What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-14 compared with 2022-08-10 · 178 added, 307 removed, 117 unchanged (81% of the section changed)

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financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30,

The following discussion and analysis compares our consolidated results of operations for the three and nine months

ended June 30, 2022 (the “2022 Quarter” and “2022 Period”, respectively) with those for the three and nine

months ended June 30, 2021 (the “2021 Quarter” and “2021 Period”, respectively).

Additionally, the

twelve months ending September 30, 2022 are referred to as “Fiscal 2022.” All dollar amounts and percentages presented

herein have been rounded to approximate values.

The following discussion and analysis compares our consolidated results of operations for the three months ended

December 31, 2022 (the “2023 Quarter”) with those for the three months ended December 31, 2021 (the “2022

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

Cautionary Note Regarding Forward-Looking Statements

This report contains

“forward-looking statements”, as such term is used within the meaning of the Private Securities Litigation Reform Act of

These statements include, 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 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 Securities and Exchange Commission.

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.

This report contains “forward-looking

statements”, as such term is used within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements

include, among other things, statements regarding our liquidity, plans on repaying outstanding debt obligations, 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.

These risks include the inability to expand our customer base, loss of additional

customers, pricing pressures, lack of success of our sales people, failure to develop products at a profit, failure to commercialize

products that we develop, continued supply chain issues, inability of our design division’s customers to pay for our services,

unanticipated issues with our affiliated sourcing agent, issues at Chinese factories that source our products as a result of the

pandemic or otherwise, and failure to obtain acceptance of our products.

No assurance can be given that the actual results will be

consistent with the forward-looking statements.

Investors should read carefully the factors described in the “Risk

Factors” section of the Company’s filings with the SEC, including the Company’s Form 10-K for the year ended

September 30, 2022 for information regarding risk factors that could affect the Company’s results.

We undertake no

obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law.

Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Business Overview

Forward Industries, Inc.

is a 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.

is a global design, manufacturing, sourcing and distribution company serving top tier medical and technology customers worldwide.

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.

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 devises 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 online retailer websites

to customers predominately 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 the second quarter of Fiscal

Labor shortages at U.S.

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 the first half of Fiscal 2022.

The timing and extent of these

COVID-19 related transportation disruptions is 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 maintaining

our employees.

The timing and extent of future inflation are difficult to predict, but we expect these rising costs to have a more significant

impact in the second half of Fiscal 2022.

pandemic continue to impact our business with higher historical costs for ocean freight and ground transportation, particularly from the

Asia-Pacific region.

We expect to see the benefits of declining ocean freight costs in future periods.

Inflation, in part associated with

the pandemic, continues to increase the cost of acquiring and retaining our employees and acquiring inventory.

The instability of transportation

costs and future inflation are still largely unknown but are expected to continue throughout 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 impact may continue

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,

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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.

pandemic and associated inflationary impact have fully receded, we expect business conditions to remain challenging.

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.

Variability of Revenues

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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”.

We discussed the material

accounting policies that are critical in making the estimates and judgments in our Annual Report on Form 10-K for the fiscal year ended

September 30, 2022, 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.

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RESULTS OF OPERATIONS FOR

THE THREE MONTHS ENDED JUNE 30, 2022 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2021

THE THREE MONTHS ENDED DECEMBER 31, 2022 COMPARED TO THE THREE MONTHS ENDED DECEMBER 31, 2021

Consolidated Results

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General and administrative expenses

Loss from operations

Other expense, net

(Loss)/income from operations

Other (income)/expense, net

Provision for income taxes

Net (loss)/income

The discussion that follows

below provides further details about our results of operations for the 2023 Quarter as compared to the 2022 Quarter.

Net revenues increased in

the OEM and design segments and were partially offset by revenue declines in the retail segment.

Net revenues declined in

the OEM and retail distribution segments, but these declines were partially offset by higher revenues in the design segment.

