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
could result in increased expenses, as we try to avoid such delays, delayed shipments or cancelled orders, or all of the above.
Depending on the severity of such consequences, this may have an adverse effect on our financial condition and results of operations.
Issues with our products may lead to
product liability, personal injury or property damage claims, recalls, withdrawals, replacements of products, or regulatory actions
by governmental authorities that could divert resources, affect business operations, decrease sales, increase costs, and put us
at a competitive disadvantage, any of which could have a significant adverse effect on our financial condition.
We may experience
issues with products that we source that may lead to product liability, personal injury or property damage claims, recalls, withdrawals,
replacements of products, or regulatory actions by governmental authorities. Any of these activities could result in increased
governmental scrutiny, harm to our reputation, reduced demand by consumers for products, decreased willingness by retailer customers
to purchase our products, absence or increased cost of insurance, or additional safety and testing requirements. Such results could
divert development and management resources, adversely affect our business operations, decrease sales, increase legal fees and
other costs, and put us at a competitive disadvantage compared to other companies not affected by similar issues with products,
any of which could have a significant adverse effect on our financial condition and results of operations. Although the Company
does not intend on providing warranties on the products it distributes directly, we can provide no assurances that customers will
not seek damages if any of the foregoing events took place. The Company does not carry product liability insurance. Although we
have not had significant claims for damages or losses from the products we distribute, any uninsured claim, if successful and of
significant magnitude, could have a material adverse effect on our business, prospects, results of operations or financial condition.
The carrying solutions distribution
business is highly competitive and does not pose significant barriers to entry.
There are many competitors
in the sale of carry solutions products to our customers including OEMs, and competition is intense. Since little or no significant
proprietary technology is involved in the design, production or distribution of the types of products we sell, others may enter
the business with relative ease and compete against us. Such competition may result in the diminution of our market share or the
loss of one or more major customers, thereby adversely affecting our net revenues, results of operations, and financial condition.
Many of our competitors are larger, better capitalized and more diversified than we are and may be better able to withstand a downturn
in the general economy or in the product areas in which we specialize. Potential customers may prefer the pricing terms offered
by competitors. These competitors may also have less sales concentration than we do and be better able to withstand the loss of
a key customer or diminution in its orders. If we are not effectively able to compete, our results of operations will be adversely
affected.
If we fail to retain our key personnel,
we may not be able to achieve our anticipated level of growth and our business could suffer.
Our future depends,
in part, on our ability to attract and retain key sales personnel and the continued contribution of our executive officers including
Terence Wise, our Chief Executive Officer, who would be difficult to replace. Our design and development business employs and contracts
highly sophisticated engineers to provide our customers with a full-service product, design and development team with vast technological
knowledge and capabilities. The loss of the services of any of our key personnel and the process to replace any key personnel would
involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.
If a third party asserts that we are
infringing on its intellectual property, whether successful or not, it could subject us to costly and time-consuming litigation
or require us to obtain expensive licenses, and our business may be adversely affected.
Third party lawsuits alleging our infringement
of patents, trade secrets or other intellectual property rights could cause us to do one or more of the following:
• incur significant legal expenses;
• cause our management to divert substantial time to our defenses;
• indemnify customers; or
Third party lawsuits
alleging our infringement of patents, trade secrets or other intellectual property rights could have a material adverse effect
on our business, results of operations and financial condition.
If we experience system interruptions,
it may cause us to lose customers and may harm our business.
Our inability to maintain
and improve our information technology systems and infrastructure may result in system interruptions. System interruptions and
slow delivery times, unreliable service levels, prolonged or frequent service outages, or insufficient capacity may prevent us
from efficiently providing services to our customers on our website, which could result in our losing customers and revenue.
We lease space for
our data center for power, security, connectivity and other services. We also rely on third party providers for bandwidth. We do
not control these vendors and it would take significant time and effort to replace them. We have experienced, and may experience
in the future, website disruptions, outages and other performance problems due to a variety of factors, including infrastructure
changes, human or software errors and capacity constraints.
