10-K
1
forward_10k-093020.htm
ANNUAL REPORT
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2020
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-34780
FORWARD INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
700 Veterans Memorial Highway, Suite
100, Hauppauge, NY 11788
(Address of principal executive offices, including zip code)
(631) 547-3041
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.01 FORD The Nasdaq Stock Market
Securities registered pursuant to Section
12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. ☐
Yes ☒ No
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Act. ☐
Yes ☒ No
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. ☒ Yes
☐ No
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rue 405 of Regulation S-T during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒
Yes ☐ No
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule
12b-2 of the Exchange Act).
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared
or issued its audit report. ̈
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐
Yes ☒ No
As
of March 31, 2020, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant
was approximately $7,400,000 based on the closing price ($1.11) as reported on the Nasdaq Stock Market.
As of November 30, 2020, 9,886,351 shares
of the registrant’s common stock were outstanding.
Documents Incorporated by Reference
Portions of the registrant's Proxy Statement
for the 2021 Annual Meeting of Shareholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K
to the extent stated herein. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of
the registrant's fiscal year ended September 30, 2020.
Forward Industries, Inc.
Table of Contents
PART I Page
No.
Item 1. Business 3
Item 1A. Risk Factors 9
Item 1B. Unresolved Staff Comments 18
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Mine Safety Disclosures 18
PART II
Item 6. Selected Financial Data 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 29
Item 8. Financial Statements and Supplementary Data 30
Item 9A. Controls and Procedures 30
Item 9B. Other Information 30
PART III
Item 10. Directors, Executive Officers and Corporate Governance 31
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners and Management 31
Item 14. Principal Accountant Fees and Services 31
PART IV
Item 15. Exhibits and Financial Statement Schedules 32
Signatures 33
PART I
ITEM 1. BUSINESS
General
Forward Industries,
Inc. (“Forward”, “we”, “our” or the “Company”), through its wholly-owned subsidiaries,
Forward Industries (IN), Inc., (“Forward US”), Forward Industries (Switzerland) GmbH, (“Forward Switzerland”),
Forward Industries UK Limited, (“Forward UK”), Intelligent Product Solutions, Inc., (“IPS”), and Kablooe,
Inc., (“Kablooe”), is a fully integrated design, development and manufacturing solution provider for top tier medical
and technology customers worldwide. The Company has expanded its ability to design and develop solutions for our existing multinational
client base and expand beyond the diabetic product line into a variety of industries with a full spectrum of hardware and software
product design and engineering services. In addition to our existing design and distribution of carry and protective solutions,
primarily for handheld electronic devices, the Company is now a one-stop shop for design, development and manufacturing solutions
serving a wide range of clients in the industrial, commercial and consumer industries. The Company’s previous principal customer
market has been original equipment manufacturers, or “OEMs” (or the contract manufacturing firms of these OEM customers),
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’s OEM products include carrying cases and other accessories for medical
monitoring and diagnostic kits and a variety of other portable electronic and non-electronic products (such as sporting and recreational
products, bar code scanners, smartphones, GPS location devices, tablets and firearms). The Company’s OEM customers are located
in: (i) the Asia-Pacific region, which we refer to as the “APAC Region”; (ii) Europe, the Middle East, and Africa,
which we refer to as the “EMEA Region”; and (iii) the geographic area encompassing North America, Central America and
South America, which we refer to as the “Americas”. The Company does not manufacture any of its OEM products and sources
substantially all of its OEM products from independent suppliers in China, through Forward Industries Asia-Pacific Corporation,
a British Virgin Islands corporation (“Forward China”).
As a result of the
expansion of the design development capabilities through its 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.
By virtue of
our strategic collaboration and distribution agreements, we have secured a portfolio of smart enabled products which we have begun
distributing to retail outlets in the United States. The rollout of these products has been delayed by COVID-19 as discussed below.
As a result of this collaboration and other product initiatives, we invested in and began to build out a retail distribution network
responsible for getting products into big box retailers for retail consumption. This build out is a continuation of our strategy
to be a one-stop shop for product development, manufacture and distribution and represents a significant achievement in completing
the strategic process of taking a product from concept to the consumer.
Through the manufacturer
representative agreements we currently have in place, we expect to gain sales coverage to retailers such as Best Buy, Target, Walmart,
Costco, Amazon, CVS, Walgreens, Staples, Office Depot and many others. The manufacturer representative model allows us to engage
and support a large sales team and cover a larger territory with a variable cost model as these representatives work on commission
only.
The outbreak of the
COVID-19 virus in China and its subsequent spread throughout the world has impacted our Fiscal 2020 results of operations.
