What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-02-10 compared with 2021-08-12 · 262 added, 450 removed, 17 unchanged (98% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

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, 2020.

The following discussion and analysis compares our consolidated results of operations for the three and nine months ended June 30, 2021

(the “2021 Quarter” and the “2021 Period”, respectively) with those for the three and nine months ended June

30, 2020 (the “2020 Quarter” and the “2020 Period”, respectively).

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, 2021.

The following discussion

and analysis compares our consolidated results of operations for the three months ended December 31, 2021 (the “2022 Quarter”)

with those for the three months ended December 31, 2020 (the “2021 Quarter”).

All dollar amounts and percentages presented

herein have been rounded to approximate values.

Cautionary Note

Regarding Forward-Looking Statements

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:

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;

expectations regarding the impact of the pandemic on our business,

expectations regarding the length of the pandemic’s business

expectations regarding revenues,

plans regarding the repayment of debt, and

beliefs regarding our capital resources

as well as other

statements regarding our future operations, financial condition and prospects and business strategies.

Forward-looking statements can

be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,”

“estimates,” “expects,” “predicts,” “projects,” “will be” and “will

continue” and similar expressions.

Forward-looking statements are based on our current expectations and assumptions regarding our

business, the economy and other future conditions.

Because forward-looking statements relate to the future, they are subject to inherent

uncertainties, risks and changes in circumstances that are difficult to predict.

Our actual results may differ materially from those

contemplated by the forward-looking statements.

We caution you therefore against relying on any of these forward-looking statements.

They are neither statements of historical fact nor guarantees or assurances of future performance.

Important factors that could cause

actual results to differ materially from those in the forward-looking statements include the failure to receive material orders, our

ability to successfully market and sell products that we develop, the effects of the COVID-19 outbreak, including levels of consumer,

business and economic confidence generally, the duration of the COVID-19 outbreak and severity of such outbreak, the pace of recovery

following the COVID-19 outbreak, the effect on our supply chain, our ability to implement cost containment;

and the adverse effects of

the COVID-19 outbreak on our business or the market price of our common stock, failure to diversify the industries in which we sell

our products, potential imposed tariffs or other restrictions placed on imports by the U.S.

government, and continued pricing pressure

on our products.

Further information on our risk factors is contained in our filings with the SEC, including our Form 10-K for the year

ended September 30, 2020.

Any forward-looking statement made by us speaks only as of the date on which it is made.

Factors or events

that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them.

undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments

or otherwise, except as may be required by law.

plans on repaying outstanding debt obligations;

expectations regarding growth in retail

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

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.

that could cause or contribute to such differences include, but are not limited to, those discussed under the caption "Risk Factors"

in Item 1A of our Form 10-K for the year ended September 30, 2021 and those discussed in other documents we file with the SEC.

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

Industries, Inc.

is a fully integrated design, development and manufacturing solution provider for top tier medical and technology customers

As a result of the continued expansion of our design and 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.

acquisition of Kablooe took place in August 2020 and its results of operations have been included in our condensed consolidated financial

statements since the acquisition date.

Accordingly, our results of operations for the 2021 Quarter and the 2021 Period include Kablooe’s

results of operations, while our results of operations for the 2020 Quarter and the 2020 Period do not.

Key terms of the acquisition

are contained in our Form 10-K filed with the Securities and Exchange Commission on December 17, 2020.

future impacts of the COVID-19 pandemic and any resulting economic impact are largely unknown and could be significant.

It is possible

that the COVID-19 pandemic, the measures taken by the governments of countries affected and the resulting economic impact 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 choosing to allocate their budgets to new or existing projects which may or may not

require our services.

Forward Industries, Inc.

is a fully integrated design, development and manufacturing solution provider for 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.

The COVID-19 pandemic continues

to impact our business.

The increase in global consumer demand, coupled with the global shipping container shortage, dramatically increased

demand for both ocean freight and ground transportation.

These factors led to a significant increase in freight costs, particularly from

the Asia-Pacific region.

Labor shortages at US ports and in ground transportation services caused container ships to spend a significant

amount of time waiting to be unloaded and to arrive at our warehouses.

These factors caused an increase in the demand and cost of ground

transportation and delayed consumer availability for many of our products in the first quarter of fiscal 2022.

The timing and extent of

these COVID-19 related transportation disruptions is still largely unknown but are expected to continue throughout fiscal 2022.

COVID-19 may further impact

our business in ways we cannot predict, and such impacts could be significant.

The current and economic impact 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.

the pandemic is fully controlled, we expect business conditions to remain challenging.

In response to these challenges, we will continue

to focus on those factors that we can control:

As a result, the effects of COVID-19 may not

be fully reflected in our financial results until future periods.

