What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-12-16 compared with 2021-12-16 · 334 added, 350 removed, 109 unchanged (86% of the section changed)

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion

and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report

The following discussion and

analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report

on Form 10-K.

All dollar amounts and percentages presented herein have been rounded to approximate values.

In addition to historical information,

this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions.

Our actual results

may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited

to those set forth under “Risk Factors.”

The following discussion and analysis compares our results of operations for the year ended September 30, 2022 (“Fiscal

2022”) with those for the year ended September 30, 2021 (“Fiscal 2021”).

All dollar amounts and percentages presented

herein have been rounded to approximate values.

In addition to historical information, this discussion and analysis contains forward-looking

statements that involve risks, uncertainties, and assumptions.

Our actual results may differ materially from those anticipated in these

forward-looking statements as a result of certain factors, including but not limited to those set forth under “Risk Factors.”

Cautionary statement regarding Forward-Looking Statements

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These statements include,

among other things, statements regarding:

Expectations regarding growth in

Plans on repaying outstanding debt

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 in this Annual Report on Form 10-K,

and in particular, the risks discussed under the caption "Risk Factors" in Item 1A of this report and those discussed in other

documents we file with the SEC.

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.

among other things, statements regarding our liquidity, plans on repaying outstanding debt obligations, expectations regarding the effect

of the pandemic and inflation on our business, as well as other statements regarding our future operations, financial condition and prospects,

and business strategies.

Forward-looking statements generally can be identified by words such as "anticipates," "believes,"

"estimates," "expects," "intends," "plans," "predicts," "projects," "will

be," "will continue," "will likely result," and similar expressions.

These forward-looking statements are based

on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially

and adversely from those reflected in the forward-looking statements.

Factors that could cause or contribute to such differences include,

but are not limited to, those discussed in this Annual Report on Form 10-K, and in particular, the risks discussed under the caption "Risk

Factors" in Item 1A of this report and those discussed in other documents we file with the SEC.

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 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

global design, manufacturing, sourcing and distribution group serving top tier medical and technology customers worldwide.

of the continued expansion of our design development capabilities through our wholly-owned subsidiaries, IPS and Kablooe, the Company

is now able to introduce proprietary products to the market from concepts brought to it from a number of different sources, both inside

and outside the Company.

The 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 Fiscal 2021 include Kablooe’s results of operations for 12 months,

while our results of operations for Fiscal 2020 include Kablooe’s results of operations for approximately six weeks.

the acquisition are described in Note 3 to the consolidated financial statements.

The 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 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.

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 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

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.

Additionally, see Part I,

Item 1A “Risk Factors” for a description of the material risks we currently face in connection with COVID-19.

Our design division provides

hardware and software product design and engineering services to customers predominantly located in the U.S.

Our OEM distribution division

sources and sells carrying cases and other accessories for medical monitoring and diagnostic kits as well as a variety of other portable

electronic and non-electronic devices to 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.

distribution division sources and sells smart-enabled furniture, hot tubs and various other products through various online retailer websites

to customers predominantly located in the U.S.

The effects of the COVID-19 pandemic

continue to impact the retail and OEM distribution segments of 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 and most notably in Fiscal 2022.

Labor shortages

ports and in ground transportation services caused container ships to spend a significant amount of time waiting for goods to

be unloaded and to arrive at our warehouses.

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

delayed consumer availability for many of our products in Fiscal 2022.

The timing and extent of these COVID-19 related transportation

disruptions are still largely unknown but are expected to continue into Fiscal 2023.

The effects of the pandemic had

a lesser impact on the design segment of our business.

Rising inflation caused an increase in the cost of acquiring and retaining our

employees, particularly in the second half of Fiscal 2022.

The timing and extent of future inflation is difficult to predict, but we expect

these rising costs to continue into 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 products and services and to choose to allocate their budgets to new or existing projects which may or may

not require our products and services.

The long-term financial impact on our business cannot be reasonably estimated at this time.

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

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.

Additionally, see Part I, Item

1A “Risk Factors” for a description of the material risks we currently face 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.

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

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of these and other accounting policies, see “Item 8.

