2028 78,000 Thereafter 187,000 Total $ 893,000 Goodwill Goodwill represents the future economic benefits of assets acquired in a business combination that are not individually identified or separately recognized. The Company’s goodwill resulted from the acquisitions of Kablooe and IPS in Fiscal 2020 and Fiscal 2018, respectively and are held under the design segment of our business. 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. NOTE 5 PROPERTY AND EQUIPMENT Property and equipment and related accumulated depreciation and amortization are summarized in the table below: Schedule of property and equipment September 30, 2023 2022 Computer hardware and software $ 502,000 $ 473,000 Furniture and fixtures 67,000 67,000 Equipment 171,000 74,000 Property and equipment, cost 740,000 614,000 Less accumulated depreciation and amortization ( 466,000 ) ( 373,000 ) Property and equipment, net $ 274,000 $ 241,000 Depreciation expense was $ 103,000 and $ 96,000 for Fiscal 2023 and Fiscal 2022, respectively. F- 14 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 FAIR VALUE MEASUREMENTS The earnout consideration of $ 0 and $ 70,000 at September 30, 2023 and 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 current and non-current portions of this liability are shown in the corresponding categories on the consolidated balance sheets in each period presented. The fair value of the earnout liability is measured on a recurring basis at each reporting date using a Black-Scholes valuation model with the following inputs and assumptions, which are categorized within Level 3 of the fair value hierarchy: Schedule of fair value assumptions September 30, 2023 2022 Volatility 40% 40% Risk-free interest rate 4.9%-5.3% 4.1% Expected term in years 0.4 - 1.4 0.4 - 2.4 Dividend yield – – In Fiscal 2023, the Company reduced this liability from $70,000 to $0 based on changes in the expected likelihood of Kablooe reaching the specified earnings targets. In Fiscal 2022, there were no changes to the total fair value of this earnout liability. NOTE 7 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities at September 30, 2023 and 2022 are as follows: Schedule of accrued expenses and other current liabilities September 30, 2023 2022 Accrued commissions/bonuses $ 872,000 $ 722,000 Paid time off 285,000 228,000 Other 201,000 204,000 Total $ 1,358,000 $ 1,154,000 NOTE 8 SHAREHOLDERS’ EQUITY “Blank Check” Preferred Stock The Company is authorized to issue up to 4,000,000 shares of “blank check” preferred stock. The Board has the authority and discretion, without shareholder approval, to issue preferred stock in one or more series for any consideration it deems appropriate, and to fix the relative rights and preferences thereof including their redemption, dividend and conversion rights. Of these shares, 100,000 shares have been authorized as the Series A Participating Preferred Stock. There were no shares of preferred stock issued or outstanding at September 30, 2023 or 2022. Warrants At September 30, 2023, the Company had 75,000 warrants outstanding and exercisable, which have an exercise price of $ 1.75 per share and an expiration date 90 days after a registration statement registering common stock (other than pursuant to an employee benefit plan) is declared effective by the Securities and Exchange Commission. During Fiscal 2023, 76,000 of the warrants outstanding at September 30, 2022 expired. Nasdaq On July 31, 2023, the Company was notified by Nasdaq that it was 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. The Company has until January 29, 2024 (the “Deadline Date”) to become compliant. 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 currently assessing all options to regain compliance. F- 15 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 SHARE-BASED COMPENSATION 2021 Equity Incentive Plan In February 2021, shareholders of the Company approved the 2021 Equity Incentive Plan (the “2021 Plan”), which is administered by the Compensation Committee of the Board of Directors and authorizes 1,291,000 shares of common stock for grants of various types of equity awards to officers, directors, employees and consultants. Upon approval of the 2021 Plan, no additional awards were granted under the 2011 Long Term Incentive Plan (the “2011 Plan”), which expired according to its terms in March 2021. Shares authorized under the 2021 Plan include 1,000,000 new shares and 291,000 shares that remained available under the 2011 Plan. Awards which are forfeited or expire are eligible for regrant under the 2021 Plan. The exercise prices of stock options granted may not be less than the fair market value of the common stock as quoted on the Nasdaq stock market on the grant date and the expiration date of option awards may not exceed 10 years. At