Until the pandemic is fully

controlled, 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;

aligning our design and development schedules

with demand in a proactive manner as there are changes in market conditions 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

aligning our design and development schedules with demand

in a proactive manner as there are changes in market conditions 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.

To help mitigate the impact of these challenging business conditions, we

implemented cost-cutting initiatives and reduced executive pay and Board of Directors compensation for the three months ended June 30,

See “Liquidity and Capital Resources” section for further description of these cost-cutting measures.

to “Part II, Item 1A — Risk Factors” for a description of the material risks that the Company currently faces in connection

with COVID-19.

of Revenues and Results of Operations

significant portion of our revenue is concentrated with several large customers, some of which are the same and some of which change

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

discuss 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, 2020, under the caption “Management’s Discussion and Analysis—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

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 JUNE 30, 2021 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2020

Net Income/(Loss)

Distribution Segment

segment net loss was $181,000 in the 2021 Quarter compared to 246,000 in the 2020 Quarter.

The decrease to the net loss was due to various

factors, including a reduction in general and administrative expenses, partially offset by lower revenue and gross profit, as reflected

in the table below.

Design Segment

segment net income was $425,000 in the 2021 Quarter compared to $31,000 in the 2020 Quarter.

The increase in net income was primarily

due to higher revenue and gross profit, partially offset by higher general and administrative expenses, as reflected in the table below:

Components of Net Income/(Loss)

(amounts in thousands)

Increase (Decrease)

Refer to “Part I, Item

1A — Risk Factors” included in the Company’s Annual Report for the year ended September 30, 2021 for a description of

the material risks that the Company currently faces in connection with COVID-19.

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 discuss 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, 2021, under the caption “Management’s Discussion and Analysis—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, 2021 COMPARED TO THE THREE MONTHS ENDED DECEMBER 31, 2020

Consolidated Results

The table below summarizes our consolidated results

of operations for the 2022 Quarter as compared to the 2021 Quarter:

Consolidated Results of Operations

Revenues, net

Cost of sales

Sales and marketing expenses

General and administrative expenses

Operating income/(loss)

Income/(loss) from operations

Other expense/(income), net

Net income/(loss)

and diluted earnings/(loss) per share were $0.02 and $(0.02), respectively, for the 2021 Quarter and the 2020 Quarter.

revenues in the distribution segment decreased $669,000, or 10.5%, to $5,720,000 in the 2021 Quarter from $6,389,000 in the 2020 Quarter,

the result of a decrease in diabetic product line revenue, partially offset by an increase in other product revenue.

Revenues from diabetic

products decreased $1,374,000 and revenue from other products increased $705,000.

In future periods, as we continue to focus on expanding

and diversifying our other product offerings, we believe other product sales will represent a larger portion of our total distribution

Provision for income taxes

$ (1,019,000 )

The discussion that follows

below provides further details about our results of operations for the 2022 Quarter as compared to the 2021 Quarter.

Net revenues increased primarily

due to higher revenues in the retail segment coupled with an increase in revenues in the design segment.

Revenues in the OEM distribution

segment remained relatively consistent with the prior year quarter.

Our gross profit increased,

primarily driven by the increase in revenues, but gross margin declined from 23.3% in the 2021 Quarter to 22.6% in the 2022 Quarter.

higher cost of importing products from overseas drove retail margins down, while lower utilization in the design segment contributed to

the remainder of the margin decline.

Gross margin for the OEM distribution segment improved slightly from the prior year quarter.

believes there will be continued volatility in cost of sales for the remainder of fiscal 2022.

Sales and marketing expenses

increased in the 2022 Quarter primarily due to higher advertising costs and sales commissions related to our retail distribution segment.

Sales and marketing as a percentage of revenues increased to 6.4% in the 2022 Quarter from 6.2% in the 2021 Quarter.

As we continue to

invest in the retail business and as it grows to represent a larger component of the overall business, management expects sales and marketing

costs, both in total and as a percentage of revenues, to increase in future periods.

General and administrative

expenses declined in the 2022 Quarter, primarily related to lower personnel related costs and lower bad debt expense in the design segment.

These declines were partially offset by higher corporate expenses, primarily related to a reduction in certain foreign tax credits received

for research and development activities.

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 make adjustments to these costs as needed based on the

overall needs of the business.

We reported other expense

of $34,000 in the 2022 Quarter as compared to net other income of $1,367,000 in the 2021 Quarter.

The decrease is primarily due to the

forgiveness of note payable related to the PPP loan in the 2021 Quarter, which did not recur in the 2022 Quarter.

In the 2022 Quarter, we generated

net income of $180,000.