In efforts to contain the virus, authorities have implemented travel restrictions, quarantines, business limitations and shutdowns.
Since the majority of our workforce is based in New York, these restrictions have required substantially all our employees to work
from home for much of Fiscal 2020. During the third quarter of Fiscal 2020, productivity of our direct labor employees was
reduced, which caused a decline in revenue and gross profit. As some of these restrictions were relaxed in the fourth quarter of
Fiscal 2020, employees started to return to the office with minimal operational challenges. Business shutdowns resulting from the
pandemic disrupted our supply chain and the manufacture or shipment of our products and have delayed the rollout of our smart enabled
retail products to big box retail stores, causing our distribution segment revenues in Fiscal 2020 to be less than anticipated.
Additionally, our design segment reported lower revenues as demand for its design and development services were reduced or delayed.
The impact from lower revenue was partially offset by a reduction in certain selling and travel related expenses resulting from
government mandated stay-at-home orders and travel restrictions as well as revenues derived from sales and sourcing of personal
protective equipment. The pandemic had temporarily impacted our liquidity in Fiscal 2020, as collections of accounts receivable
were somewhat delayed at certain times.
The economy
started to open in certain jurisdictions where the virus was considered under control. However, there continue to be
areas with increased rates of infection that could cause government officials to enact more restrictions on how businesses
operate. The future impacts of the pandemic and any resulting economic impact are largely unknown and could be
significant. It is possible that the pandemic, the measures taken by the governments of countries affected and the resulting
economic impact may 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 choosing 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. Refer to “Part I, Item 1A — Risk Factors” in this report for a description of the
material risks that the Company currently faces in connection with COVID-19.
Until there is a
vaccine and treatment that is widely distributed, 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; aligning our design and development schedules with demand in a proactive manner as there are changes in market
conditions 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 profitability strategy.
Corporate History
Forward was incorporated
in 1961 as a manufacturer and distributer of advertising specialty and promotional products. In 1989, we acquired Forward US, a
manufacturer of soft-sided carrying cases. The carrying case business became our predominant business, and in September 1997, we
sold the assets relating to the production of advertising specialty and promotional products, ceasing to operate in that segment.
In May 2001, we formed
Forward Switzerland to facilitate distribution of aftermarket products under our licenses for cell phone cases with a major North
American multinational and to further develop our OEM European business presence. After the expiration of the last of these licenses
in March 2009, staff at Forward Switzerland was significantly reduced and in recent years has primarily served our OEM customers
in Europe.
In
January 2018, Forward acquired IPS which resulted in IPS being a wholly-owned subsidiary of Forward.
In
August 2020, Forward acquired the assets of Kablooe Design, a medical and consumer design and development company. The Company
believes that the design and engineering service capabilities of Kablooe will complement the IPS business and further diversify
the industries and customers with which the Company does business.
In
this report, the Company uses the term “distribution” to refer to what has historically been described as the “OEM”
business. However, we may refer to our customers as “OEM” customers, using a standard industry term. In addition, we
use the term “design” or “design and development” to describe the acquired IPS and Kablooe businesses,
to be consistent with the operating segment definitions (see Note 16 to the audited consolidated financial statements herein).
Customers
The Company’s
distribution customers are located in: (i) the APAC Region; (ii) the EMEA Region; and (iii) the Americas.
IPS and Kablooe provide
product development services for Fortune 500 companies, established mid-level companies, and start-ups. The wide range of industries
served includes industrial electronics, medical and dental equipment, food/beverage, U.S. Department of Defense, certain luxury
brands, and oil/gas.
Products
The Company’s
distribution products include carrying cases and other accessories for medical monitoring and diagnostic kits and a variety of
other portable electronic and non-electronic products (such as sporting and recreational products, bar code scanners, smartphones,
GPS location devices, tablets, and firearms). Beginning in Fiscal 2020, the Company’s distribution products also include
smart-enabled products such as speakers and lamps.
The Company does not
manufacture any of its distribution products and sources substantially all of its distribution products from independent suppliers
in China, through Forward China, a related party (see Note 14 to the consolidated financial statements).
Diabetic Products
We sell carrying cases
for blood glucose diagnostic kits (“Diabetic Products”) directly to OEM customers, or their contract manufacturers.
