Forward Industries, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS December 31, September 30, 2023 2023 (Unaudited) Assets Current assets: Cash $ 3,026,786 $ 3,180,468 Accounts receivable, net 6,534,702 6,968,778 Inventories, net 405,229 334,384 Discontinued assets held for sale 135,604 508,077 Prepaid expenses and other current assets 392,282 378,512 Total current assets 10,494,603 11,370,219 Property and equipment, net 265,346 274,046 Intangible assets, net 839,954 893,143 Goodwill 1,758,682 1,758,682 Operating lease right-of-use assets, net 2,916,385 3,021,315 Other assets 68,737 68,737 Total assets $ 16,343,707 $ 17,386,142 Liabilities and shareholders' equity Current liabilities: Note payable to Forward China $ 850,000 $ – Accounts payable 392,202 518,892 Due to Forward China 8,894,245 8,246,015 Deferred income 250,405 297,407 Current portion of operating lease liability 425,998 416,042 Accrued expenses and other current liabilities 494,724 1,357,743 Total current liabilities 11,307,574 10,836,099 Other liabilities: Note payable to Forward China – 1,100,000 Operating lease liability, less current portion 2,723,281 2,833,782 Total other liabilities 2,723,281 3,933,782 Total liabilities 14,030,855 14,769,881 Commitments and contingencies – – Shareholders' equity: Common stock, par value $ 0.01 per share; 40,000,000 shares authorized; 10,061,185 shares issued and outstanding at December 31, 2023 and September 30, 2023 100,612 100,612 Additional paid-in capital 20,253,013 20,202,202 Accumulated deficit ( 18,040,773 ) ( 17,686,553 ) Total shareholders' equity 2,312,852 2,616,261 Total liabilities and shareholders' equity $ 16,343,707 $ 17,386,142 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 3 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the Three Months Ended December 31, 2023 2022 Revenues, net $ 7,151,951 $ 9,752,684 Cost of sales 5,509,465 7,786,614 Gross profit 1,642,486 1,966,070 Sales and marketing expenses 368,736 411,174 General and administrative expenses 1,654,071 1,682,812 Operating loss ( 380,321 ) ( 127,916 ) Fair value adjustment of earnout consideration – ( 40,000 ) Interest income ( 17,469 ) – Interest expense 19,010 27,958 Other income, net ( 687 ) ( 24,560 ) Loss from continuing operations before income taxes ( 381,175 ) ( 91,314 ) Provision for income taxes – – Loss from continuing operations ( 381,175 ) ( 91,314 ) Income / (loss) from discontinued operations, net of tax 26,955 ( 338,961 ) Net loss $ ( 354,220 ) $ ( 430,275 ) Basic earnings/(loss) per share: Basic loss per share from continuing operations $ ( 0.04 ) $ ( 0.01 ) Basic earnings/(loss) per share from discontinued operations 0.00 ( 0.03 ) Basic loss per share $ ( 0.04 ) $ ( 0.04 ) Diluted earnings/(loss) per share: Diluted loss per share from continuing operations $ ( 0.04 ) $ ( 0.01 ) Diluted earnings/(loss) per share from discontinued operations 0.00 ( 0.03 ) Diluted loss per share $ ( 0.04 ) $ ( 0.04 ) Weighted average common shares outstanding: Basic 10,061,185 10,061,185 Diluted 10,061,185 10,061,185 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 4 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) For the Three Months Ended December 31, 2023 Additional Common Stock Paid-In Accumulated Shares Amount Capital Deficit Total Balance at September 30, 2023 10,061,185 $ 100,612 $ 20,202,202 $ ( 17,686,553 ) $ 2,616,261 Share-based compensation – – 50,811 – 50,811 Net loss – – – ( 354,220 ) ( 354,220 ) Balance at December 31, 2023 10,061,185 $ 100,612 $ 20,253,013 $ ( 18,040,773 ) $ 2,312,852 For the Three Months Ended December 31, 2022 Additional Common Stock Paid-In Accumulated Shares Amount Capital Deficit Total Balance at September 30, 2022 10,061,185 $ 100,612 $ 20,115,711 $ ( 13,949,896 ) $ 6,266,427 Share-based compensation – – 23,935 – 23,935 Net loss – – – ( 430,275 ) ( 430,275 ) Balance at December 31, 2022 10,061,185 $ 100,612 $ 20,139,646 $ ( 14,380,171 ) $ 5,860,087 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 5 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Three Months Ended December 31, 2023 2022 Operating Activities: Net loss $ ( 354,220 ) $ ( 430,275 ) Adjustments to reconcile net loss to net cash provided by/(used in) operating activities: Share-based compensation 50,811 23,935 Depreciation and amortization 81,403 77,530 Bad debt (recoveries) expense ( 10,991 ) 13,109 Change in fair value of earnout consideration – ( 40,000 ) Changes in operating assets and liabilities: Accounts receivable 445,067 ( 993,522 ) Inventories ( 70,845 ) ( 288,509 ) Discontinued assets held for sale 372,473 ( 49,340 ) Prepaid expenses and other current assets ( 13,770 ) 23,262 Accounts payable and due to Forward China 521,540 2,070,341 Deferred income ( 47,002 ) ( 104,290 ) Net changes in operating lease liabilities 4,385 8,416 Accrued expenses and other current liabilities ( 863,019 ) ( 459,262 ) Net cash provided by / (used in) operating activities 115,832 ( 148,605 ) Investing Activities: Purchases of property and equipment ( 19,514 ) ( 45,111 ) Net cash used in investing activities ( 19,514 ) ( 45,111 ) Financing Activities: Repayment of note payable to Forward China ( 250,000 ) ( 50,000 ) Net cash used in financing activities ( 250,000 ) ( 50,000 ) Net decrease in cash ( 153,682 ) ( 243,716 ) Cash at beginning of period 