Financial Statements and Supplementary Data” in this Annual Report.

preparation of our consolidated financial statements requires us to make estimates and assumptions that are believed to be reasonable

under the circumstances.

There can be no assurance that actual results will not differ from those estimates and such differences could

be significant.

Financial Statements and Supplementary Data” in this report.

The preparation

of our consolidated financial statements requires us to make estimates and assumptions that are believed to be reasonable under the circumstances.

There can be no assurance that actual results will not differ from those estimates and such differences could be significant.

Revenue Recognition

OEM and Retail Distribution Segments

We generally recognize revenue

in our OEM and retail distribution segments when:

(i) finished goods are shipped to our 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;

OEM Distribution Segment

The OEM distribution segment

recognizes revenue when 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.

When we receive consideration before achieving the criteria previously mentioned, we record a contract liability, which is classified

as a component of deferred income in the accompanying consolidated balance sheets.

The OEM distribution segment had no contract liabilities

at September 30, 2021, 2020 or 2019.

The retail distribution segment had contract liabilities of $0, $75,000 and $0 at September 30, 2021,

2020 and 2019, respectively.

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 consolidated balance sheets.

Retail Distribution Segment

The retail distribution segment

sells products primarily through online websites operated by authorized third-party retailers.

Revenue is recognized when control, as

defined in Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers”, of the related

goods is transferred to the retailer, which generally occurs upon shipment to the end customer.

Other than product delivery, the retail

distribution segment does not typically have other deliverables or performance obligations associated with its products.

Revenue is measured

as the amount of consideration expected to be received in exchange for the products provided, net of allowances taken by retailers for

product returns and any taxes collected from customers that will be remitted to governmental authorities.

When the Company receives consideration

before achieving the criteria previously mentioned, it records a contract liability, which is classified as a component of deferred income

in the accompanying consolidated balance sheets.

Design Segment

We apply 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 contracts.

We recognize revenue

over time on our time and material contracts utilizing a “right to invoice” method.

The design segment applies the

“cost to cost” and “right to invoice” methods of revenue recognition to its contracts with customers.

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

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 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 consolidated balance sheets.

The design segment had contract assets of $693,000, $649,000 and $611,000 at September

30, 2021, 2020 and 2019, respectively.

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 consolidated balance sheets.

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 consolidated balance sheets.

segment had contract liabilities of $188,000, $410,000 and $220,000 at September 30, 2021, 2020 and 2019, respectively.

Business Combinations

We allocate the fair value

of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values.

The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.

determining the fair values of assets acquired and liabilities assumed, we make significant estimates and assumptions, especially with

respect to intangible assets.

Critical estimates in valuing certain intangible assets include but are not limited to future expected cash

flows from customer relationships and developed technology, discount rates and terminal values.

Our estimate of fair value is based upon

assumptions believed to be reasonable, but actual results may differ from estimates.

Other estimates associated with the accounting for

acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed.

Segment Reporting

We have three reportable

We have three reportable segments:

OEM distribution, retail distribution and design.

The OEM distribution segment sources and distributes carrying cases and other

accessories for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic devices directly

to OEMs or their contract manufacturers.

The retail distribution segment sources and sells smart-enabled furniture and a variety of other

products through agreements with various retailers, both in stores and through online retailer websites.

The design reportable 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.

The OEM distribution segment sources and distributes carrying cases and other accessories

for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic devices directly to OEMs or their

contract manufacturers 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.

Our chief operating decision

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We do not include intercompany

activity in our segment results to be consistent with the information that is presented to the CODM (see Note 16 to the consolidated

financial statements).

activity in our segment results 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 (see Note 15 to the consolidated financial statements).

Inventory Valuation

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.

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 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.

Goodwill and Intangible Assets

We review goodwill

for impairment at least annually, or more often if triggering events occur.

We have two reporting units with goodwill (IPS and Kablooe)

and we perform our annual goodwill impairment test on September 30, the end of the fiscal year, or upon the occurrence of a triggering

We have the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred.

If we 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 we would not need to perform a quantitative impairment test for the reporting unit.

If we cannot support such a conclusion

or do not elect to perform the qualitative assessment, then we will perform the quantitative impairment test 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.