These electronic monitoring kits are made for use by diabetics. We typically sell these cases at prices ranging from approximately
$0.60 to $7.00 per unit. Unit volumes are sold predominantly at the lower end of this price range. We also sell higher end units
ranging from approximately $18.50 to $39.00 per unit, but this represents less than 2% of net revenues. The distribution customer
(or its contract manufacturer) packages our carry cases “in box” as a custom accessory for the customer’s blood
glucose testing and monitoring kits, or to a much lesser extent, sells them through their retail distribution channels. These kits
typically include a small, electronic blood glucose monitor, testing strips, lancets for drawing a drop of blood and our carrying
case, customized with the manufacturer’s logo and designed to fit and secure the glucose monitor, testing strips, and lancets
in separate straps, pouches, and holders. As the kits and technology change, our carrying case designs change to accommodate the
changes in size, shape and layout of the electronic monitoring device, strips and lancet. For Fiscal 2020, our Diabetic Products
customers accounted for 83% of our total net revenues in the distribution business, compared to 89% in Fiscal 2019.
Other Products
We also sell carrying
and protective solutions to distribution customers for a diverse array of other portable electronic and other products (“Other
Products”), including sporting and recreational products, bar code scanners, smartphones, GPS and location devices, tablets,
and firearms, on a made-to-order basis that are customized to fit the products sold by our distribution customers. Our selling
prices for these products also vary across a broad range, depending on the size and nature of the product for which we design and
sell the carry solution. In Fiscal 2020, we added smart-enabled products to our distribution business. Our smart-enabled products
include speakers and lamps that provide lighting and sound with connectivity to other devices via Bluetooth. Our selling prices
for these products, including related accessories, ranges from $35 to $135 per unit. For Fiscal 2020, our other products accounted
for 17% of our total net revenues in the distribution business, compared to 11% in Fiscal 2019.
Our design segment
provides a complete range of design, engineering and development services with respect to a diverse array of consumer and industrial
electronics products. These include but are not limited to medical products, smart displays, beverage vending, enterprise and mobile
software applications, lighting, security and detections systems, cameras, wearables and vehicle controls. Solutions in these and
other areas are designed and developed in-house, beginning at product concept, extending through design, engineering and prototype,
and final design for manufacturing and Computer-Aided Design (“CAD”) files. As a combined company, we are able to provide
manufacturing sourcing and final product support and delivery services for initial short-run, low volume products.
Product Development
In the OEM division
of our distribution business, we typically receive requests to submit product designs in connection with a customer’s introduction
and rollout to market of a new product. IPS collaborates with clients to determine functionality, size and other basic specifications
and requirements for products. Our design and production resources develop more detailed product specifications and design options
for our customers’ evaluation. We provide documentation of each phase to the client and gain approval of a working prototype.
Working with our suppliers and the customer, samples are modified and refined. Once approved for commercial introduction and order
by our customer, we work with our suppliers to ensure conformity of commercial production to the definitive product samples and
specifications. Manufacture and delivery of products in production quantities are coordinated with the customer’s manufacturing
and shipment schedules so that our products are available to be packaged with the customer’s additional product components
prior to shipment and sale, or to make the product available to the customer for direct sale through its retail distribution channels.
Services
Services offered for
each engagement vary from full development utilizing a wide range of in-house design and engineering functions, to targeted design
and engineering support for clients with in-house development teams. Our in-house capabilities include the following:
• Electrical Engineering
• Mechanical Engineering
• Software Engineering
• Industrial Design
• User Experience/User Interface (UX/UI) Design and Development
• Optical Engineering
• Program Management
• IoT System Architecture
• Marketing
Distribution
Channels of Distribution
We primarily ship
our OEM products directly to our customers (or their contract manufacturers), who package our accessory products “in box”
with their branded products. Some of our customers also purchase certain of our products and offer them for sale as stand-alone
accessories to complement their product offerings.
In Fiscal 2019,
we secured a portfolio of smart-enabled products which we began distributing through retail outlets in the U.S. in Fiscal
2020. We continue to invest in and build out a distribution network for retail products as we expect this part of our
business to grow in the future. The retail distribution network is responsible for placing products with major retailers for
consumption both in store and online.
Distribution Hubs for Customers
We have arrangements
with various customer’s distribution hubs. These arrangements obligate us to supply our products to our customers’
distribution hubs where their products are manufactured, kitted, and/or warehoused pending sale, and where our products are packaged
“in box” with the distribution customers’ products. The product quantities we are required to supply to each
distribution hub are based on the distribution customer’s purchase orders and forecasts. We do not recognize revenue for
product shipped to a customers’ hub until we have been notified by our customer that our product has been withdrawn or used
by the distribution hub. Hub arrangements have had the general effect of providing financing for our customers’ inventory
purchases by extending the time between our placement of orders to our suppliers in order to ship and supply the hubs and the time
that we are able to recognize revenue. The corollary effect is an increase in our inventory levels.