3,180,468 2,575,522 Cash at end of period $ 3,026,786 $ 2,331,806 Supplemental Disclosures of Cash Flow Information: Cash paid for interest $ 19,010 $ 27,958 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 6 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 OVERVIEW Business Forward Industries, Inc. (“Forward”, “we”, “our” or the “Company”) is a global design, 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 9. Discontinued Operations In July 2023, the Company decided to cease operations of its retail distribution segment (“Retail Exit”) 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 December 31, 2023 and September 30, 2023. Where applicable, certain footnotes exclude the discontinued operations unless otherwise noted. See Note 3 for additional information on discontinued operations. Liquidity For the three months ended December 31, 2023, the Company generated a net loss of $354,000, loss from continuing operations of $381,000 and cash flows from operating activities of $116,000. At December 31, 2023, the Company had $ 1,300,000 of borrowing available under its line of credit with a bank that was renewed in March 2023 and has a maturity date of May 31, 2024 (see Note 11). By discontinuing the retail segment, which incurred significant losses, the Company expects improved performance 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 9). 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 February 28, 2025. The condensed consolidated financial statements do not include any adjustments that might result if the Company is unable to continue as a going concern. 7 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. NOTE 2 ACCOUNTING POLICIES Basis of Presentation The accompanying condensed consolidated financial statements include the accounts of Forward Industries, Inc. and all of its wholly-owned subsidiaries: Forward Industries (IN), Inc. (“Forward US”), Forward Industries (Switzerland) GmbH (“Forward Switzerland”), Forward Industries UK Limited (“Forward UK”), Intelligent Product Solutions, Inc. (“IPS”) and Kablooe, Inc. (“Kablooe”). The terms “Forward”, “we”, “our” or the “Company” as used throughout this document are used to indicate Forward Industries, Inc. and all of its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, the accompanying condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q reflect all normal recurring adjustments necessary to present fairly the financial position and results of operations and cash flows for the interim periods presented herein but are not necessarily indicative of the results of operations for the year ending September 30, 2024. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2023, and with the disclosures and risk factors presented therein. The September 30, 2023 condensed consolidated balance sheet has been derived from the audited consolidated financial statements. Accounting Estimates The preparation of the Company’s condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the 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. 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 6 for more information on segments. 8 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Accounts Receivable Accounts receivable consist of unsecured trade accounts with customers in amounts that have been invoiced ($ 6,183,000 and $ 6,949,000 at December 31, 2023 and September 30, 2023, respectively) and contract assets as described further below under the heading “Revenue Recognition.” The Company maintains an allowance for doubtful accounts, which is recorded as a reduction to accounts receivable on the condensed consolidated balance sheets. Collectability of accounts receivable is estimated by evaluating the number of days accounts are outstanding, customer payment history, recent payment trends and perceived creditworthiness, adjusted as necessary based on specific customer situations. At December 31, 2023 and September 30, 2023, the Company had no allowances for doubtful accounts for the OEM distribution segment, allowances for doubtful accounts of $ 35,000 and $ 46,000 , respectively, for the discontinued retail distribution segment and $ 760,000 and $ 771,000 , respectively, for the design segment. The Company has agreements with various retailers which contain different terms for trade discounts, promotional and other sales allowances. At December 31, 2023 and September 30, 2023, the Company recorded accounts receivable allowances of $ 193,000 and $ 139,000 , respectively, for the discontinued retail distribution segment. Inventories Inventories consist primarily of finished goods and are stated at the lower of cost (determined by the first-in, first-out method) or net realizable value. Based on management’s estimates, an allowance is made to reduce excess, obsolete, or otherwise unsellable inventories to net realizable value. The allowance is established through charges to cost of sales in the Company’s condensed consolidated statements of operations. In determining the adequacy of the allowance, management’s estimates are based upon several factors, including analyses of inventory levels, historical loss trends, sales history and projections of future sales demand. The Company’s estimates of the allowance may change from time to time based on management’s assessments, and