Forward Industries, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements, and the notes thereto, and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2024. The following discussion and analysis compares our condensed consolidated results of operations for the three and six months ended March 31, 2025 (the “2025 Quarter” and the “2025 Period”, respectively) with those for the three and six months ended March 31, 2024 (the “2024 Quarter” and “2024 Period”, respectively). All dollar amounts and percentages presented herein have been rounded to approximate values. Cautionary Note Regarding Forward-Looking Statements This report contains “forward-looking statements” (as such term is defined in the Private Securities Litigation Reform Act of 1995). These statements include, among other things, statements regarding our liquidity, plans on repaying outstanding debt obligations, planned sale of the OEM business, closing of an equity line of credit or other equity financing as well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forward-looking statements generally can be identified by words such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "projects," "will be," "will continue," "will likely result," and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. These risks include the inability to expand our customer base, loss of additional customers, pricing pressures, lack of success of our marketing people, economic or other factors resulting in the failure to enter into purchase agreements for the sale of equity, failure to reach a definitive agreement for the sale of the OEM business , inability to maintain compliance with Nasdaq listing standards, and the inability of our customers to pay for our services. No assurance can be given that the actual results will be consistent with the forward-looking statements. Investors should read carefully the factors described in the “Risk Factors” section of the Company’s filings with the SEC, including the Company’s Form 10-K for the year ended September 30, 2024 for information regarding risk factors that could affect the Company’s results. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by applicable law or regulation. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Business Overview Forward Industries, Inc. is a global design, sourcing and distribution company serving top tier medical and technology customers worldwide. The Company provides hardware and software product design and engineering services to customers predominantly located in the U.S. In June 2024, the Company’s stockholders authorized, and the Company’s Board of Directors approved, a 1-for-10 reverse stock split of our common stock, which became effective on June 18, 2024. Accordingly, all references made to share, per share, or common share amounts in the accompanying condensed consolidated financial statements and applicable disclosures have been retroactively adjusted to reflect the reverse stock split. Discontinued Operations Considering the recurring losses incurred by the retail distribution segment, in July 2023, we decided to cease operations of our retail distribution segment (“Retail Exit”) and we are presenting the results of operations for this segment within discontinued operations in the current and prior periods presented herein. The discontinuation of the retail segment represented a strategic shift in the Company’s business. The primary assets of the retail segment were inventory and accounts receivable. The Company sold, liquidated, or otherwise disposed of the remaining retail inventory and collected the remaining retail accounts receivable by September 30, 2024, at which time the retail segment was considered fully discontinued. We expect to have no further significant continuing involvement with this segment. The inventory of the retail segment met the criteria to be considered “held-for-sale” in accordance with ASC 205-20, “Discontinued Operations.” Accordingly, the retail inventory was classified on our condensed consolidated balance sheet as “discontinued assets held for sale” at 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 and six months ended March 31, 2025 and 2024. 19 In March 2025, in connection with the fourth Conversion Agreement (see Note 8 to the condensed consolidated financial statements), Forward China determined it would not renew the Buying Agency and Supply Agreement, which was scheduled to expire on April 30, 2025. Without this agreement, the Company determined it would not continue the OEM segment of the business and committed to a plan to sell the segment in the next three months, after which it does not plan to have any significant continuing involvement with this segment. The sale of the OEM business is considered a strategic shift that will have a significant impact on the Company’s operations and financial results. The assets and liabilities of the OEM segment are classified as assets and liabilities held for sale on the condensed consolidated balance sheets at March 31, 2025 and September 30, 2024. The results of operations for the OEM segment have been classified as discontinued operations on the condensed consolidated statements of operations for the three and six months ended March 31, 2025 and 2024. Unless otherwise noted, results for discontinued operations are excluded from the discussion that follows. Variability of Revenues and Results of Operations A significant portion of our revenue is concentrated with several large customers, some of which are the same and some of which change over time. Orders from some of these customers can be highly variable, with short lead times, which can cause our quarterly revenues, and consequently our results of operations, to vary over a relatively short period of time. Critical Estimates We discussed the significant estimation processes that are