September 30, 2023, there were 889,000 shares of common stock available for grants under the 2021 Plan. Stock Options The fair value of option awards is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions in the following table. The expected term represents the period over which the stock option awards are expected to be outstanding. The Company utilizes the simplified method to develop an estimate of the expected term of “plain vanilla” option grants. The expected volatility used is based on the historical price of the Company’s stock over the most recent period commensurate with the expected term of the award. The risk-free interest rate used is based on the implied yield of U.S. Treasury zero-coupon issues with a remaining term equivalent to the award’s expected term. The Company historically has not paid any dividends on its common stock and had no intention to do so on the date the share-based awards were granted. The Company accounts for forfeitures in the period they occur. In applying the Black-Scholes option pricing model to options granted, the Company used the following assumptions: Schedule of assumptions used for options Fiscal 2023 Fiscal 2022 Expected term (years) 2.75 2.5 - 5.0 Expected volatility 69.0 % 68.8 % - 78.6 % Risk free interest rate 4.31 % 0.4 % - 3.1 % Expected dividends – – In Fiscal 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 of grant. 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. On October 1, 2023, the Company granted options to three of its non-employee directors to purchase an aggregate of 332,409 shares of its common stock at an exercise price of $ 0.76 per share. The options vest one year from the date of grant and expire five years from the date of the grant. The options have a weighted average grant-date fair value of $ 0.36 per share and an aggregate grant-date fair value of $ 120,000 , which will be recognized ratably over the vesting period. In Fiscal 2022, the Company made the following option grants which collectively had a weighted-average grant date fair value of $ 0.82 per share: · Options to current and former non-employee directors to purchase an aggregate of 297,000 shares of its common stock. The options were granted throughout Fiscal 2022, expire five to ten years from the date of grant, 145,000 vested immediately, 129,000 vest one year from the date of grant and 23,000 were forfeited prior to vesting. These options had an aggregate grant date fair value of $ 245,000 , which is being recognized ratably over the vesting period. · Options to an employee to purchase 27,000 shares of its common stock. These options were granted in January and July of 2022, vest ratably over two years, expire five years from the date of grant and had an aggregate grant date fair value of $ 20,000 , which is being recognized ratably over the vesting period. F- 16 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company recognized compensation expense for stock option awards of $ 86,000 and $ 201,000 during Fiscal 2023 and Fiscal 2022, respectively, which was recorded as a component of general and administrative expenses in its consolidated statements of operations. No options were exercised during Fiscal 2023 and Fiscal 2022. At September 30, 2023, there was $ 22,000 of unrecognized compensation cost related to nonvested stock option awards that is expected to be recognized over a weighted average period of 0.2 years. The following table summarizes stock option activity during Fiscal 2023: Schedule of stock option activity Weighted Weighted Average Average Aggregate Number of Exercise Remaining Intrinsic Options Price Life (Yrs.) Value Outstanding at September 30, 2022 1,085,000 $ 1.48 Granted 125,000 $ 1.03 Expired ( 287,000 ) $ 1.46 Outstanding at September 30, 2023 923,000 $ 1.43 2.6 $ – Exercisable at September 30, 2023 789,000 $ 1.49 2.3 $ – Options outstanding at September 30, 2023 have an exercise price between $ 1.03 and $ 2.39 per share. NOTE 10 INCOME TAXES The following table summarizes the Company’s consolidated provision from continuing operations for U.S. federal, state and foreign taxes on income: Schedule of income tax provision Fiscal 2023 Fiscal 2022 Current: Federal $ – $ – State 20,000 3,000 Foreign – – Deferred: Federal 112,000 220,000 State ( 244,000 ) 32,000 Foreign ( 39,000 ) ( 23,000 ) Deferred income tax expense (benefit) ( 151,000 ) 232,000 Change in valuation allowance 171,000 ( 229,000 ) Income tax provision $ 20,000 $ 3,000 The deferred tax provision/(benefit) is the change in the deferred tax assets and liabilities representing the tax consequences of changes in the amounts of temporary differences, net operating loss carryforwards and changes in tax rates during the fiscal year. F- 17 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company’s