Our systems are vulnerable
to damage or interruption from terrorist attacks, floods, fires, power loss, telecommunications failures, hurricanes, computer
viruses, computer denial of service attacks or other attempts to harm our systems. Any such damage or interruption would adversely
affect our results of operations.
Because our networks and IT systems
may be vulnerable to unauthorized persons hacking our systems, it could disrupt our operations and result in the theft of our proprietary
information.
A party who is able
to breach the security measures on our networks could misappropriate either our or our customers’ proprietary information,
or cause interruptions or malfunctions in our operations. Hacking of companies’ infrastructure is a growing problem. Although
we believe our systems and engineering team have the capability of protecting the Company from any such hacking, we can provide
you with no such assurance. If we grow and obtain more visibility, we may be more vulnerable to hacking. We may be required to
expend significant capital and other resources to protect against such threats or to alleviate problems caused by breaches in security,
which could have a material adverse effect on our financial performance and operating results.
Our design business uses software that
is highly technical, and undetected errors, if any, could adversely affect our business.
Our design business
may use software that is highly technical and complex. Our software has contained, and may now or in the future contain, undetected
errors, bugs, flaws, corrupted data or vulnerabilities. Some errors in our software code may only be discovered after the code
has been released. Any errors, bugs, flaws or corrupted data could result in damage to our reputation, loss of users, or loss of
revenue, any of which could adversely affect our business and financial results.
We maintain cash balances in our bank
accounts that exceed the FDIC insurance limitation.
We maintain our cash
assets at commercial banks in the U.S. in amounts in excess of the Federal Deposit Insurance Corporation insurance limit of $250,000
and in Europe in amounts that may exceed any applicable deposit insurance limits. In the event of a failure at a commercial bank
where we maintain our deposits or uninsured losses on money market or other cash equivalents in which we maintain cash balances,
we may incur a loss to the extent such loss exceeds the insurance limitation, which could have a material adverse effect upon our
financial conditions and our results of operations.
Our Chairman and Chief Executive Officer
is a significant shareholder, which makes it possible for him to have significant influence over the outcome of all matters submitted
to our shareholders for approval and which influence may be alleged to conflict with our interests and the interests of our other
shareholders.
Terence Wise, our
Chairman and Chief Executive Officer, is a significant shareholder who beneficially owns approximately 17% of the outstanding
shares of our common stock as of September 30, 2020. Mr. Wise has substantial influence over the outcome of all matters submitted
to our shareholders for approval, including the election of our directors and other corporate actions. This influence may be alleged
to conflict with our interests and the interests of our other shareholders. In addition, such influence by Mr. Wise could have
the effect of discouraging potential business partners or create actual or perceived governance instabilities that could adversely
affect the price of our common stock.
Risks Related to Our Common Stock
Due to factors beyond our control, our
stock price may be volatile.
Any of the following
factors could affect the market price of our common stock:
• The loss of Forward China as our agent;
• The loss of customers or our failure to attract more customers;
• The sale of a large amount of common stock by our shareholders;
• An adverse court ruling or regulatory action;
• Changes in market valuations of similar companies;
• Short selling activities;
In the past, following
periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted.
A securities class action suit against us could result in substantial costs and divert our management’s time and attention,
which would otherwise be used to benefit our business.
Because our common stock is not actively
traded, purchasers of our stock may incur difficulty in selling their shares at or above the price they paid for them, or at all.
Our average daily
trading volume on The Nasdaq Capital Market (“Nasdaq”) has been approximately 120,000 shares of common stock for the
six trading days prior to November 30, 2020. An active market for our common stock may never develop, or if it does, it may not
be sustained. Accordingly, investors may experience difficulty in selling their shares of common stock at or above the price they
paid for them, or at all.
Failure to meet the continued listing
requirements of Nasdaq, could result in delisting of our common stock, which in its turn would negatively affect the price of our
common stock and limit investors’ ability to trade in our common stock.