critical to our business operations and the understanding of our financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2024, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.” There have been no material changes in critical accounting policies or estimation processes during the period covered by this report, but the following accounting estimates had a material impact on our results of operations for the 2025 Period and fiscal 2024. We review goodwill for impairment annually, or more often if events or changes in circumstances indicate the carrying value of a reporting unit may exceed its fair value. Evaluating goodwill for impairment requires a significant amount of judgment, including the estimation of future cash flows, future growth rates and profitability. Changes in our business strategy or adverse changes in market conditions could impact impairment analyses and require the recognition of an impairment charge. Although we base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances at the time of evaluation, actual results could differ from these estimates. In December 2024, the Company was notified by its largest design customer of its plan to discontinue their insulin patch pump program, on which IPS was working, and was beginning to wind down all activities related to it. Revenue from this customer (all of which related to this program) represented more than 30% of the Company’s consolidated net revenues in fiscal 2024. Due to the historically high concentration of revenue with this customer, the loss of its business was considered a triggering event which prompted the Company to evaluate the goodwill of the IPS reporting unit. Management performed quantitative testing on this reporting unit, which indicated its carrying amount exceeded its fair value, resulting in a goodwill impairment charge of $225,000 in December 2024, primarily driven by a reduction in its expected future performance. In the second quarter of fiscal 2025, the IPS reporting unit continued to experience low levels of staff utilization due in part to the loss of the aforementioned major customer, which was anticipated. In addition, due to the uncertainty in the global markets related to tariffs on imports, many IPS customers were slow to commit funds to projects as they were unsure how tariffs and other macroeconomic factors would impact their business. The combination of these events resulted in negative gross profit for the IPS reporting unit in the second quarter, which the Company considered another triggering event to evaluate the goodwill of the IPS reporting unit for impairment. Management performed a quantitative goodwill impairment analysis for the IPS reporting unit at March 31, 2025, which indicated the fair value of the IPS reporting unit exceeded its carrying amount, resulting in no further goodwill impairment in the three months ended March 31, 2025. Due to the historical losses of the Kablooe reporting unit, the Company elected to bypass the qualitative assessment and perform quantitative goodwill impairment testing for the Kablooe reporting unit at September 30, 2024. This quantitative testing indicated the carrying amount of the Kablooe reporting unit exceeded its fair value, resulting in a goodwill impairment charge of $200,000 in September 2024, primarily driven by a reduction in its expected future performance. 20 We will continue to monitor the IPS and Kablooe goodwill for impairment as needed in future periods. Changes in economic, industry or market conditions, business operations, competition, the price of our common shares or market capitalization or our actual performance compared with estimates of our future performance may affect the fair value of goodwill and could result in additional impairment charges in the future. Recent Accounting Pronouncements For information on recent accounting pronouncements and impacts, see Note 2 to the unaudited condensed consolidated financial statements. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2025 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2024 The table below summarizes our consolidated results from continuing operations for the 2025 Quarter as compared to the 2024 Quarter: Consolidated Results of Operations 2025 Quarter 2024 Quarter Change ($) Change (%) Revenues, net $ 3,123,000 $ 5,071,000 $ (1,948,000 ) (38.4% ) Cost of sales 3,302,000 3,742,000 (440,000 ) (11.8% ) Gross profit/(loss) (179,000 ) 1,329,000 (1,508,000 ) (113.5% ) Sales and marketing expenses 148,000 206,000 (58,000 ) (28.2% ) General and administrative expenses 1,495,000 1,744,000 (249,000 ) (14.3% ) Loss from operations (1,822,000 ) (621,000 ) (1,201,000 ) 193.4% Other expense, net – 6,000 (6,000 ) (100.0% ) Loss from continuing operations $ (1,822,000 ) $ (627,000 ) $ (1,195,000 ) 190.6% The discussion that follows below provides further details about our results from continuing operations for the 2025 Quarter as compared to the 2024 Quarter. The decline in net revenues from the 2024 Quarter to the 2025 Quarter is primarily attributable to the loss of a major customer in December 2024 as well as a net decrease in volume of work and projects with continuing customers, partially offset by projects from new customers. In December 2024, our largest design customer notified us of its plan to discontinue their insulin patch pump program, on which we were working. We expect this to continue to cause a material decrease in our revenues in fiscal 2025. We are working on cost reduction efforts to mitigate the reduction in revenue. Additionally, based on current economic conditions, in part due to the uncertainty in how tariffs will affect our customers, we believe that our revenues will continue to decrease in the design business as customers are slow to commit funds to projects. Our gross profit/(loss) margin declined significantly, from 