We also have arrangements
with various third-party fulfillment centers for products distributed through retail outlets in the U.S. We do not recognize revenue
for products shipped to a fulfillment center until the product has been shipped to the end-user customer.
Product Supply
Manufacturing
The manufacture of
custom carrying cases and other carry and protective solutions generally consists of die cutting fabrics and heat sealing, gluing,
sewing, and decorating (affixing logos to) the cut-outs by means of silk screening, hot-stamping, embroidering or embossing. The
principal materials used in the manufacture of our products are vinyl, nylon, leather, metal and plastic parts (for clips, buckles,
loops, hinges and other hardware), foam padding and cardboard, all of which are obtained from suppliers based on our specifications.
We do not believe that any of the component materials or parts used in the manufacture of our products are supply constrained.
We believe that there are adequate available alternative sources of supply for all of the materials used to manufacture, package,
and ship our products.
Dependence on Sourcing Agent
The Company has a
Buying Agency and Supply Agreement (the “Supply Agreement”) with Forward China (the “Agent”). The Supply
Agreement provides that the Agent acts as the Company’s exclusive buying agent. The Agent also arranges for sourcing, manufacture
and exportation of such products. The Company purchases products at the Agent’s cost and pays a service fee to the Agent.
The service fee is calculated at $100,000 monthly plus 4% of “Adjusted Gross Profit”, which is defined as the selling
price less the cost from the Agent. The Supply Agreement has been extended to October 22, 2023. Terence Wise, the Company’s
Chairman, Chief Executive Officer and largest shareholder, is a principal of the Agent. See “Item 1A. – Risk Factors”
regarding our dependence on the Agent.
Suppliers
We procure substantially
all products for our distribution business from independent suppliers in China through the Agent. Depending on the product, we
may require several different suppliers to furnish component parts or pieces.
We place orders with
the Agent for particular products. We do not have minimum supply requirement agreements with our suppliers to guarantee a supply
of finished product, nor have we made purchase commitments to purchase minimum amounts from any of our suppliers. However, from
time to time, we may order products from our suppliers in advance of receiving a customer purchase order, or in quantities in excess
of those forecasted to us by our customer, for which they are contractually obligated to us, in order to meet our customers’
anticipated delivery demands. Beginning September 1, 2013, we began making purchases directly from Forward China. During Fiscal
2020 and Fiscal 2019, all of our purchases for our distribution business were made directly through Forward China.
There are very few
suppliers for the design and development part of the business as it is a service-based business. We do, however, purchase supplies
and equipment to develop prototypes or “mock-ups” for design and development projects. Design business suppliers are
predominantly based in the United States.
Quality Assurance
Forward’s quality
assurance manager oversees the process to ensure that our distribution products manufactured by our Chinese suppliers meet our
quality assurance standards. He independently verifies and supervises the inspection of products provided by independent contractors
in China. In July 2015, Forward China received its ISO 9001:2008 quality certification, which was renewed in July 2018 and is valid
until July 2021.
Our design business
follows general industry standard practices for review and corrective actions related to its design services. There are no independent
quality assurance standards in place for its design and engineering work. Customer specifications and scope of services are laid
out in the project contracts and the Company works closely with the customer to identify and correct any quality issues that arise.
Competition
Distribution Business
The OEM division of
our distribution business is highly competitive in terms of product pricing, design, delivery terms, and customer service. In the
production of our distribution products, we compete with numerous United States and foreign producers and distributors. Some of
our competitors are substantially larger than we are and have greater financial and other resources. We believe that we sustain
our competitive position through maintenance of an effective product design capability, rapid response time to customer requests
for proposals and product shipment, reliable product delivery and product quality, and competitive pricing. We believe that our
ability to compete based on product quality assurance considerations is enhanced by Forward China’s local presence, quality
control, shipment capabilities and expertise in sourcing.
Design and Engineering Business
The depth and breadth
of the services offered, and industries served by our design segment are unique. Our management team is aware that there are very
few competitive firms that have the full set of capabilities that our design segment has under one roof. There are however, numerous
design and engineering companies that compete with us in specific industries and/or with specific targeted skills or competitive
advantages.
Human Capital/Employees
The
Company’s key human capital management objectives are to attract, retain and develop the highest quality talent. To support
these objectives, the Company’s human resources programs are designed to develop talent to prepare them for critical roles
and leadership positions for the future; reward and support employees through competitive pay and benefits; enhance the Company’s
culture through efforts aimed at making the workplace more engaging and inclusive; acquire talent and facilitate internal talent
mobility to create a high-performing, and diverse workforce. None of our employees are covered by a collective bargaining agreement.