Our gross profit decreased

driven by lower profit in the OEM and retail distribution divisions, partially offset by higher profit in the design segment.

declined from 21.9% in the 2021 Quarter to 18.1% in the 2022 Quarter.

Higher utilization and billing rates drove design segment margins

However, higher importation and logistics costs drove margins down in both the OEM and retail distribution segments.

believes there will be continued volatility in OEM and retail distribution cost of sales for the remainder of Fiscal 2022.

across all segments and our gross margin declined from 22.6% in the 2022 Quarter to 17.8% in the 2023 Quarter, driven by continued pricing

pressures from our customers, higher importation and logistics costs and inflation.

Management believes there will be continued volatility

in OEM and retail distribution cost of sales for the remainder of Fiscal 2023.

Sales and marketing expenses

increased in the 2022 Quarter primarily due to an increase in sales related expenses in the design segment, partially offset by lower

advertising costs and sales commissions related to our retail distribution segment.

decreased in the 2023 Quarter primarily due to a decrease in advertising costs and sales commissions in the OEM and retail distributions

segments, partially offset by higher sales related expenses in our design segment.

Sales and marketing as a percentage of revenues remained

relatively flat at 6.3% in the 2022 Quarter.

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 revenues, to increase in future periods.

flat at 6.4% in the 2023 Quarter.

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 revenues, to increase in future periods.

General and administrative

expenses increased in the 2022 Quarter, primarily related to increases in corporate and design segment expenses.

These increases were

driven by higher payroll costs and higher cash and non-cash compensation for non-employee board members resulting from the cost cutting

measures taken in the 2021 Quarter which were not implemented in the 2022 Quarter.

Higher insurance costs accounted for a smaller portion

of the increase.

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.

Net other expense increased

due to a decrease in interest income on a customer note receivable, partially offset by a decrease in interest expense resulting from

expenses increased in the 2023 Quarter, primarily related to increases in corporate expenses, which were partially offset by declines

in design segment expenses.

These increase in corporate expenses were primarily driven by higher payroll costs and professional fees,

partially offset by lower equity compensation for non-employee board members.

Management continues to monitor the various components of

general and administrative expenses and how these costs are affected by inflationary and other factors.

We intend to adjust these costs

as needed based on the overall needs of the business.

We recorded net other income

of $37,000 in the 2023 Quarter compared to net other expense of $34,000 in the 2022 Quarter.

The variance is due to fair value adjustments

of $40,000 in the 2023 Quarter to reduce to the fair value of the earnout consideration related to the Kablooe acquisition, $18,000 of

net duty drawback income received in the 2023 Quarter, foreign currency fluctuations and a decrease in interest expense resulting from

a reduction in the amount of debt outstanding.

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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.

and do not recognize a significant income tax expense or benefit as our deferred tax provision is typically offset by a full valuation

allowance on our net deferred tax asset.

Consolidated basic and diluted

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

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Net revenues in the OEM distribution

segment increased primarily from an increase in sales of diabetic products, partially offset by a decrease in revenues from other products.

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 revenue.

segment decreased from lower sales volume from both diabetic customers as well as other OEM customers.

As consumer demand increases for

diabetic testing products which require no carrying case, we expect diabetic product sales to continue to represent a smaller portion

of our OEM distribution revenue.

In March 2023, a contract with one of our major diabetic customers will expire.

Due to increased pricing

pressures, we will not be extending our contract with this customer.

Revenue from this customer represented 12% of our consolidated net

revenues in both the 2023 Quarter and the 2022 Quarter.

We expect the loss of this customer to cause a significant decline in OEM distribution

segment revenues in future periods.

The following tables set

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Revenues from diabetic products

increased in the 2022 Quarter due to shipping and other logistical delays in the 2021 Quarter which delayed recognition of revenue for

some customers in the 2021 Quarter and a temporary increase in demand from one customer based on a change in product line.