During Fiscal 2020, we recorded

an impairment charge related to goodwill (See Note 4 to the consolidated financial statements).

There were no impairment charges in Fiscal

We review goodwill for impairment

at least annually, or more often if triggering events occur.

We have 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.

We have the option to perform a qualitative assessment to determine if an impairment is more likely than not to have

If we 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 we would not need to perform a quantitative impairment test for the reporting unit.

If we cannot support such a

conclusion or do not elect to perform the qualitative assessment, then we will perform the quantitative impairment test 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

amount, no impairment charge is recognized.

If the fair value of the reporting unit is less than its carrying amount, 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.

There were no indications

of goodwill impairment in Fiscal 2022 or Fiscal 2021.

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.

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.

There were no indications of impairment

of intangible assets in Fiscal 2022 or 2021.

Recent Accounting Pronouncements

In August 2018, the Financial

Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13 “Fair Value Measurement

– Disclosure Framework (Topic 820)” to improve the disclosure requirements on fair value measurements.

The updated guidance

is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

Early adoption is permitted

for any removed or modified disclosures.

We adopted this guidance in the first quarter of Fiscal 2021 with no material impact to our consolidated

financial statements.

In November 2019, the FASB

issued ASU 2019-08, “Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606)”

to provide guidance for share-based payment awards granted to a customer in conjunction with selling goods or services accounted for under

The pronouncement is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years.

We adopted this guidance in the first quarter of Fiscal 2021 with no material impact to our consolidated financial statements.

In November 2019, the FASB

issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” ASU 2019-11 is

an accounting pronouncement that provides clarity to and amends earlier guidance on this topic and would be effective concurrently with

the adoption of such earlier guidance.

This pronouncement is effective for us for fiscal years beginning after December 15, 2022 and interim

periods within those fiscal years.

We are currently evaluating the effects of this pronouncement on our consolidated financial statements.

In August 2018, the FASB

issued ASU 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)” addressing customers’

accounting for implementation costs incurred in a cloud computing arrangement that is a service contract, which requires customers to

apply internal-use software guidance to determine the implementation costs that are able to be capitalized.

Capitalized implementation

costs are required to be amortized over the term of the arrangement, beginning when the cloud computing arrangement is ready for its intended

The effective date of the new guidance for public companies is for fiscal years beginning after December 15, 2019 and interim

periods within those fiscal years.

Early adoption is permitted.

We adopted this guidance in the first quarter of Fiscal 2021 with

no material impact to our consolidated financial statements.

In December 2019, the FASB

issued ASU 2019-12 “Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes.” This guidance removes certain

exceptions to the general principles in Topic 740 and provides consistent application of U.S.

GAAP by clarifying and amending existing

The effective date of the new guidance for public companies is for fiscal years beginning after December 15, 2020 and interim

periods within those fiscal years.

In November 2019, the Financial

Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 us for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years.

We are currently

evaluating the effects of this pronouncement on our consolidated financial statements.

In December 2019, the FASB issued

ASU 2019-12 “Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes.” This guidance removes certain exceptions

to the general principles in Topic 740 and provides consistent application of U.S.

GAAP by clarifying and amending existing guidance.

The effective date of the new guidance for public companies is for fiscal years beginning after December 15, 2020 and interim periods

within those fiscal years.

Early adoption is permitted.

We are currently evaluating the effects of this pronouncement on our consolidated

financial statements.

We adopted this guidance in the first quarter of fiscal 2022 with no material

impact to our consolidated financial statements.

RESULTS OF OPERATIONS FOR FISCAL 2022 COMPARED

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General and administrative expenses

Goodwill impairment

Loss from operations

Other expense, net

Other expense/(income), net

Income tax provision

Consolidated net income/(loss)

Consolidated net (loss)/income

$ (1,378,000 )

Net revenues increased 13.2%

from Fiscal 2020 to Fiscal 2021.

The timing of the Kablooe acquisition in August 2020 accounted for $2,059,000 of the increase, with the

majority of the remaining increase due to the growth of the retail business.

$ (1,902,000 )

The increase in net revenues

in Fiscal 2022 was primarily driven by revenue growth in the design segment and to a lesser extent, revenue growth in the retail segment,

which was partially offset by a decline in revenue in the OEM distribution segment.

