What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-14 compared with 2023-05-12 · 302 added, 281 removed, 171 unchanged (77% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following

discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements, and the notes thereto,

and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion

and analysis should be read in conjunction with our unaudited condensed consolidated financial statements, and the notes thereto, and

other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements

and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

The following discussion

and analysis compares our consolidated results of operations for the three and six months ended March 31, 2023 (the “2023 Quarter”

and “2023 Period”, respectively) with those for the three and six months ended March 31, 2022 (the “2022 Quarter”

and analysis compares our consolidated results of operations for the three and nine months ended June 30, 2023 (the “2023 Quarter”

and “2023 Period”, respectively) with those for the three and nine months ended June 30, 2022 (the “2022 Quarter”

and “2022 Period”, respectively).

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

Cautionary Note Regarding Forward-Looking

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.

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.

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

additional customers, pricing pressures, lack of success of our sales people, continued supply chain issues, inability of our design

division’s customers to pay for our services, unanticipated issues with our affiliated sourcing agent, and issues at Chinese

factories that source our product.

No assurance can be given that the actual results will be consistent with the forward-looking

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.

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

growth in our design segment, we are 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 segment provides hardware

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

Our OEM distribution segment 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.

Our retail distribution

segment sources and sells smart-enabled furniture, hot tubs and saunas, 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 our business with high capitalized inventory costs for inbound ocean freight, particularly from the Asia-Pacific region,

and expenses associated with outbound ground transportation.

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

Inflation, in part associated with the pandemic, continues to increase the cost of acquiring and retaining our employees and

acquiring inventory.

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

In July 2023, the Company

decided to cease its retail operations (“Retail Exit”).

The Retail Exit will have no effect on the operations of our other

The Company is currently working on a plan that will ensure the Retail Exit is made in an orderly manner.

At the time of this filing, the Company does not know the extent, or a range, of the costs that it will incur

as a result of the exit.

Our design segment provides

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

Our OEM distribution segment

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 segment sources and sells smart-enabled furniture, hot tubs and saunas, 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 our business with high capitalized inventory costs for inbound ocean freight, particularly from the Asia-Pacific

region, and expenses associated with outbound ground transportation.

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 conditions may continue to

negatively impact our results of operations, cash flows and financial position in future periods as well as that of our customers, including

their ability to pay for our services and to choose to allocate their budgets to new or existing projects which may or may not require

our services.

The effects of COVID-19 may

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

The current economic conditions may continue

to negatively impact our results of operations, cash flows and financial position in future periods as well as that of our customers,

including their ability to pay for our services and to choose to allocate their budgets to new or existing projects which may or may not

require our services.

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

As a result, the effects of

COVID-19 may not be fully reflected in our financial results until future periods.

Until the effects of the pandemic

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

In response to these

challenges, we will continue to focus on those factors that we can control:

closely managing and controlling our expenses and inventory

aligning our design and development schedules with demand in a proactive manner to minimize our cash operating costs;

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.

As a result, the effects

of COVID-19 may not be fully reflected in our financial results until future periods.

Until the effects of the

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

to these challenges, we will continue to focus on those factors that we can control:

closely managing and controlling our expenses;

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

RESULTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2023 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2022

RESULTS OF OPERATIONS FOR

THE THREE MONTHS ENDED JUNE 30, 2023 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2022

Consolidated Results

The table below summarizes our consolidated

results of operations for the 2023 Quarter as compared to the 2022 Quarter:

The table below summarizes our consolidated results

of operations for the 2023 Quarter as compared to the 2022 Quarter:

Consolidated Results of Operations

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Provision for income taxes

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

design and retail distribution segments but were partially offset by lower revenues in the OEM distribution segment.

Our gross profit decreased across

all segments and our gross margin declined from 21.8% in the 2022 Quarter to 14.2% in the 2023 Quarter, driven by continued pricing pressures

from our customers, high product, importation and logistics costs, additional retail inventory reserves and inflation.

Management believes

there will be continued volatility in OEM and retail distribution cost of sales for the remainder of Fiscal 2023.

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 decreased in

the OEM distribution segment, primarily related to the loss of a major diabetic customer in March 2023.

Higher revenues in the design

and retail distribution segments partially offset this decline.

As a result of the Retail Exit, we expect consolidated revenues to decline

in future periods.

