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, 2022
☐ 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, a smaller reporting company or an emerging growth company. See
the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and
“emerging growth 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, 2022, the aggregate market value
of the registrant’s common stock held by non-affiliates of the registrant was approximately $12,000,000 based on the closing price
as reported on the Nasdaq Stock Market.
There were 10,061,185 shares of the registrant’s
common stock outstanding as of December 9, 2022.
Documents Incorporated by Reference
Portions of the registrant's Proxy Statement for the
2023 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, 2022.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
Page No.
PART I
Item 1. Business 1
Item 1A. Risk Factors 7
Item 1B. Unresolved Staff Comments 17
Item 2. Properties 17
Item 3. Legal Proceedings 17
Item 4. Mine Safety Disclosures 17
PART II
Item 6. Reserved 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26
Item 8. Financial Statements and Supplementary Data 26
Item 9A. Controls and Procedures 26
Item 9B. Other Information 27
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 27
PART III
Item 10. Directors, Executive Officers and Corporate Governance 28
Item 11. Executive Compensation 28
Item 14. Principal Accountant Fees and Services 28
PART IV
Item 15. Exhibits and Financial Statement Schedules 29
Signatures 30
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 global design, manufacturing,
sourcing and distribution group serving 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 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 original equipment manufacturer (“OEM”) distribution business has been 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, GPS location devices, tablets and firearms. Our OEM customers are located in various regions worldwide.
Our retail distribution business,
which we began in 2019, sources and sells smart-enabled furniture, hot tubs and a variety of other products through various online retailer
websites to customers predominantly located in the U.S. The rollout of many of these products was delayed by COVID-19 as discussed below.
As we expanded our retail distribution network, 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 OEM or retail distribution products and source substantially all these products from independent suppliers in China through Forward
Industries Asia-Pacific Corporation, a British Virgin Islands corporation (“Forward China”). Forward China is owned by our
Chairman and Chief Executive Officer.
Our design business provides
a full spectrum of hardware and software product design and engineering services to customers predominantly located in the U.S. Our expertise
in various disciplines enables us to serve a wide variety of industries and provide clients with a single source solution for concepts,
industrial design, mechanical engineering, embedded software and systems architecture, mobile and enterprise application software, and
optical engineering.
The outbreak of the COVID-19
virus had a significant impact on our business. In Fiscal 2020, the business shutdowns resulting from the pandemic disrupted our supply
chain and the manufacture and shipment of our OEM products and delayed the rollout of our retail products. Demand for our design and development
services was reduced or delayed because of the pandemic as certain customers reduced discretionary spending. In Fiscal 2021, the economy
began to open across the world, and consumer demand grew much faster than manufacturers could satisfy, leading to extensive shipping delays,
a global shipping container shortage and higher ocean freight costs. This continued to reduce the availability of many of our products
and increased their cost of importation. The increase in consumer demand continued in Fiscal 2022, which dramatically increased demand
for ocean freight, particularly from the Asia-Pacific region. Labor shortages at U.S. ports and in ground transportation services caused
container ships to spend a significant amount of time waiting to be unloaded and to arrive at our warehouses, which caused an increase
in the demand for and cost of ground transportation. These factors resulted in further cost increases and delayed consumer availability
for many of our products. The impact of inflation in Fiscal 2022 caused an increase in the cost of acquiring and retaining employees in
our design business.
The effects of COVID-19 may further
impact our business in ways we cannot predict, and such impacts could be significant. The current economic conditions may continue to
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 products and services and to choose to allocate their budgets to new or existing projects which may or may
not require our products and 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 effects of the pandemic
have fully receded, 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 and inventory levels; aligning our design and development
schedules with demand in a proactive manner 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.
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 all geographic regions worldwide. Our retail distribution customers are predominantly located in the U.S.
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 U.S.
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, GPS location devices, tablets, and firearms). Our products also include
smart-enabled furniture, hot tubs 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 13 to the consolidated financial statements).
