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, 2021
☐ 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,
NY11788
(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
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, 2021, the aggregate market
value of the registrant’s common stock held by non-affiliates of the registrant was approximately $18,700,000 based on the closing
price as reported on the Nasdaq Stock Market.
As of December 10, 2021, 10,061,185 shares of
the registrant’s common stock were outstanding.
Documents Incorporated by Reference
Portions of the registrant's Proxy Statement
for the 2022 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, 2021.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
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 19
Item 4. Mine Safety Disclosures 19
PART II
Item 6. Selected Financial Data 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 28
Item 8. Financial Statements and Supplementary Data 28
Item 9A. Controls and Procedures 28
Item 9B. Other Information 29
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. 29
PART III
Item 10. Directors, Executive Officers and Corporate Governance 30
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners and Management 30
Item 14. Principal Accountant Fees and Services 30
PART IV
Item 15. Exhibits and Financial Statement Schedules 31
Signatures 32
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.
We have expanded our 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, we are
now a one-stop shop for design, development and manufacturing solutions serving a wide range of clients in the industrial, commercial
and consumer industries. 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 principal customer market
in our distribution line of business has been original equipment manufacturers (“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. Our 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. Our OEM customers are located in the Asia-Pacific region,
which we refer to as the “APAC Region”, Europe, the Middle East, and Africa, which we refer to as the “EMEA Region”
and the geographic area encompassing North America, Central America and South America, which we refer to as the “Americas”.
In 2019, we invested in and
began to build out a retail distribution network responsible for getting various 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 solutions
and represents a significant achievement in completing the strategic process of taking a product from concept to the consumer. The rollout
of these products has been delayed by COVID-19 as discussed below. Our retail customers are generally located in the Americas. As we continued
to expand our retail distribution network in 2020 and 2021, we have been able to sell a variety of products through retailers such as
Best Buy, Wayfair, Walmart, Costco, and Amazon. 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.
We do not manufacture any
of our products and source substantially all our products from independent suppliers in China through Forward Industries Asia-Pacific
Corporation, a British Virgin Islands corporation (“Forward China”). Forward China is owned by the Company’s Chairman
and Chief Executive Officer. The sale and distribution of products to OEM and retail customers is referred to in this report as our “distribution”
line of business. We use the term “design” or “design and development” to describe the IPS and Kablooe engineering
services line of business.
The outbreak of the COVID-19
virus continues to impact our results of operations. While the most significant impact was in Fiscal 2020, the virus continued to impact
our results of operations in Fiscal 2021. The business shutdowns resulting from the pandemic disrupted our supply chain and the manufacture
or shipment of our products and delayed the rollout of our retail products. Additionally, demand for our design and development services
was reduced or delayed as a result of the pandemic as certain customers reduced discretionary spending. While revenues for Fiscal 2021
increased as compared to Fiscal 2020, they were lower than anticipated due in part to the impact of COVID-19 and the resulting economic
conditions. The impact of lower than anticipated revenue was further complicated by a significant increase in freight costs due to the
global shipping container shortage. These challenges were partially offset by a reduction in certain selling and travel related expenses.
Many government restrictions
have been relaxed and the economy has continued to open in more jurisdictions. However, the emergence of new and transmittable variants
of COVID-19 could lead to a possible resurgence of the virus, particularly in populations with low vaccination rates, and has resulted
in new restrictions in certain geographies and among certain businesses. 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” for a description of the material risks that we currently face in connection
with COVID-19.
Until the pandemic is fully
controlled, 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 strategy. To help mitigate the impact of these challenging business conditions, we
implemented cost-cutting initiatives and reduced executive pay and Board of Directors compensation for the three months ended June 30,
2021. See “Liquidity and Capital Resources” section of Part II, Item 7 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” for further description of these cost-cutting measures.
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, an engineering design company, and in August 2020, Forward acquired the assets of Kablooe Design, a medical and consumer
design and development company. We believe that the design and engineering service capabilities of Kablooe will complement the IPS business
and further diversify the industries and customers with which we do business.
Customers
Our OEM distribution customers
are located in the APAC Region, the EMEA Region and the Americas. Our retail distribution customers are predominantly located in the Americas.
Our design business provides
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, certain luxury brands, and oil/gas. Our design customers
are located primarily in the Americas.
Products
Our 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). In Fiscal 2020
and 2021, our products also include smart-enabled furniture and a variety of other products sold through our retail distribution network.
We do not manufacture any of our products and we source substantially all our 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. The diabetic products 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.
Other Products
We also sell carrying and
protective solutions to customers for a diverse array of other portable electronic and 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 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.
Retail Products
In Fiscal 2020, as a result
of the build out and growth of our retail distribution network, we began selling smart-enabled products, such as speakers and lamps that
provide lighting and sound with Bluetooth® connectivity. In Fiscal 2021, we expanded our retail product offerings to include additional
smart-enabled furniture, such as desks and side tables, as well as hot tubs and various other products.
Our design business 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 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, we typically
receive requests to submit product designs in connection with a customer’s introduction and rollout to market of a new product.
We collaborate 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.