deferred tax assets and liabilities are comprised of the following: Schedule of deferred tax assets and liabilities September 30, 2023 2022 Deferred tax assets Net operating losses $ 2,976,000 $ 2,006,000 Share-based compensation 242,000 220,000 AMT & other tax credits 5,000 5,000 Excess tax over book basis in inventory 18,000 101,000 Reserves and other allowances 893,000 649,000 Deferred rent – 8,000 Lease liability 794,000 – Accrued compensation 101,000 70,000 Accrued related party interest 5,000 5,000 Charitable contributions 1,000 – Interest expense limitation 46,000 48,000 Total deferred tax assets 5,081,000 3,112,000 Deferred tax liabilities Depreciation ( 9,000 ) ( 12,000 ) Prepaid expenses ( 88,000 ) ( 96,000 ) Intangible assets ( 145,000 ) ( 178,000 ) ROU Asset ( 737,000 ) – Total deferred tax liabilities ( 979,000 ) ( 286,000 ) Valuation allowance ( 4,102,000 ) ( 2,826,000 ) Net deferred tax assets $ – $ – The Company recorded a provision for income taxes which includes net expense of $20,000 and $3,000 in Fiscal 2023 and 2022, respectively, primarily for state income tax expenses in states where net operating loss carryforwards (“NOLs”) were not available. At September 30, 2023, the Company had available NOLs for U.S. federal income tax purposes of $ 9,350,000 and NOLs for state income tax purposes of $ 5,113,000 . NOLs generated prior to 2018 expire beginning in 2031 while NOLs generated after 2018 have an indefinite carryforward period. The NOLs result in a deferred tax asset of $ 2,283,000 with respect to U.S. federal income taxes and $ 371,000 for state income taxes. In addition, at September 30, 2023, the Company had available NOLs for foreign income tax purposes of $ 1,839,000 , resulting in a deferred tax asset of $ 322,000 , expiring through 2028. Total net deferred tax assets, before valuation allowance, were $ 4,102,000 and $ 2,826,000 at September 30, 2023 and 2022, respectively. Undistributed earnings of the Company's foreign subsidiaries are considered permanently reinvested; therefore, in accordance with U.S. GAAP, no provision for U.S. federal or state income taxes would result. In Fiscal 2023, Forward Switzerland had a net loss for tax purposes of $ 113,000 and Forward UK had a net loss for tax purposes of $ 158,000 . At September 30, 2023, as part of its periodic evaluation of the necessity to maintain a valuation allowance against its deferred tax assets, and after consideration of all factors, including, among others, projections of future taxable income, current year NOL utilization and the extent of the Company's cumulative losses in recent years, the Company determined that, on a more likely than not basis, it would not be able to use remaining deferred tax assets, except with respect to the U.S. federal income taxes in the event the Company elects to effect repatriation of certain foreign source income of Forward Switzerland, which income is currently considered to be permanently reinvested and for which no U.S. tax liability has been accrued. Accordingly, the Company has determined to maintain a full valuation allowance against its net deferred tax assets. At September 30, 2023 and 2022, the valuation allowance was $4,102,000 and $2,826,000, respectively. The change in the valuation allowance of $1,275,000 is comprised of $171,000 from continuing operations and $1,104,000 from discontinued operations. In the future, the utilization of the Company's NOLs may be subject to certain change of control limitations. If the Company determines that it will be able to use some or all of its deferred tax assets in a future reporting period, the adjustment to reduce or eliminate the valuation allowance would reduce its income tax expense and increase after-tax income. F- 18 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The significant elements contributing to the difference between the U.S. federal statutory tax rate and the Company’s effective tax rate are as follows: Schedule of reconciliation of effective tax rate Fiscal 2023 Fiscal 2022 U.S. federal statutory rate 21.0 % 21.0 % State tax rate, net of federal benefit 3.9 % 5.8 % Foreign rate differential ( 9.2 % ) ( 5.3 % ) Tax return to provision adjustments ( 94.6 % ) 4.1 % Effect of state tax rate change ( 8.5 % ) 7.0 % Change in valuation allowance 95.7 % ( 34.1 % ) Permanent differences 2.9 % 2.0 % Effective tax rate 11.2 % 0.5 % At September 30, 2023 and 2022, the Company had not accrued any interest or penalties related to uncertain tax positions. It is the Company's policy to recognize interest and/or penalties, if any, related to income tax matters in income tax expense in the consolidated statements of operations. For the periods presented in the accompanying consolidated statements of operations, no material income tax