Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended December 31, 20222023

OR

For the transition period from ________________ to ________________

Commission file number 001-34780

FORWARD INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (631) 547-3041547-3055

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☒x     No  ☐o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  ☒x     No  ☐o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐     Noo     ☒No  x

There were 10,061,185 shares of the registrant’s common stock outstanding as of January 31, 2023.2024.

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

PART I.  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

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

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(UNAUDITED)

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

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

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

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

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

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(UNAUDITED)

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

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

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

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, manufacturing, sourcing and distribution company serving top tier medical and technology customers worldwide. As

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 resultvariety 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 continued expansion of our design development capabilities through our wholly-owned subsidiaries,retail segment is presented as discontinued assets held for sale on the Company is able to introduce proprietary products tobalance sheets at December 31, 2023 and September 30, 2023. Where applicable, certain footnotes exclude the market from concepts brought to it from a number of different sources, both inside and outside the Company.discontinued operations unless otherwise noted. See Note 3 for additional information on discontinued operations.

Liquidity

For the three months ended December 31, 2022,2023, 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 $430,000, and used $149,0001,300,000 of cash flowsborrowing available under its line of credit with a bank that was renewed in operating activities.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 29, 2024. At December 31, 2022, the Company had $1,300,000 of borrowing available under its line of credit with a bank28, 2025. The condensed consolidated financial statements do not include any adjustments that has a maturity date of May 31, 2023 (see Note 10). As this line of credit has been renewed on multiple prior occasions, management expects it will be renewed again. Considering the loss of a significant OEM distribution segment customer (see Note 5) and the retail distribution segment operating losses, management is planning to evaluate the Company’s cost structure and implement cost cutting initiatives as deemed necessary. In light of these events,might result if the Company is currently assessing the terms of its sourcing agreement with Forward Industries Asia-Pacific Corporation (“Forward China”), which is scheduled to expire on October 22, 2023 (See Note 8). The Company and Forward China have agreed to begin negotiations on a new sourcing agreement early in the third quarter of Fiscal 2023. While we believe a new agreement will be reached, we cannot provide any assurances that we will be successful.  If an agreement cannot be reached, which could have a significant impact on the Company’s operations, we will look at other alternatives for our OEM and retail distribution businesses prior to the expiration of the agreement.

Impact of COVID-19

The effects of the COVID-19 pandemic continue to impact our business with higher historical costs for ocean freight and ground transportation, particularly from the Asia-Pacific region. We expect to see the benefits of declining ocean freight costs in future periods. Inflation, in part associated with the pandemic, continues to increase the cost of acquiring and retaining our employees and acquiring inventory. The instability of transportation costs and future inflation are still largely unknown but are expectedunable to continue throughout the fiscal year ended September 30, 2023 (“Fiscal 2023”).

The effects of COVID-19 may further impact our business in ways we cannot predict, and such impacts could be significant. The current economic conditions may continue to negatively impact our results of operations, cash flows and financial position in future periods as well as that of our customers, including their ability to pay for our services and to choose to allocate their budgets to new or existing projects which may or may not require our services. The long-term financial impact on our business cannot be reasonably estimated at this time. As a result, the effects of COVID-19 may not be fully reflected in our financial results until future periods.

Until the effects of the pandemic and associated inflationary impact have fully receded, we expect business conditions to remain challenging.  In response to these challenges, we will continue to focus on those factors that we can control: closely managing and controlling our expenses and inventory levels; aligning our design and development schedules with demand in a proactive manner to minimize our cash operating costs; pursuing further improvements in the productivity and effectiveness of our development, selling and administrative activities and, where appropriate, taking advantage of opportunities to enhance our business growth and strategy.going concern.

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, 2023.2024. 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, 2022,2023, and with the disclosures and risk factors presented therein. The September 30, 20222023 condensed consolidated balance sheet has been derived from the audited consolidated financial statements.

Accounting Estimates

The preparation of the Company’s condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.

Throughout Within this document,report, certain dollar amounts and percentages have been rounded to their approximate values.

Segment Reporting

TheAs a result of the discontinued retail segment, as disclosed in Note 3, the Company now has threetwo reportable segments: Original Equipment Manufacturing (“OEM”) distribution, retailOEM distribution and design. The OEM distribution segment sources and sells carrying cases and other accessories for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic devices directly(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 OEMs or their contract manufacturersfit the products sold by our OEM customers worldwide. The retail distribution segment sources and sells smart-enabled furniture, hot tubs and a variety of other products through various online retailer websites to customers predominantly located in the U.S. The design segment consists of two operating segments (IPS and Kablooe, which have been aggregated into one reportable segment) that provide a full spectrum of hardware and software product design and engineering services to customers predominantly located in the U.S. See Note 56 for more information on segments.

