What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-14 compared with 2024-05-10 · 153 added, 157 removed, 239 unchanged (56% of the section changed)

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

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion

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The following discussion

and analysis compares our condensed consolidated results of operations for the three and six months ended March 31, 2024 (the “2024

Quarter” and “2024 Period”, respectively) with those for the three and six months ended March 31, 2023 (the “2023

and analysis compares our condensed consolidated results of operations for the three and nine months ended June 30, 2024 (the “2024

Quarter” and “2024 Period”, respectively) with those for the three and nine months ended June 30, 2023 (the “2023

Quarter” and “2023 Period”, respectively).

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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, continued supply chain issues, a significant decrease in our stock price

upon effectuating a reverse stock split, inability to regain or maintain compliance with Nasdaq listing standards, 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 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.

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

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, continued supply chain issues, a

significant decrease in our stock price upon effectuating a reverse stock split, inability to maintain compliance with Nasdaq listing

standards, 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 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.

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

Business Overview

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Chief Executive Officer.

In June 2024, the Company’s stockholders

authorized, and the Company’s Board of Directors approved, a 1-for-10 reverse stock split of our common stock, which became

effective on June 18, 2024.

Accordingly, all references made to share, per share, or common share amounts in the accompanying condensed

consolidated financial statements and applicable disclosures have been retroactively adjusted to reflect the reverse stock split.

Discontinued Operations

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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.

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 March 31, 2024 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 and six months ended March 31, 2024 and 2023.

The Company sold, liquidated, or otherwise disposed of

the remaining retail inventory as of June 30, 2024, and will collect the 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 June 30, 2024 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 and nine months ended June 30, 2024 and 2023.

On May 11, 2023, the U.S.

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RESULTS OF OPERATIONS FOR

THE THREE MONTHS ENDED MARCH 31, 2024 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2023

THE THREE MONTHS ENDED JUNE 30, 2024 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2023

Consolidated Results

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Revenues, net

$ (1,909,000 )

Cost of sales

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Net revenues declined significantly

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

Our design segment gross

profit decreased while our OEM gross profit remained essentially flat.

Our gross margin increased from 19.8% in the 2023 Quarter to 20.5%

in the 2024 Quarter, primarily driven by a change in the mix of our OEM distribution segment revenue and a reduction in our sourcing fee

with Forward China, partially offset by lower utilization rates in our design segment.

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

Our gross profit decreased

in both the design and OEM distribution segments.

Our gross margin decreased from 25.2% in the 2023 Quarter to 20.4% in the 2024 Quarter,

due to lower utilization rates in our design segment, partially offset by a change in the mix of our OEM distribution segment revenue

and a reduction in our sourcing fee with Forward China.

Sales and marketing expenses

decreased primarily due to staff reduction in our OEM distribution segment and remained essentially flat as a percentage of revenues.

decreased primarily due to staff reduction in our OEM distribution segment and decreased slightly as a percentage of revenues.

General and administrative

expenses increased in the 2024 Quarter, primarily due to a credit loss recovery in the 2023 Quarter that did not recur in the 2024 Quarter,

slightly offset by a decline in corporate expenses.

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 $6,000 in the 2024 Quarter compared to $27,000 in the 2023 Quarter.

The variance is due to an increase in 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.

expenses remained flat in the 2024 Quarter mainly due to increased costs related to the Nasdaq non-compliance matter that were offset by

lower Board of directors’ compensation.

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 $5,000 in the 2024 Quarter compared to net other expense of $15,000 in the 2023 Quarter.

The variance is due to an increase in 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 $546,000 and $119,000 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.

continuing operations of $377,000 in the 2024 Quarter compared to income of $134,000 in the 2023 Quarter.

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 from continuing operations were $0.05 and $0.01 for the 2024 Quarter and the 2023 Quarter, respectively.

(loss) / income per share from continuing operations were ($0.34) and $0.12 for the 2024 Quarter and the 2023 Quarter, respectively.

Segment Results

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2023 Quarter revenues

$ (1,298,000 )

$ (1,909,000 )

2024 Quarter operating income/(loss)

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Net revenues in the OEM distribution

segment decreased primarily from the loss of one major diabetic customer in March 2023.