related interest or penalties were assessed or recorded. All fiscal years prior to the fiscal year ended September 30, 2020, are closed to federal and state examination. NOTE 11 EARNINGS PER SHARE Basic earnings per share data for each period presented is computed using the weighted average number of shares of common stock outstanding during each such period. Diluted earnings per share data is computed using the weighted average number of common and dilutive common equivalent shares outstanding during each period. Dilutive common equivalent shares consist of shares that would be issued upon the exercise of stock options and warrants, computed using the treasury stock method. A reconciliation of basic and diluted earnings/loss per share is as follows: Schedule of reconciliation of basic and diluted earnings/loss per share For the Fiscal Years Ended September 30, 2023 2022 Numerator: Income from continuing operations $ 179,000 $ 450,000 Loss from discontinued operations, net of tax ( 3,895,000 ) ( 1,828,000 ) Net loss $ ( 3,716,000 ) $ ( 1,378,000 ) Denominator: Weighted average common shares outstanding 10,061,000 10,061,000 Dilutive common share equivalents – 140,000 Weighted average dilutive shares outstanding 10,061,000 10,201,000 Basic earnings/(loss) per share : Basic earnings per share from continuing operations $ 0.02 $ 0.04 Basic loss per share from discontinued operations ( 0.39 ) ( 0.18 ) Basic loss per share $ ( 0.37 ) $ ( 0.14 ) Diluted earnings/(loss) per share: Diluted earnings per share from continuing operations $ 0.02 $ 0.04 Diluted loss per share from discontinued operations ( 0.39 ) ( 0.18 ) Diluted loss per share $ ( 0.37 ) $ ( 0.14 ) F- 19 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following securities were excluded from the calculation of diluted earnings per share in Fiscal 2023 and 2022 because their inclusion would have been anti-dilutive: Schedule of anti-dilutive For the Fiscal Years Ended September 30, 2023 2022 Options 923,000 277,000 Warrants 75,000 151,000 Total potentially dilutive shares 998,000 428,000 NOTE 12 COMMITMENTS AND CONTINGENCIES Guarantee Obligation In February 2010, Forward Switzerland and its European logistics provider (freight forwarding and customs agent) entered into a Representation Agreement (the “Representation Agreement”) whereby, among other things, the European logistics provider agreed to act as Forward Switzerland's fiscal representative in The Netherlands for the purpose of providing services in connection with any value added tax matters. As part of this agreement, Forward Switzerland agreed to provide an undertaking (in the form of a bank letter of guarantee) to the logistics provider with respect to any value added tax liability arising in The Netherlands that the logistics provider is required to pay to Dutch tax authorities on its behalf. In February 2010, Forward Switzerland entered into a guarantee agreement with a Swiss bank relating to the repayment of any amount up to €75,000 (equal to approximately $79,000 at September 30, 2023) paid by such bank to the logistics provider in order to satisfy such undertaking pursuant to the bank letter of guarantee. Forward Switzerland would be required to perform under the guarantee agreement only in the event that (i) a value added tax liability is imposed on the Company's revenues in The Netherlands; (ii) the logistics provider asserts that it has been called upon in its capacity as surety by the Dutch Receiver of Taxes to pay such taxes; (iii) Forward Switzerland or the Company on its behalf fails or refuses to remit the amount of value added tax due to the logistics provider upon its demand; and (iv) the logistics provider makes a drawing under the bank letter of guarantee. Under the Representation Agreement, Forward Switzerland agreed that the letter of guarantee would remain available for drawing for three years following the date that its relationship terminates with the logistics provider to satisfy any value added tax liability arising prior to expiration of the Representation Agreement but asserted by The Netherlands after expiration. The initial term of the bank letter of guarantee expired February 28, 2011, but it renews automatically for one-year periods on February 28 of each subsequent year unless Forward Switzerland provides the Swiss bank with written notice of termination at least 60 days prior to the renewal date. It is the intent of Forward Switzerland and the logistics provider that the bank letter of guarantee amount be adjusted annually. In consideration of the issuance of the letter of guarantee, Forward Switzerland has granted the Swiss bank a security interest in all of its assets on deposit with, held by, or credited to Forward Switzerland’s accounts with, the Swiss bank (approximately $358,000 at September 30, 2023). At September 30, 2023, the Company had not incurred a liability in connection with this guarantee. Legal Proceedings From time to time, the Company may become a party to legal actions or proceedings in the ordinary course of its business. At September 30, 2023, there were no such actions or proceedings, either individually or in the aggregate, that, if decided adversely to its interests, the Company believes would be material to its business. F- 20 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 LEASES The Company’s operating leases are primarily for corporate, engineering, and administrative office space. Total operating lease expense in Fiscal 2023 was $ 621,000 , of which $ 3,000 was recorded in sales and marketing expenses and $ 618,000 was recorded in general and administrative expenses on the consolidated statements of operations. Total operating lease expense in Fiscal 2022 was $ 631,000 , of which $ 57,000 was recorded in sales and marketing expenses and $ 574,000 was recorded in general and administrative expenses on the consolidated statements of operations. Cash paid for amounts included in operating lease liabilities in Fiscal 2023 and Fiscal 2022, which have been included in cash flows from operating activities, was $ 575,000 and $ 601,000 , respectively. At September 30, 2023, the Company’s operating leases had a weighted average remaining lease term of 7.6 years and a weighted average discount rate of 5.7 %. Future minimum payments under non-cancellable operating leases are as follows: Schedule of future minimum payments under operating leases Fiscal 2024 $ 592,000 Fiscal 2025 556,000 Fiscal 2026 510,000 Fiscal 2027 419,000 Fiscal 2028 428,000 Thereafter 1,551,000 Total future minimum lease payments 4,056,000 Less imputed interest ( 806,000 ) Present value of lease liabilities 3,250,000 Less current portion of lease liabilities ( 416,000 ) Long-term portion of lease liabilities $ 2,834,000 NOTE 14 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 through March 2023 paid 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. Considering the loss of a significant OEM distribution customer (see Note 16), 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 expired in October 2023, resulting in cash savings of $100,000 in Fiscal 2023. Effective October 2023, the Company and Forward China entered into a new sourcing agreement under which the fixed portion of the sourcing fee was further reduced to $65,833 per month. Other terms in the agreement are substantially the same as the prior agreement. Due to the Retail Exit and decline in the OEM distribution segment business, the new sourcing agreement expires October 31, 2024. Terence Wise, Chief Executive Officer and Chairman of the Company, is the owner of Forward China. In addition, Jenny P. Yu, a Managing Director of Forward China, beneficially owns more than 5% of the Company’s common stock. The Company recorded service fees to Forward China of $ 1,266,000 and $ 1,398,000 during Fiscal 2023 and Fiscal 2022, respectively, which are included as a component of cost of sales upon sales of the related products. The Company had purchases from Forward China of $ 12,799,000 and $ 18,055,000 during Fiscal 2023 and Fiscal 2022, respectively. The Company has a separate agreement with Forward China to address the potential impact of customers sourcing directly from Forward China. In the event a customer bypasses the services of the Company and does business directly with Forward China, Forward China will pay a commission of 50% of the net revenue, less direct costs, generated from the products or services sold. No commissions were recognized in Fiscal 2023 and Fiscal 2022. F- 21 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In connection with the new sourcing agreement and in order to preserve the Company’s future liquidity, in November 2023, the Company and Forward China entered into an agreement whereby Forward China agreed to limit the amount of outstanding payables it would seek to collect from the Company to $500,000 in any 12-month period, which the Company agreed to pay within 30 days of any such request. This agreement pertains only to payables that were outstanding at October 30, 2023 of approximately $ 7,365,000 . Purchases from Forward China made after October 30, 2023 are not covered by this agreement and are expected to be paid according to normal payment terms. The Company made prepayments to Forward China for inventory purchases of $ 20,000 at September 30, 2022, which are included in prepaid expenses and other current assets on the consolidated balance sheets. As of September 30, 2023, there were no such prepayments. During 2023, as a result of the Retail Exit, the Company recognized a loss of approximately $ 1,021,000 relating to the termination of unfulfilled purchase orders for retail products (see Note 3). Promissory Note On January 18, 2018, the Company issued a $ 1,600,000 unsecured promissory note payable to Forward China to fund the acquisition of IPS. The promissory note bears interest at a rate of 8 % per annum and had an original maturity date of January 18, 2019. Monthly interest payments commenced on February 18, 2018, with the principal due at maturity. The Company incurred and paid interest associated with this note of $ 104,000 and $ 122,000 in Fiscal 2023 and Fiscal 2022, respectively. The maturity date of this note was extended to December 31, 2024 . The maturity date of the note has been extended on several occasions to assist the Company with liquidity. The Company made principal payments of $ 300,000 and $ 200,000 on this note during Fiscal 2023 and Fiscal 2022, respectively, and this note has a remaining balance of $ 1,100,000 at September 30, 2023. 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 $ 2,058,000 and $ 1,741,000 in Fiscal 2023 and Fiscal 2022, respectively. Due to the Retail Exit, these revenues are included in the loss from discontinued operations for Fiscal 2023 and 2022. 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 was effective until August 31, 2023. Effective September 1, 2023, the Company entered into an agreement to extend this agreement on a month-to-month basis and to expand its scope to include inventory management assistance. The Company incurred costs of $ 127,000 under this agreement for Fiscal 2023, of which $ 120,000 was included in selling and marketing expenses and $ 7,000 is included as a component of cost of sales upon sales of the related products. The Company incurred costs of $ 90,000 under this agreement for Fiscal 2022, of which $ 84,000 was included in selling and marketing expenses and $ 6,000 is included as a component of cost of sales upon sales of the related products. The Company had accounts payable to Justwise of $ 10,000 and $ 15,000 at September 30, 2023 and 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 revenues from this customer of $ 626,000 and $ 780,000 in Fiscal 2023 and Fiscal 2022, respectively. The Company had no accounts receivable from this customer at September 30, 2023 or 2022. A member of the Company’s Audit, Governance and Compensation Committees of its Board of Directors is also a member of the Board of Directors of a company to whom the Company’s OEM distribution segment sold products during Fiscal 2022. The Company recognized revenue of $ 0 and $ 13,000 from the sale of such products during Fiscal 2023 and 2022, respectively. NOTE 15 401(k) PLAN The Company maintains a 401(k) benefit plan allowing eligible employees to make pre-tax and/or after-tax contributions of a portion of their salary in amounts subject to Internal Revenue Service limitations. The Company made immediately vested contributions of $ 426,000 during Fiscal 2023, of which $ 310,000 was recorded to cost of sales, $ 25,000 was recorded to sales and marketing expense and $ 91,000 was recorded to general and administrative expense on the consolidated statement of operations. The Company made immediately vested contributions of $ 379,000 during Fiscal 2022, of which $ 313,000 was recorded to cost of sales, $ 16,000 was recorded to sales and marketing expense and $ 50,000 was recorded to general and administrative expense on the consolidated statement of operations. F- 22 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16 SEGMENTS AND CONCENTRATIONS Segments As a result of discontinuing the retail segment, see Note 3, the Company now has two reportable segments: OEM distribution and design. See Note 2 for more information on the composition and accounting policies of our reportable segments. The results of the retail segment were classified as discontinued operations as discussed in Note 3. Segment information presented herein excludes the results of the retail segment for all periods presented. 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 distribution segments, we exclude general and administrative and general corporate expenses from their measure of profitability as these expenses are not allocated to the segments and therefore not included in the measure of profitability used by the CODM. For the design segment, general and administrative expenses directly attributable to that segment are included in its measure of profitability as these expenses are included in the measure of its profitability reviewed by the CODM. We do not include intercompany activity in our segment results shown below to be consistent with the information that is presented to the CODM. Segment assets consist of accounts receivable and inventory, which are regularly