Our gross profit decreased,

and our gross margin decreased slightly from 18.1% in the 2022 Quarter to 18.0% in the 2023 Quarter, driven by increased inventory reserves

in the retail segment, partially offset by higher revenues, better utilization and higher billing rates in the design segment.

was also offset by the loss of a major diabetic customer, which yielded lower margins, coupled with the placement of certain retail products

in physical stores, which yielded higher margins.

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 2023 Quarter primarily due to sales related severance costs in the OEM distribution segment and higher advertising and

commission expense in the design segment.

Sales and marketing as a percentage of revenues increased to 7.3% in the 2023 Quarter from 6.8%

in the 2022 Quarter.

If revenues from the retail distribution segment grow to comprise a significantly 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

decreased in the 2023 Quarter, primarily related to lower bad debt expense in the design segment.

increased in the 2023 Quarter primarily due to higher commission expense in the design segment due to increased sales and higher sales

promotions in the retail segment, offset by decreases in the sales related salaries in the OEM distribution segment.

Sales and marketing

as a percentage of revenues increased to 7.0% in the 2023 Quarter from 6.3% in the 2022 Quarter.

As a result of the Retail Exit, we expect

that our sales and marketing expenses will decrease in fiscal 2024.

General and administrative

expenses decreased slightly in the 2023 Quarter.

Lower corporate expenses, primarily driven by a reduction in bad debt expense and non-employee

directors share-based compensation expense, were partially offset by higher personnel related costs.

Management continues to monitor the

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

The decrease in other expense

is primarily due to a decrease in interest expense resulting from a reduction in the amount of debt outstanding.

We generated a net loss

of $871,000 and $356,000 in the 2023 Quarter and 2022 Quarter, respectively.

We maintain significant net operating loss carryforwards

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

allowance on our net deferred tax asset.

Higher interest income from

improved treasury management, coupled with lower interest expense resulting from a reduction in the amount of debt outstanding, drove

the change in net other expense.

We generated a net loss of

$537,000 and $419,000 in the 2023 Quarter and 2022 Quarter, respectively.

We maintain significant net operating loss carryforwards and

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

on our net deferred tax asset.

Consolidated basic and diluted

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Segment Results

The discussion that follows below

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

The discussion that follows

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

Segment Results of Operations

OEM Distribution

Retail Distribution

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2022 Quarter revenues

$ (1,845,000 )

2023 Quarter operating income/(loss)

2 unchanged sentences

The decrease in net revenues

in the OEM distribution segment resulted from lower sales volume from diabetic customers, which was partially offset by increased revenue

from 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 expired.

Due to increased pricing pressures, we did not extend our contract with this customer.

Revenue from this customer

represented approximately 12% of our consolidated net revenues in both the 2023 Quarter and 2022 Quarter.

We expect the loss of this customer

to cause a significant decline in OEM distribution segment revenues in future periods.

in the OEM distribution segment resulted from lower sales from both diabetic customers and 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 expired.

Due to increased pricing

pressures, we did not extend our contract with this customer.

Revenue from this customer represented approximately 12% of our consolidated

net revenues in 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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Diabetic products

$ (1,685,000 )

Other products

Total net revenues

$ (1,845,000 )

Diabetic Product Revenues

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

Revenues from diabetic

products decreased due to lower volumes from one major customer in the 2023 Quarter resulting from lower demand and the loss of one product

to a competitor.

These decreases were partially offset by an increase in volumes from another customer that was timing related.

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

Revenues from diabetic products represented

83% of net revenues for the OEM distribution segment in the 2023 Quarter compared to 89% in the 2022 Quarter.

Revenues from diabetic products

decreased due to the loss of one major diabetic customer in March 2023, the loss of one product to a competitor and the net decrease in

volume from other customers resulting from the timing of orders relative to the 2022 Quarter.

As mentioned above, management believes

that revenues from diabetic customers will decline in future periods.

Revenues from diabetic products represented 82% of net revenues

for the OEM distribution segment in the 2023 Quarter compared to 86% in the 2022 Quarter.

Other Product Revenues

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Revenues from other products

increased due to higher sales volume with some existing customers, which was partially offset by lower sales volume from some other customers.

decreased due to lower sales volume with some existing customers, which was partially offset by higher sales volume from some 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

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Operating income for the

OEM distribution segment decreased and operating income margin decreased from 7.0% in the 2022 Quarter to 0.7% in the 2023 Quarter, driven

by lower gross margins due to lower revenues and a shift in the mix of revenue, coupled with sales related severance costs.

While diabetic

revenues decreased overall, the decrease was mostly from more profitable products, thus driving overall gross margins down.

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, management reduced its OEM distribution segment sales and marketing personnel in March 2023 and is currently

OEM distribution segment decreased but operating income margin increased from 3.7% in the 2022 Quarter to 5.6% in the 2023 Quarter.

loss of one major diabetic customer in March 2023, which yielded lower margins, reduced revenues and gross profit, but improved gross

margin for this segment.

Lower sales and marketing costs resulting from reduced OEM sales personnel also contributed to the improvement.

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.

Considering the loss of a

significant diabetic customer, management reduced its OEM distribution segment sales and marketing personnel in March 2023 and 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

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Effective April 1, 2023, the Company and Forward China agreed to reduce the fixed portion

of the sourcing fee from $100,000 to $83,333 per month for the remaining term of the sourcing agreement, which is expected to result in

cash savings of $100,000 for the remainder of the 2023 fiscal year.

The Company and Forward China have begun negotiations on a new sourcing

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.

Management is planning to further evaluate the

OEM distribution segment cost structure and implement additional cost cutting initiatives as deemed necessary.

of the sourcing fee from $100,000 to $83,333 per month for the remaining term of the sourcing agreement, which resulted in cash savings

of $50,000 in the third quarter of fiscal 2023 and is expected to result in cash savings of $50,000 for the remainder of the 2023 fiscal

The Company and Forward China have begun negotiations on a new sourcing agreement.

In light of the Retail Exit, the Company

plans to discuss a further reduction in the sourcing fee commensurate with the services provided.

While we believe a new agreement will

be reached, we cannot provide any assurances that we will be successful.

If an agreement cannot be reached, which could have a significant

impact on the Company’s operations, we will look at other alternatives for our OEM distribution business prior to the expiration

of the agreement.

Management is planning to further evaluate the OEM distribution segment cost structure and implement additional cost

cutting initiatives as deemed necessary.

Retail Distribution Segment

The increase in net revenues

in the 2023 Quarter was driven by higher sales volumes and additional product offerings with existing retailers, and, to a lesser extent,

business from new retailers, which was partially offset by price reductions on certain products.

As inflation continues to increase the

cost of products and constrain consumer spending, profitability continues to be 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, attempt to negotiate

lower costing for these products, and expand these product offerings through additional retailer websites.

in the 2023 Quarter was driven by higher sales volumes and the placement of certain products in physical stores, which was partially offset

by price reductions on certain other products.

As inflation continues to increase the cost of products and constrain consumer spending,

profitability continues to be challenging in the retail segment.

The cost of importation,

storage, and other logistics services, coupled with additional inventory reserves, outpaced revenue leading to a decline in gross margin

from the 2022 Quarter to the 2023 Quarter.

This was partially offset by slightly lower sales and marketing expenses driven by a reduction

in commission expense resulting from a change in the mix of revenue.

The operating loss margin increased from 54.9% in the 2022 Quarter

to 80.1% in the 2023 Quarter.

Management continues to evaluate plans to reduce costs in efforts to improve operating results in the retail

distribution segment, including the consolidation of warehouse facilities and selling off slow-moving inventory to reduce storage costs.

storage, and other logistics services, coupled with higher inventory reserves and price reductions on certain products, outpaced revenue

leading to a negative gross profit and margin in the 2023 Quarter.

However, margins on some products placed in physical retail stores

slightly offset this.

Higher sales and marketing expenses, driven by an increase in marketing promotions to support revenue growth, drove

operating income down further.

The operating loss margin increased from 45.2% in the 2022 Quarter to 47.9% in the 2023 Quarter.

above, the Company recently decided to implement the Retail Exit.

Please see “Liquidity and Capital Resources”.

Design Segment

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The impact of better

utilization, increased billing rates and lower general and administrative expenses, driven by lower bad debt expense, was partially offset

by higher direct labor costs, driven by inflationary pressures, and slightly higher sales and marketing expenses.

RESULTS OF OPERATIONS

FOR THE SIX MONTHS ENDED MARCH 31, 2023 COMPARED TO THE SIX MONTHS ENDED MARCH 31, 2022

utilization and increased billing rates was partially offset by higher direct labor costs, driven by inflationary pressures, and slightly

higher personnel related expenses.