such changes could be material. Revenue Recognition OEM Distribution Segment The OEM distribution segment recognizes revenue when: (i) finished goods are shipped to its customers (in general, these conditions occur at either point of shipment or point of destination, depending on the terms of sale and transfer of control); (ii) there are no other deliverables or performance obligations; and (iii) there are no further obligations to the customer after the title of the goods has transferred. If the Company receives consideration before achieving the criteria previously mentioned, it records a contract liability, which is classified as a component of deferred income in the accompanying condensed consolidated balance sheets. The OEM distribution segment had no contract liabilities at December 31, 2023, September 30, 2023 or September 30, 2022. Discontinued Retail Distribution Segment The discontinued retail distribution segment sells products primarily through online websites operated by authorized third-party retailers. Revenue is recognized when control (as defined in Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers”) of the related goods is transferred to the retailer, which generally occurs upon shipment to the end customer. Other than product delivery, the retail distribution segment does not typically have other deliverables or performance obligations associated with its products. Revenue is measured as the amount of consideration expected to be received in exchange for the products provided, net of allowances taken by retailers for product returns and any taxes collected from customers that will be remitted to governmental authorities. When the Company receives consideration before achieving the criteria previously mentioned, it records a contract liability, which is classified as a component of deferred income in the accompanying condensed consolidated balance sheets. The retail distribution segment had no contract liabilities at December 31, 2023, September 30, 2023 or 2022. The results of operations of the retail segment are reported as discontinued operations for the three months ended December 31, 2023 and 2022. See Note 3. 9 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Design Segment The Company applies the “cost to cost” and “right to invoice” methods of revenue recognition to the contracts with customers in the design segment. The design segment typically engages in two types of contracts: (i) time and material and (ii) fixed price. The Company recognizes revenue over time on its time and material contracts utilizing a “right to invoice” method. Revenues from fixed price contracts that require performance of services that are not related to the production of tangible assets are recognized by using cost inputs to measure progress toward the completion of its performance obligations, or the “cost to cost” method. Revenues from fixed price contracts that contain specific deliverables are recognized when the performance obligation has been satisfied or the transfer of goods to the customer has been completed and accepted. Recognized revenues that will not be billed until a later date, or contract assets, are recorded as an asset and classified as a component of accounts receivable in the accompanying condensed consolidated balance sheets. The design segment had contract assets of $ 1,340,000 , $ 976,000 and $ 609,000 at December 31, 2023, September 30, 2023 and September 30, 2022, respectively. Contracts where collections to date have exceeded recognized revenues, or contract liabilities, are recorded as a liability and classified as a component of deferred income in the accompanying condensed consolidated balance sheets. The design segment had contract liabilities of $ 250,000 , $ 297,000 , and $ 439,000 at December 31, 2023, September 30, 2023 and September 30, 2022, respectively. Goodwill The Company reviews goodwill for impairment at least annually, or more often if triggering events occur. The Company has two reporting units with goodwill (the IPS and Kablooe operating segments) and we perform our annual goodwill impairment test on September 30, the end of the fiscal year, or upon the occurrence of a triggering event. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company would not need to perform a quantitative impairment test for the reporting unit. If the Company cannot support such a conclusion or does not elect to perform the qualitative assessment, then the Company will perform the quantitative assessment by comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying value, no impairment charge is recognized. If the fair value of the reporting unit is less than its carrying value, an impairment charge will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value. A significant amount of judgment is required in performing goodwill impairment tests including estimating the fair value of a reporting unit. Management evaluated and concluded that there were no indications goodwill was impaired at December 31, 2023. Intangible Assets Intangible assets include trademarks and customer relationships, which were acquired as part of the acquisitions of IPS in Fiscal 2018 and Kablooe in Fiscal 2020 and are amortized over their estimated useful lives, which are periodically evaluated for reasonableness. Our intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In assessing the recoverability of our intangible assets, we must make estimates and assumptions regarding future cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and the magnitude of any such charge. Fair value estimates are made at a specific point in time, based on relevant information. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. If these estimates or material related assumptions change in the future, we may be required to record impairment charges related to our intangible assets. Management evaluated and concluded that there were no indications of impairments of intangible assets at December 31, 2023. 10 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Income Taxes The Company recognizes future tax benefits and liabilities measured at enacted rates attributable to temporary differences between financial statement and income tax bases of assets and liabilities and to net tax operating loss carryforwards to the extent that realization of these benefits is more likely than not. At December 31, 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. Fair Value Measurements We perform fair value measurements in accordance with the guidance provided by ASC 820, “Fair Value Measurement.” ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at their fair values, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the assets or liabilities, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset's or liability's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value: · Level 1: quoted prices in active markets for identical assets or liabilities; · Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or · Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities. Leases Lease assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term, using the Company’s incremental borrowing rate commensurate with the lease term, since the Company’s lessors do not provide an implicit rate, nor is one readily available. The Company has certain leases that may include an option to renew and when it is reasonably probable to exercise such option, the Company will include the renewal option terms in determining the lease asset and lease liability. Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Operating lease assets are shown as right of use assets on the condensed consolidated balance sheets. The current and long-term portions of operating lease liabilities are shown separately as such on the condensed consolidated balance sheets. 11 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED 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. The Company adopted this guidance in the first quarter of fiscal 2024 with no material impact on its condensed 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 condensed consolidated balance sheets as “discontinued assets held for sale” at December 31, 2023 and September 30, 2023, and the results of operations for the retail segment have been classified as “Discontinued Operations” on the condensed consolidated statements of operations for the three months ended December 31, 2023 and 2022. The condensed 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. The total amount related to the discontinued retail segment included in Due to Forward China on the condensed consolidated balance sheets was approximately $ 905,000 and $ 1,002,000 (which includes the $723,000 due on canceled purchase orders) at December 31, 2023 and September 30, 2023, respectively. The following table presents the major classes of the “Income / loss from discontinued operations, net of tax” in our condensed consolidated statements of operations. Schedule of discontinued operations For the Three Months Ended December 31, 2023 2022 Revenues, net $ 665,000 $ 1,057,000 Cost of sales 470,000 1,104,000 Gross profit 195,000 ( 47,000 ) Sales and marketing expenses 145,000 279,000 General and administrative expenses 23,000 13,000 Income / (loss) from discontinued operations before income taxes 27,000 ( 339,000 ) Provision for income taxes – – Income / (loss) from discontinued operations $ 27,000 $ ( 339,000 ) 12 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2023 and September 30, 2023, discontinued assets held for sale of $ 136,000 and $ 508,000 , respectively, consist of the net inventory of the retail segment. These numbers include an allowance of $ 834,000 and $ 1,464,000 , 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 the three months ended December 31, 2023 and 2022. NOTE 4 INTANGIBLE ASSETS AND GOODWILL Intangible Assets The Company’s intangible assets consist of the following: Schedule of intangible assets December 31, 2023 September 30, 2023 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 ( 213,000 ) ( 922,000 ) ( 1,135,000 ) ( 203,000 ) ( 879,000 ) ( 1,082,000 ) Net carrying amount $ 372,000 $ 468,000 $ 840,000 $ 382,000 $ 511,000 $ 893,000 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 8 years for the customer relationships. Amortization expense related to intangible assets was $ 53,000 for the three months ended December 31, 2023 and 2022, which is included in general and administrative expenses on the condensed consolidated statements of operations. At December 31, 2023, estimated amortization expense for the Company’s intangible assets is as follows: Schedule of estimated amortization expense Remainder of Fiscal 2024 $ 160,000 Fiscal 2025 213,000 Fiscal 2026 121,000 Fiscal 2027 82,000 Fiscal 2028 78,000 Fiscal 2029 39,000 Thereafter 147,000 Total $ 840,000 13 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Goodwill Goodwill represents the future economic benefits of assets acquired in a business combination that are not individually identified or separately recognized. The Company’s goodwill resulted from the acquisitions of Kablooe and IPS in Fiscal 2020 and Fiscal 2018, respectively. The goodwill associated with the IPS acquisition is not deductible for tax purposes, but the goodwill associated with the Kablooe acquisition is deductible for tax purposes. All of the Company’s goodwill is held under the design segment of our business. NOTE 5 FAIR VALUE MEASUREMENTS The acquisition of Kablooe provides annual contingent earnout payments based on their results of operations through August 2025. The fair value of the earnout liability is measured on a recurring basis at each reporting date using a Black-Scholes valuation model with inputs categorized within level three of the fair value hierarchy. During the three months ended December 31, 2022, the Company reduced this liability from $70,000 to $30,000 based on changes to the expected likelihood of Kablooe reaching the specified earnings targets. In September 2023, the Company further reduced this liability from $30,000 to $0 due to the low likelihood of Kablooe reaching the specified earnings target. The fair value of this earnout liability remained $ 0 at December 31, 2023. The resulting gains have been recorded as a component of other income on the condensed consolidated statements of operations. NOTE 6 SEGMENTS AND CONCENTRATIONS As a result of discontinuing the retail segment, see Note 3, the Company now has two reportable segments: OEM distribution and design. 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 segment, we exclude general and administrative and general corporate expenses from its 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. 14 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Information by segment and related reconciliations are shown in tables below: Schedule of segment and related reconciliations For the Three Months Ended December 31, 2023 2022 Revenues: OEM distribution $ 2,010,000 $ 4,377,000 Design 5,142,000 5,376,000 Total segment revenues $ 7,152,000 $ 9,753,000 Operating income/(loss): OEM distribution $ 41,000 $ 112,000 Design 266,000 433,000 Total segment operating income 307,000 545,000 General corporate expenses ( 687,000 ) ( 673,000 ) Operating loss from continuing operations before income taxes ( 380,000 ) ( 128,000 ) Other expense (income), net 1,000 ( 37,000 ) Loss from continuing operations before income taxes $ ( 381,000 ) $ ( 91,000 ) Depreciation and amortization: OEM distribution $ 1,000 $ 2,000 Design 80,000 76,000 Total depreciation and amortization $ 81,000 $ 78,000 Schedule of segment assets December 31, 2023 September 30, 2023 Segment Assets: OEM distribution $ 2,321,000 $ 2,478,000 Design 6,823,000 6,721,000 Total segment assets 9,144,000 9,199,000 General corporate assets 6,669,000 6,924,000 Discontinued assets held for sale 136,000 508,000 Other assets of discontinued retail segment 395,000 755,000 Total assets $ 16,344,000 $ 17,386,000 The Company had certain customers in the OEM distribution segment whose individual percentage of the Company’s consolidated revenues was 10% or greater. There were no customers in the OEM distribution segment whose individual percentage of the Company’s consolidated revenues was 10% or greater during the three months ended December 31, 2023. Revenues from two customers or their affiliates or contract manufacturers represented 27.7 % of the Company’s consolidated net revenues for the three months ended December 31, 2022. 15 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the three months ended December 31, 2023 and 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 27.5 % and 15.9 %, respectively, of the Company’s consolidated net revenues for the three months ended December 31, 2023 and 2022. At December 31, 2023 and September 30, 2023, the Company had customers in the OEM distribution segment whose accounts receivable balance accounted for 10% or more of the Company’s consolidated accounts receivable. One customer or its affiliate or contract manufacturer represented 13.5 % and 12.0 % of the Company’s consolidated accounts receivable at December 31, 2023 and September 30, 2023, respectively. At December 31, 2023 and September 30, 2023, the Company had one customer in the design segment whose accounts receivable balance accounted for 10% or more of the Company’s consolidated accounts receivable. Accounts receivable from this customer represented 28.4 % and 31.1 %, respectively, of the Company’s consolidated accounts receivable at December 31, 2023 and September 30, 2023. 