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
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. For example, in March 2021, a container ship carrying some of our products was stuck in the Suez Canal for six days.
Although this accident did not have a material adverse effect on our business, there is no assurance that, if it happened again, that
it would not. In any such case, our customers 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 or develop 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 provide only limited warranties and carries
product liability insurance, we can provide no assurance that customers will not seek damages beyond what we warranty or beyond our insurance
coverage. 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 is highly labor intensive and, therefore,
our ability to attract and retain professional and technical staff is an important factor in our future success. The market for qualified
engineers is competitive and, from time to time, it may be difficult to attract and retain qualified individuals with the required expertise
within the timeframe demanded by our clients. 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, 2021. 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;
· Cybersecurity breaches;
· The loss of customers or our failure to attract more customers;
· Creditworthiness and solvency of clients;
· Loss of key employees;
· The sale of a large amount of common stock by our shareholders;
· An adverse court ruling or regulatory action;
· Changes in regulatory practices, including tariffs and taxes;
· 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.
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 December 10, 2021, our closing price was $1.81. 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. In 2019, 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
We lease all properties where
our 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 and rent payments were $30,000 per month during Fiscal 2021.
We lease 11,000 square feet
in Coon Rapids, Minnesota for Kablooe, which we rent under a lease agreement scheduled to expire in June 2026. The lease has annual escalations
and rent payments were $10,000 per month during Fiscal 2021.
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 claimed monetary damages, asserts that certain intellectual property was misappropriated
by IPS and one of its former employees. In October 2021, the Court ruled that the misappropriation claim was invalid. The remaining
allegation is that IPS breached a non-disclosure agreement with a party to the case. IPS denies the allegations, believes the action is
without merit and intends to vigorously defend it. The Company has filed a motion to dismiss.
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, 2021, 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
Market for Common Stock
The principal market for
our common stock is Nasdaq. Our common stock is traded under the symbol “FORD”.
On December 10, 2021, the
closing price for our common stock was $1.81.
Holders of Common Stock
At November 30, 2021, there
were approximately 70 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 Statements
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 growth in retail;
· Plans on repaying outstanding debt obligations;
· 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 acquisition of Kablooe
took place in August 2020 and its results of operations have been included in our condensed consolidated financial statements since the
acquisition date. Accordingly, our results of operations for Fiscal 2021 include Kablooe’s results of operations for 12 months,
while our results of operations for Fiscal 2020 include Kablooe’s results of operations for approximately six weeks. Key terms of
the acquisition are described in Note 3 to the consolidated financial statements.
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 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 for further description of these cost-cutting measures.
Additionally, see Part I,
Item 1A “Risk Factors” for a description of the material risks we currently face in connection with COVID-19.
Variability of Revenues and Results of Operations
A significant portion of
our revenue is concentrated with several large customers, some of which are the same and some of which change over time. Orders from some
of these customers can be highly variable, with short lead times, which can cause our quarterly revenues, and consequently our results
of operations, to vary 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. The
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
OEM and Retail Distribution Segments
We generally recognize revenue
in our OEM and retail distribution segments when: (i) finished goods are shipped to our customers (in general, these conditions occur
at either point of shipment or point of destination, depending on the terms of sale and 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 we receive consideration before achieving the criteria previously mentioned, we record a contract liability, which is classified
as a component of deferred income in the accompanying consolidated balance sheets. The OEM distribution segment had no contract liabilities
at September 30, 2021, 2020 or 2019. The retail distribution segment had contract liabilities of $0, $75,000 and $0 at September 30, 2021,
2020 and 2019, respectively.
Design Segment
We apply 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. We recognize revenue
over time on our 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. The design segment had contract assets of $693,000, $649,000 and $611,000 at September
30, 2021, 2020 and 2019, 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. The design
segment had contract liabilities of $188,000, $410,000 and $220,000 at September 30, 2021, 2020 and 2019, respectively.
Business Combinations
We allocate 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, we make 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
We have three reportable
segments: OEM distribution, retail distribution and design. The OEM distribution segment sources and distributes carrying cases and other
accessories for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic devices directly
to OEMs or their contract manufacturers. The retail distribution segment sources and sells smart-enabled furniture and a variety of other
products through agreements with various retailers, both in stores and through online retailer websites. The design reportable 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.
Our chief operating decision
maker (“CODM”) regularly reviews revenue and operating income for each segment to assess financial results and allocate resources.
For our OEM and retail distribution segments, we exclude general and administrative and general corporate expenses from their measure
of profitability as these expenses are not allocated to the segments and therefore not included in the measure of profitability used by
the CODM. For the design segment, general and administrative expenses directly attributable to that segment are included in its measure
of profitability as these expenses are included in the measure of its profitability reviewed by the CODM. We do not include intercompany
activity in our segment results to be consistent with the information that is presented to the CODM (see Note 16 to the consolidated
financial statements).
Goodwill and Intangible Assets
We review goodwill
for impairment at least annually, or more often if triggering events occur. We have two reporting units with goodwill (IPS and Kablooe)
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. We have the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred.
If we 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 we would not need to perform a quantitative impairment test for the reporting unit. If we cannot support such a conclusion