The
Company employed approximately 85 people as of November 30, 2020. We hire consultants on an as-needed basis in our design segment.
Regulation and Environmental Protection
Our sourcing business
is subject to various regulations in various jurisdictions, including the United States and member states of the European Community,
that restrict the use or importation of products manufactured with compounds deemed to be hazardous. We work with our suppliers
to ensure compliance with such regulations. In addition, from time to time, one or more customers may require testing of our products
to ensure compliance with applicable consumer safety rules and regulations or the customer’s safety or packaging protocols.
Because we do not manufacture the products that we sell and distribute, compliance with federal, state and local laws and regulations
pertaining to the discharge of materials into the environment, or otherwise relating to the protection of the environment, has
not had, and is not anticipated to have, any direct material effect upon our capital expenditures, earnings, or competitive position.
However, compliance with such laws and regulations on the part of our suppliers may result in increased costs of supply to us,
particularly if domestic environmental regulations in China becomes more prevalent.
We have not been engaged
in any environmental litigation or incurred any material costs related to compliance with environmental or other regulations. From
time to time, we incur chemical and/or safety laboratory testing expenses in order to address customer requests regarding our product
materials or method of manufacture or regarding their packaging methods and standards.
There are no specific
regulatory or environmental requirements imposed upon the design segment of our business. As a paid service provider, end customers
are assisted in securing regulatory certifications including UL (Underwriters Laboratories – a U.S. based safety certification
organization), FCC (Federal Communications Commission – U.S. governmental certification department for electronic goods),
CE (Conformité Européenne – a European certification for health, safety and environmental protection standards)
and others depending on needs, product types and locations of end customers’ product markets.
As our retail business increases, we anticipate
that we will be required to obtain certain certifications for products on an as required basis.
ITEM 1A. RISK FACTORS
Investing in our
common stock involves a high degree of risk. You should carefully consider the following Risk Factors before deciding whether
to purchase or sell stock in the Company. Additional risks and uncertainties not presently known to us, or that we currently
deem immaterial, may also impair our business operations or our financial condition. If any of the events discussed in the
Risk Factors below occur, our business, consolidated financial condition, results of operations or prospects could be
materially and adversely affected. In such case, the value and marketability of the common stock could decline.
Risks Relating to Our Business, Liquidity and Operations
Our results of operations have been
negatively impacted by the coronavirus pandemic.
The COVID-19 pandemic
has spread across the globe and continues to negatively impact worldwide economic activity and has impacted our
Company in a number of ways. COVID-19 has increased the risk that the Company or its employees, suppliers, customers
and other commercial partners may be prevented from conducting business for an indefinite period of time, including due to the
spread of the disease or shutdowns requested or mandated by governmental authorities. Specifically, COVID-19 has increased the
risk of customers’ inability to pay for our design services and has the potential to continue to impact collections on the
distribution side of the business. The Company has transitioned some of its employees to working remotely, which subjects
the Company to increased cybersecurity risks and may reduce workplace efficiency. Business shutdowns have disrupted our supply
chain and the manufacture or shipment of our products and have delayed the rollout of our smart enabled retail products to big
box retail stores.
The full extent of
COVID-19’s negative impact on our business remains uncertain and it is not possible at this time to estimate the full impact
that COVID-19 will have on our business. Any of the issues discussed above could have a material adverse effect on our business
if this continues for an extended period of time. If we incur significant declines in customer orders, increased aging of accounts
receivable or other negative consequences due to COVID-19, the extent of which remains highly uncertain, it will have a material
adverse effect on our business, financial condition and results of operations.
During Fiscal 2020, we generated an
operating loss and negative cash flow from operations, we cannot assure you that we will regain profitability in the future.
In Fiscal 2020, we
generated an operating loss of $1,982,000 and had net cash used in operating activities of $263,000. Although we generated net
income in Fiscal 2018 and 2017, we incurred significant losses from operations in Fiscal 2019 and Fiscal 2020. We can provide no
assurance that we will not continue to experience operating losses. In addition to our $1,300,000 commercial line of credit (the
“Line of Credit”) of which $1,000,000 has been utilized as of the date of this report, Forward China holds a $1,600,000
note which is due December 31, 2021. Forward China, which is owned by our Chief Executive Officer and Chairman of the Board, has
agreed to extend this note numerous times to assist the Company with its liquidity resources. We cannot provide you with any assurance
that he will continue to grant us extensions on this note. If we cannot generate sufficient revenues to operate profitably, we
may be forced to cease, limit or suspend operations, or we may be required to raise capital to maintain or grow our operations.
There is no assurance that we will be able to raise such capital and if so on terms that are not onerous and dilutive to the Company
and its shareholders.
