RELATED PARTY TRANSACTIONS

9 Months Ended

Jun. 30, 2023

Related Party Transactions [Abstract]

RELATED PARTY TRANSACTIONS

NOTE 8                  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. The Supply 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. The Company recorded service fees to Forward China of $284,000 and $344,000 during the three months ended June 30, 2023 and 2022, respectively, and $978,000 and $1,056,000 during the nine months ended June 30, 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 and nine months ended June 30, 2023 of approximately $2,000,000 and $10,000,000, respectively. The Company had purchases from Forward China during the three and nine months ended June 30, 2022 of approximately $5,000,000 and $15,000,000, respectively. Considering the loss of a significant OEM distribution customer (see Note 5), 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 resulted in cash savings of $50,000 in the third quarter of fiscal 2023 and is expected to result in cash savings of $50,000 for the remainder of fiscal 2023. The Company and Forward China have begun negotiations on a new sourcing agreement.  In light of the Retail Exit, the Company plans to discuss a further reduction in the sourcing fee commensurate with the services provided. While we believe a new agreement will be reached, we cannot provide any assurances that we will be successful.  If an agreement cannot be reached, which could have a significant impact on the Company’s operations, we will look at other alternatives for our OEM distribution business prior to the expiration of the agreement.

The Company has prepayments to Forward China for inventory purchases of $205,000 and $20,000 at June 30, 2023 and September 30, 2022, respectively, which are included in prepaid expenses and other current assets on the condensed consolidated balance sheets.

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 $25,000 and $30,000 in the three months ended June 30, 2023 and 2022, respectively, and $80,000 and $93,000 in the nine months ended June 30, 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 $200,000 on this note during the nine months ended June 30, 2023, and this note has a remaining balance of $1,200,000 at June 30, 2023.

Other Related Party Activity

The Company sells 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 $509,000 and $356,000 in the three months ended June 30, 2023 and 2022, respectively, and $1,550,000 and $1,337,000 in the nine months ended June 30, 2023 and 2022, respectively. The Company has an agreement with Justwise effective March 1, 2022, under which (i) Justwise will perform design and marketing services related to the Koble products sold by the Company and (ii) the Company was granted a license to sell Koble products. In exchange for such services, the Company will pay Justwise $10,000 per month plus 1% of the cost of Koble products purchased from Forward China. This agreement is effective until August 31, 2023. The Company incurred costs of $31,000 and $95,000 under this agreement for the three and nine months ended June 30, 2023, respectively, of which $30,000 and $90,000, respectively, were included in selling and marketing expenses and $1,000 and $5,000, respectively, are included as a component of cost of sales upon sales of the related products. The Company incurred costs of $33,000 and $45,000 under this agreement for the three and nine months ended June 30, 2022, respectively, of which $29,000 and $39,000, respectively, were included in selling and marketing expenses and $4,000 and $6,000 are included as a component of cost of sales upon sales of the related products.  The Company had accounts payable to Justwise of $0 and $15,000 at June 30, 2023 and September 30, 2022, respectively.

The Company recorded revenue from a customer whose principal owner is an immediate family member of Jenny P. Yu, a shareholder of the Company and managing director of Forward China. The Company recognized revenue from this customer of $122,000 and $260,000 for the three months ended June 30, 2023 and 2022, respectively, and $507,000 and $661,000 for the nine months ended June 30, 2023 and 2022, respectively. The Company had no accounts receivable from this customer at June 30, 2023 or September 30, 2022.