Gross profit increased $234,000,

from Fiscal 2020 to Fiscal 2021 and gross margin increased from 19.3% to 20.8% in the same period.

The increase in gross profit was primarily

attributable to the increase in revenues resulting from the Kablooe acquisition in August 2020 and retail sales.

The improvement in gross

margin was due to higher margins in the design segment, partially offset by pricing pressures in the OEM segment and higher cost of products

in the retail segment.

but gross margin declined from 20.8% in Fiscal 2021 to 19.8% in Fiscal 2022.

Better utilization and higher billing rates in the design

segment were mostly offset by higher importation and logistics costs, which drove OEM and retail distribution margins down.

Due to inflation

and the continued uncertainty surrounding supply chain stability, management believes there will be continued volatility in OEM and retail

distribution cost of sales in Fiscal 2023.

Sales and marketing expenses

increased 28.3% from Fiscal 2020 to Fiscal 2021.

The increase was primarily due to higher advertising costs and sales commissions as we

continue to expand our retail segment.

Sales and marketing as a percentage of revenues increased to 6.4% in Fiscal 2021 from 5.7% in Fiscal

General and administrative

expenses increased 13.1%, from Fiscal 2020 to Fiscal 2021.

The increase was driven by several factors including $836,000 of additional

expenses resulting from Kablooe, which was acquired in August 2020 and a $583,000 increase in bad debt expense.

These increases were partially

offset by a $327,000 decrease in impairment charges (see Note 6 to the consolidated financial statements), lower personnel and Board of

Director expenses resulting from the cost-cutting measures taken in the third quarter of Fiscal 2021, a reduction in severance costs and

lower professional fees.

General and administrative expenses remained consistent at 16.4% of revenues in Fiscal 2021 and Fiscal 2020.

We reported other income

of $1,289,000 in Fiscal 2021 as compared to $216,000 in Fiscal 2020.

The increase is due to the $1,357,000 forgiveness of note payable

related to the Paycheck Protection Program loan (“PPP loan”) and an increase in interest income on a note receivable from

a customer which was fully reserved for in Fiscal 2019.

These increases in other income were partially offset by a decrease in fair value

adjustments associated with acquisition related liabilities (see Note 6 to the consolidated financial statements).

In Fiscal 2021, we recorded

no tax provision or benefit, and we generated income before income taxes of $524,000, primarily resulting from the $1,357,000 forgiveness

of note payable related to the PPP loan.

The forgiveness of the PPP loan will not be recognized as taxable income per the Coronavirus

increased due to higher advertising and promotional costs, primarily in the retail segment.

Sales and marketing expenses as a percentage

of revenue increased from 6.4% in Fiscal 2021 to 6.7% in Fiscal 2022.

If revenues from 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 revenue, to increase in future

General and administrative expenses

increased in Fiscal 2022, primarily related to an increase in payroll costs and non-employee board members’ cash and equity compensation

due to the cost cutting measures taken in Fiscal 2021 which were not implemented in Fiscal 2022.

These increases were partially offset

by lower bad debt expense.

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 reported other expense of

$135,000 in Fiscal 2022 as compared to other income of $1,289,000 in Fiscal 2021.

The variance is primarily due to the $1,357,000 forgiveness

of note payable related to the Paycheck Protection Program loan (“PPP loan”) and to a lesser extent, driven by a decrease

in interest income on a note receivable from a customer which was fully reserved for in Fiscal 2019.

In Fiscal 2022, we recorded a

tax provision of $3,000, generated a loss before income taxes of $1,376,000 and had an effective tax rate of (0.2%).

In Fiscal 2021, we

recorded no tax provision or benefit, and we generated income before income taxes of $524,000, primarily resulting from the $1,357,000

forgiveness of note payable related to the PPP loan.

The forgiveness of the PPP loan was not recognized as taxable income per the Coronavirus

Aid, Relief and Economic Security Act (the “CARES Act”).

In Fiscal 2020, we recorded a tax provision of $9,000, generated

a loss before income taxes of $1,766,000 and had an effective tax rate of 0.5%.

We maintain significant net

operating loss carryforwards and do not recognize a significant income tax provision or benefit as our deferred tax provision is typically

offset by maintaining a full valuation allowance on our net deferred tax assets.