In the 2021 Quarter, we generated net income of $1,199,000, primarily resulting from the $1,357,000 forgiveness

of note payable related to the PPP loan, which was not recognized as taxable income per the CARES Act.

We maintain significant net operating

loss carryforwards and do not recognize 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

earnings per share were $0.02 and $0.12 for the 2022 Quarter and the 2021 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 quarter.

Due to the growth of

our retail division, we determined it to be a separate reportable segment in the fourth quarter of fiscal 2021.

The results of operations

for the 2021 Quarter for each segment discussed below have been reformatted from what was previously disclosed to segregate the retail

distribution segment and exclude general corporate expenses from segment operating income to show them as a reconciling item so that results

are comparable to the current year presentation.

Segment Results of Operations

OEM Distribution

Retail Distribution

Corporate Expenses

2022 Quarter revenues

2021 Quarter revenues

2022 Quarter operating income/(loss)

2021 Quarter operating income/(loss)

OEM Distribution Segment

Net revenues in the OEM distribution

segment increased slightly from the 2021 Quarter to the 2022 Quarter as the increase in revenue from other products was mostly offset

by declines in the sale of diabetic products.

Revenues from other products increased $260,000 and revenue from diabetic products decreased

As consumer demand increases for diabetic testing products which require no carrying case, we expect diabetic product sales

to represent a smaller portion of our distribution revenue.

following tables set forth revenues by channel, product line and geographic location of our distribution segment customers for the periods

Net Revenues for the 2021 Quarter

(amounts in thousands)

Diabetic products

Other products

Total net revenues

Revenues for the 2020 Quarter

in thousands)

to represent a smaller portion of our OEM distribution revenue.

The following tables set

forth revenues by product line of our OEM distribution segment customers for the periods indicated:

OEM Revenues by Product Line

Diabetic products

1 unchanged sentence

Total net revenues

Diabetic Product

distribution segment manufactures to the order of, and sells carrying cases for, blood glucose diagnostic kits directly to original equipment

manufacturers (“OEM”s) or their contract manufacturers.

The OEM customer or its contract manufacturer packages our carrying

cases “in box” as a custom accessory for the OEM’s blood glucose testing and monitoring kits, or to a lesser extent,

sells them through their retail distribution channels.

from diabetic products decreased $1,374,000, or 28.1%, to $3,520,000 in the 2021 Quarter from $4,894,000 in the 2020 Quarter.

This decrease

was primarily due to lower revenues from one major diabetic products customer (Diabetic Products Customer A), coupled with smaller decreases

from all other diabetic products customers.

As mentioned above, management believes that revenues from diabetic products customers will

continue to decline in future periods.

following table sets forth our distribution segment net revenues by diabetic products customer for the periods indicated:

Diabetic Revenues

(amounts in thousands)

Diabetic Products Customer A

Diabetic Products Customer B

Diabetic Products Customer C

Diabetic Products Customer D

All other Diabetic Products Customers

Total Diabetic Revenue

from diabetic products represented 62% of our distribution segment’s net revenues in the 2021 Quarter compared to 77% in the 2020

Other Product

product revenues include cases and protective solutions sourced and sold to OEMs for a diverse array of portable electronic and non-electronic

products (such as sporting and recreational products, bar code scanners, GPS location devices, tablets and firearms) on a made-to-order

basis that are customized to fit the products sold by our OEM customers.

Other product revenues also include sales of a variety of other

products, such as smart-enabled furniture, sold through our retail distribution network.

from other products increased $705,000, or 47.2%, to $2,200,000 in the 2021 Quarter from $1,495,000 in the 2020 Quarter.

was driven by sales to one new customer, which comprised $868,000 of our total distribution revenue for the 2021 Quarter.

Other factors

contributing to the variance include an increase in sales of non-medical cases, partially offset by a decrease in sales of other products.

We will continue to focus on our sales and sales support teams in our continued efforts to expand and diversify our other products customer

base as well as take advantage of opportunities to source other products.

from other products represented 38% of our distribution segment’s net revenues in the 2021 Quarter compared to 23% in the 2020

Design Segment

revenues in the design segment increased $1,084,000, or 34.3%, to $4,244,000 in the 2021 Quarter from $3,160,000 in the 2020 Quarter,

primarily driven by revenues generated by Kablooe, which was acquired in August 2020.

The remaining increase was driven by revenue from

new customers, an increase in revenue from existing customers, partially offset by a decline in revenue from certain other customers

as projects were either completed or spending was reduced in response to COVID-19.