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Accounts Receivable

Accounts receivable consist of unsecured trade accounts with customers in amounts that have been invoiced ($8,900,0006,183,000 and $7,861,0006,949,000 at December 31, 20222023 and September 30, 2022,2023, 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, 20222023 and September 30, 2022,2023, the Company had no allowances for doubtful accounts for the OEM distribution segment, allowances for doubtful accounts of $32,00035,000 and $20,00046,000, respectively, for the discontinued retail distribution segment and $837,000760,000 and $852,000771,000, 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, 20222023 and September 30, 2022,2023, the Company recorded accounts receivable allowances of $110,000193,000 and $55,000139,000, 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. At December 31, 2022 and September 30, 2022, the allowance for slow-moving inventory, which relates entirely to our retail segment, was $460,000 and $535,000, respectively.

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, 2022,2023, September 30, 20222023 or September 30, 2021.2022.

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”(“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, 2022,2023, September 30, 20222023 or September 30, 2021.2022. 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.

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 $602,0001,340,000, $609,000976,000 and $693,000609,000 at December 31, 2022,2023, September 30, 20222023 and September 30, 2021,2022, 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 $335,000250,000, $439,000297,000, and $188,000439,000 at December 31, 2022,2023, September 30, 20222023 and September 30, 2021,2022, 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, 2022.2023.

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, 2022.2023.

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, 2022,2023, 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’sasset's or liability’sliability'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:

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.

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Recent Accounting Pronouncements

In November 2019, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”)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 is currently evaluatingadopted this guidance in the effectsfirst quarter of this pronouncementfiscal 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.

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 34     INTANGIBLE ASSETS AND GOODWILL

Intangible Assets

The Company’s intangible assets consist of the following:

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 15years for the trademarks and eight 8years for the customer relationships. Amortization expense related to intangible assets was $53,000for the three months ended December 31, 20222023 and 2021,2022, which is included in general and administrative expenses on the condensed consolidated statements of operations.

At December 31, 2022,2023, estimated amortization expense for the Company’s intangible assets is as follows:

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 45     FAIR VALUE MEASUREMENTS

The earnout consideration of $30,000 and $70,000 at December 31, 2022 and September 30, 2022, respectively, represents the fair value of the contingent earnout consideration related to the acquisition of Kablooe which provides annual contingent earnout payments based on 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. The current and non-current portions of this liability are shown in the corresponding categories on the condensed consolidated balance sheets in each period presented. During the three months ended December 31, 2022, the Company reduced this liability from $70,000 to $30,000 based on changes to the expected likelihood of Kablooe reaching the specified earnings targets. 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 gain hasgains have been recorded as a component of other income on the condensed consolidated statementstatements of operations.

NOTE 56     SEGMENTS AND CONCENTRATIONS

TheAs a result of discontinuing the retail segment, see Note 3, the Company now has threetwo reportable segments: OEM distribution retail distribution and design. SeeThe results of the retail segment were classified as discontinued operations as discussed in Note 23. Segment information presented herein excludes the results of the retail segment for more information on the composition and accounting policies of our reportable segments.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 and retail distribution segments,segment, we exclude general and administrative and general corporate expenses from theirits 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.

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Information by segment and related reconciliations are shown in the tables below:

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 25.027.7% and 25.2%, respectively, of the Company’s consolidated net revenues for the three months ended December 31, 2022 and 2021, respectively.2022.

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 14.427.5% and 15.9%, respectively, of the Company’s consolidated net revenues for the three months ended December 31, 2023 and 2022. There were no customers in the design segment whose individual percentage of the Company’s consolidated revenues was 10% or greater during the three months ended December 31, 2021.

At December 31, 20222023 and September 30, 2022,2023, 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. Accounts receivable from two customersOne customer or their affiliatesits affiliate or contract manufacturersmanufacturer represented 37.013.5% and 28.112.0%, respectively, of the Company’s consolidated accounts receivable at December 31, 20222023 and September 30, 2022.2023, respectively.

At December 31, 2022,2023 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 11.528.4% and 31.1%, respectively, of the Company’s consolidated accounts receivable at December 31, 2022. There were no customers in the design segment whose individual percentage of the Company’s consolidated accounts receivable was 10% or greater at2023 and September 30, 2022.2023.