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 13.4 % of our consolidated net revenues for the three months ended December 31, 2022. The Company expects the loss of this customer to cause a significant decline in OEM distribution segment revenues in future periods. NOTE 7 SHAREHOLDERS’ EQUITY Stock Options 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. No options were granted during the three months ended December 31, 2022. There were no options exercised during the three months ended December 31, 2023 or 2022. The Company recognized compensation expense for stock option awards of $ 51,000 and $ 24,000 during the three months ended December 31, 2023 and 2022, respectively, which was recorded as a component of general and administrative expenses in its condensed consolidated statements of operations. At December 31, 2023, there was $ 91,000 of total unrecognized compensation cost related to nonvested stock option awards that is expected to be recognized over a weighted average period of 0.8 years. 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 had 180 days, or until January 29, 2024, to regain compliance with this requirement. On January 30, 2024, we were notified by Nasdaq that based on our continued non-compliance with this requirement, it had determined that the Company’s common stock would be scheduled for delisting from Nasdaq. T he Company requested a hearing on this matter with the Nasdaq Hearings Panel (“Panel”) and a hearing has been scheduled for April 9, 2024. This request stayed any trading suspension or delisting of the Company’s common stock until the completion of the hearings process.  The Company has received shareholder approval for a reverse stock split (see below), on February 6, 2024, and is considering its options. We can provide no assurances that we will regain compliance with the requirements to remain listed on Nasdaq or that the Panel will approve our plans to regain compliance. 16 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Reverse Stock Split On February 6, 2024, the Company's shareholders approved an amendment to our Restated Certificate of Incorporation (the "Amendment") to effect a reverse stock split at a ratio in the range of 1-for-2 to 1-for-3 , with such ratio to be determined at the discretion of the Company's board of directors and with such reverse stock split to be effected at such time and date, if at all, as determined by the Company's board of directors in its sole discretion. The Company’s board of directors intends to determine whether to proceed with the reverse stock split, the effective time and ratio of the reverse stock split at a future date. We can provide no assurances that it will be implemented or that it will result in our stock price increasing to meet the bid price requirement for a period of time sufficient to regain compliance with Nasdaq listing requirements. NOTE 8 EARNINGS PER SHARE Basic earnings per share data for each period presented is computed using the weighted average number of shares of common stock outstanding during each such period. Diluted earnings per share data is computed using the weighted average number of common and dilutive common equivalent shares outstanding during each period. Dilutive common-equivalent shares consist of shares that would be issued upon the exercise of stock options and warrants, computed using the treasury stock method. A reconciliation of basic and diluted earnings per share is as follows: Schedule of basic and diluted earnings per share For the Three Months Ended December 31, 2023 2022 Numerator: Loss from continuing operations $ ( 381,000 ) $ ( 91,000 ) Income / (loss) from discontinued operations, net of tax 27,000 ( 339,000 ) Net loss $ ( 354,000 ) $ ( 430,000 ) Denominator: Weighted average common shares outstanding 10,061,000 10,061,000 Dilutive common share equivalents – – Weighted average dilutive shares outstanding 10,061,000 10,061,000 Basic (loss)/earnings per share: Basic loss per share from continuing operations $ ( 0.04 ) $ ( 0.01 ) Basic earnings/(loss) per share from discontinued operations 0.00 ( 0.03 ) Basic loss per share $ ( 0.04 ) $ ( 0.04 ) Diluted (loss)/earnings per share: Diluted loss per share from continuing operations $ ( 0.04 ) $ ( 0.01 ) Diluted earnings/(loss) per share from discontinued operations 0.00 ( 0.03 ) Diluted loss per share $ ( 0.04 ) $ ( 0.04 ) 17 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following securities were excluded from the calculation of diluted earnings per share in each period because their inclusion would have been anti-dilutive: Schedule of anti-dilutive securities For the Three Months Ended December 31, 2023 2022 Options 1,255,000 1,075,000 Warrants 75,000 151,000 Total potentially dilutive shares 1,330,000 1,226,000 NOTE 9 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 6), 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. 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. The new sourcing agreement expires October 31, 2024. The Company recorded service fees to Forward China of $ 234,000 and $ 344,000 during the three months ended December 31, 2023 and 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 during the three months ended December 31, 2023 and 2022 of approximately $ 1,516,000 and $ 4,412,000 , respectively. In order to preserve the Company’s current and 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. At December 31, 2023, the remaining balance covered by this agreement was approximately $ 7,365,000 . Promissory Note On January 18, 2018, the Company issued a $ 1,600,000 unsecured promissory note payable to Forward China to fund the acquisition of IPS. The promissory note bears an interest rate of 8 % per annum and had an original maturity date of January 18, 2019. Monthly interest payments commenced on February 18, 2018, with the principal due at maturity. The Company incurred and paid interest associated with this note of $ 19,000 and $ 28,000 in the three months ended December 31, 2023 and 2022, respectively. The maturity date of this note was extended to December 31, 2024 . The maturity date of this note has been extended on several occasions to assist the Company with liquidity. The Company made principal payments of $ 250,000 and $ 50,000 on this note during the three months ended December 31, 2023 and 2022, respectively, and this note has a remaining balance of $ 850,000 at December 31, 2023. 