Due to increased pricing pressures, we did not

extend our contract with this customer.

Revenue from this customer represented 13.9% 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.

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.

segment decreased slightly as volume declines from some diabetic customers were partially offset by higher volumes with other diabetic

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.

The following tables set

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Diabetic products

$ (1,402,000 )

Other products

Total net revenues

$ (1,298,000 )

Diabetic Product Revenues

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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 and

the loss of one product to a competitor.

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

future periods.

decreased due to the loss of one of our major diabetic customers whose contract expired, lower volumes from some diabetic customers, partially

offset by higher volumes from other diabetic customers.

Management believes that revenues from diabetic customers will decline in future

Revenues from diabetic products represented 81% of net revenues for the OEM distribution segment in the 2024 Quarter compared

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Revenues from other products

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.

increased due to some new customers, partially offset by reduced demand from other customers.

We will continue to focus on our sales and

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

Operating Income

Operating income for the

OEM distribution segment increased and operating income margin increased from 0.7% in the 2023 Quarter to 4.1% in the 2024 Quarter, driven

by a change in the mix of revenue and lower sales and marketing expenses.

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.

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

Operating income declined

slightly for the OEM distribution segment and operating income margin declined from 5.5% in the 2023 Quarter to 4.8% in the 2024 Quarter.

Reductions to marketing personnel were offset by lower gross margins due to the mix of revenue and allocation of the sourcing fee from

Forward China.

Design Segment

The decrease in net revenues

in the design segment was driven by declines in revenues from certain prior year customers, a decrease in volume of work and projects

with continuing customers, partially offset by projects from new customers.

in the design segment was primarily driven by one customer whose revenue declined approximately $1,200,000, as well as a net decrease

in volume of work and projects with continuing customers, partially offset by projects from new customers.

Operating income for the

design segment decreased and operating income margin decreased from 9.3% in the 2023 Quarter to (1.1%) in 2024 Quarter.

This decrease

was driven by lower utilization rates in the 2024 Quarter and credit loss recoveries in the 2023 Quarter that did not recur in the 2024

design segment decreased and operating income margin decreased from 10.0% in the 2023 Quarter to 1.1% in 2024 Quarter, primarily driven

by lower utilization rates.

RESULTS OF OPERATIONS FOR

THE SIX MONTHS ENDED MARCH 31, 2024 COMPARED TO THE SIX MONTHS ENDED MARCH 31, 2023

THE NINE MONTHS ENDED JUNE 30, 2024 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 2023

Consolidated Results

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Loss from continuing operations

$ (1,304,000 )

$ (1,227,000 )

The discussion that follows

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Our gross profit decreased

across both segments, but our gross margin increased from 20.0% in the 2023 Period to 21.7% in the 2024 Period driven by a change in the

mix of our OEM distribution segment revenue and a reduction in our sourcing fee with Forward China, partially offset by lower utilization

rates in our design segment.

across both segments, and our gross margin decreased slightly from 21.6% in the 2023 Period to 21.2% in the 2024 Period driven by lower

utilization rates in our design segment, partially offset by a change in the mix of our OEM distribution segment revenue and a reduction

in our sourcing fee with Forward China.

Sales and marketing expenses

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General and administrative

expenses increased in the 2024 Period, primarily related to a credit loss recovery in the 2023 Period that did not recur in the 2024 Period,

offset by a slight decrease in corporate expenses.

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.

expenses increased slightly in the 2024 Period.

Increased corporate expenses, primarily driven by costs related to Nasdaq non-compliance

issues and a credit loss recovery in the 2023 Period that did not recur in the 2024 Period, were partially offset by lower payroll related

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 $7,000 in the 2024 Period compared to net other income of $10,000 in the 2023 Period.

of $3,000 in the 2024 Period compared to net other expense of $5,000 in the 2023 Period.

The variance is due to fair value adjustments

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Segment Results of Operations

OEM Distribution

Corporate Expenses

2024 Period revenues

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$ (1,586,000 )

$ (5,330,000 )

2024 Period operating income/(loss)

$ (1,858,000 )

$ (1,301,000 )

2023 Period operating income/(loss)

$ (1,273,000 )

$ (1,230,000 )

OEM Distribution Segment

Net revenues in the OEM distribution

segment decreased primarily from the loss of one major diabetic customer in March 2023.