These increases

were partially offset by a decrease in demand from another customer due to a computer chip shortage toward the end of the 2022 Quarter,

which decreased demand for the related product’s carrying case, and lower overall demand from another customer.

As mentioned above,

management believes that revenues from diabetic customers will decline in future periods.

decreased due to lower volumes in the 2023 Quarter related to timing of orders relative to our fiscal quarters and the loss of one product

to a competitor.

These decreases were partially offset by an increase in demand from another customer, which was also timing related.

As mentioned above, management believes that revenues from diabetic customers will decline in future periods.

Revenues from diabetic products

represented 91% of net revenues for the OEM distribution segment in the 2023 Quarter compared to 81% in the 2022 Quarter.

The remaining

revenues from our OEM distribution segment are described below.

Other Product Revenues

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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

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

decreased primarily due to lower sales volume with several existing customers.

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.

decreased due to lower sales volume with several existing customers, partially driven by the delayed rollout of certain customer product

lines and reduced demand from some customers.

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.

Operating Income

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OEM distribution segment decreased and operating income margin decreased from 9.5% in the 2022 Quarter to 2.6% in the 2023 Quarter, driven

by lower gross margins due to a shift in the mix of revenue in each period as well as rising material and importation costs.

While revenues

increased overall, more revenue was generated from sales to diabetic customers, which yield a lower gross margin, while revenue from other

OEM customers, which yield a higher gross margin, declined.

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.

by lower gross margins due to lower revenues and a shift in the mix of revenue in each period.

While revenues decreased in both diabetic

and other products, a higher portion of revenue in the 2023 Quarter was generated from sales to diabetic customers, which yield a lower

gross margin, while a lower portion of revenue was generated from other OEM customers, which yield a higher gross margin.

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

Considering the loss of a

significant diabetic customer and expected performance in the OEM and retail distribution segments, the Company is currently assessing

the terms of its sourcing agreement with Forward China, which is scheduled to expire on October 22, 2023 (See Note 8 to the condensed

consolidated financial statements).

The Company and Forward China have agreed to begin negotiations on a new sourcing agreement early

in the third quarter of Fiscal 2023.

While we believe a new agreement will be reached, we cannot provide any assurances that we

will be successful.

If an agreement cannot be reached, which could have a significant impact on the Company’s operations,

we will look at other alternatives for our OEM and retail distribution businesses prior to the expiration of the agreement.

Retail Distribution Segment

Net revenues decreased in

the 2022 Quarter primarily due to a reduction in sales volume of some products with one existing retailer.

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 decrease in revenues

was coupled with a decrease in gross margin resulting from higher freight, storage and other logistics costs, further increasing the operating

loss and operating loss margin from the prior year quarter.

This was partially offset by lower sales and marketing expenses driven by

lower sales commissions resulting from the decrease in revenue.

the 2023 Quarter primarily due to a reduction in sales volume with one existing retailer, which was partially offset by new business and

higher sales volumes from other 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, sell off slow-moving inventory to reduce storage and other inventory holding costs, 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 revenue leading to a decline in gross margin from the 2022 Quarter to the 2023 Quarter.

This was partially offset by lower sales and marketing expenses driven by lower sales commissions resulting from the decrease in revenue.

The operating loss margin increased from 16.4% in the 2022 Quarter to 30.8% in the 2023 Quarter.

Management continues to evaluate plans

to reduce costs in efforts to improve operating results in the retail distribution segment.

Design Segment

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Operating income for the

design segment increased, but operating income margin decreased slightly from 9.3% in the 2021 Quarter to 9.1% in 2022 Quarter.

in gross profit, driven by higher revenues and better utilization and billing rates, was partially offset by an increase in selling, general

and administrative expenses due to higher payroll related costs.