18 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 $ 273,000 and $ 497,000 in the three months ended December 31, 2023 and 2022, respectively. Due to the Retail Exit, these revenues are included in the income / (loss) from discontinued operations for the three months ended December 31, 2023 and 2022. The Company had an agreement with Justwise, under which (i) Justwise performed design, marketing and inventory management 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 paid Justwise $10,000 per month plus 1% of the cost of Koble products purchased from Forward China. This agreement existed on a month-to-month basis until November 30, 2023. The Company incurred costs under this agreement of $ 20,000 and $ 33,000 for the three months ended December 31, 2023 and 2022, respectively. Due to the Retail Exit, these costs are included in the income / (loss) from discontinued operations for the three months ended December 31, 2023 and 2022. The Company had accounts payable to Justwise of $ 0 and $ 10,000 at December 31, 2023 and September 30, 2023, respectively. The Company recorded revenue from a customer whose principal owner is an immediate family member of Jenny P. Yu, a shareholder of the Company and managing director of Forward China. The Company recognized revenue from this customer of $ 120,000 and $ 134,000 for the three months ended December 31, 2023 and 2022, respectively. The Company had no accounts receivable from this customer at December 31, 2023 or September 30, 2023. The Company recorded revenue from a customer who employs an immediate family member of a former member of our Audit, Governance and Compensation committees of our Board of Directors. The Company recognized revenue from this customer of $ 16,000 and $ 0 for the three months ended December 31, 2023 and 2022, respectively. The Company had no accounts receivable from this customer at December 31, 2023 or September 30, 2023. NOTE 10 LEGAL PROCEEDINGS From time to time, the Company may become a party to legal actions or proceedings in the ordinary course of its business. At December 31, 2023, and through the date of this filing, there were no such actions or proceedings, either individually or in the aggregate, that, if decided adversely to the Company’s interests, the Company believes would be material to its business. NOTE 11 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 % at December 31, 2023 and September 30, 2023. At December 31, 2023, the Company had $ 1,300,000 available under the line of credit. The Company is subject to certain debt-service ratio requirements which are measured annually. At September 30, 2023, the Company was in compliance with such covenants. 19 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 LEASES The Company’s operating leases are primarily for corporate, engineering, and administrative office space. Total operating lease expense for the three months ended December 31, 2023, was $ 155,000 , of which $ 4,000 was recorded in sales and marketing expenses and $ 151,000 was recorded in general and administrative expenses on the condensed consolidated statement of operations. Total operating lease expense for the three months ended December 31, 2022, was $ 148,000 , of which $ 1,000 was recorded in sales and marketing expenses and $ 147,000 was recorded in general and administrative expenses on the condensed consolidated statement of operations. Cash paid for amounts included in operating lease liabilities for the three months ended December 31, 2023 and 2022, which have been included in cash flows from operating activities, was $ 147,000 and $ 143,000 , respectively. At December 31, 2023, the Company’s operating leases had a weighted average remaining lease term of 7.4 years and a weighted average discount rate of 5.7 %. At December 31, 2023, future minimum payments under non-cancellable operating leases were as follows: Schedule of future minimum payments under operating leases Remainder of Fiscal 2024 $ 445,000 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 3,909,000 Less imputed interest ( 760,000 ) Present value of lease liabilities 3,149,000 Less current portion of lease liabilities ( 426,000 ) Long-term portion of lease liabilities $ 2,723,000 NOTE 13 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities at December 31, 2023 and September 30, 2023 are as follows: Schedule of accrued expenses and other accrued liabilities December 31, September 30, 2023 2023 Accrued commissions/bonuses $ 117,000 $ 872,000 Paid time off 219,000 285,000 Other 159,000 201,000 Total $ 495,000 $ 1,358,000 20