We maintain significant net operating loss carryforwards and do not

recognize a significant income tax provision or benefit as our deferred tax provision is typically offset by maintaining a full valuation

allowance on our net deferred tax assets.

Consolidated basic and diluted

earnings/(loss) per share was $0.05 and $(0.19) for Fiscal 2021 Fiscal 2020, respectively.

earnings/(loss) per share was $(0.14) and $0.05 for Fiscal 2022 and Fiscal 2021, 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.

In Fiscal 2021, due to

the growth of our retail division, we determined it to be a separate reportable segment.

The Fiscal 2020 results of operations 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.

The discussion that follows below

provides further details about the results of operations for each segment as compared to the prior year.

Segment Results of Operations

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Fiscal 2021 revenues

$ (1,254,000 )

Fiscal 2022 operating income/(loss)

$ (1,809,000 )

$ (2,484,000 )

$ (1,240,000 )

Fiscal 2021 operating income/(loss)

$ (1,030,000 )

OEM Distribution

in the OEM distribution segment declined 2.2% due to reduced revenues in the sale of diabetic products, partially offset by an increase

in other product revenue.

Revenues from diabetic products declined $649,000 and revenues from other products increased $213,000.

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

Net revenues in the OEM distribution

segment declined due to reduced revenues in the sale of diabetic products and, to a lesser extent, a decline in other OEM product revenue.

Revenues from diabetic products declined $1,185,000 and revenues from other products declined $69,000.

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 OEM distribution

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

$ (1,185,000 )

Other products

Total net revenues

$ (1,254,000 )

Diabetic Product Revenues

4 unchanged sentences

Revenues from diabetic products

declined 3.8%, primarily due to lower revenues from one major diabetic customer, which resulted from their switch to a lower cost product,

coupled with delays caused by supply chain constraints.

Revenue declines from other major diabetic customers were less significant and

were partially offset by an increase in revenue from all other diabetic products customers.

As mentioned above, management believes that

revenues from diabetic customers will continue to decline.

Revenues from diabetic products represented 86% of net revenues for the OEM

distribution segment in Fiscal 2021 compared to 87% in Fiscal 2020.

declined due to lower revenues from all major diabetic customers due to a reduction in the volume of orders from most major diabetic customers.

An increase in competition and continued pricing pressures, driven by inflation and in some cases a transition to lower cost carrying

cases, drove diabetic revenues down further.

These declines were partially offset by a net increase in revenue from other diabetic customers

which were less significant.

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

Revenues from diabetic products

represented 85% of net revenues for the OEM distribution segment in Fiscal 2022 compared to 86% in Fiscal 2021.

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 devices, tablets and firearms) on a made-to-order basis that are customized

to fit the products sold by our OEM customers.

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 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 8.6% due to the acquisition of new customers plus higher volume from certain existing customers.

We will continue to focus on

our sales and sales support teams in our attempt to expand and diversify our other products customer base.

Revenues of other products

represented 14% of our OEM distribution revenues in Fiscal 2021 as compared to 13% in Fiscal 2020.

decreased due to a decrease in sales volume from certain existing customers, which was offset by increases in business from other customers.

We will continue to focus on our sales and sales support teams in our attempt to expand and diversify our other products customer base.

Operating Income

Operating income for the

OEM distribution segment declined $137,000, or 8.5%, from Fiscal 2020 to Fiscal 2021 and operating income margin declined to 7.7% in Fiscal

2021, compared to 8.2% in Fiscal 2020.

These declines were driven primarily by lower sales revenue and a shift to lower-margin cases and

pricing pressures on diabetic products from customers.

The decline in gross margin from our diabetic products was partially offset by

higher gross margins on the sale of other products in Fiscal 2021.

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

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

Operating income for the OEM

distribution segment declined and operating income margin declined to 5.0% in Fiscal 2022, compared to 7.7% in Fiscal 2021, primarily

due to rising material and importation costs and continued pricing pressure from our major diabetic customers.

The cost of importing

all products from China has increased and both the diabetic and other OEM product lines have experienced pricing pressures from customers,

resulting in a decrease in gross margin as compared to the prior year.