The following table sets forth our design segment

net revenues by major customers for the periods indicated:

Design Revenues

(amounts in thousands)

Design Segment Customer 1

Design Segment Customer 2

Design Segment Customer 3

Design Segment Customer 4

Design Segment Customer 9

All other Design Segment Customers

Total design segment revenues

profit for the distribution segment decreased $158,000, or 16.8%, to $781,000 in the 2021 Quarter as compared to $939,000 in the

2020 Quarter, and gross margin declined from 14.7% to 13.7% in the same period.

The decrease in both gross profit and margin are

driven by higher freight costs due to the global shipping container shortage caused in part by the pandemic.

This decrease in profit

margin was also impacted by the continued decline in gross margin on diabetic products due to a shift to lower margin cases and

pricing pressures on diabetic products from customers.

We continue to work on expanding our product offering to include higher

margin products and enhancing our sales efforts to grow revenue and increase gross profit.

Design Segment

profit for the design segment increased $566,000, or 67.7%, to $1,402,000 in the 2021 Quarter from $836,000 in the 2020 Quarter.

Gross margin improved from 26.5% to 33.0% in the same period.

The acquisition of Kablooe in August 2020 represented almost half

of the improvement in both gross profit and margin in the 2021 Quarter, with the remaining increase driven by an increase in revenue

and better utilization rates in the IPS business.

Depreciation expense, which is allocated to cost of sales for the design segment,

was $22,000 and $21,000 for the 2021 Quarter and 2020 Quarter, respectively.

Sales and Marketing

and marketing expenses for the distribution segment increased $157,000, or 43.1%, to $521,000 in the 2021 Quarter from $364,000 in the

2020 Quarter.

The increase was primarily due to an increase in advertising expenses and sales commissions as we continue our efforts

to expand and diversify our product offerings.

Sales and marketing expenses for the distribution segment increased to 9.1% of revenues

in the 2021 Quarter as compared to 5.7% of revenues in the 2020 Quarter.

Design Segment

and marketing expenses for the design segment remained flat at $100,000 in the 2021 Quarter and the 2020 Quarter.

The $12,000 of sales

and marketing expenses generated by Kablooe, which was acquired in August 2020, were offset by lower payroll costs.

Sales and marketing

expenses for the design segment decreased to 2.4% of revenues in the 2021 Quarter from 3.2% of revenues in the 2020 Quarter.

Administrative Expenses

and administrative expenses in the distribution segment decreased $401,000, or 51.0%, to $385,000 in the 2021 Quarter from $786,000 in

the 2020 Quarter.

The decrease primarily resulted from the salary reductions taken as part of our cost-cutting measures enacted in April

2021, the reduction in severance costs and a decrease in professional fees.

General and administrative expenses for the distribution

segment decreased to 6.7% of revenues in the 2021 Quarter as compared to 12.3% of revenues in the 2020 Quarter.

Diabetic Product Revenues

Our OEM distribution segment

manufactures to the order of, and sells carrying cases for, blood glucose diagnostic kits directly to OEMs (or their contract manufacturers).

The OEM customer or its contract manufacturer packages our carry cases “in box” as a custom accessory for the OEM’s

blood glucose testing and monitoring kits, or to a lesser extent, sells them through their retail distribution channels.

Revenues from diabetic products

decreased primarily due to lower revenues from one major diabetic customer.

The lower revenue from this customer was due to the timing

of shipments near the end of the 2022 Quarter compared to the 2021 Quarter and was partially offset by higher revenue from other diabetic

customers, which were less significant.

As mentioned above, management believes that revenues from diabetic customers will continue to

decline in future periods.

Revenues from diabetic products

represented 81% of net revenues for the OEM distribution segment in the 2022 Quarter compared to 86% in the 2021 Quarter.

Other Product Revenues

Our OEM distribution segment

also sources and sells cases and protective solutions for a diverse array of portable electronic and non-electronic products (such as

sporting and recreational products, bar code scanners, GPS location devices, tablets and firearms) on a made-to-order basis that are customized

to fit the products sold by our OEM customers.

Revenues from other products

increased due to an increase in customers and higher sales volume.

We will continue to focus on our sales and sales support teams in our

continued efforts to expand and diversify our other products customer base.

Revenues from other products represented 19% of our OEM distribution

revenues in the 2022 Quarter compared to 14% in the 2021 Quarter.

Operating Income

Operating income for the

OEM distribution segment increased and operating income margin improved to 9.5% in the 2022 Quarter from 8.0% in the 2021 Quarter.

higher gross margins derived from other products was mostly offset by declining margins on diabetic products due to pricing pressures

from customers, resulting in a slight increase in gross margin as compared to the prior year quarter.

Operating income was further enhanced

by a reduction in selling and marketing expenses.

Retail Distribution Segment

Net revenues increased due

to new product offerings and the continued expansion of our retail distribution network;

revenue derived from new retail partnerships

as well as an increase in volume with certain existing retailers.

We will continue to focus on our sales and sales support teams in our

attempt to expand and diversify our retail product offerings.