reviewed by the CODM, as well as goodwill and intangible assets resulting from design segment acquisitions. Information by segment and related reconciliations are shown in tables below: Schedule of segment and related reconciliations Revenues Fiscal 2023 Fiscal 2022 OEM distribution $ 14,002,000 $ 18,036,000 Design 22,686,000 20,171,000 Total segment revenues $ 36,688,000 $ 38,207,000 Operating Income/(Loss) Fiscal 2023 Fiscal 2022 OEM distribution $ 440,000 $ 905,000 Design 2,182,000 2,148,000 Total segment operating income 2,622,000 3,053,000 General corporate expenses ( 2,462,000 ) ( 2,465,000 ) Operating loss from continuing operations before income taxes 160,000 588,000 Other expense/(income), net ( 19,000 ) 136,000 Income from continuing operations before income taxes $ 179,000 $ 452,000 Depreciation and Amortization Fiscal 2023 Fiscal 2022 OEM distribution $ 4,000 $ 8,000 Design 312,000 301,000 Total $ 316,000 $ 309,000 Schedule of condensed balance sheet Segment Assets September 30, 2023 2022 OEM distribution $ 2,478,000 $ 4,276,000 Design 6,721,000 6,116,000 Total segment assets 9,199,000 10,392,000 General corporate assets 6,924,000 6,731,000 Discontinued assets held for sale 508,000 3,150,000 Other assets of discontinued retail segment 755,000 666,000 Total assets $ 17,386,000 $ 20,939,000 F- 23 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Geographic Concentrations The Company’s long-lived assets consist of property and equipment and operating lease right-of-use assets, all of which are located in the United States. The following table sets forth our consolidated net revenues by country for Fiscal 2023 and Fiscal 2022: Schedule of consolidated net revenues Revenues Fiscal 2023 Fiscal 2022 United States $ 27,116,000 $ 25,538,000 China 3,443,000 5,325,000 Germany 3,000,000 2,976,000 Poland 1,275,000 2,643,000 Other foreign countries 1,854,000 1,725,000 Total $ 36,688,000 $ 38,207,000 Customer Concentrations The Company had certain customers in the OEM distribution segment whose individual percentage of the Company’s consolidated revenues was 10% or greater. Revenue from one of these customers or their affiliates or contract manufacturers represented 11.2 % of the Company’s consolidated net revenues in Fiscal 2023 and revenues from two of these customers or their affiliates or contract manufacturers represented 25.5 % of the Company’s consolidated net revenues in Fiscal 2022. The Company had one customer in the design segment whose individual percentage of the Company’s consolidated revenues was 10% or greater. Revenues from this customer represented 27.9 % and 11.8 % of the Company’s consolidated net revenues in Fiscal 2023 and 2022, respectively. The Company had customers in the OEM distribution segment whose accounts receivable balances accounted for 10% or more of the Company’s consolidated accounts receivable. One customer or its affiliate or contract manufacturer represented 12.0 % of the Company’s consolidated accounts receivable at September 30, 2023 and two customers or their affiliates or contract manufacturers represented 28.1 % of the Company’s consolidated accounts receivable at September 30, 2022. At September 30, 2023, the Company had one customer in the design segment whose accounts receivable balances accounted for 10% or more of the Company’s consolidated accounts receivable. Accounts receivable from this customer represented 31.1 % of the Company’s consolidated accounts receivable at September 30, 2023. 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 expired. Due to increased pricing pressures, the Company did not extend its contract with this customer. Revenue from this customer represented approximately 13 % of our consolidated net revenues for Fiscal 2022. The Company expects the loss of this customer to cause a significant decline in OEM distribution segment revenues in future periods. Supplier Concentration The Company’s OEM distribution segment procures substantially all its products through independent suppliers in China through Forward China (see Note 14). Depending on the product, Forward China may require several different suppliers to furnish component parts or pieces. NOTE 17 LINE OF CREDIT The Company, specifically IPS, has a $ 1,300,000 revolving line of credit with a bank which was renewed in March 2023. The line of credit has a maturity date of 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 9.25 % and 7.0 % at September 30, 2023 and 2022, respectively. In March 2021, the Company paid down the outstanding balance on the line of credit and $ 1,300,000 was available at September 30, 2023 and 2022. The Company is subject to certain debt-service ratio requirements which are measured annually. The Company was in compliance with such covenants at September 30, 2023. F- 24