The decline in gross margin was partially mitigated by lower selling

and marketing costs related to OEM sales commissions.

We continue to work on expanding our product offerings to include higher margin

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

Retail Distribution Segment

Net revenues in the retail

distribution segment increased $2,157,000 in Fiscal 2021 due to new product offerings and the continued expansion of our retail distribution

network, revenue derived from new retail agreements as well as an increase in volume with certain existing retailers.

In Fiscal 2020,

$758,000 of retail distribution revenues were derived from the sale and sourcing of personal protective equipment, the result of demand

caused by the pandemic, which did not recur in Fiscal 2021.

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

to expand and diversify our retail product offerings.

Operating loss for the retail

distribution segment increased $442,000 in Fiscal 2021.

The increase in revenues was offset by higher cost of sales caused by supply chain

issues and the elimination of the sale of personal protective equipment from Fiscal 2020, which generated higher gross margins.

and marketing expenses increased as well driven by higher sales commissions resulting from the increase in revenue.

Net revenues increased in Fiscal

2022 due to an increase in sales volume on certain products with two retailers.

As the cost of products increases and inflation continues

to reduce consumer spending, profitability becomes more challenging in the retail segment.

We plan to focus our sales and sales support

teams on efforts to match our product offerings with consumer demand, strategically increase the volume of revenue from more profitable

products and expand these product offerings through additional retailer websites.

The rising cost of freight, storage

and other logistics services outpaced the increase in revenue, which, when coupled with additional expense associated with increases in

other inventory related costs, led to a decrease in gross profit from Fiscal 2021 to Fiscal 2022.

This was further exacerbated by higher

sales and marketing expenses related to sales commissions, and advertising and promotional expenses necessary to support the growth in

revenue, which increased the operating loss margin from 24.5% in Fiscal 2021 to 43.8% in Fiscal 2022.

Design Segment

Net revenues in the

design segment increased $2,823,000, or 20.6%.

The increase in revenues was primarily due to the $2,059,000 additional revenue generated

by Kablooe, which was acquired in August 2020.

Additional revenue from new and existing customers drove the balance of the increase, which

was partially offset by declines in revenues from certain prior year customers.

Operating income/(loss) for

the design segment improved $981,000, primarily due to the reduction of $1,342,000 of impairment charges from Fiscal 2020.

improvements driven by better utilization rates and the inclusion of a full year of Kablooe results were offset by additional general

and administrative expenses relating to a $673,000 increase in bad debt expense and higher personnel costs.

The increase in net revenues

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 increased and

operating income margin improved from 3.6% in Fiscal 2021 to 10.6% in Fiscal 2022.

The increase in gross profit, driven by higher revenue

and better utilization and billing rates, was further enhanced by a decrease in general and administrative expenses primarily due to a

reduction in bad debt expense, partially offset by higher payroll costs.

LIQUIDITY AND CAPITAL RESOURCES

6 unchanged sentences

At September 30, 2022,

our working capital was $5,587,000 compared to $3,396,000 at September 30, 2020.

The improvement in working capital was primarily

due to the extension of the $1,600,000 note payable to Forward China to December 31, 2022.

Our largest vendor is Forward China, a related

entity, which is able to extend payment terms on outstanding liabilities when necessary (see Note 14 to the consolidated financial statements).

We can provide no assurances that any such extension will be given if requested.

In 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.

Therefore, in

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

and fourth quarters of Fiscal 2021.

At November 30, 2021, we

had $1,200,000 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 (see Note 14).

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.

As discussed in Note 18 to

the consolidated financial statements, on April 18, 2020, we entered into a PPP loan in an aggregate principal amount of $1,357,000.

December 2020, the Small Business Administration (“SBA”) approved our forgiveness request for this loan.

There is a six-year

period during which the SBA can review this forgiveness.

our working capital was $4,362,000 compared to $5,587,000 at September 30, 2021, the decrease primarily due to higher payables and accrued

expenses, partially offset by higher inventory levels.

At November 30, 2022, we had approximately $3,200,000 cash on hand and $1,300,000

available under our line of credit with a bank which matures May 31, 2023.