Although revenues increased,

the increase in operating loss was driven by higher cost of sales caused by supply chain issues and higher sales and marketing expenses

driven by higher sales commission resulting from the increase in revenue.

Design Segment

and administrative expenses for the design segment increased $209,000, or 29.9%, to $909,000 in the 2021 Quarter from $700,000 in the

2020 Quarter.

The increase is primarily driven by general and administrative costs of $255,000 generated by Kablooe, which was acquired

in August 2020, partially offset by lower professional fees.

General and administrative expenses for the design segment decreased to

21.4% of revenues in the 2021 Quarter as compared to 22.2% of revenues in the 2020 Quarter.

distribution segment reported other expense of $56,000 in the 2021 Quarter as compared to $35,000 in the 2020 Quarter.

The increase in net revenues

in the design segment was driven by new customers and an increase in projects from certain existing customers, which was partially offset

by declines in revenues from certain prior year customers.

Operating income for the

design segment increased and operating income margin improved to 11.7% in 2022 Quarter from 4.3% in the 2021 Quarter.

The increase in

other expense relates to the increase in the fair value of the contingent earnout liability coupled with higher interest expense.

Design Segment

design segment reported other income of $32,000 in the 2021 Quarter as compared to other expense of $5,000 in the 2020 Quarter, primarily

related to interest income on the note receivable from a customer which was fully reserved in Fiscal 2019 and lower interest expense

resulting from the paydown of the line of credit in March 2021.

the 2021 Quarter, the Company generated net income of $244,000.

The Company maintains significant net operating loss carryforwards and

does not recognize income tax expense / (benefit) as its deferred tax provision is typically offset by a full valuation allowance on

its net deferred tax asset.

RESULTS OF OPERATIONS

FOR THE NINE MONTHS ENDED JUNE 30, 2021 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 2020

Net Income/(Loss)

Distribution Segment

segment net loss was $1,096,000 in the 2021 Period compared to $793,000 in the 2020 Period.

The increase to the net loss was primarily

due to an increase in sales and marketing expenses, the reduction in other income resulting from non-cash fair value adjustments to acquisition

related earnout liabilities (see Note 4 of the condensed consolidated financial statements), partially offset by lower general and administrative

expenses, as reflected in the table below.

Design Segment

segment net income was $1,704,000 in the 2021 Period compared to a net loss of $875,000 in the 2020 Period.

The net income generated

in the 2021 Period primarily resulted from the $1,357,000 forgiveness of note payable associated with the PPP loan.

A reduction in impairment

charges (see Notes 3 and 4 of the condensed consolidated financial statements) and higher gross profit were partially offset by higher

general and administrative expenses, as reflected in the table below:

Components of Net Income/(Loss)

(amounts in thousands)

Increase (Decrease)

Sales and marketing expenses

General and administrative expenses

Goodwill impairment

Operating (loss)/income

Other (income)/expense, net

Net income/(loss)

and diluted earnings/(loss) per share were $0.06 and $(0.18), respectively, for the 2021 Period and the 2020 Period.

revenues in the distribution segment increased $99,000, or 0.6%, to $15,808,000 in the 2021 Period from $15,709,000 in the 2020 Period,

primarily due to an increase in other product revenue.

Revenues from other products increased $1,436,000, which was partially offset

by a decline in revenue from diabetic products of $1,337,000.

In future periods, we believe other product sales will continue to increase

while diabetic product sales will continue to decline.

following tables set forth revenues by channel, product line and geographic location of our distribution segment customers for the periods

Net Revenues for the 2021 Period

(amounts in thousands)

Diabetic products

Other products

Total net revenues

Revenues for the 2020 Period

in thousands)

Diabetic products

Other products

Total net revenues

Diabetic Product

distribution segment manufactures to the order of, and sells carrying cases for, blood glucose diagnostic kits directly to OEMs (or their

contract manufacturers).

The OEM customer or its contract manufacturer packages our carrying cases “in box” as a custom accessory

for the OEM’s blood glucose testing and monitoring kits, or to a lesser extent, sells them through their retail distribution channels.

from diabetic products decreased $1,337,000, or 10.2%, to $11,825,000 in the 2021 Period from $13,162,000 in the 2020 Period.