RESULTS OF OPERATIONS FOR

THE NINE MONTHS ENDED JUNE 30, 2022 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 2021

Consolidated Results

The table below summarizes our consolidated results

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

Consolidated Results of Operations

Revenues, net

Cost of sales

Sales and marketing expenses

General and administrative expenses

Loss from operations

Other expense/(income), net

Provision for income taxes

Net (loss)/income

$ (1,203,000 )

The discussion that follows

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

Net revenues increased across

all segments, most notably in the design segment and to a lesser extent, in the retail and OEM distribution segments.

Our gross profit increased,

primarily driven by the increase in revenues, but gross margin dropped slightly from 22.0% in the 2021 Period to 20.9% in the 2022 Period.

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.

Management believes there will be continued volatility in OEM and retail distribution

cost of sales for the remainder of Fiscal 2022.

Sales and marketing expenses

increased in the 2022 Period primarily due to higher advertising and promotional costs coupled with sales commissions related to our retail

distribution segment.

Sales and marketing as a percentage of revenues increased slightly to 6.5% in the 2022 Period.

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 revenues, to increase in future periods.

General and administrative

expenses increased in the 2022 Period, primarily related to an increase in corporate payroll costs and non-employee board members’

cash and equity compensation due to the cost cutting measures taken in the 2021 Quarter which were not implemented in the 2022 Period.

Higher insurance costs and a reduction in certain foreign tax credits received for research and development activities comprised the balance

of the increase.

These increases were partially offset by lower bad debt expense in the design segment.

Management continues to monitor

the various components of general and administrative expenses and how these costs are affected by inflationary and other factors.

to adjust these costs as needed based on the overall needs of the business.

We reported other expense

of $101,000 in the 2022 Period as compared to net other income of $1,323,000 in the 2021 Period.

The variance is primarily due to the

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

A decrease in interest

income on a customer note receivable and a decrease in interest expense contributed to the balance of the change.

In the 2022 Period, we generated

a net loss of $595,000.

In the 2021 Period, we generated net income of $608,000, 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

(loss)/earnings per share were $(0.06) and $0.06 for the 2022 Period and the 2021 Period, 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 period.

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 Period 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 Period revenues

2021 Period revenues

2022 Period operating income/(loss)

$ (1,937,000 )

2021 Period operating income/(loss)

OEM Distribution Segment

Net revenues in the OEM distribution

segment increased primarily due to higher sales of diabetic products coupled with a smaller increase in other OEM product revenue.

from diabetic products increased $655,000 and revenue from other products increased $127,000.

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

Other products

Total net revenues

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

increased in the 2022 Period due to shipping and other logistical delays in the 2021 Period which delayed recognition of revenue for some

customers in the 2021 Period and a temporary increase in demand from one customer based on a change in product line.

These increases were

partially offset by a decrease in demand from another customer due to a computer chip shortage toward the end of the 2022 Period, which

decreased demand for the related product’s carrying case, and lower overall demand from another customer.

As mentioned above, management

believes that revenues from diabetic customers will decline in future periods.

Revenues from diabetic products

remained consistent at 85% of net revenues for the OEM distribution segment in both the 2022 Period and the 2021 Period.

The remaining

revenues from our OEM distribution segment are described below.

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 sales volume from existing customers, which was partially offset by declines in business from other customers.

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

Operating Income

Operating income for the

OEM distribution segment decreased and operating income margin declined to 6.8% in the 2022 Period from 7.8% in the 2021 Period due to

a shift in the mix of revenue and rising material and importation costs.

The higher gross margins derived from other products was mostly

offset by declining margins on diabetic products.

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 period.

The decline in gross margin was partially mitigated by lower selling and marketing costs related to OEM sales commissions.

Retail Distribution Segment

Net revenues increased in

the 2022 Period due to an increase in sales volume on some products with certain existing 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 outpaced the increase in revenue, which led to a decrease in gross profit from the 2021 Period.

This was further

exacerbated by higher sales and marketing expenses related to sales commissions, advertising and promotional expenses to support the growth

in revenue, which increased the operating loss margin from 25.8% in the 2021 Period to 33.6% in the 2022 Period.