In March 2023, the Company’s contract with one of its major diabetic customers in the OEM distribution segment will expire.expired. Due to increased pricing pressures, the Company willdid not be extendingextend its contract with this customer. Revenue from this customer represented 1213.4% of our consolidated net revenues for both the three months ended December 31, 2022 and 2021.2022. The Company expects the loss of this customer to cause a significant decline in OEM distribution segment revenues in future periods.

NOTE 67     SHARE-BASED COMPENSATIONSHAREHOLDERS’ 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. In October 2021, the Company granted options to non-employee directors to purchase an aggregate of 58,000 shares of its common stock at an exercise price of $2.39 per share. The options expire five years from the date of grant, approximately half vested immediately and approximately half vested one year from the date of grant. The options had a weighted average grant-date fair value of $1.03 per share and an aggregate grant-date fair value of $60,000, which was be recognized ratably over the vesting period.

There were no options exercised during the three months ended December 31, 20222023 or 2021.2022.

The Company recognized compensation expense for stock option awards of $24,00051,000 and $39,00024,000 during the three months ended December 31, 20222023 and 2021,2022, respectively, which was recorded as a component of general and administrative expenses in its condensed consolidated statements of operations. At December 31, 2022,2023, there was $24,00091,000 of total unrecognized compensation cost related to nonvested stock option awards that is expected to be recognized over a weighted average period of 0.50.8 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. The 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.

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 78     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:

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:

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 89     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 paysthrough March 2023 paid Forward China a monthly service fee equal to the sum of:of (i) $100,000, and (ii) 4% of “Adjusted Gross Profit”, which is defined as the selling price less the cost from Forward China. TheConsidering 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 22, 2023. 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. 31, 2024. The Company recorded service fees to Forward China of $344,000 234,000and $362,000 344,000during the three months ended December 31, 20222023 and 2021,2022, 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 haveentered into an agreement whereby Forward China agreed to begin negotiations on a new sourcinglimit 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 early in the third quarterpertains only to payables that were outstanding at October 30, 2023 of Fiscal 2023. While we believe a new agreement will be reached, we cannot provide any assurances that we will be successful. If an agreement cannot be reached, which could have a significant impact on the Company’s operations, we will look at other alternatives for our OEM and retail distribution businesses prior to the expiration of the agreement.

The Company has prepayments toapproximately $7,365,000. Purchases from Forward China for inventory purchases of $20,000 atmade after October 30, 2023 are not covered by this agreement and are expected to be paid according to normal payment terms. At December 31, 2022 and September 30, 2022, which are included in prepaid expenses and other current assets on2023, the condensed consolidatedremaining balance sheets.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 $28,00019,000 and $32,00028,000, respectively, in the three months ended December 31, 20222023 and 2021,2022, 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 $1,350,000850,000 at December 31, 2022.2023.

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 $497,000273,000 and $540,000497,000 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 2021, respectively.2022. The Company entered intohad an agreement with Justwise, effective March 1, 2022, under which (i) Justwise will performperformed design, marketing and marketinginventory 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 will paypaid Justwise $10,000 per month plus 1% of the cost of Koble products purchased from Forward China. This agreement is effectiveexisted on a month-to-month basis until August 31, 2023, may be extended thereafter for a mutually agreed upon term and can be terminated thereafter by either party giving three months’ notice.November 30, 2023. The Company incurred costs of $33,000under this agreement of $20,000 and $33,000 for the three months ended December 31, 2023 and 2022, of which $30,000 wererespectively. Due to the Retail Exit, these costs are included in sellingthe income / (loss) from discontinued operations for the three months ended December 31, 2023 and marketing expenses and $3,000 are included as a component of cost of sales upon sales of the related products.2022. The Company had accounts payable to Justwise of $1,0000 and $15,00010,000 at December 31, 20222023 and September 30, 2022,2023, 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 $134,000120,000 and $266,000134,000 for the three months ended December 31, 20222023 and 2021,2022, respectively. The Company had no accounts receivable from this customer at December 31, 20222023 or September 30, 2022.2023.

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.

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 910    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, 2022,2023, 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 1011    LINE OF CREDIT

The Company, specifically IPS, has a $1,300,000revolving line of credit with a bank which was renewed in February 2022.March 2023. The line of credit has a maturity date of May 31, 20232024, 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.rate. The effective interest rate was 8.259.25% and 7.0% at December 31, 20222023 and September 30, 2022, respectively.2023. At December 31, 2022,2023, the Company had $1,300,000available under the line of credit. The Company is subject to certain debt-service ratio requirements which are measured annually. At September 30, 2022,2023, the Company was in compliance with such covenants.