In the retail division, we
work with various retailers to understand their product requirements and utilize our sourcing resources to obtain products. Additionally,
we have a portfolio of retail products that we share with retailers to gauge the level of consumer interest.
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
distribution 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.
We primarily ship our retail
distribution products directly to customers from one of our distribution centers located in the U.S. We may also ship certain retail products
directly to some larger retailers. 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
certain customers’ 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 customer’s
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.
Third-Party Warehouses
We also have arrangements
with third-party warehouses in the U.S. to store, manage and ship our retail products. We do not recognize revenue for retail products
shipped to any of these warehouses 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
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.
The manufacture of smart
furniture consists of laser cutting, punching, welding and powder coating the various parts and finished product, including lamination,
board cutting and drilling for certain products. The main materials used include particle board, engineered wood composite, tempered glass
and metal. The manufacture of certain other retail products includes mold creation and assembly and uses various plastics and light components.
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
We have a Buying Agency and
Supply Agreement (the “Supply Agreement”) with Forward China. The Supply Agreement provides that Forward China acts as our
exclusive buying agent for the products we sell. Forward China also arranges for sourcing, manufacture and exportation of such products.
We purchase products at Forward China’s cost and pay them a service fee calculated at $100,000 monthly plus 4% of “Adjusted
Gross Profit”, which is defined as the selling price less the cost from Forward China. The Supply Agreement has been extended to
October 22, 2023. Terence Wise, our Chairman, Chief Executive Officer and largest shareholder, is the owner of Forward China. See “Item
1A. – Risk Factors” regarding our dependence on Forward China.
Suppliers
We procure substantially
all our distribution OEM and distribution products from independent suppliers in China through Forward China. Depending on the product,
we may require several different suppliers to furnish component parts or pieces. We place orders for particular products and do not have
minimum supply requirement agreements to guarantee a supply of finished product, nor have we made purchase commitments to purchase minimum
amounts. However, from time to time, we may order products 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.
There are very few
suppliers required for the design segment of the business as it is a service-based business. We do, however, purchase supplies and
equipment to develop prototypes required 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 in China 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 and is valid until July 2024.
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 we work closely with the customer to identify and correct any quality issues that arise.
Competition
Distribution Business
Our OEM and retail distribution
businesses are highly competitive in terms of product pricing, design, delivery terms, and customer service. In the production of our
distribution products, we compete with numerous U.S. 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
Our key human capital management
objectives are to attract, retain and develop the highest quality talent. To support these objectives, our human resources programs are
designed to:
· reward and support employees through competitive pay and benefits;
None of our employees are
covered by a collective bargaining agreement. As of November 30, 2021, we employed approximately 90 employees. We hire consultants on
an as-needed basis.
Regulation and Environmental Protection
Our retail and OEM distribution
businesses are subject to various regulations in various jurisdictions, including the U.S. and member states of the European Union, 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
become 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, 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 customers’ product markets.
Available Information
Our corporate website is www.ForwardIndustries.com.
On our website under “Investors” "SEC Filings", we make available access to our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements on Schedule 14A and amendments to those materials filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), free of charge. The contents
of the website are not incorporated into this filing.
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 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
The ongoing COVID-19 pandemic and measures
intended to prevent its spread have had, and may continue to have, a material and adverse effect on our business and results of operations.
Global health concerns relating
to the COVID-19 pandemic and related government actions taken to reduce the spread of the virus have been weighing on the macroeconomic
environment, and the pandemic has significantly increased economic uncertainty and reduced economic activity. Small businesses, which
represent a large portion of our design customers, have been impacted particularly hard. The pandemic has resulted in government authorities
and businesses implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter
in place or total lock-down orders, school closures, and business limitations and shutdowns. Such measures have contributed significantly
to increased unemployment and negatively impacted consumer and business spending. Business shutdowns have disrupted our supply chain and
the manufacture or shipment of our products and delayed the rollout of our retail distribution products.
The pandemic has caused us
to modify our business practices to help minimize the risk of the virus to our employees, our customers, and the communities in which
we participate, which could negatively impact our business. We continue to permit employees to work remotely, which subjects the Company
to increased cybersecurity risks and may reduce workplace efficiency. As the availability of vaccines increased and COVID-19 case rates
diminished, we gradually re-opened our offices. We continue to employ additional safety measures in our offices, including enhanced cleaning
and sanitation, mask wearing, suspending international business travel for our employees and limiting domestic business travel, limiting
external guests visiting our offices, and holding most meetings and events virtually. Local conditions may require us to move back under
more restrictive guidelines, which could include mandatory remote work and additional safety measures. Given the continually evolving
situation, including new variants, there is no certainty that the measures we have taken will be sufficient to mitigate the risks posed
by the virus.
The full extent to which
the COVID-19 pandemic will continue to impact our business, results of operations, and financial condition remains uncertain and will
depend on developments that remain uncertain and difficult to predict, including, but not limited to, the duration and spread of the pandemic,
its severity, the actions to contain the virus or treat its impact, the availability, distribution and efficacy of vaccines, and acceptance
by the population to get the vaccine and how quickly and to what extent normal economic and operating conditions resume. Even after the
COVID-19 pandemic has subsided, we may experience material and adverse impacts to our business as a result of the virus’s global
economic impact, including the availability of credit, bankruptcies or insolvencies of customers, and recession or economic downturn.