RESULTS OF OPERATIONS FOR

THE NINE MONTHS ENDED JUNE 30, 2023 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 2022

Consolidated Results

The table below summarizes our consolidated

results of operations for the 2023 Period as compared to the 2022 Period:

The table below summarizes our consolidated results

of operations for the 2023 Period as compared to the 2022 Period:

Consolidated Results of Operations

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Loss from operations

Other (income)/expense, net

Other expense, net

Provision for income taxes

1 unchanged sentence

$ (1,243,000 )

The discussion that follows below

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

Net revenues declined in the

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

Our gross profit decreased across

all segments and our gross margin declined from 22.2% in the 2022 Period to 16.0% in the 2023 Period, driven by continued pricing pressures

from our customers, high product, importation and logistics costs, additional retail inventory reserves and inflation.

Management believes

there will be continued volatility in OEM and retail distribution cost of sales for the remainder of Fiscal 2023.

The discussion that follows

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

Net revenues declined in

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

of the Retail Exit, we expect consolidated revenues to decline in future periods.

Our gross profit decreased

in both our OEM and retail segments, partially offset by a slight increase in gross profit in the design segment.

Gross margin declined

from 20.9% in the 2022 Period to 16.6% in the 2023 Period, driven by continued pricing pressures from our customers, high product, importation

and logistics costs, higher retail inventory reserves 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 slightly in the 2023 Period as sales related severance costs in the OEM distribution segment and higher advertising and commission

expenses in the design segment were partially offset by lower retail sales commissions resulting from a change in the mix of revenue.

Sales and marketing as a percentage of revenues increased slightly from 6.6% in the 2022 Period to 6.8% in the 2023 Period.

from the retail distribution segment grow to comprise a significantly 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

decreased in the 2023 Period, primarily related to 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.

We intend to adjust

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

We recorded net other income

of $10,000 in the 2023 Period compared to net other expense of $67,000 in the 2022 Period.

The variance is due to fair value adjustments

of $40,000 in the 2023 Period 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 Period, foreign currency fluctuations and a decrease in interest expense resulting from

a reduction in the amount of debt outstanding.

We generated a net loss

of $1,301,000 and $176,000 in the 2023 Period and 2022 Period, respectively.

We maintain significant net operating loss carryforwards

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

allowance on our net deferred tax asset.

increased slightly primarily due to higher sales related expenses in the design segment, partially offset by lower commissions, travel

and marketing overhead related to our retail segment and lower marketing related overhead in our OEM distribution segment.

Sales and marketing

as a percentage of revenues increased slightly from 6.5% in the 2022 Period to 6.9% in the 2023 Period.

As a result of the Retail Exit,

we expect that our sales and marketing expenses will decrease in fiscal 2024.

General and administrative

expenses decreased in the 2023 Period, primarily related to bad debt recoveries in the design segment and lower non-employee directors

share-based compensation expense, partially offset by higher professional fees and personnel costs.

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 recorded net other expense

of $5,000 in the 2023 Period compared to $101,000 in the 2022 Period.

The variance is due to fair value adjustments of $40,000 in the

2023 Period 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 Period, interest income from improved treasury management, foreign currency fluctuations and a decrease in

interest expense resulting from a reduction in the amount of debt outstanding.

We generated a net loss of

$1,838,000 and $595,000 in the 2023 Period and 2022 Period, respectively.

We maintain significant net operating loss carryforwards and

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

on our net deferred tax asset.

Consolidated basic and diluted

1 unchanged sentence

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.

The discussion that follows

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

Segment Results of Operations

OEM Distribution

Retail Distribution

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OEM Distribution Segment

Net revenues in the OEM

distribution 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.

Net revenues in the OEM distribution

segment decreased from lower sales volume from both diabetic customers and 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 expired.

Due to increased

pricing pressures, we did not extend our contract with this customer.

Revenue from this customer represented approximately 12% of our

consolidated net revenues in both the 2023 Period and 2022 Period.

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

in OEM distribution segment revenues in future periods.

Due to increased pricing pressures,

we did not extend our contract with this customer.

Revenue from this customer represented approximately 12% of our consolidated net revenues

in the 2022 Period.

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

The following tables set

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

Revenues from diabetic

products decreased due to lower demand from one major customer and the loss of one product to a competitor.

These decreases were partially

offset by an increase in demand from another customer, which was timing related.

As mentioned above, management believes that revenues

from diabetic customers will decline in future periods.