Diabetic Products
We sell carrying cases for blood
glucose diagnostic kits 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, GPS 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 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 began expanding 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 that are sold through
retailer websites.
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.
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 specifications and consumer demand and utilize our sourcing resources
to obtain products that meet these needs. Additionally, we have a portfolio of retail products that we share with retailers to gauge the
level of consumer interest. We receive design and marketing services for some retail products from The Justwise Group Ltd., a company
owned by Terence Wise, our Chairman, Chief Executive Officer and largest shareholder.
Services
Services offered in our design
business 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
· IT Support
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 end customers from distribution centers located in the U.S. and Canada. We may also ship certain retail
products directly to some larger retailers. We continue to evaluate our strategy for the retail distribution business in an effort to
increase profitability and match our product offerings with consumer demand.
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 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 and the time that we are able to recognize revenue. The corollary effect is an increase in our inventory levels.
Third-Party and Consignment Warehouses
We also have arrangements with
third-party warehouses and consignment warehouses of major retailers in the U.S. and Canada 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 customer
and our performance obligation is complete.
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 monthly service fee calculated at $100,000 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 OEM and retail 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 certain OEM 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 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. The
quality assurance manager 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 Business
The depth and breadth of 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 have competitive advantages.
Human Capital/Employees
As of November 30, 2022, we had approximately
100 employees, substantially all of whom work full-time, none of which are covered by a collective bargaining agreement. We hire consultants
on an as-needed basis.
Human capital management is critical
to our ongoing business success, which requires investing in our people. Our aim is to create a highly engaged and motivated workforce
where employees are inspired by leadership, engaged in purpose-driven, meaningful work and have opportunities for growth and development.
We are committed to creating and maintaining a work environment in which employees are treated with respect and dignity. We
value our diverse employees and provide career and professional development opportunities that foster the success of our company.
An effective approach to human
capital management requires that we invest in talent, development, culture and employee engagement. We aim to create an environment where
our employees are encouraged to make positive contributions and fulfill their potential. We emphasize our core values of innovation, encouragement,
motivation, and curiosity with our employees to instill our culture and create an environment of growth and positivity.
Our Compensation Committee is
also actively involved in reviewing and approving executive compensation, and succession plans so that we have leadership in place with
the requisite skills and experience to deliver results the right way. We offer fair, competitive compensation and benefits that support
our employees’ overall wellbeing. In addition to health benefits, we contribute to employees’ 401(k) plans and offer student
tuition reimbursement (if certain requirements are met).
Impact of COVID-19
The health and well-being of
our employees is of utmost importance to us. Starting in March 2020, the majority of our employees transitioned to a remote workforce.
Since that time, our employees have demonstrated resilience, wisdom, commitment, and compassion in working with our customers. As conditions
improved, employees in the U.S. were encouraged to return to their offices. We encourage all employees to follow Centers for Disease Control
and Prevention and local guidelines and recommendations.
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 report.
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 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 weighed on the macroeconomic environment,
and the pandemic has significantly increased economic uncertainty and reduced economic activity in the past. Small businesses, which represent
a large portion of our design customers, were impacted particularly hard. The pandemic 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
lockdown orders, school closures, and business limitations and shutdowns. Such measures contributed significantly to increased unemployment
and negatively impacted consumer and business spending. Business shutdowns disrupted our supply chain and the manufacture or shipment
of our products and delayed the rollout of our retail distribution products. While many of the foregoing developments have largely subsided
since the pandemic’s peak, there can be no assurances that a subsequent wave will not occur in the future or that a new, potentially
more contagious or dangerous variant will not arise.
Various regions throughout China
have been subject to government mandated Covid lockdowns. While these lockdowns have not had a material impact on our ability to
source product, there is no assurance that future actions will not affect our supply chain. The timing and extent of these lockdowns,
as well as the potential impact on our business, are largely unknown and difficult to predict. Disruption of our key suppliers could
have a material impact on our ability to source product and the related cost of these products.