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 2021, 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 2021, we generated
an operating loss of approximately $765,000 and had net cash used in operating activities of approximately $528,000. 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”), none of which has been utilized as of the date of this report, Forward China holds a $1,600,000 note which is due December
31, 2022. Forward China, which is owned by our Chief Executive Officer and Chairman of the Board, has previously agreed to extend this
note numerous times to assist the Company with its liquidity resources. We cannot provide you with any assurance that Forward China 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 OEM 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
accounted for 86% of our OEM distribution net revenues in Fiscal 2021. 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 OEM distribution
business is and has been characterized by a high degree of customer concentration. Our four largest distribution customers accounted
for 85% and 83% of OEM distribution net revenues in Fiscal 2021 and Fiscal 2020, respectively. 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 OEM 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 OEM distribution 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 any
tariffs previously implemented by former President Trump on the medical technology industry. However, we do not know if the new administration
will implement any. 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 any tensions relating to potential military conflict between China
and Taiwan, 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 OEM 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 2021, we continued
to experience significant pricing pressure from our largest OEM 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 OEM 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 OEM 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 OEM distribution business has benefited
from customers deciding to outsource their carry and protective solutions assembly needs to us. If our OEM distribution customers choose
to provide these services in-house or select other providers, our OEM distribution business could suffer.
Our future OEM distribution
revenue growth partially depends on new outsourcing opportunities from our OEM 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 our design teams fail to complete a project
in a timely manner, miss a required performance standard, or otherwise fail to adequately perform on a project, then we may incur a loss
on that project.
Our design engagements often
involve large-scale, complex projects. The quality of our performance on such projects depends in large part upon our ability to manage
the relationship with our clients and our ability to effectively manage the project and deploy appropriate resources, including third-party
contractors and our own personnel, in a timely manner. We may commit to a client that we will complete a project by a scheduled date and/or
at a fixed fee. We may also commit that a project, when completed, will achieve specified performance standards. If the project is not
completed by the scheduled date or fails to meet required performance standards, we may incur significant additional costs or be held
responsible for the costs incurred by the client to rectify damages due to late completion or failure to achieve the required performance
standards. The uncertainty of the timing of a project can present difficulties in planning the amount of personnel needed for the project.
If the project is delayed or canceled, we may bear the cost of an underutilized workforce that was dedicated to fulfilling the project.
In addition, performance of projects can be affected by a number of factors beyond our control, including unavoidable delays from government
inaction, inability to obtain financing, weather conditions, unavailability of vendor materials, changes in the project scope of services
requested by our clients, industrial accidents, environmental hazards, and labor disruptions. To the extent these events occur, the total
costs of the project could exceed our estimates, and we could experience reduced profits or, in some cases, incur a loss on a project,
which may reduce or eliminate our overall profitability on that project. Further, any defects or errors, or failures to meet our clients’
expectations, could result in claims for damages against us. Failure to meet performance standards or complete performance on a timely
basis could also adversely affect our reputation.
Our results of operations could suffer if we
are not able to maintain adequate utilization of our workforce.
The cost of providing our
design services, including the extent to which we utilize our workforce, affects our profitability. The rate at which we utilize our workforce
is affected by a number of factors, including:
· our ability to manage attrition;
If we over-utilize our workforce,
our employees may become disengaged, which could impact employee attrition. If we under-utilize our workforce, our profit margin and profitability
could suffer.
Employee or agent misconduct, or our failure
to comply with anti-bribery and other laws or regulations, could harm our reputation, reduce our revenue and profits, and subject us to
criminal and civil enforcement actions.
Misconduct, fraud, non-compliance
with applicable laws and regulations, or other improper activities by one of our employees or agents could have a significant negative
impact on our business and reputation. Such misconduct could include the failure to comply with government procurement regulations, regulations
regarding the protection of classified information, regulations prohibiting bribery and other foreign corrupt practices, regulations
regarding the pricing of labor and other costs in government contracts, regulations on lobbying or similar activities, regulations pertaining
to the internal controls over financial reporting, environmental laws, and any other applicable laws or regulations. For example, as
previously noted, the FCPA and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries
from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Our policies mandate compliance
with these regulations and laws, and we take precautions to prevent and detect misconduct. However, since our internal controls are subject
to inherent limitations, including human error, it is possible that these controls could be intentionally circumvented or become inadequate
because of changed conditions. As a result, we cannot assure that our controls will protect us from reckless or criminal acts committed
by our employees or agents. Our failure to comply with applicable laws or regulations or acts of misconduct could subject us to fines
and penalties and suspension or debarment from contracting, any or all of which could harm our reputation,
reduce our revenue and profits, and subject us to criminal and civil enforcement actions.
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 OEM 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 OEM
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 OEM distribution customer. Therefore, it is the contract manufacturing firm to
which we must look for payment in such cases and not our OEM 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 and cash flows will be