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1112    LEASES

The Company’s operating leases are primarily for corporate, salesengineering, 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$1,000 was recorded in sales and marketing expenses and $147,000$147,000 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, 2021 was $156,000, of which $14,000 was recorded in sales and marketing expenses and $142,000 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, 20222023 and 2021,2022, which have been included in cash flows from operating activities, was $143,000147,000 and $149,000143,000, respectively.

At December 31, 2022,2023, the Company’s operating leases had a weighted average remaining lease term of 8.27.4 years and a weighted average discount rate of 5.7%.

At December 31, 2022,2023, future minimum payments under non-cancellable operating leases were as follows:

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1213    ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities at December 31, 20222023 and September 30, 20222023 are as follows:

The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements, and the notes thereto, and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.2023.  The following discussion and analysis compares our condensed consolidated results of operations for the three months ended December 31, 20222023 (the “2023“2024 Quarter”) with those for the three months ended December 31, 20212022 (the “2022“2023 Quarter”). All dollar amounts and percentages presented herein have been rounded to approximate values.

Cautionary Note Regarding Forward-Looking Statements

This report contains “forward-looking statements”, as such term is used within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements include, among other things, statements regarding our liquidity, plans on repaying outstanding debt obligations, expectationsour beliefs and our plans regarding the effect of the pandemic and inflation on our business, gaining Nasdaq compliance, 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"anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "projects," "will be,” “will" "will continue,” “will" "will likely result,”" and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially and adversely from those reflected in the forward-looking statements. These risks include the inability to expand our customer base, loss of additional customers, pricing pressures, lack of success of our sales people, failure to develop products at a profit, failure to commercialize products that we develop, continued supply chain issues, a significant decrease in our stock price upon effectuating a reverse stock split, inability of our design division’s customers to pay for our services, unanticipated issues with our affiliated sourcing agent, issues at Chinese factories that source our products, as a result of the pandemic or otherwise, and failure to obtain acceptance of our products. 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, 20222023 for information regarding risk factors that could affect the Company’s results. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Business Overview

Forward Industries, Inc. is a global design, manufacturing, sourcing and distribution company serving top tier medical and technology customers worldwide. As a result of the continued expansion of our design development capabilities through our wholly-owned subsidiaries, IPS and Kablooe, we are now able to introduce proprietary products to the market from concepts brought to us from a number of different sources, both inside and outside the Company.

OurThe Company’s design division provides hardware and software product design and engineering services to customers predominantly located in the U.S. Our OEMThe 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 devisesdevices to OEMs, or their contract manufacturers worldwide, that either package our products as accessories “in box” together with their branded product offerings or sell them through their retail distribution channels. OurThe 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”).

Discontinued Operations

Considering the recurring losses incurred by the retail distribution division sourcessegment, in July 2023, the Company decided to cease operations of our retail distribution segment (“Retail Exit”) and sells smart-enabled furniture, hot tubs and various other products through online retailer websites to customers predominately locatedwe are presenting the results of operations for this segment within discontinued operations in the U.S.

current and prior periods presented herein. The effectsdiscontinuation of the COVID-19 pandemic continueretail segment represents a strategic shift in the Company’s business. The primary assets of the retail segment are inventory and accounts receivable. The Company expects to impact our business with higher historical costs for ocean freightsell, liquidate, or otherwise dispose of remaining retail inventory by June 30, 2024, and ground transportation, particularly fromto collect remaining retail accounts receivable by the Asia-Pacific region. Weend of fiscal 2024. After this time, we expect to see the benefits of declining ocean freight costs in future periods. Inflation, in part associatedhave no further significant continuing involvement with the pandemic, continues to increaseretail distribution segment. The inventory of the costretail segment is presented as discontinued assets held for sale on the balance sheets at December 31, 2023 and September 30, 2023 and the results of acquiringoperations 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 retaining our employees and acquiring inventory. The instability of transportation costs and future inflation are still largely unknown but are expected to continue throughout Fiscal 2023.2022.

The effectsCOVID-19

On May 11, 2023, the U.S. Department of COVID-19 may further impact our business in ways we cannot predict,Health and such impacts could be significant. The current economic conditions may continue to negatively impact our resultsHuman Services declared the end of operations, cash flows and financial position in future periods as well as that of our customers, including their ability to paythe Public Health Emergency for our services and to choose to allocate their budgets to new or existing projects which may or may not require our services. The long-term financial impact on our business cannot be reasonably estimated at this time. As a result,COVID-19; however, the effects of COVID-19 may not be fully reflected in our financial results until future periods.