Even after the COVID-19 pandemic
has completely 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. For example,
in the U.S. and other countries, stimulus packages, rising inflation and demand and other developments during and in the wake of the pandemic
have created an inflationary market environment, and in response the Federal Reserve and foreign entities have imposed significant interest
rate increases which have resulted in the increased likelihood of a recession in the short-term.
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 2022, 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 2022, we generated
an operating loss of approximately $1,240,000. 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 $1,400,000 note which is due December 31, 2024. 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.
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 or incur
additional debt 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 85% of our OEM distribution revenues in Fiscal 2022, and OEM distribution revenue accounted for approximately 43% of our
overall revenue in Fiscal 2022. 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.
Each of our distribution and
design businesses can at times be concentrated with certain larger customers. Our largest design customer accounted for 10.6% of our consolidated
net revenue in Fiscal 2022. Further, two distribution customers accounted for 23.0% of our consolidated net revenue in Fiscal 2022 and
three distribution customers represented 36.8% of our consolidated net revenue in Fiscal 2021. Although our customer concentration changes
from year to year, and 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 which remain in place pending the Biden Administration’s
continued review of the tariffs. However, we do not know if the Biden administration will implement any new tariffs or alter current tariffs.
If any such tariffs or any restrictions are imposed on products that we import for 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.
In an effort to reduce the impact of this potential disruption, we continue to explore low-cost opportunities from non-China manufacturers.
We can provide no assurance that we will obtain alternate sources or that our mitigation efforts will prevent any such disruptions.
We continue to encounter pressure from our largest
customers to maintain or even decrease prices, or to provide lower priced 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 and labor.
During Fiscal 2022, we continued
to experience significant pricing pressure from many customers, including some of our largest 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.
The recent inflationary environment in the U.S. and globally has caused production costs to increase in Fiscal 2022. Similarly, due to
continued trends of high demand and low supply in the labor market which have persisted despite Federal Reserve interest rate increases,
the cost of labor has risen in both our design and distribution businesses. These developments have a material adverse impact on our margins
and our ability to achieve or maintain profitability. 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 costs 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 or services, coupled with pressure
from the market and our customers to decrease our prices, would have a material adverse effect on 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
damage to the distribution business.
Our business has benefited from customers deciding
to outsource their carry and protective solutions assembly needs, as well as product development and design functions, to us. If our customers
choose to provide these services in-house or select other providers, our business could suffer.
Our future revenue growth partially
depends on new outsourcing opportunities from our current and prospective customers. Current and prospective customers continuously evaluate
our performance against other providers. They also evaluate the potential benefits of developing, designing, manufacturing and transporting
their products themselves. To the extent that outsourcing opportunities are not available either due to these customers deciding to develop,
design, produce or transport 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 services or if we are unable to deliver our products and/or services to our 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 develop, design and produce 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 high-quality products and a sophisticated product designer
and developer would likely be damaged. If we are unable to meet anticipated product and service standards imposed by contractual arrangements,
customer expectations, industry practices, regulatory requirements and competitive forces, we may be unable to obtain new or keep our
existing 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. Furthermore, our entrance into fixed price
arrangements mean that if the costs of supplies, labor and other resources rise due to shortages, heightened demand, inflation or other
factors, our margin for a given project will decline. 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 or in general. 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 various procurement regulations, regulations
regarding the protection of confidential information, regulations prohibiting bribery and other foreign corrupt practices, regulations
regarding the pricing of labor and other costs in 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, the Foreign
Corrupt Practices Act, or 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 and operating in multiple segments.
Because our revenues can at times
be 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. Further, in our design and development business customers may decline to use us for future work after a project is completed,
which may be due to lack of continued need for our services after their product has been developed, produced and marketed or because they
are dissatisfied with our pricing or performance. All of these factors tend to lead to a high degree of variability in our quarterly revenue