26.2% in the 2024 Quarter to (5.7%) in the 2025 Quarter, driven by lower staff utilization rates, and partially mitigated by an increase in the average bill rate. Sales and marketing expenses decreased primarily due to lower personnel costs and increased as a percentage of revenues from 4.1% in the 2024 Quarter to 4.7% in the 2025 Quarter. General and administrative expenses decreased in the 2025 Quarter. Lower personnel costs and a reduction in expenses related to our annual shareholder meeting were partially offset by higher professional fees. Management continues to monitor the various components of general and administrative expenses and how these costs are affected by inflationary and other factors. We intend to adjust these costs as needed based on the overall needs of the business. The decrease in other expense, net is due to a decrease in interest expense resulting from a reduction in the amount of debt outstanding, a decrease in interest income resulting from lower cash balances in interest bearing accounts and a reduction in foreign currency exchange losses. 21 We generated a loss from continuing operations of $1,822,000 in the 2025 Quarter compared to $627,000 in the 2024 Quarter. We maintain significant net operating loss carryforwards and do not recognize a significant income tax expense or benefit as our deferred tax provision is typically offset by a full valuation allowance on our net deferred tax asset. Consolidated basic and diluted loss per share from continuing operations were $1.65 and $0.57 for the 2025 Quarter and the 2024 Quarter, respectively. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2025 COMPARED TO THE SIX MONTHS ENDED MARCH 31, 2024 The table below summarizes our consolidated results from continuing operations for the 2025 Period as compared to the 2024 Period: Consolidated Results of Operations 2025 Period 2024 Period Change ($) Change (%) Revenues, net $ 7,747,000 $ 10,213,000 $ (2,466,000 ) (24.1% ) Cost of sales 6,793,000 7,441,000 (648,000 ) (8.7% ) Gross profit 954,000 2,772,000 (1,818,000 ) (65.6% ) Sales and marketing expenses 308,000 415,000 (107,000 ) (25.8% ) General and administrative expenses 3,141,000 3,342,000 (201,000 ) (6.0% ) Goodwill impairment 225,000 – 225,000 – Loss from operations (2,720,000 ) (985,000 ) (1,735,000 ) 176.1% Other expense, net – 7,000 (7,000 ) (100.0% ) Loss from continuing operations $ (2,720,000 ) $ (992,000 ) $ (1,728,000 ) 174.2% The discussion that follows below provides further details about our results from continuing operations for the 2025 Period as compared to the 2024 Period. The decline in net revenues from the 2024 Period to the 2025 Period is primarily attributable to the loss of a major customer in December 2024 as well as a net decrease in volume of work and projects with continuing customers, partially offset by projects from new customers. In December 2024, our largest design customer notified us of its plan to discontinue their insulin patch pump program, on which we were working. We expect this to continue to cause a material decrease in our revenues in fiscal 2025. We are working on cost reduction efforts to mitigate the reduction in revenue. Additionally, based on current economic conditions, in part due to the uncertainty in how tariffs will affect our customers, we believe that our revenues will continue to decrease in the design business as customers are slow to commit funds to projects. Our gross margin decreased from 27.1% in the 2024 Period to 12.3% in the 2025 Period, driven by lower staff utilization rates and was partially offset by an increase in the average bill rate. Sales and marketing expenses decreased primarily due to lower personnel costs but remained flat at 4.0% of revenues in both periods. General and administrative expenses decreased in the 2025 Period. Lower personnel costs related to staff reductions, coupled with a reduction in expenses related to our annual shareholder meeting and lower director compensation were partially offset by higher professional fees. Management continues to monitor the various components of general and administrative expenses and how these costs are affected by inflationary and other factors. We intend to adjust these costs as needed based on the overall needs of the business. During the 2025 Period, we recorded a goodwill impairment charge of $225,000 related to the IPS reporting unit. This impairment charge resulted from the quantitative goodwill impairment testing performed at December 31, 2024 and was driven by the expected reduction in revenues following the loss of a significant customer. 22 The decrease in other expense, net is due to a decrease in interest expense resulting from a reduction in the amount of debt outstanding, a decrease in interest income resulting from lower cash balances in interest bearing accounts and a reduction in foreign currency exchange losses. We generated a loss from continuing operations of $2,720,000 in the 2025 Period compared to $992,000 in the 2024 Period. We maintain significant net operating loss carryforwards and do not recognize a significant income tax expense or benefit as our deferred tax provision is typically offset by a full valuation allowance on our net deferred tax asset. Consolidated basic and diluted loss per share from continuing operations were $2.47 and $0.90 for the 2025 Period and the 2024 Period, respectively. LIQUIDITY AND CAPITAL RESOURCES Our primary source of liquidity is our operations. The primary demand on our working capital has historically been (i) operating losses, (ii) repayment of debt obligations, and (iii) any increases in accounts receivable and inventories arising in the ordinary course of business. Historically, our sources of liquidity have been adequate to satisfy working capital requirements arising in the ordinary course of business. At