In March 2023, a contract with one of our major

diabetic customers expired.

segment decreased primarily from the loss of one major diabetic customer in March 2023 and, to a lesser extent, due to lower volumes from

other diabetic customers, which were partially offset by new business with non-diabetic customers.

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 13.7% of our consolidated net revenues in the 2023 Period.

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

decline in OEM distribution segment revenues in future periods.

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.

from this customer represented 10.1% of our consolidated net revenues in the 2023 Period.

We expect the loss of this customer to continue

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

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

The following tables set

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

OEM Revenues by

OEM Revenues by Product Line

Diabetic products

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The decrease in net revenues

in the design segment was driven by declines in revenues from certain prior year customers, a decrease in volume of work and projects

with continuing customers, partially offset by projects from new customers.

in the design segment was primarily driven by one customer whose revenue declined approximately $1,200,000, as well as a net decrease

in volume of work and projects with continuing customers, partially offset by projects from new customers.

Operating income for the

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This decrease was

driven by lower utilization rates in the 2024 Period and credit loss recoveries in the 2023 Period that did not recur in the 2024 Period,

partially offset by lower payroll costs and increased billing rates on some projects.

driven by lower utilization rates and credit loss recoveries in the 2023 Period that did not recur in the 2024 Period, partially offset

by lower payroll costs and increased billing rates on some projects.

LIQUIDITY AND CAPITAL RESOURCES

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

At March 31, 2024, our

At June 30, 2024, our

working capital deficit, which excludes discontinued assets held for sale, was $1,576,000 compared to working capital of $26,000 at September

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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 $750,000 after we made principal payments of $850,000 through March 31, 2024.

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 March 31, 2024, our accounts payable due to Forward China was approximately $8,688,000.

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 new 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 necessary to preserve future cash flow and liquidity, we have the ability to implement cost-cutting

measures in a timely manner as we have done in prior periods, which may include a reduction in labor force and/or salary reductions

for existing personnel as deemed necessary.

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.

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 $600,000 after we made principal payments of $1,000,000 through June 30, 2024.

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 June 30, 2024, our accounts payable due to Forward China was approximately $9,301,000.

In 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.

Effective July 5, 2024, the

Company entered into an Accounts Payable Conversion Agreement (the “Conversion Agreement”) with Forward China.

Under the terms

of the Conversion Agreement, Forward China agreed to convert $1,700,000 of the Due to Forward China payable into shares of the Company’s

Series A-1 preferred stock (the “Preferred Stock”).

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 new 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 necessary to preserve future cash flow and liquidity, we have the ability to implement cost-cutting measures in a timely manner as

we have done in prior periods, which may include a reduction in labor force and/or salary reductions for existing personnel as deemed

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.

Although we do not anticipate

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

During the 2024 Period,

cash used in operating activities of $528,000 resulted from a net loss of $907,000, decreases in accrued expenses and other current

liabilities of $797,000, a decrease in deferred income of $69,000, and the net change in other operating assets and liabilities of

$46,000 partially offset by a decrease in discontinued assets held for sale of $508,000, non-cash expenses of $228,000 related to

depreciation, amortization, share-based compensation and credit loss expense, a decrease in accounts receivable of $484,000, and an

During the 2024 Period, cash

used in operating activities of $72,000 resulted from a net loss of $1,307,000, decreases in accrued expenses and other current liabilities

of $715,000, a decrease in deferred income of $92,000, and the net change in other operating assets and liabilities of $50,000 partially

offset by a decrease in discontinued assets held for sale of $508,000, non-cash expenses of $333,000 related to depreciation, amortization,

share-based compensation and credit loss expense, a decrease in accounts receivable of $479,000, a decrease in inventory $91,000 and an

increase in accounts payable and amounts due to Forward China of $681,000.

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 and discontinued assets

held for sale 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 credit loss expense.

During the 2023 Period, cash

provided by operating activities of $562,000 resulted from a decrease in discontinued assets held for sale $1,622,000, a decrease in inventory

$286,000, 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.

Investing Activities

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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