Until the effects of the pandemic and associated inflationary impact have fully receded, we expect business conditions to remain challenging.  In response to these challenges, we will continue to focus on those factors that we can control: closely managinglinger throughout the global economy and controlling our expensesbusinesses. Though the severity of COVID-19 has subsided, new variants, or the outbreak of a new pathogen, could interrupt business, cause renewed labor and inventory levels; aligningsupply chain disruptions, and negatively impact the global and US economy, which could materially and adversely impact our design and development schedules with demand in a proactive manner to minimize our cash operating costs; pursuing further improvements in the productivity and effectiveness of our development, selling and administrative activities and, where appropriate, taking advantage of opportunities to enhance our business growth and strategy.businesses.

Variability of Revenues and Results of Operations

A significant portion of our revenue is concentrated with several large customers, some of which are the same and some of which change over time. Orders from some of these customers can be highly variable, with short lead times, which can cause our quarterly revenues, and consequently our results of operations, to vary over a relatively short period of time.

Critical Accounting Policies and Estimates

We discussed the material accounting policies that are critical in making the estimates and judgments in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022,2023, under the caption “Management’s Discussion and Analysis—Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates”. There has been no material change in critical accounting policies or estimates during the period covered by this report.

Recent Accounting Pronouncements

For information on recent accounting pronouncements and impacts, see Note 2 to the unaudited condensed consolidated financial statements.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 20222023 COMPARED TO THE THREE MONTHS ENDED DECEMBER 31, 20212022

Consolidated Results

The table below summarizes our consolidated results offrom continuing operations for the 20232024 Quarter as compared to the 20222023 Quarter:

The discussion that follows below provides further details about our results offrom continuing operations for the 20232024 Quarter as compared to the 20222023 Quarter.

Net revenues declined significantly in the OEM distribution segment and, retail distribution segments, but these declines were partially offset by higher revenuesto a lesser extent, in the design segment.

Our gross profit decreased across allboth segments, andbut our gross margin declinedincreased from 22.6% in the 2022 Quarter to 17.8%20.2% in the 2023 Quarter to 23.0% in the 2024 Quarter. The gross margin increase was driven by continued pricing pressures from our customers, higher importationOEM distribution segment due to a change in the mix of revenue and logistics costs and inflation. Management believes there will be continued volatilitya reduction in OEM and retail distribution cost of sales for the remainder of Fiscal 2023.our sourcing fee with Forward China, partially offset by lower utilization rates in our design segment.

Sales and marketing expenses decreased in the 2023 Quarter primarily due to a decrease in advertising costs and sales commissions in the OEM and retail distributions segments, partially offset by higher saleslower marketing related expensesoverhead in our designOEM distribution segment. Sales and marketing as a percentage of revenues remained flat at 6.4%increased from 4.2% in the 2023 Quarter. If revenues fromQuarter to 5.2% in the retail segment grow to comprise a larger portion of the overall business, management expects sales and marketing costs, both in total and as a percentage of revenues, to increase in future periods.2024 Quarter.

General and administrative expenses increaseddecreased in the 20232024 Quarter, primarily related to increases in corporate expenses, which were partially offset by declinesa decline in design segment and corporate expenses. These increase in corporate expensesdecreases were primarily driven by higherlower payroll costs and professional fees, partially offset by lower equity compensation for non-employee board members.costs. Management continues to monitor the various components of general and administrative expenses and how these costs are affected by inflationary and other factors. We intend to adjust these costs as needed based on the overall needs of the business.

We recorded net other expense of $1,000 in the 2024 Quarter compared to net other income of $37,000 in the 2023 Quarter compared to net other expense of $34,000 in the 2022 Quarter. The variance is due to fair value adjustments of $40,000 in the 2023 Quarter to reduce to the fair value of the earnout consideration related to the Kablooe acquisition, $18,000 of net duty drawback income received in the 2023 Quarter, foreign currency fluctuationsoffset by interest income from interest bearing deposits in the 2024 Quarter and a decrease in interest expense resulting from a reduction in the amount of debt outstanding.

We generated a net loss from continuing operations of $430,000$381,000 and net income of $180,000$91,000 in the 20232024 Quarter and 20222023 Quarter, respectively. We maintain significant net operating loss carryforwards and do not recognize a significant income tax expense or benefit as our deferred tax provision is typically offset by a full valuation allowance on our net deferred tax asset.

Consolidated basic and diluted (loss)/earningsloss per share from continuing operations were $(0.04)$0.04 and $0.02$0.01 for the 20232024 Quarter and the 20222023 Quarter, respectively.

Segment Results

The discussion that follows below provides further details about the results of operations for each segment as compared to the prior year quarter.