This decrease

was primarily due to lower revenues from one major diabetic products customer (Diabetic Products Customer A), which was partially offset

by a net increase in revenue from all other diabetic products customers, of which no changes were individually significant.

above, management believes that revenues from diabetic products customers will continue to decline in future periods.

following table sets forth our distribution segment net revenues by diabetic products customer for the periods indicated:

Diabetic Revenues

(amounts in thousands)

Diabetic Products Customer A

Diabetic Products Customer B

Diabetic Products Customer C

Diabetic Products Customer D

All other Diabetic Products Customers

Total Diabetic Revenue

from diabetic products represented 75% of our distribution segment’s net revenues in the 2021 Period compared to 84% in the 2020

Other Product

product revenues include cases and protective solutions sourced and sold to OEMs for a diverse array of portable electronic and non-electronic

products (such as sporting and recreational products, bar code scanners, GPS location devices, tablets and firearms) on a made-to-order

basis that are customized to fit the products sold by our OEM customers.

Other product revenues also include sales of a variety of other

products, such as smart-enabled furniture, sold through our retail distribution network.

from other products increased $1,436,000, or 56.4%, to $3,983,000 in the 2021 Period from $2,547,000 in the 2020 Period.

was driven by sales to one new customer, which comprised $947,000 of our total distribution revenue for the 2021 Period.

in sales of non-medical cases and protective solutions, both driven by an increase in customers and higher sales volume, comprised the

remainder of the increase.

We will continue to focus on our sales and sales support teams in our continued efforts to expand and diversify

our other products customer base as well as take advantage of opportunities to source other products.

from other products represented 25% of our distribution segment’s net revenues in the 2021 Period compared to 16% in the 2020 Period.

Design Segment

revenues in the design segment increased $2,105,000, or 20.7%, to $12,269,000 in the 2021 Period from $10,164,000 in the 2020 Period,

primarily driven by revenues generated by Kablooe, which was acquired in August 2020.

The remaining variance was driven by an increase

in revenue from new business from both new and existing customers, partially offset by a decline in revenue from certain existing customers

as projects were either completed or customer spending was reduced in response to COVID-19.

The following table sets forth our design

segment net revenues by major customers for the periods indicated:

Design Revenues

(amounts in thousands)

Design Segment Customer 1

Design Segment Customer 2

Design Segment Customer 3

Design Segment Customer 4

All other Design Segment Customers

Total design segment revenues

profit for the distribution segment decreased $25,000, or 1.2%, to $2,078,000 in the 2021 Period as compared to $2,103,000 in the

2020 Period, and gross margin declined from 13.4% to 13.1% in the same period.

The decrease in both gross profit and margin are

driven by higher freight costs due to the global shipping container shortage caused in part by the pandemic and the continued

decline in gross margin on diabetic products due to a shift to lower margin cases and pricing pressures on diabetic products from

We continue to work on expanding our product offering to include higher margin products and enhancing our sales efforts

to grow revenue and increase gross profit.

Design Segment

profit for the design segment increased $1,266,000, or 44.5%, to $4,111,000 in the 2021 Period from $2,845,000 in the 2020 Period.

Gross margin improved from 28.0% to 33.5% in the same period.

The acquisition of Kablooe accounted for the majority of the increase

in both gross profit and margin in the 2021 Period.

Higher revenue and better utilization rates contributed to the remainder of

the increase.

Depreciation expense, which is allocated to cost of sales for the design segment, was $83,000 and $75,000 for the 2021

Period and 2020 Period, respectively.

Sales and Marketing

and marketing expenses for the distribution segment increased $382,000, or 34.5%, to $1,488 ,000 in the 2021 Period from $1,106,000 in

the 2020 Period.

The increase was primarily due to an increase in advertising costs and sales commissions as we continue our efforts

to expand and diversify our product offerings.

Sales and marketing expenses for the distribution segment increased to 9.4% of revenues

in the 2021 Period as compared to 7.0% of revenues in the 2020 Period.

Design Segment

and marketing expenses for the design segment decreased $59,000, or 15.8%, to $314,000 in the 2021 Period from $373,000 in the 2020 Period.

The decrease in sales and marketing expenses is primarily due to lower payroll costs and was partially offset by $32,000 of marketing

expenses generated by Kablooe, which was acquired in August 2020.

Sales and marketing expenses for the design segment decreased to 2.6%

of revenues in the 2021 Period from 3.7% of revenues in the 2020 Period.

Administrative Expenses

and administrative expenses in the distribution segment decreased $443,000, or 21.8%, to $1,586,000 in the 2021 Period from $2,029,000

in the 2020 Period.

The decrease was primarily driven by from the salary reductions taken as part of our cost-cutting measures enacted

in April 2021, the reduction in severance costs and a decrease in professional fees.

General and administrative expenses for the distribution

segment decreased to 10.0% of revenues in the 2021 Period as compared to 12.9% of revenues in the 2020 Period.

Design Segment

and administrative expenses for the design segment increased $1,220,000, or 53.1%, to $3,516,000 in the 2021 Period from $2,296,000 in

the 2020 Period.