Revenues from diabetic products represented 87% of net revenues for the OEM distribution

segment in the 2023 Period compared to 85% in the 2022 Period.

Revenues from diabetic products

decreased due to the loss of a major customer in March 2023, lower demand from one major customer and the loss of one product to a competitor.

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

As mentioned above, management

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

Revenues from diabetic products represented 86% of net

revenues for the OEM distribution segment in the 2023 Period compared to 85% in the 2022 Period.

Other Product Revenues

4 unchanged sentences

Revenues from other products

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

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

lines and reduced demand from some customers.

9 unchanged sentences

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

Sales related severance costs had a lesser impact in the 2023 Period as they were mostly offset by savings in other sales related expenses.

Considering the loss of

a significant diabetic customer, management reduced its OEM distribution sales and marketing personnel in March 2023 and is currently

Considering the loss of a

significant diabetic customer, management reduced its OEM distribution segment sales and marketing personnel in March 2023 and 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

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Effective April 1, 2023, the Company and Forward China agreed to reduce the fixed portion

of the sourcing fee from $100,000 to $83,333 per month for the remaining term of the sourcing agreement, which is expected to result in

cash savings of $100,000 for the remainder of Fiscal 2023.

of the sourcing fee from $100,000 to $83,333 per month for the remaining term of the sourcing agreement, which resulted in cash savings

of $50,000 in the third quarter of fiscal 2023 and is expected to result in cash savings of $50,000 for the remainder of the 2023 fiscal

The Company and Forward China have begun negotiations on a new sourcing agreement.

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.

Management is planning to further evaluate the OEM distribution

segment cost structure and implement additional cost cutting initiatives as deemed necessary.

In light of the Retail Exit, the Company

plans to discuss a further reduction in the sourcing fee commensurate with the services provided.

While we believe a new agreement will

be reached, we cannot provide any assurances that we will be successful.

If an agreement cannot be reached, which could have a significant

impact on the Company’s operations, we will look at other alternatives for our OEM distribution business prior to the expiration

of the agreement.

Management is planning to further evaluate the OEM distribution segment cost structure and implement additional cost

cutting initiatives as deemed necessary.

Retail Distribution Segment

Net revenues decreased

slightly in the 2023 Period as lower sales volumes and price reductions on certain products were mostly offset by higher sales volumes

and additional product offerings with other retailers, and, to a lesser extent, business with new retailers.

As inflation continues to

increase the cost of products and constrain consumer spending, profitability continues to be challenging in the retail segment.

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, attempt

to negotiate lower costing for these products, and expand these product offerings through additional retailer websites.

Net revenues increased in

the 2023 Period due to an increase in sales volumes on some products with certain existing customers and the placement of certain products

in physical stores, partially offset by price reductions on certain other products.

As inflation continues to increase the cost of products

and constrain consumer spending, profitability continues to be challenging in the retail segment.

The cost of importation,

storage and other logistics services, coupled with additional inventory reserves, outpaced revenue leading to a decline in gross margin

from the 2022 Period to the 2023 Period.

This was partially offset by lower sales and marketing expenses driven by a reduction in commission

expense resulting from a change in the mix of revenue.

The operating loss margin increased from 28.6% in the 2022 Period to 53.7% in the

Management continues to evaluate plans to reduce costs in efforts to improve operating results in the retail distribution

segment including the consolidation of warehouse facilities and selling off slow-moving inventory to reduce storage costs.

storage, and other logistics services, coupled with higher inventory reserves and price reductions on certain products, outpaced revenue

leading to a decline in gross margin from the 2022 Period to the 2023 Period.

This was partially offset by lower sales and marketing expenses

driven by a reduction in commission expense resulting from a change in the mix of revenue.

The operating loss margin increased from 33.6%

in the 2022 Period to 51.3% in the 2023 Period.

As mentioned above, the Company recently decided to implement the Retail Exit.

see “Liquidity and Capital Resources”.

Design Segment

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Operating income for the

design segment decreased and operating income margin decreased from 9.8% in the 2022 Period to 8.7% in 2023 Period.

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 and lower general and administrative expenses, driven by lower bad debt expense.

LIQUIDITY AND CAPITAL

design segment increased slightly but operating income margin decreased from 9.5% in the 2022 Period to 9.1% in 2023 Period.

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 and lower general and administrative expenses, driven by bad debt recoveries.