Design Segment

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 from 2.3% in the 2021 Period to 9.5% in the 2022 Period.

The increase in

gross profit, driven by higher revenues 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.

design segment decreased and operating income margin decreased from 11.7% in the 2022 Quarter to 8.1% in 2023 Quarter.

The impact of higher

direct labor costs driven by inflationary pressures, coupled with higher sales and marketing expenses, was slightly offset by better utilization

and increased billing rates.

LIQUIDITY AND CAPITAL RESOURCES

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liquidity have been adequate to satisfy working capital requirements arising in the ordinary course of business.

At June 30, 2022, our

working capital was $5,067,000 compared to $5,587,000 at September 30, 2021.

At July 31, 2022, we had

approximately $2,000,000 cash on hand and $1,300,000 available under our line of credit with a bank which matures May 31, 2023.

At December 31, 2022,

our working capital was $3,919,000 compared to $4,359,000 at September 30, 2022, the decrease primarily due to higher payables, partially

offset by higher accounts receivable balances.

At January 31, 2023, we had approximately $2,100,000 cash on hand and $1,300,000 available

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

As this line of credit has been renewed on multiple prior occasions,

management expects it will be renewed again.

Considering the loss of a significant OEM distribution segment customer (see Note 5 to the

condensed consolidated financial statements) and the retail distribution segment operating losses, management is planning to evaluate

the Company’s cost structure and implement cost cutting initiatives as deemed necessary.

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 the Company which matures on December 31, 2023 (see Note 8 to the condensed consolidated financial statements).

The balance of the FC Note was reduced to $1,450,000 after the Company made principal payments of $150,000 in Fiscal 2022.

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 when we need them, or (iii) any additional

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

Note”) issued by us which matures on December 31, 2024 (see Note 8 to the condensed consolidated financial statements).

of the FC Note was reduced to $1,350,000 after we made principal payments of $250,000 through December 31, 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

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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

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

During the 2022 Period and

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

During the 2022 Period, cash

provided by operating activities of $1,158,000 resulted from an increase in accounts payable and amounts due to Forward China of $3,064,000,

an increase in accrued expenses and other liabilities of $546,000, an increase in deferred revenue of $436,000, non-cash expenses of $442,000

related to depreciation, amortization, share-based compensation and bad debt expense and the net change in other operating assets and

liabilities of $74,000, partially offset by a $2,809,000 increase in inventories and a net loss of $595,000.

During the 2021 Period, cash

used in operating activities of $338,000 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.

During the 2023 Quarter and

2022 Quarter, our sources and uses of cash were as follows:

During the 2023 Quarter,

cash used in operating activities of $149,000 resulted from a net loss of $430,000, an increase in accounts receivable of $994,000, an

increase in inventories of $338,000, a decrease in accrued expenses and other current liabilities of $459,000 and the net change in other

operating assets and liabilities of $73,000, partially offset by an increase in accounts payable and amounts due to Forward China of $2,070,000

and non-cash expenses of $75,000 related to fair value adjustments, depreciation, amortization, share-based compensation and bad debt

During the 2022 Quarter,

cash provided by operating activities of $1,138,000 primarily resulted from net income of $180,000, 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 and the net change

in other operating assets and liabilities of $85,000.

Cash used in investing activities

in the 2022 Period and the 2021 Period of $140,000 and $61,000, respectively, resulted from purchases of property and equipment.

In the 2022 Period, cash

used in financing activities of $150,000 consisted of principal payments on the promissory note held by Forward China.

In the 2021 Period, cash

used in financing activities of $921,000 consisted of net repayments of the line of credit of $1,000,000, repayments of notes payable

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

in the 2023 Quarter and the 2022 Quarter of $45,000 and $66,000, respectively, resulted from purchases of property and equipment.

Cash used in financing activities

in the 2023 Quarter and the 2022 Quarter of $50,000 consisted of principal payments on the promissory note held by Forward China.

Related Party Transactions

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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

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