Forward China, our largest vendor

and an entity owned by our Chairman of the Board and Chief Executive Officer, holds a $1,600,000 promissory note (the “FC Note”)

issued by us which matures on December 31, 2024 (see Note 13 to the consolidated financial statements).

The balance of the FC Note was

reduced to $1,400,000 after we made principal payments of $200,000 in Fiscal 2022.

Although the FC 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.

Additionally, Forward China 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 FC Note again if we request an extension,

(ii) Forward China will continue to extend payment terms on outstanding payables when we need them, or (iii) any additional credit facility

will be available on terms acceptable to us or at all.

We anticipate that our liquidity

and financial resources will be adequate to manage our operating and financial requirements until at least December 31, 2022.

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.

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.

current environment of rising interest rates, any future borrowing is expected to result in higher interest expense.

Although we do not anticipate

4 unchanged sentences

Operating Activities

During Fiscal 2021, cash

used in operating activities of $528,000 resulted from an operating loss of $765,000, an increase in accounts receivable of $1,665,000,

an increase in inventories of $787,000, a decrease in deferred income of $297,000 and the net change in other operating assets and liabilities

During Fiscal 2022, cash provided

by operating activities of $1,535,000 resulted from an increase in accounts payable and amounts due to Forward China of $1,856,000, a

decrease in accounts receivable of $953,000, non-cash charges for depreciation, amortization, share-based compensation and bad debt expense

of $775,000, an increase in accrued expenses of $624,000 and the net change in other operating assets and liabilities of $443,000, partially

offset by the net loss of $1,378,000 and an increase in inventories of $1,738,000.

During Fiscal 2021, cash used

in operating activities of $528,000 resulted from an operating loss of $765,000, an increase in accounts receivable of $1,665,000, an

increase in inventories of $787,000, a decrease in deferred income of $297,000 and the net change in other operating assets and liabilities

of $223,000, partially offset by an increase in accounts payable and amounts due to Forward China of $2,306,000 and non-cash expenses

of $903,000 related to depreciation, amortization, share-based compensation and bad debt expense.

During Fiscal 2020, cash

used in operating activities of $263,000 resulted from a net loss of $1,775,000, an increase in accounts receivable of $733,000, non-cash

fair value adjustments of $334,000, and bad debt recoveries of $78,000, partially offset by non-cash impairment charges of $1,342,000,

depreciation and amortization of $272,000, share-based compensation of $245,000 and the net change in other operating assets and liabilities

Investing Activities

In Fiscal 2021, cash used

for investing activities of $67,000 resulted from purchases of property and equipment.

In Fiscal 2020, cash used

for investing activities of $390,000 resulted from the $322,000 net cash consideration for the Kablooe acquisition and purchases of property

and equipment of $68,000.

In Fiscal 2022 and Fiscal 2021,

cash used for investing activities of $170,000 and $67,000, respectively, resulted from purchases of property and equipment.

Financing Activities

In Fiscal 2021, cash used

in financing activities of $919,000 consisted of net repayments under our line of credit of $1,000,000, repayments of notes payable and

finance lease liabilities of $187,000, partially offset by proceeds from stock options exercised of $268,000.

In Fiscal 2020, cash provided

by financing activities of $485,000 consisted of $1,357,000 proceeds from the PPP loan and $32,000 in proceeds from stock options exercised,

partially offset by net repayments of $300,000 on the line of credit, payments of $500,000 of deferred cash consideration and $104,000

in repayments on notes payable and finance leases.

AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In Fiscal 2022, cash used in

financing activities of $200,000 consisted of principal payments on the promissory note held by Forward China.

In Fiscal 2021, cash used in

financing activities of $919,000 consisted of net repayments under our line of credit of $1,000,000, repayments of notes payable and finance

lease liabilities of $187,000, partially offset by proceeds from stock options exercised of $268,000.

QUANTITATIVE AND

QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial

statements and notes thereto included in this Annual Report may be found beginning on page F-1 of this Annual Report on Form 10-K.

IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

The consolidated financial statements

and notes thereto included in this Annual Report may be found beginning on page F-1 of this Annual Report on Form 10-K.

CHANGES IN AND

DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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-K

Item 7. Management’s Discussion and Analysis