The increase is primarily driven by general and administrative costs of $762,000 generated by Kablooe, which was acquired

in August 2020, a $623,000 increase in bad debt expense and a $266,000 increase in payroll related costs, partially offset by a decrease

in impairment charges (see Note 4 of the condensed consolidated financial statements) and lower professional fees.

General and administrative

expenses for the design segment increased to 28.7% of revenues in the 2021 Period as compared to 22.6% of revenues in the 2020 Period.

distribution segment reported other expense of $100,000 in the 2021 Period as compared to other income of $239,000 in the 2020 Period.

The variance is primarily due to the decrease in other income related to fair value adjustments associated with contingent earnout liabilities

(see Note 4 of the condensed consolidated financial statements).

Design Segment

design segment reported other income of $1,423,000 in the 2021 Period as compared to other expense of $36,000 in the 2020 Period.

primary component of other income in the 2021 Period was the $1,357,000 forgiveness of note payable related to the PPP loan.

significant factors contributing to the change were interest income on the note receivable from a customer which was fully reserved for

in Fiscal 2019 and lower interest expense due to a reduction in the average amount of debt outstanding.

the 2021 Period, the Company generated net income of $608,000, primarily resulting from the $1,357,000 forgiveness of the PPP loan, which

will not be recognized as taxable income per the CARES Act.

The Company maintains significant net operating loss carryforwards and does

not recognize income tax expense / (benefit) as its deferred tax provision is typically offset by a full valuation allowance on its net

deferred tax asset.

LIQUIDITY AND

CAPITAL RESOURCES

primary source of liquidity is our operations.

The primary demands on our working capital have 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 June 30, 2021, our working capital was $5,571,000 compared to $3,396,000 at September 30, 2020.

improvement in working capital was primarily due to the extension of the note payable to Forward China.

Our largest vendor is

Forward China, a related entity, which is able to extend payment terms on outstanding liabilities when necessary (see Note 9 of the

condensed consolidated financial statements).

We can provide no assurances

that any such extension will be given if requested.

an abundance of caution and to proactively conserve the Company’s cash flow, we implemented certain cost-cutting measures which

became effective in April 2021.

These cost-cutting measures included (i) our executive officers agreeing to a temporary pay cut

and our Chief Executive Officer temporarily forgoing his base salary, (ii) a reduction in our head count and amounts paid to outside

consultants and (iii) non-employee Board members agreeing to reduce their board fees.

These cost-cutting measures ended in June

2021 and compensation was returned to pre-existing amounts in July 2021.

The Company estimates that these pay cuts and other reductions

resulted in approximately $200,000 of cash savings in the third quarter of Fiscal 2021.

The Company will reevaluate any future need for

these or similar cost-cutting measures as business conditions warrant.

In light of these circumstances, the Compensation Committee

of the Board of Directors deferred a recommendation for director equity compensation until such time as the Company’s performance

Therefore, in addition to cash savings, the resulting reduction in equity compensation lowered the Company’s non-cash

expenses in the third quarter of Fiscal 2021 and will continue to lower the Company’s non-cash expenses in future periods until

any new equity grants are awarded.

July 31, 2021, we had approximately $1,015,000 cash on hand and $1,300,000 available under our line of credit which matures May 31, 2022.

Additionally, Forward China holds a $1,600,000 promissory note which matures December 31, 2022.

Although this note has been extended

on multiple occasions to assist us with our liquidity position, we plan on funding the repayment at maturity using existing cash balances

and/or obtaining an additional credit facility as deemed necessary.

We can provide no assurance that Forward China will extend the note

again if we request an extension nor that any such credit facility will be available on terms acceptable to us or at all.

anticipate that our liquidity and financial resources will be adequate to manage our operating and financial requirements until at least

September 30, 2022.

If we have the opportunity to make a strategic acquisition (as we have in the past with the acquisitions of IPS and

Kablooe) or an investment in a product or partnership, we may require additional capital beyond our current cash balance to fund the

If we seek to raise additional capital, there is no assurance that we will be able to raise funds on terms that are acceptable

to us or at all.

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 equipment and other capital assets in the future, depending on need.

the nine months ended June 30, 2021 and 2020, our sources and uses of cash were as follows:

Operating Activities

the 2021 Period, cash used in operating activities of $338,000 primarily resulted from an operating loss of $715,000, an increase in

inventories of $631,000, an increase in accounts receivable of $595,000, and the net change in other operating assets and liabilities

of $72,000, partially offset by an increase of $855,000 in accounts payable and amounts due to Forward China and non-cash expenses of

$820,000 relating to depreciation, amortization, share-based compensation and bad debt expense.

the 2020 Period, cash used in operating activities of $760,000 primarily resulted from an operating loss of $1,871,000, an increase in

accounts receivable of $1,448,000, bad debt recoveries of $121,000, a decrease in accounts payable, amounts due to Forward China, accrued

expenses and other liabilities of $105,000 and net changes in other operating assets and liabilities of $53,000, partially offset by

a decline in inventories of $881,000, an increase in deferred income of $306,000, non-cash impairment charges of $1,342,000 and other

non-cash expenses of $309,000 relating to depreciation, amortization, and share-based compensation.