March 31, 2025, our working capital (excluding discontinued assets held for sale) was $2,784,000 compared to working capital of $4,663,000 at September 30, 2024. The decrease was primarily due to lower cash and accounts receivable balances. Forward China, our largest vendor and an entity owned by our Chairman of the Board and Chief Executive Officer, holds a $1,600,000 promissory note (the “FC Note”) issued by us which matures on June 30, 2025 (see Note 8 to the condensed consolidated financial statements). The outstanding balance of the FC Note has been reduced to $600,000 following principal payments totaling $1,000,000 made through March 31, 2025. While the FC Note has been extended multiple times to support our liquidity position, we intend to fund the repayment at maturity using existing cash balances, proceeds from equity and/or debt financing, and/or by seeking additional extensions as deemed necessary. Additionally, Forward China has extended payment terms on our outstanding payables due to them when necessary. At March 31, 2025, our accounts payable due to Forward China was approximately $4,998,000. In connection with the sourcing agreement entered into in October 2023 (see Note 8 to the condensed consolidated financial statements) and in order to preserve our current and future liquidity, Forward China agreed to limit the amount of outstanding payables it would seek to collect from us up to $500,000 in any 12-month period. We have agreed to pay these amounts within 30 days of any such request. This agreement pertains only to payables that were outstanding at October 30, 2023 which totaled $7,365,000. Purchases made 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 March 31, 2025, the remaining balance covered by this agreement was $2,099,000. As previously disclosed on a Form 8-K filed with the SEC on March 24, 2025, the Company and Forward China have entered into proposed terms which would provide a framework by which Forward China would purchase either the assets or the securities of the OEM business. As part of those proposed terms, a payment plan on the amounts owed under the FC Note and the outstanding payables will be provided by Forward China as part of the consideration paid. We can provide no assurance that a definitive agreement will be reached or that any transaction will be completed. The Company is in preliminary discussions regarding a potential sale of equity securities and establishment of an equity line of credit facility with an institutional investor. We can provide no assurance that either financing will close or, if closed, will be on terms acceptable to us. Our condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. We had an accumulated deficit and working capital (excluding discontinued assets held for sale) of $21,797,000 and $2,784,000, respectively, at March 31, 2025, a net loss of $2,160,000 for the six months ended March 31, 2025 and $1,951,000 in Fiscal 2024 and a cash balance of approximately $1,400,000 at April 30, 2025. In December 2024, we were notified by our largest design customer of its plan to discontinue their insulin patch pump program, on which we were working, and was beginning to wind down all activities related to it. Revenue from this customer (all of which related to this program) represented more than 30% of the Company’s consolidated net revenues in fiscal 2024. We expect this to continue to cause a material decrease in our revenues in Fiscal 2025. Based on our forecasted cash flows, we believe that there is substantial doubt about our ability to continue as a going concern for a period of 12 months from the date of issuance of the condensed consolidated financial statements. If we have the opportunity to make a strategic acquisition, we may require additional capital beyond our current cash balance to fund the opportunity. Although we do not anticipate the need to purchase additional material capital assets in order to carry out our business, it may be necessary for us to purchase a material amount of equipment and other capital assets in the future, depending on need. 23 Cash Flows During the 2025 Period and 2024 Period, our sources and uses of cash were as follows: Operating Activities During the 2025 Period, cash used in operating activities of $972,000 resulted from a net loss of $2,160,000, a decrease in accrued expenses and other current liabilities of $153,000 and the net change in other operating assets and liabilities of $33,000, partially offset by non-cash expenses of $462,000 related to depreciation, amortization, share-based compensation and credit loss expense and a decrease in accounts receivable of $912,000. During the 2024 Period, cash used in operating activities of $383,000 resulted from a net loss of $907,000, decreases in accrued expenses and other current liabilities of $785,000, a decrease in accounts payable of $304,000, a decrease in deferred income of $69,000 and the net change in other operating assets and liabilities of $55,000, partially offset by the net change in discontinued assets and liabilities held for sale of $891,000, non-cash expenses of $228,000 related to depreciation, amortization, share-based compensation and credit loss expense and a decrease in accounts receivable of $618,000. Investing Activities Cash used in investing activities in the 2025 Quarter and the 2024 Quarter of $7,000 and $41,000, respectively, resulted from purchases of property and equipment. Financing Activities Cash used in financing activities in the 2024 Quarter of $350,000 consisted of principal payments on the promissory note held by Forward China. Related Party Transactions For information on related party transactions and their financial impact, see Note 8 to the unaudited condensed consolidated financial statements contained herein. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.