LIQUIDITY AND CAPITAL RESOURCES

Our primary source of liquidity

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

At March 31, 2023, our

working capital was $3,066,000 compared to $4,359,000 at September 30, 2022, the decrease primarily due to higher payables and lower inventories,

partially offset by higher accounts receivable balances.

At April 30, 2023, we had approximately $2,800,000 cash on hand and $1,300,000

available under our line of credit with a bank which was renewed in March 2023 and matures May 31, 2024.

Considering the loss of a significant

OEM distribution segment customer (see Note 5 to the condensed consolidated financial statements), which led to the April 2023 reduction

in the sourcing fee to Forward China, and the continued retail distribution segment operating losses, management reduced its OEM segment

sales and marketing personnel in March 2023 and is planning to further evaluate the Company’s OEM and retail cost structure and

implement additional cost cutting initiatives as deemed necessary.

At June 30, 2023, our

working capital was $2,476,000 compared to $4,359,000 at September 30, 2022, the decrease was primarily due to lower inventory balances.

At July 31, 2023, we had approximately $3,000,000 cash on hand and $1,300,000 available under our line of credit with a bank which was

renewed in March 2023 and matures May 31, 2024.

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

the condensed consolidated financial statements), which led to the April 2023 reduction in the sourcing fee to Forward China, and the

continued retail distribution segment operating losses, management reduced its OEM segment sales and marketing personnel in March 2023

and is planning to further evaluate the Company’s OEM cost structure and implement additional cost cutting initiatives as deemed

Additionally, in July 2023, the Company decided to implement the Retail Exit.

The Company is working on a plan that will ensure

the transition out of the retail business is done in an orderly manner while also satisfying existing customer obligations.

At this time,

the Company does not know the extent, or a range, of the costs that it will incur as a result of the exit.

Forward China, our largest

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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 $1,300,000 after we made principal payments of $300,000 through March 31, 2023.

We made additional principal

payments on this note of $50,000 subsequent to March 31, 2023.

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

At March 31, 2023, our accounts payable due to Forward China was $8,977,000.

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 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

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

of the FC Note was reduced to $1,200,000 after we made principal payments of $400,000 through June 30, 2023.

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.

At June 30, 2023, our accounts payable due to Forward China was approximately

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 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

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

During the 2023 Period

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

During the 2023 Period,

cash used in operating activities of $50,000 resulted from a net loss of $1,301,000, an increase in accounts receivable of $686,000, a

decrease in accrued expenses and other current liabilities of $196,000, a decrease in deferred income of $272,000 and the net change in

other operating assets and liabilities of $78,000, partially offset by a decrease in inventories of $880,000, an increase in accounts

payable and amounts due to Forward China of $1,404,000 and non-cash expenses of $199,000 related to fair value adjustments, depreciation,

amortization, share-based compensation and bad debt expense.

During the 2023 Period and

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

During the 2023 Period, cash

provided by operating activities of $360,000 primarily resulted from an increase in accounts payable, accrued expenses and amounts due

to Forward China of $1,836,000, and increase in deferred income of $433,000 and non-cash expenses of $321,000 for depreciation, amortization,

share-based compensation and bad debt expense, partially offset by an operating loss of $109,000, an increase in inventories of $1,835,000,

a decrease in prepaid expenses and other current assets of $255,000 and the net change in other operating assets and liabilities of $31,000.

Cash used in investing

activities in the 2023 Period and the 2022 Period of $70,000 and $130,000, respectively, resulted from purchases of property and equipment.

provided by operating activities of $562,000 resulted from a decrease in inventories of $1,908,000, an increase in accounts payable and

amounts due to Forward China of $651,000, non-cash expenses of $271,000 related to fair value adjustments, depreciation, amortization,

share-based compensation and bad debt expense, an increase in accrued expenses and other current liabilities of $129,000 and the net change

in other operating assets and liabilities of $24,000, partially offset by a net loss of $1,838,000, an increase in prepaid expenses and

other current assets of $272,000, a decrease in deferred income of $174,000 and an increase in accounts receivable of $137,000.

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.

Cash used in investing activities

in the 2023 Period and the 2022 Period of $117,000 and $140,000, respectively, resulted from purchases of property and equipment.

Cash used in financing activities

in the 2023 Period and the 2022 Period of $100,000 consisted of principal payments on the promissory note held by Forward China.

in the 2023 Period and the 2022 Period of $200,000 and $150,000, respectively, consisted of principal payments on the promissory note

held by Forward China.

Related Party Transactions

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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