While we believe that
our existing cash resources are sufficient to support our growth strategy, there can be no assurances that our growth strategy
will be successful or that we will earn a return on these investments.
Our distribution business remains highly
concentrated in our Diabetic Products Line. If our Diabetic Products Line were to suffer the loss of a principal customer or a
material decline in revenues from any such large customer, our business would be materially and adversely affected.
Revenues from diabetic
products to distribution customers accounted for 83% of our distribution net revenues in Fiscal 2020. As a result, our financial
condition and results of operations are subject to higher risk from the loss of a major diabetic products customer or changes in
their business practices. For example, in 2018 a new diabetes monitoring product was brought to the market which does not use a
carrying case. If our customers use new solutions in their diabetes product lines that do not use carrying cases, our business
would be materially and adversely affected.
The loss of any of, or a material reduction
in orders from, our largest customers, would materially and adversely affect our results of operations and financial condition.
Our distribution business
is and has been characterized by a high degree of customer concentration. Our four largest distribution customers accounted for
79% and 87% of distribution net revenues in Fiscal 2020 and Fiscal 2019, respectively. Additionally, three of our largest design
and development customers accounted for 46% of design and development net revenues in both Fiscal 2020 and Fiscal 2019. Although
we continue our efforts to diversify our business, we cannot provide any assurance that we will be successful. The loss of any
of these customers would have a material adverse effect on our financial condition, liquidity and results of operations.
If any one or more of our distribution
customers elect to reduce or discontinue inclusion of cases “in box”, our results of operations and financial condition
would be materially and adversely affected.
The predominant percentage
of our revenues is derived from sales of case accessories to our OEM customers who package our cases “in box” with
their electronics. During recent years, there have been numerous federal legislative and administrative actions that have affected
government programs, including adjustments that have reduced or increased payments to healthcare providers and patients. Any measures
to restrict healthcare spending could result in decreased sales of our products. If one or more of our distribution customers reduce
or discontinue the practice of including carry case accessories “in box” or if our customers experience reduced demand
for their products as a result of political changes, we may incur a significant decline in our revenues and our results of operations
and financial condition would be materially and adversely affected.
Rising threats of international tariffs,
including tariffs applied to goods between the U.S. and China, may materially and adversely affect our business.
Rising threats of
international tariffs, including tariffs applied to goods traded between the U.S. and China, could materially and adversely affect
our business and results of operations. Since the beginning of 2018, there has been increasing rhetoric, in some cases coupled
with legislative or executive action, from several U.S. and foreign leaders regarding the possibility of instituting tariffs on
the foreign imports of certain materials and products. More specifically, throughout 2020 and 2019, the U.S. and China imposed
tariffs or announced proposed tariffs to be applied in the future to certain of each other’s exports. As of the date of this
report, the Company had not been directly affected by the tariffs implemented by President Trump on the medical technology industry.
However, we do not know what the new administration will implement when President-Elect Biden takes office. If any such tariffs
or any restrictions are imposed on products that we import to our customers, we would be required to raise our prices which may
result in the loss of customers and harm our business. Additionally, some of our non-diabetic distribution customers and customers
in the design and development business have been affected by these tariffs, specifically those who manufacture electronic products.
This may cause these customers to reduce the amount of discretionary spending they use on outsource product design and engineering
services supplied by our design segment.
Changes in political
conditions in China and changes in the state of China-U.S. relations, including the current trade tensions, are difficult to predict
and could adversely affect the operations or financial condition of the Company. In addition, because of our involvement in the
Chinese market, any deterioration in political or trade relations might cause a public perception in the U.S. or elsewhere that
might cause our business to become less attractive. Such an impact could adversely affect our revenues and cash flows.
We continue to encounter pressure from
our largest distribution customers to maintain or even decrease prices, or to supply lower priced carry solutions, and expect such
pressure to persist. The effects of such price constraints on our business may be exacerbated by inflationary pressures that affect
our costs of supply.
During Fiscal 2020,
we continued to experience significant pricing pressure from our largest distribution customers to reduce the prices we charge
them. When we are unable to extract comparable concessions from our suppliers on prices they charge us, our product sales margins
erode. In addition, competitors may reduce their average selling prices faster than we are able to reduce costs, which can also
accelerate the rate of decline of our selling prices.
In addition to margin
compression from customers in general, we are encountering increased pricing from our Chinese suppliers who are reacting to inflationary
increases in materials and labor costs incurred by them. In addition, prices that our Chinese vendors charge to us may reflect
appreciation of the Chinese currency against the U.S. dollar, which can be passed through to us in the form of higher U.S. dollar
prices. This in turn will tend to reduce gross profit if we are unable to raise our prices. Any decrease in demand for our products,
coupled with pressure from the market and our customers to decrease our prices, would materially adversely affect our business,
financial condition, and results of operations.