Investing Activities

used in investing activities in the 2021 Period and the 2020 Period of $61,000 and $56,000, respectively, resulted from purchases of

property and equipment.

Financing Activities

the 2021 Period, cash used in financing activities of $921,000 consisted of net repayments of the line of credit of $1,000,000 and repayments

of notes payable and finance leases of $155,000, partially offset by proceeds from stock options exercised of $234,000.

the 2020 Period, cash provided by financing activities of $808,000 consisted of $1,357,000 proceeds from the PPP loan and $32,000 of

proceeds from stock options exercised, partially offset by $300,000 in net repayments on the line of credit, $200,000 paid in deferred

cash consideration and $81,000 in repayments of notes payable and finance leases.

Related Party

information on related party transactions and their financial impact, see Note 9 to the unaudited condensed consolidated financial statements

contained herein.

gross profit, driven by higher revenues, was further enhanced by a decrease in general and administrative expenses due to lower personnel

costs and a reduction in bad debt expense.

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 December 31, 2021,

our working capital was $4,229,000 compared to $5,587,000 at September 30, 2021;

the decrease primarily due to the note payable to Forward

China becoming current at December 31, 2021 as compared to long-term at September 30, 2021.

At January 31, 2022, we had

$2,200,000 cash on hand and $1,300,000 available under our line of credit which matures May 31, 2022.

Although we can provide no assurance,

we plan to renew this line of credit with the bank through May 31, 2023.

Additionally, Forward China, an entity owned by our Chairman

of the Board and Chief Executive Officer, holds a $1,600,000 promissory note issued by the Company which matures on December 31, 2022

(see Note 8 to the condensed consolidated financial statements).

The balance of this promissory note was reduced to $1,550,000 after the

Company made a principal payment of $50,000 in December 2021.

Although this promissory note has been extended on multiple occasions to

assist us with our liquidity position, we plan on funding the repayment at maturity using existing cash balances and/or obtaining an additional

credit facility as deemed necessary.

Forward China, our largest vendor, has extended payment terms on our outstanding payables due to

them when necessary.

We can provide no assurance that (i) Forward China will extend the promissory note again if we request an extension,

(ii) Forward China will continue to provide favorable payment terms when we need them, or (ii) any additional credit facility will be

available on terms acceptable to us or at all.

We anticipate that our liquidity

and financial resources for the 12 months following the date of this report will be adequate to manage our operating and financial requirements.

If we have the opportunity to make a strategic acquisition (as we have in the past with the acquisitions of IPS and Kablooe) or an investment

in a product or partnership, we may require additional capital beyond our current cash balance to fund the opportunity.

If we seek to

raise additional capital, there is no assurance that we will be able to raise funds on terms that are acceptable to us or at all.

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 equipment

and other capital assets in the future, depending on need.

During the 2022 Quarter and

2021 Quarter, our sources and uses of cash were as follows:

During the 2022 Quarter,

cash provided by operating activities of $1,138,000 primarily resulted from operating income of $214,000, an increase in accounts payable,

accrued expenses and amounts due to Forward China of $1,276,000, an increase in deferred income of $565,000 and non-cash expenses of $112,000

for depreciation, amortization and share-based compensation, partially offset by an increase in inventories of $910,000, an increase in

prepaid expenses and other current assets of $70,000 and the net change in other operating assets and liabilities of $49,000.

During the 2021 Quarter,

cash used in operating activities of $511,000 primarily resulted from an operating loss of $167,000, a decrease in deferred income of

$315,000, an increase in accounts receivable of $204,000, a decrease in accounts payable, accrued expenses and amounts due to Forward

China of $176,000, partially offset by non-cash expenses of $213,000 relating to depreciation, amortization, share-based compensation

and bad debt expense, an increase of $125,000 in prepaid expenses and other assets and the net change in other operating assets and liabilities

Cash used in investing activities

in the 2022 Quarter and the 2021 Quarter of $66,000 and $30,000, respectively, resulted from purchases of property and equipment.

In the 2022 Quarter, cash

used in financing activities of $50,000 consisted of principal payments on the promissory note held by Forward China.

In the 2021 Quarter, cash

used in financing activities of $51,000 consisted of repayments of notes payable and capital leases of $52,000, partially offset by proceeds

from stock options exercised.

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.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis