What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-12-21 compared with 2022-12-16 · 212 added, 262 removed, 181 unchanged (72% of the section changed)

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and

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

The following discussion

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

on Form 10-K.

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Forward Industries, Inc.

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

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

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

and outside the Company.

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

Our design division provides

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“in box” together with their branded product offerings or sell them through their retail distribution channels.

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

to customers predominantly located in the U.S.

The effects of the COVID-19 pandemic

continue to impact the retail and OEM distribution segments of our business.

The increase in global consumer demand, coupled with the

global shipping container shortage, dramatically increased demand for both ocean freight and ground transportation.

These factors led

to a significant increase in freight costs, particularly from the Asia-Pacific region and most notably in Fiscal 2022.

Labor shortages

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

be unloaded and to arrive at our warehouses.

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

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

The timing and extent of these COVID-19 related transportation

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

The effects of the pandemic had

a lesser impact on the design segment of our business.

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

employees, particularly in the second half of Fiscal 2022.

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

these rising costs to continue into Fiscal 2023.

The effects of COVID-19 may further

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

The current economic conditions may continue to

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

their ability to pay for our products and services and to choose to allocate their budgets to new or existing projects which may or may

not require our products and services.

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

a result, the effects of COVID-19 may not be fully reflected in our financial results until future periods.

Until the effects of the pandemic

have fully receded, we expect business conditions to remain challenging.

In response to these challenges, we will continue to focus

on those factors that we can control:

closely managing and controlling our expenses and inventory levels;

aligning our design and development

schedules with demand in a proactive manner to minimize our cash operating costs;

pursuing further improvements in the productivity and

effectiveness of our development, selling and administrative activities and, where appropriate, taking advantage of opportunities to enhance

our business growth and strategy.

Additionally, see Part I, Item

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

Considering the recurring losses incurred by the

retail segment, in July 2023, the Company decided to cease operations of our retail distribution segment and we are presenting the results

of operations for this segment within discontinued operations in the current and prior periods presented herein.

The discontinuation of

the retail segment represents a strategic shift in the Company’s business.

The primary assets of the retail segment are inventory

and accounts receivable.

The Company expects to sell, liquidate, or otherwise dispose of remaining retail inventory by June 30, 2024,

and to collect remaining retail accounts receivable by the end of Fiscal 2024.

After this time, we expect to have no further significant

continuing involvement with the retail distribution segment.

The inventory of the retail segment is presented as discontinued assets held

for sale on the balance sheets at September 30, 2023 and 2022 and the results of operations for the retail segment have been classified

as discontinued operations on the consolidated statements of operations for the years ended September 30, 2023 and 2022.

All information

and results in this annual report on Form 10-K exclude the discontinued operations unless otherwise noted.

See Note 3 to our consolidated

financial statements for additional information on discontinued operations.

On May 11, 2023, the U.S.

Department of Health and Human Services declared the end of the Public Health Emergency for COVID-19;

however, the effects of COVID-19

continue to linger throughout the global economy and our businesses.

Though the severity of COVID-19 has subsided, new variants, or the

outbreak of a new pathogen, could interrupt business, cause renewed labor and supply chain disruptions, and negatively impact the global

and US economy, which could materially and adversely impact our businesses.

Additionally, see Part I,

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

Variability of Revenues and Results of Operations

A significant portion of our

revenue is concentrated with several large customers, some of which are the same and some of which change over time.

A significant portion of

our revenue is concentrated with several large customers, some of which are the same and some of which change over time.

Orders from some

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OEM Distribution Segment

The OEM distribution segment

recognizes revenue when finished goods are shipped to its customers (in general, these conditions occur at either point of shipment or

point of destination, depending on the terms of sale and transfer of control);

(ii) there are no other deliverables or performance obligations;

The OEM distribution

segment recognizes revenue when:

(i) finished goods are shipped to its customers (in general, these conditions occur at either point

of shipment or point of destination, depending on the terms of sale and transfer of control);

(ii) there are no other deliverables

or performance obligations;

and (iii) there are no further obligations to the customer after the title of the goods has transferred.

If the Company receives consideration

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

in the accompanying consolidated balance sheets.

Retail Distribution Segment

The retail distribution segment

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

Revenue is recognized when control, as

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

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

Other than product delivery, the retail

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

Revenue is measured

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

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

When the Company receives consideration

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

in the accompanying consolidated balance sheets.

If the Company receives consideration before achieving the criteria previously mentioned, it records a contract liability, which is

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

Design Segment

The design segment applies the

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

segment typically engages in two types of contracts:

The design segment applies

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

design segment typically engages in two types of contracts:

(i) time and material and (ii) fixed price.

The Company recognizes revenue over time

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

Revenues from fixed price contracts that require

performance of services that are not related to the production of tangible assets are recognized by using cost inputs to measure progress

toward the completion of its performance obligations, or the “cost to cost” method.

The Company recognizes revenue

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

Revenues from fixed price contracts that

contain specific deliverables are recognized when the performance obligation has been satisfied or the transfer of goods to the customer

require performance of services that are not related to the production of tangible assets are recognized by using cost inputs to measure

progress toward the completion of its performance obligations, or the “cost to cost” method.

Revenues from fixed price contracts

that contain specific deliverables are recognized when the performance obligation has been satisfied or the transfer of goods to the customer

has been completed and accepted.

Recognized revenues that will

not be billed until a later date, or contract assets, are recorded as an asset and classified as a component of accounts receivable in

the accompanying consolidated balance sheets.

Recognized revenues that

will not be billed until a later date, or contract assets, are recorded as an asset and classified as a component of accounts receivable

in the accompanying consolidated balance sheets.

Contracts where collections to date have exceeded recognized revenues, or contract liabilities,

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Segment Reporting

We have three reportable segments:

OEM distribution, retail distribution and design.

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

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

contract manufacturers worldwide.

The retail distribution segment sources and sells smart-enabled furniture, hot tubs and a variety of

other products through various online retailer websites to customers predominantly located in the U.S.

The design segment consists of

two operating segments (IPS and Kablooe, which have been aggregated into one reportable segment) that provide a full spectrum of hardware

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

As a result of discontinuing

our retail reportable segment, we now have two reportable segments:

OEM distribution and design.

The OEM distribution segment sources

and distributes carrying cases and other accessories for medical monitoring and diagnostic kits and a variety of other portable electronic

and non-electronic devices directly to OEMs or their contract manufacturers worldwide.

The design segment consists of two operating segments

(IPS and Kablooe, which have been aggregated into one reportable segment) that provide a full spectrum of hardware and software product

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

Our chief operating decision

maker (“CODM”) regularly reviews revenue and operating income for each segment to assess financial results and allocate resources.

For our OEM and retail distribution segments, we exclude general and administrative and general corporate expenses from their measure

of profitability as these expenses are not allocated to the segments and therefore not included in the measure of profitability used by

For the design segment, general and administrative expenses directly attributable to that segment are included in its measure

of profitability as these expenses are included in the measure of its profitability reviewed by the CODM.

We do not include intercompany

activity in our segment results to be consistent with the information that is presented to the CODM.

Segment assets consist of accounts

receivable and inventory, which are regularly reviewed by the CODM, as well as goodwill and intangible assets resulting from design segment

acquisitions (see Note 15 to the consolidated financial statements).

For our OEM distribution segment, we exclude general and administrative and general corporate expenses from its measure of profitability

as these expenses are not allocated to the segments and therefore not included in the measure of profitability used by the CODM.

design segment, general and administrative expenses directly attributable to that segment are included in its measure of profitability

as these expenses are included in the measure of its profitability reviewed by the CODM.

We do not include intercompany activity in our

segment results to be consistent with the information that is presented to the CODM.

Segment assets consist of accounts receivable and

inventory, which are regularly reviewed by the CODM, as well as goodwill and intangible assets resulting from design segment acquisitions (see

Note 16 to the consolidated financial statements).

Inventory Valuation

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of goodwill impairment in Fiscal 2023 or Fiscal 2022.

Our intangible assets are reviewed

for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

the recoverability of our intangible assets, we must make estimates and assumptions regarding future cash flows and other factors to determine

the fair value of the respective assets.

These estimates and assumptions could have a significant impact on whether an impairment charge

is recognized and the magnitude of any such charge.

Fair value estimates are made at a specific point in time, based on relevant information.

These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined

with precision.

Our intangible assets are

reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

In assessing the recoverability of our intangible assets, we must make estimates and assumptions regarding future cash flows and other

factors to determine the fair value of the respective assets.

These estimates and assumptions could have a significant impact on whether

an impairment charge is recognized and the magnitude of any such charge.

Fair value estimates are made at a specific point in time, based

on relevant information.

These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore

cannot be determined with precision.

Changes in assumptions could significantly affect the estimates.

If these estimates or material related assumptions change

in the future, we may be required to record impairment charges related to our intangible assets.

There were no indications of impairment

of intangible assets in Fiscal 2022 or 2021.

If these estimates or material related

assumptions change in the future, we may be required to record impairment charges related to our intangible assets.

There were no indications

of impairment of intangible assets in Fiscal 2023 or 2022.

Recent Accounting Pronouncements

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This pronouncement

is effective for us for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years.

We are currently

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

In December 2019, the FASB issued

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

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

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

GAAP by clarifying and amending existing guidance.

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

within those fiscal years.

Early adoption is permitted.

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

impact to our consolidated financial statements.

is effective for us for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years and is not expected

to have a material impact on our consolidated financial statements.

RESULTS OF OPERATIONS FOR FISCAL 2023 COMPARED

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The table below summarizes our consolidated results

of operations for Fiscal 2022 as compared to Fiscal 2021:

of continuing operations for Fiscal 2023 as compared to Fiscal 2022:

Consolidated Results of Operations

$ (1,519,000 )

Cost of sales

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General and administrative expenses

Loss from operations

Operating income

Other expense/(income), net

Income tax provision

Consolidated net (loss)/income

$ (1,378,000 )

$ (1,902,000 )

The increase in net revenues

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

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

Gross profit increased $234,000,

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

Better utilization and higher billing rates in the design

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

Due to inflation

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

distribution cost of sales in Fiscal 2023.

Income from continuing operations

The decrease in net revenues

in Fiscal 2023 was primarily driven by a decline in revenue in the OEM distribution segment, which was partially offset by revenue growth

in the design segment.

Gross profit decreased and

gross margin declined from 23.0% in Fiscal 2022 to 22.8% in Fiscal 2023.

This decrease was mainly driven by the OEM distribution segment

because of continued pricing pressures from our customers, high product, importation and logistics costs and inflation.

Sales and marketing expenses

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

Sales and marketing expenses as a percentage

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

If revenues from the retail segment grow to comprise a larger portion

of the overall business, management expects sales and marketing costs, both in total and as a percentage of revenue, to increase in future

General and administrative expenses

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

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

These increases were partially offset

by lower bad debt expense.

Management continues to monitor the various components of general and administrative expenses and how these

costs are affected by inflationary and other factors.

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

We reported other expense of

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

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

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

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

In Fiscal 2022, we recorded a

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

In Fiscal 2021, we

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

forgiveness of note payable related to the PPP loan.

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

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

We maintain significant net operating loss carryforwards and do not

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

allowance on our net deferred tax assets.

increased primarily due to higher sales related expenses in the design segment, partially offset by lower marketing related overhead in

our OEM distribution segment.

Sales and marketing expenses as a percentage of revenue increased from 3.9% in Fiscal 2022 to 4.5% in Fiscal

General and administrative

expenses decreased in Fiscal 2023, 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.

We intend to adjust these costs

as needed based on the overall needs of the business.

We reported other

income of $19,000 in Fiscal 2023 as compared to other expense of $135,000 in Fiscal 2022.

The variance is due to fair value

adjustments of $70,000 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 interest bearing deposits,

foreign currency fluctuations and a decrease in interest expense resulting from a reduction in the amount of debt outstanding.

In Fiscal 2023, we recorded

a tax provision of $20,000, generated income from continuing operations before income taxes of $179,000 and had an effective tax rate

In Fiscal 2022, we recorded a tax provision of $3,000, generated income from continuing operations before income taxes of $452,000

and had an effective tax rate of 0.5%.

Consolidated basic and diluted

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

earnings per share from continuing operations was $0.02 and $0.04 for Fiscal 2023 and Fiscal 2022, 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.

The discussion that follows

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

Segment Results of Operations

OEM Distribution

Retail Distribution

Corporate Expenses

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$ (4,034,000 )

Fiscal 2022 operating income/(loss)

$ (1,519,000 )

$ (2,484,000 )

$ (1,240,000 )

Fiscal 2021 operating income/(loss)

Fiscal 2023 operating income

$ (2,462,000 )

Fiscal 2022 operating income

OEM Distribution

Net revenues in the OEM distribution

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

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

As consumer demand increases for

diabetic testing products which require no carrying case, we expect diabetic product sales to represent a smaller portion of our OEM distribution

The following tables set forth

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

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 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

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

OEM Revenues by Product Line

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Revenues from diabetic products

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

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

cases, drove diabetic revenues down further.

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

which were less significant.

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

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 continue to decline.

Revenues from diabetic products

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Our OEM distribution segment

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

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

products sold by our OEM customers.

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

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

to fit the products sold by our OEM customers.

Revenues from other products

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

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

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.

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

Operating income for the OEM

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

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

Operating income for the

OEM distribution segment declined and operating income margin declined to 3.1% in Fiscal 2023, compared to 5.0% in Fiscal 2022, driven

by lower gross margins and a shift in the mix of revenue.

While revenues decreased in both diabetic and other products, a large portion

of the decrease in diabetic revenue was from more profitable products, thus driving overall gross margins down.

The cost of importing

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

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

The decline in gross margin was partially mitigated by lower selling

and marketing costs related to OEM sales commissions.