Increasingly, our distribution customers
are requesting that we enter into supply agreements with them that have restrictive terms and conditions. These agreements typically
include provisions that increase our financial exposure, which could result in significant costs to us.
Increasingly, our
distribution customers are requesting that we enter into supply agreements with them. These agreements typically do not include
volume commitments but do include provisions that generally serve to increase our exposure for product liability and limited sales
returns, which could result in higher costs to us as a result of such claims. In addition, these agreements typically contain provisions
that seek to limit our operational and pricing flexibility and extend payment terms, which could materially adversely affect our
cash flow, business, financial condition, and results of operations.
Our distribution business depends on
a single exclusive buying agent who, in turn, depends on a limited number of key suppliers.
Our Chairman, Chief
Executive Officer and largest shareholder is the owner of Forward China, our exclusive sourcing agent in the Asia Pacific region.
We have entered into a Buying Agency and Supply Agreement with Forward China whereby Forward China will act as the Company’s
exclusive agent to arrange for sourcing, manufacturing and exporting the Company’s distribution products. Historically, Forward
China has relied on a limited number of suppliers to supply the component parts and pieces necessary for the production of our
carry and protective solutions products. As a result, our ability to effectively push back against rising material costs may diminish,
although historically Forward China has absorbed these costs. In addition, any inability to obtain supplies from a single or limited
number of suppliers may result in difficulty obtaining the supplies necessary for our business and may restrict our ability to
produce our carry and protective solutions products. Where practical, we intend to establish alternative sources through Forward
China to mitigate the risk that the failure of any single supplier will adversely affect our business. Nevertheless, either a prolonged
inability to obtain certain components or the failure of one of our suppliers to do so could impair our ability to ship products
and generate revenues, which could adversely affect our operating results and damage our customer relationships.
In addition, we depend
significantly on Forward China as our exclusive buying agent for substantially all of our component parts. As a result, we have
limited visibility as to our supplier base, making it difficult to forecast future events and to plan our operations. In addition,
if Forward China fails to satisfactorily perform its obligations, including payment obligations, to our suppliers or its duties
to us as our exclusive buying agent as a result of financial or other difficulties or for any other reason, or if our relationship
with Forward China was to suffer or we are unable to extend our agreement with Forward China which expires in October 2023, we
could suffer irreparable harm resulting in substantial harm to the distribution business.
Our distribution business has benefited
from customers deciding to outsource their carry and protective solutions assembly needs to us. If our distribution customers choose
to provide these services in-house or select other providers, our distribution business could suffer.
Our future distribution
revenue growth partially depends on new outsourcing opportunities from our distribution customers. Current and prospective customers
continuously evaluate our performance against other providers. They also evaluate the potential benefits of manufacturing their
products themselves. To the extent that outsourcing opportunities are not available either due to these customers deciding to produce
these products themselves or to use other providers, our financial results and future growth could be materially adversely affected.
If we are unable to provide our customers
with high-quality products, and service, or if we are unable to deliver our products and/or service to our distribution customers
in a timely manner, our business, financial condition, and results of operations may be materially adversely affected.
In order to maintain
our existing customer base and obtain business from new customers, we must demonstrate our ability to produce our products and
services at the level of quality, responsiveness, timeliness, and cost that our customers require. If our products or services
are provided at what customers believe are of a substandard quality, if they are not delivered on time, if we are not responsive
to our customers’ demands or cannot meet their needs, our reputation as a reliable supplier of our products and a sophisticated
product designer and developer would likely be damaged. If we are unable to meet anticipated product and service standards, we
may be unable to obtain new or keep our existing distribution customers, and this would have a material adverse effect on our business,
financial condition, and results of operations.
If we fail to maintain an effective
system of internal controls over financial reporting, we may not be able to accurately report our financial results. As a result,
current and potential stockholders could lose confidence in our financial reporting, which could harm our business and the trading
price of our stock.
Effective internal
controls over financial reporting are necessary for us to provide reliable financial reports. If we cannot maintain effective controls
and reliable financial reports, our business and operating results could be harmed. We continue to work on improvements to our
internal controls over financial reporting. Any failure to implement and maintain internal controls over our financial reporting
or difficulties encountered in the implementation of improvements in our controls, could cause us to fail to meet our reporting
obligations. Any failure to improve our internal controls over financial reporting or to address identified weaknesses in the future,
if they were to occur, could also cause investors to lose confidence in our reported financial information, which could have a
negative impact on the trading price of our stock.
Our results of operations are subject
to the risks of fluctuations in the values of foreign currencies relative to the U.S. Dollar.
Our results of operations
are expressed in U.S. dollars. When the U.S. dollar appreciates or depreciates in value against a currency in which all or a significant
portion of revenues or other accounts receivable are denominated, such as the Euro, our results of operations can be adversely
affected or benefited, respectively. The degree of impact is proportional to the amount of foreign currency expense or revenue,
as the case may be, and the fluctuations in exchange rates over the period in which the effect is measured on our financial statements.
In addition, such currency fluctuations may affect the comparability of our results of operations between financial periods.
Future revenues are difficult to predict
and are likely to show significant variability as a consequence of customer concentration.
Because our revenues
are highly concentrated in a few large customers, and because the volumes of these customers’ order flows to us can fluctuate
markedly in a short period of time, our quarterly revenues, and consequently our results of operations, may be highly variable
and subject to significant changes over a relatively short period of time. Our largest distribution customers may keep consumer
products with which our carry solutions are packaged “in-box” in active promotion for many months, or for a very short
period of time, depending on various factors, including sales trends for the product, product development cycles, new product introductions,
and our customers' competitors' product offerings. As demand for the consumer product relating to the in-box program matures and
decreases, we may be forced to accept significant price and/or volume reductions in customer orders for our carry solutions, which
will adversely affect revenues. Additionally, our large design and development customers may have their budgets limited from many
factors including economic declines (resulting from a pandemic or any other reason) causing discretionary budgets to decline or
may from-time-to-time choose to do their development work in-house. All of these factors tend to lead to a high degree of variability
in our quarterly revenue levels. Significant, rapid shifts in our operating results may occur if and when one or more of these
customers increases or decreases the size(s) of, or eliminates, their orders or engagement from us by amounts that are material
to our business.
Our gross margins, and therefore our
profitability, vary considerably by customer and by product, and if the revenue contribution from one or more distribution customers
or products changes materially, relative to total revenues, our gross profit percentage may fluctuate.
Our gross profit margins
on the distribution products we sell can vary widely depending on the product type, customer, and order size. Because of the broad
variability in price ranges and product types, we anticipate that gross margins, and accordingly their impact on operating income
or loss, may fluctuate depending on the relative revenue contribution from each customer or product. If our gross margins decrease,
our results of operations will be adversely affected.
Product manufacture is often outsourced
by our distribution customers to contract manufacturing firms in China and in these cases it is the contract manufacturer to which
we must look for payment.
Contract manufacturing
firms are performing manufacturing, assembly, and product packaging functions, including the bundling of our product accessories
with the distribution customer's product. As a consequence of this business practice, we often sell our carry solutions products
directly to the contract manufacturing firm. This is particularly significant in the case of diabetic product sales to certain
customers. In these cases, we invoice the contract manufacturing firm and not the distribution customer. Therefore, it is the contract
manufacturing firm to which we must look for payment in such cases and not our distribution customer. If we fail to receive payment
from the contract manufacturer, our ability to be paid for products already delivered would be limited. In such event, our results
of operations will be adversely affected.
Our dependence on foreign manufacturers
creates quality control and other risks to our business. From time to time we may experience certain quality control, on-time delivery,
cost, or other issues that may jeopardize customer relationships.
Our reliance on foreign
suppliers, manufacturers and other contractors involves significant risks, including risk of product quality issues and reduced
control over quality assurance, manufacturing yields and costs, pricing, timely delivery schedules, the potential lack of adequate
manufacturing capacity and availability of product, the lack of capital and potential misappropriation of our designs. In any such
event, our reputation and our business will be harmed.
Our shipments of distribution products
may become subject to delays or cancellation due to work stoppages or slowdowns, piracy, damage to port facilities, and congestion
due to inadequacy of port terminal equipment and other causes.
To the extent that
there are disruptions or delays in loading container cargo in ports of origin or off-loading cargo at ports of destination as a
result of labor disputes, work-rules related slowdowns, tariff or World Trade Organization-related disputes, piracy, physical damage
to port terminal facilities or equipment caused by severe weather or terrorist incidents, congestion in port terminal facilities,
inadequate equipment to load, dock and offload container vessels or energy-related tie-ups or otherwise, or for other reasons,
product shipments to our customers will be delayed. In any such case, our customer may cancel or change the terms of its purchase
order, resulting in a cancellation or delay of payments to us. A closure or partial closure of port facilities or other causes
of delays in the loading, importation, offloading or movement of our products to the shipping destination agreed to with our customer