Our common stock trades
on Nasdaq. Nasdaq rules impose certain continued listing requirements, including the minimum $1 bid price, corporate governance
standards and number of public stockholders. At November 30, 2020, our closing bid price was $1.83. If we fail to meet these continued
listing requirements, Nasdaq may take steps to delist our common stock. If our common stock is delisted from The Nasdaq Capital
Market, we could face significant material adverse consequences, including:
• a limited availability of market quotations for our common stock;
• reduced liquidity with respect to our common stock;
• a limited amount of news and analyst coverage for our company; and
If we become subject to a regulatory
investigation, it could cause us to incur substantial costs or require us to change our business practices in a manner materially
adverse to our business.
From time to time,
we may receive inquiries from regulators regarding our compliance with laws and other matters. Recently, we incurred significant
expenses responding to an SEC investigation into potential insider trading by certain insiders of the Company. Although that investigation
has concluded, responding to, or defending other such actions would cause us to continue to incur substantial expenses and divert
our management’s attention.
Violation of existing
or future regulatory orders or consent decrees could subject us to substantial monetary fines and other penalties that could negatively
affect our financial condition and results of operations. In addition, it is possible that future orders issued by, or enforcement
actions initiated by, regulatory authorities could cause us to incur substantial costs or require us to change our business practices
in a manner materially adverse to our business.
We do not expect to pay dividends in
the future, which means that investors may not be able to realize the value of their shares except through a sale.
We do not anticipate
that we will declare or pay a cash dividend. We expect to retain future earnings, if any, for our business and do not anticipate
paying dividends on common stock at any time in the foreseeable future. Because we do not anticipate paying dividends in the future,
the only opportunity for our shareholders to realize the creation of value in our common stock will likely be through a sale of
those shares.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2. PROPERTIES
The Company leases
all of its properties where its business is operated. We believe that these properties are adequate for the purposes for which
they are used. All leases are with unaffiliated third parties. We believe that the loss of any lease would not have a material
adverse effect on our operations, as we believe that we could identify and lease comparable facilities upon approximately equivalent
terms. The following properties which are material to the Company’s business are described below:
We lease 14,000 square
feet in Hauppauge, New York for our executive offices and IPS, which we rent under a lease agreement scheduled to expire in 2027.
The lease has annual escalations; rent payments were $29,000 per month during Fiscal 2020.
We lease 46,000 square
feet in Coon Rapids, Minnesota for Kablooe, which we rent under a lease agreement schedule to expire in June 2021. Rent payments
were $9,200 per month during Fiscal 2020.
ITEM 3. LEGAL PROCEEDINGS
On August 21, 2020,
IPS was named a third-party defendant in a patent dispute claim currently pending in the U.S. District Court for the Eastern District
of New York. The complaint, which contains no specific amount of monetary damages, asserts that certain intellectual property was
misappropriated by IPS and one of its former employees. IPS denies the allegations, believes the action is without merit
and intends to vigorously defend it. The Company received permission from the District Court to file a motion to dismiss
the complaint and filed such motion on December 14, 2020.
From time to time,
the Company may become a party to other legal actions or proceedings in the ordinary course of its business. As of September 30,
2020, there were no such actions or proceedings, either individually or in the aggregate, that, if decided adversely to the Company’s
interests, the Company believes would be material to its business.
ITEM 4.
MINE SAFETY DISCLOSURES.
Not Applicable.
PART II
ITEM 5.MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Common Stock
The principal market
for our common stock is Nasdaq. Our common stock is traded under the symbol “FORD”.
On November 30, 2020,
the closing price for our common stock was $1.83.
Holders of common stock.
At November 30, 2020,
there were approximately 75 holders of record of our common stock. Because many of our shares of common stock are held by brokers
and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these
record holders.
Dividends
We have not paid any
cash dividends on our common stock since 1987 and do not plan to pay cash dividends in the foreseeable future. The payment of dividends
in the future, if any, will depend upon our results of operations, as well as our short-term and long-term cash availability, net
working capital, working capital needs, and other factors, as determined by our Board of Directors. Currently, except as may be
provided by applicable laws, there are no contractual or other restrictions on our ability to pay dividends if we were to decide
to declare and pay them.
Recent Sales of Unregistered Securities
None.
ITEM 6. SELECTED
FINANCIAL DATA
Not applicable.
ITEM 7.MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
The following discussion
and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in
this report on Form 10-K. All dollar amounts and percentages presented herein have been rounded to approximate values. In addition
to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties,
and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result
of certain factors, including but not limited to those set forth under “Risk Factors.”
Cautionary statement regarding Forward-Looking Statement
This report includes
“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:
• Expectations regarding having our products in retail outlets;
• Liquidity
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. Factors that could cause or contribute to such differences include, but are not limited to,
those discussed in this Annual Report on Form 10-K, and in particular, the risks discussed under the caption "Risk Factors"
in Item 1A of this report and those discussed in other documents we file with the SEC. 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 fully integrated design, development and manufacturing solution provider for top tier medical and technology customers
worldwide. As a result of the continued expansion of our design development capabilities through our wholly owned subsidiaries,
IPS and Kablooe, we are now able to introduce proprietary products to the market from concepts brought to us from a number of different
sources, both inside and outside the Company.
The future
impacts of the COVID-19 pandemic and any resulting economic impact are largely unknown and could be significant. It is
possible that the COVID-19 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.
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.
Additionally,
see Part I., Item 1A. Risk Factors - The adverse impact of COVID-19 on our businesses will continue for an unknown length of time
and may continue to impact our results of operations.
Variability of Revenues and Results of Operation
Because a high percentage
of our revenues is highly concentrated in a few large customers, and because the volumes of these customers’ order flows
to us are highly variable, with short lead times, our quarterly revenues, and consequently our results of operations, are susceptible
to significant variability over a relatively short period of time.
Critical Accounting Policies and Estimates
We have identified
the accounting policies and significant estimation processes below as critical to our business operations and the understanding
of our results of operations. The discussion below is not intended to be comprehensive. In many cases, the accounting treatment
of a particular transaction is specifically dictated by U.S. GAAP, with no need for management’s judgment. In other cases,
management is required to exercise judgment in the application of accounting principles with respect to particular transactions.
The impact and any associated risks related to these policies on our business operations are discussed throughout this “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect reported and expected
financial results. For a detailed discussion of the applications of these and other accounting policies, see “Item 8. Financial
Statements and Supplementary Data” in this Annual Report. Our preparation of our Consolidated Financial Statements requires
us to make estimates and assumptions that are believed to be reasonable under the circumstances. There can be no assurance that
actual results will not differ from those estimates and such differences could be significant.
Revenue Recognition
Distribution Segment
The Company
generally recognizes revenue in its distribution segment when: (i) finished goods are shipped to our distribution customers
(in general, these conditions occur at either point of shipment or point of destination, depending on the terms of sale,
i.e., transfer of control); (ii) there are no other deliverables or performance obligations; and (iii) there are no further
obligations to the customer after the title of the goods has transferred. When the Company receives consideration before
achieving the criteria previously mentioned, it records a contract liability, which is classified as a component of deferred
income in the accompanying consolidated balance sheets. Contract liabilities at September 30, 2020 and 2019 were $75,000 and
$0, respectively, for the distribution segment.
Design Segment
The Company applies
the “cost to cost” and “right to invoice” methods of revenue recognition to the contracts with customers
in the design segment. The design segment typically engages in two types of contracts: (i) time and material and (ii) fixed price
contracts. The Company recognizes revenue over time on its time and material contracts utilizing a “right to invoice”
method. Revenues from fixed price contracts that require performance of services that are not related to the production of tangible
assets are recognized by using cost inputs to measure progress toward the completion of its performance obligations or the “cost
to cost” method. Revenues from contracts that contain specific deliverables are recognized when the performance obligation
has been satisfied or the transfer of goods to the customer has been completed and accepted.
Recognized revenues
that will not be billed until a later date, or contract assets, are recorded as an asset and classified as a component of accounts
receivable in the accompanying consolidated balance sheets. Contract assets at September 30, 2020 and 2019 were $649,000 and $611,000,
respectively. Contracts where collections to date have exceeded recognized revenues, or contract liabilities, are recorded as a
liability and classified as a component of deferred income in the accompanying consolidated balance sheets. Contract liabilities
at September 30, 2020 and 2019 were $410,000 and $220,000, respectively.
Business Combinations
The Company allocates
the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their
estimated fair values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities
is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, the Company makes significant
estimates and assumptions, especially with respect to intangible assets.
Critical estimates
in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships and
developed technology, discount rates and terminal values. Our estimate of fair value is based upon assumptions believed to be reasonable,
but actual results may differ from estimates.
Other estimates associated
with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities
assumed.
Segment Reporting
The Company has two
reportable segments: distribution and design. The distribution segment consists of two reporting units (Forward US and Forward
Switzerland, that collectively comprise one operating segment) that source and distribute carrying cases and other accessories
for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic devices. The design segment
consists of two operating segments (IPS and Kablooe, which have been aggregated into one reportable segment) that provide a full
spectrum of hardware and software product design and engineering services.
Organizing our business
through these operating segments allows us to align our resources and manage our operations. Our chief operating decision maker
regularly reviews operating segment revenue and profitability when assessing financial results of operating segments and allocating
resources.
We measure the performance
of our operating segments based upon operating segment revenue and operating income or loss. Segment operating income or loss includes
revenues earned and expenses incurred directly by the operating segment, including cost of sales and selling, marketing, and general
and administrative expenses (see Note 16 for more discussion on operating segments).
Goodwill and Intangible Assets
The Company reviews
goodwill for impairment at least annually, or more often if triggering events occur. The Company has two reporting units with goodwill
and we perform our annual goodwill impairment test on September 30, the end of the fiscal year, or upon the occurrence of a triggering
event. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to
have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting
unit is less than its carrying amount, then the Company would not need to perform the impairment test for the reporting unit. If
the Company cannot support such a conclusion or does not elect to perform the qualitative assessment, then the Company will compare
the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds
its carrying value, no impairment charge is recognized. If the fair value of the reporting unit is less than its carrying value,
an impairment charge will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value.
A significant amount of judgment is required in performing goodwill impairment tests including estimating the fair value of a reporting
unit and the implied fair value of goodwill. During Fiscal 2020, the Company recorded an impairment charge related to goodwill
(See Note 4).
Recent Accounting Pronouncements
In August 2018, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13 “Fair
Value Measurement – Disclosure Framework (Topic 820)” to improve the disclosure requirements on fair value measurements.
The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15,
2019. Early adoption is permitted for any removed or modified disclosures. The Company does not expect the adoption of this guidance
to have a material impact on its consolidated financial statements.
In November 2019,
the FASB issued ASU 2019-08, “Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic
606)” to provide guidance for share-based payment awards granted to a customer in conjunction with selling goods or services
accounted for under Topic 606. The pronouncement is effective for fiscal years beginning after December 15, 2019 and interim periods
within those fiscal years. The Company does not expect the adoption of this guidance to have a material impact on its consolidated
financial statements.
In November 2019,
the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.”
ASU 2019-11 is an accounting pronouncement that provides clarity to and amends earlier guidance on this topic and would be effective
concurrently with the adoption of such earlier guidance. This pronouncement is effective for the Company for fiscal years beginning
after December 15, 2022 and interim periods within those fiscal years. The Company is currently evaluating the effects of this
pronouncement on its consolidated financial statements.
In
August 2018, the FASB issued ASU 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic
350-40)” addressing customers’ accounting for implementation costs incurred
in a cloud computing arrangement that is a service contract, which requires customers to apply internal-use software guidance
to determine the implementation costs that are able to be capitalized. Capitalized implementation costs are required to be
amortized over the term of the arrangement, beginning when the cloud computing arrangement is ready for its intended
use. The effective date of the new guidance for public companies is for fiscal years beginning after December 15,
2019 and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the
adoption of this guidance to have a material impact on its consolidated financial statements.
In December
2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This
guidance removes certain exceptions to the general principles in Topic 740 and provides consistent application of
U.S. GAAP by clarifying and amending existing guidance. The effective date of the new guidance for public companies is for