What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-02-14 compared with 2023-08-14 · 194 added, 385 removed, 88 unchanged (87% 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 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

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

The following

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

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

and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023.

The following discussion

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

and analysis compares our condensed consolidated results of operations for the three months ended December 31, 2023 (the “2024 Quarter”)

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

All dollar amounts and percentages presented

herein have been rounded to approximate values.

Cautionary Note Regarding Forward-Looking Statements

This report contains

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

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

obligations, expectations regarding the effect of the pandemic and inflation on our business, as well as other statements regarding

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

Forward-looking statements generally can be

identified by words such as "anticipates," "believes," "estimates," "expects,"

"intends," "plans," "predicts," "projects," "will be," "will continue,"

"will likely result," and similar expressions.

These forward-looking statements are based on current expectations and

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

from those reflected in the forward-looking statements.

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.

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, our

beliefs and our plans regarding gaining Nasdaq compliance, 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, a

significant decrease in our stock price upon effectuating a reverse stock split, 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,

and failure to obtain acceptance of our products.

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.

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, 2023 for information regarding risk factors that

could affect the Company’s results.

We undertake no obligation to revise or publicly release the results of any revision to these

forward-looking statements, except as required by law.

Given these risks and uncertainties, readers are cautioned not to place undue reliance

on such forward-looking statements.

Business Overview

Forward Industries, Inc.

is a 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 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.

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.

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

Company’s design division provides hardware and software product design and engineering services to customers predominantly located

The Company’s original equipment manufacturing (“OEM”) distribution division sources and sells carrying

cases and other accessories for medical monitoring and diagnostic kits as well as a variety of other portable electronic and non-electronic

devices to OEMs, or their contract manufacturers worldwide, that either package our products as accessories “in box” together

with their branded product offerings or sell them through their retail distribution channels.

The Company does not manufacture any of

its OEM products and sources substantially all of these products from independent suppliers in China, through Forward Industries Asia-Pacific

Corporation, a British Virgin Islands corporation (“Forward China”).

Discontinued Operations

Considering the

recurring losses incurred by the retail distribution segment, in July 2023, the Company decided to cease operations of our retail

distribution segment (“Retail Exit”) 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.

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 December 31, 2023 and September 30, 2023 and the results of operations for the retail segment have

been classified as discontinued operations on the condensed consolidated statements of operations for the three months ended

December 31, 2023 and 2022.

On May 11, 2023, the U.S.

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.

Variability of Revenues

9 unchanged sentences

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

September 30, 2022, under the caption “Management’s Discussion and Analysis—Critical Accounting Policies and Estimates”.

There has been no material change in critical accounting policies or estimates during the period covered by this report.

September 30, 2023, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical

Accounting Policies and Estimates”.

There has been no material change in critical accounting policies or estimates during the period

covered by this report.

Recent Accounting Pronouncements

1 unchanged sentence

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

RESULTS OF OPERATIONS FOR

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

RESULTS OF OPERATIONS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2023 COMPARED TO THE THREE MONTHS ENDED DECEMBER 31, 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 from continuing operations for the 2024 Quarter as compared to the 2023 Quarter:

Consolidated Results of Operations

Revenues, net

$ (2,601,000 )

Cost of sales

2 unchanged sentences

Loss from operations

Other expense, net

Other (income)/expense, net

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 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.

Loss from continuing operations

The discussion that follows below

provides further details about our results from continuing operations for the 2024 Quarter as compared to the 2023 Quarter.

Net revenues declined significantly

in the OEM distribution segment and, to a lesser extent, in the design segment.

Our gross profit decreased across

both segments, but our gross margin increased from 20.2% in the 2023 Quarter to 23.0% in the 2024 Quarter.

The gross margin increase was

driven by our OEM distribution segment due to a change in the mix of revenue and a reduction in our sourcing fee with Forward China, partially

offset by lower utilization rates in our design segment.

Sales and marketing expenses

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

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.

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.

decreased primarily due to lower marketing related overhead in our OEM distribution segment.

Sales and marketing as a percentage of revenues

increased from 4.2% in the 2023 Quarter to 5.2% in the 2024 Quarter.

General and administrative expenses

decreased in the 2024 Quarter, primarily related to a decline in design segment and corporate expenses.

These decreases were primarily

driven by lower payroll 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 recorded net other expense

of $1,000 in the 2024 Quarter compared to net other income of $37,000 in the 2023 Quarter.

The variance is due to fair value adjustments

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

net duty drawback income received in the 2023 Quarter, offset by interest income from interest bearing deposits in the 2024 Quarter and

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

We generated a loss from

continuing operations of $381,000 and $91,000 in the 2024 Quarter and 2023 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

loss per share was $0.05 and $0.04 for the 2023 Quarter and the 2022 Quarter, respectively.

loss per share from continuing operations were $0.04 and $0.01 for the 2024 Quarter and the 2023 Quarter, respectively.

Segment Results

The discussion that follows

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

Corporate Expenses

2 unchanged sentences

$ (2,367,000 )

$ (2,601,000 )

2024 Quarter operating income/(loss)

1 unchanged sentence

OEM Distribution Segment

The decrease in net revenues

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

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

OEM Revenues by Product Line

Diabetic products

$ (1,685,000 )

Other products

Total net revenues

$ (1,845,000 )

Diabetic Product Revenues

Our OEM distribution segment

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

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

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

Revenues from diabetic products

decreased 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

Our OEM distribution segment

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

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

to fit the products sold by our OEM customers.