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

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

Retail Distribution Segment

Net revenues increased in Fiscal

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

As the cost of products increases and inflation continues

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

We plan to focus our sales and sales support

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

products and expand these product offerings through additional retailer websites.

The rising cost of freight, storage

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

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

This was further exacerbated by higher

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

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

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

to work on expanding our product offerings to include higher margin products and enhancing our sales efforts to grow revenue and increase

gross profit.

Considering the loss of a

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

its sourcing fee with Forward China.

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 resulted in cash savings of $100,000

for Fiscal 2023.

The Company and Forward China signed a new Supply Agreement effective October 2023, which further reduced the fixed portion

of the sourcing fee to $65,833 per month.

See Note 14 to the consolidated financial statements for more information on the sourcing agreement

with Forward China.

Design Segment

The increase in net revenues

was driven by new customers and an increase in projects from certain existing customers, which was partially offset by declines in revenues

from certain prior year customers.

Operating income increased and

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

The increase in gross profit, driven by higher revenue

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

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

in the design segment was driven by an increase in revenue from one major customer, coupled with an increase in projects from new and

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

Operating income for the

design segment increased slightly but operating income margin decreased from 10.6% in Fiscal 2022 to 9.6% in Fiscal 2023.

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 bad debt recoveries.

LIQUIDITY AND CAPITAL RESOURCES

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At September 30, 2023,

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

expenses, partially offset by higher inventory levels.

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

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

Forward China, our largest vendor

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

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

The balance of the FC Note was

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

Although the FC Note has been extended on multiple

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

an additional credit facility as deemed necessary.

Additionally, Forward China has extended payment terms on our outstanding payables

due to them when necessary.

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

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

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

our working capital was $26,000 compared to $1,209,000 at September 30, 2022, which excludes discontinued assets held for sale.

was primarily due to higher payables and accrued expenses and a decrease in accounts receivable, partially offset by an increase in cash.

At November 30, 2023, we had approximately $3,800,000 cash on hand and $1,300,000 available under our line of credit with a bank which

matures May 31, 2024.

There are no assurances this line of credit will extend beyond May 31, 2024.

Forward China, our

largest vendor and an entity owned by our Chairman of the Board and Chief Executive Officer, holds a $1,600,000 promissory note (the

“FC Note”) issued by us which matures on December 31, 2024 (see Note 14 to the consolidated financial statements).

balance of the FC Note was reduced to $1,100,000 after we made principal payments of $500,000 in Fiscal 2023 and Fiscal 2022.

Although the FC Note has been extended on multiple occasions to assist us with our liquidity position, we plan on funding the

repayment at maturity using existing cash balances and/or obtaining additional extensions as deemed necessary.

Additionally, Forward

China has extended payment terms on our outstanding payables due to them when necessary.

At September 30, 2023, our accounts payable

due to Forward China was approximately $8,246,000.

In connection with the new sourcing agreement (see Note 14 to the consolidated

financial statements) and in order to preserve our future liquidity, Forward China agreed to limit the amount of outstanding

payables it would seek to collect from us to $500,000 in any 12-month period, which we agreed to pay within 30 days of any such

This agreement pertains only to payables that were outstanding at October 30, 2023 of $7,365,000.

Purchases from Forward

China made after October 30, 2023, are not covered by this agreement and are expected to be paid according to normal payment terms.

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

extend additional payment terms on any payables not covered by the agreement, if needed, 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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Operating Activities

During Fiscal 2022, cash provided

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

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

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

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

During Fiscal 2021, cash used

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

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

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

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

During Fiscal 2023,

cash provided by operating activities of $1,041,000 resulted from a decrease in discontinued assets held for sale of $2,642,00, an

increase in accounts payable and amounts due to Forward China of $783,000, an increase in accounts receivable of $495,000, non-cash

charges for depreciation, amortization, share-based compensation and bad debt expense of $481,000 and the net change in other

operating assets and liabilities of $427,000, partially offset by the $70,000 non-cash adjustment to the fair value of the Kablooe

earnout consideration and the net loss of $3,737,000.

During Fiscal 2022, cash

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

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

expense of $775,000, an increase in accrued expenses of $624,000 and the net change in other operating assets and liabilities of $552,000,

partially offset by the net loss of $1,378,000 and an increase in discontinued assets held for sale of $1,847,000.

Investing Activities

2 unchanged sentences

Financing Activities

In Fiscal 2022, cash used in

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

In Fiscal 2021, cash used in

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

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

QUANTITATIVE AND

QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In Fiscal 2023 and Fiscal

2022, cash used in financing activities of $300,000 and $200,000, respectively, consisted of principal payments on the promissory note

held by Forward China.

AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements

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

CHANGES IN AND

DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

The consolidated financial

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

IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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

What changed 10-K

Item 7. Management’s Discussion and Analysis