Revenues from other products

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

Operating Income

Operating income for the

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

condensed consolidated financial statements).

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 $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 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 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

The increase in net revenues

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

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

Operating income for the

design segment increased and operating income margin increased from 9.1% in the 2022 Quarter to 10.0% in 2023 Quarter.

The impact of better

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:

Consolidated Results of Operations

Revenues, net

Cost of sales

Sales and marketing expenses

General and administrative expenses

Loss from operations

Other expense, net

Provision for income taxes

$ (1,838,000 )

$ (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 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 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

loss per share was $0.18 and $0.06 for the 2023 Period and the 2022 Period, respectively.

Segment Results

The discussion that follows

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

Segment Results of Operations

OEM Distribution

Retail Distribution

Corporate Expenses

2023 Period revenues

2022 Period revenues

$ (3,328,000 )

2023 Period operating income/(loss)

$ (1,742,000 )

$ (1,933,000 )

$ (1,833,000 )

2022 Period operating income/(loss)

$ (1,339,000 )

OEM Distribution Segment

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 the 2022 Period.

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

Net revenues in the OEM

distribution segment decreased from lower sales volume from diabetic customers, partially offset by increased volumes with other OEM

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 13% of our consolidated net revenues in the 2023 Quarter.

We expect the loss of this customer to continue to

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

The following tables set

8 unchanged sentences

Our OEM distribution segment

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

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

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

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

Revenues from diabetic products

decreased 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.

Revenues from diabetic

products decreased primarily due to the loss of one of our major diabetic customers whose contract expired, lower volumes in the 2024

Quarter related to timing of orders relative to our fiscal quarters and the loss of one product to a competitor.

As mentioned above, management

1 unchanged sentence

Revenues from diabetic products represented 71% of net

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

revenues for the OEM distribution segment in the 2024 Quarter compared to 91% in the 2023 Quarter.

Other Product Revenues

4 unchanged sentences

Revenues from other products

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.

increased due to new customers and higher sales volume with several existing customers, partially offset by reduced demand from other

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 decreased and operating income margin decreased from 6.8% in the 2022 Period to 2.7% in the 2023 Period, driven

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

While revenues decreased in both diabetic and other products,

the decrease in diabetic revenue was mostly 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.

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

condensed consolidated financial statements).

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 $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

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 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”.

OEM distribution segment decreased and operating income margin decreased from 2.6% in the 2023 Quarter to 2.0% in the 2024 Quarter, driven

by lower revenues and lower gross profit.

Operating expenses decreased, but at a lower rate than revenue.

This was partially offset by

higher gross margins driven by a decrease in revenues from lower margin diabetic customers.

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.

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 9 to the

condensed consolidated financial statements for more information on the sourcing agreement with Forward China.

Design Segment

The increase in net revenues

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.

The decrease in net revenues

in the design segment was driven by declines in revenues from certain prior year customers, a shift in timing of projects with some customers,

partially offset by projects from new customers.

Operating income for the

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

design segment decreased and operating income margin decreased from 8.1% in the 2023 Quarter to 5.2% in 2024 Quarter.

This decrease was

driven by lower utilization rates and higher direct labor costs driven by inflationary pressures, partially offset by lower sales and

marketing expenses and increased billing rates on some projects.

LIQUIDITY AND CAPITAL

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 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

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 8 to the condensed consolidated financial statements).

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.

At December 31, 2023,

our working capital deficit, which excludes discontinued assets held for sale, was $949,000 compared to working capital of $26,000 at

September 30, 2023.

The decrease was primarily due to the Forward China promissory note of $850,000, which matures on December 31, 2024

and is now included in current liabilities, an increase in payables due Forward China and lower accounts receivable balances.

31, 2024, 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

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 9 to the condensed consolidated financial statements).

The balance of the FC

Note was reduced to $850,000 after we made principal payments of $750,000 through December 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 additional extensions as deemed necessary.

Additionally, Forward China has extended payment terms on our outstanding

payables due to them when necessary.

At December 31, 2023, our accounts payable due to Forward China was approximately $8,894,000.

order to preserve our current and 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 request.

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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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

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.

During the 2024 Quarter

and 2023 Quarter, our sources and uses of cash were as follows:

During the 2024 Quarter,

cash provided by operating activities of $116,000 resulted from an increase in accounts payable and amounts due to Forward China of $522,000,

a decrease in accounts receivable of $445,000, a decrease in discontinued assets held for sale $372,000 and non-cash expenses of $121,000

related to depreciation, amortization, share-based compensation and bad debt expense, partially offset by a decrease in accrued expenses

and other current liabilities of $863,000, a net loss of $354,000 and the net change in other operating assets and liabilities of $127,000.

During the 2023 Quarter,

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

increase in inventories of $289,000, an increase in discontinued assets held for sale $49,000, a decrease in accrued expenses and other

current liabilities of $459,000 and the net change in other operating assets and liabilities of $73,000, partially offset by an increase

in accounts payable and amounts due to Forward China of $2,070,000 and non-cash expenses of $75,000 related to fair value adjustments,

depreciation, amortization, share-based compensation and bad debt expense.

Cash used in investing

activities in the 2024 Quarter and the 2023 Quarter of $20,000 and $45,000, respectively, resulted from purchases of property and equipment.

Cash used in financing activities

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

in the 2024 Quarter and the 2023 Quarter of $250,000 and $50,000, respectively, consisted of principal payments on the promissory note

held by Forward China.

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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