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
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 potential
profitability, vary considerably by customer and by product and service offering, and if the revenue contribution from one or more customers
or products or project changes materially, relative to total revenues, our gross profit percentage may fluctuate.
Our gross profit margins on the
products and services we sell can vary widely depending on the product or project type, customer, and contract or order size. Because
of the broad variability in price ranges and product and project 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. Similarly, because
we offer a wide range of products and services which often vary with each customer and project, we face challenges in maintaining and
enhancing operational efficiencies. For example, because of the range of products and services we offer and our general lack of specializations
within our fields relative to some of our competitors, we may not enjoy the advantages offered by more focused or streamlined operations,
such as economies of scale or improved production capabilities from our labor, facilities, and procedures with the passage of time. 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 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 ran aground in the Suez Canal and was immobilized
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 or services 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, or with the services we render, 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 or services, decreased willingness
by retailer customers to purchase our products or procure our services, 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 and services, any of which could have a significant adverse effect on our financial condition and results of operations.
Although the Company carries product liability insurance and works with its customers to satisfy product quality concerns (the cost of
such efforts are typically covered by our sourcing agent, Forward China) 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 in our distribution business or assist in the development, design or production of in our design business, 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 product distribution and design businesses
are highly competitive and do 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. Further, with respect to our
design business, while management believes there are a limited number of customers offering the broad range of design and development
services we do, there are numerous design and engineering companies that compete with us in specific industries and/or with specific targeted
skills or competitive advantages, and some prospective customers might prefer a competitor that focuses in a specialty area in which they
operate or target over an offering such as ours that is not limited to any specific industry or product type.
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. In addition to our products, potential adverse developments involving intellectual property
described above may occur with respect to customers’ products incorporating our products or services that we render.
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 18% of the outstanding shares of our common
stock as of December 9, 2022. 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 9, 2022, our closing price was $1.25. 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 approximately $30,000 per month during Fiscal 2022.
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 approximately $10,000 per month during Fiscal 2022.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company
may become a party to legal actions or proceedings in the ordinary course of its business. As of September 30, 2022, 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 9, 2022, the
closing price for our common stock was $1.25.
Holders of Common Stock
At November 30, 2022, 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. RESERVED
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. The following discussion and analysis compares our results of operations for the year ended September 30, 2022 (“Fiscal
2022”) with those for the year ended September 30, 2021 (“Fiscal 2021”). 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 our liquidity, plans on repaying outstanding debt obligations, expectations regarding the effect
of the pandemic and inflation on our business, 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
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, the Company
is now able to introduce proprietary products to the market from concepts brought to it from a number of different sources, both inside
and outside the Company.
Our design division provides
hardware and software product design and engineering services to customers predominantly located in the U.S. Our OEM distribution division
sources and sells carrying cases and other accessories for medical monitoring and diagnostic kits as well as a variety of other portable
electronic and non-electronic devices to OEMs, or their contract manufacturers worldwide, that either package our products as accessories
“in box” together with their branded product offerings or sell them through their retail distribution channels. Our retail
distribution division sources and sells smart-enabled furniture, hot tubs and various other products through various online retailer websites
to customers predominantly located in the U.S.
The effects of the COVID-19 pandemic
continue to impact the retail and OEM distribution segments of our business. The increase in global consumer demand, coupled with the
global shipping container shortage, dramatically increased demand for both ocean freight and ground transportation. These factors led
to a significant increase in freight costs, particularly from the Asia-Pacific region and most notably in Fiscal 2022. Labor shortages
at U.S. ports and in ground transportation services caused container ships to spend a significant amount of time waiting for goods to
be unloaded and to arrive at our warehouses. These factors caused an increase in the demand for and cost of ground transportation and
delayed consumer availability for many of our products in Fiscal 2022. The timing and extent of these COVID-19 related transportation
disruptions are still largely unknown but are expected to continue into Fiscal 2023.
The effects of the pandemic had
a lesser impact on the design segment of our business. Rising inflation caused an increase in the cost of acquiring and retaining our
employees, particularly in the second half of Fiscal 2022. The timing and extent of future inflation is difficult to predict, but we expect
these rising costs to continue into Fiscal 2023.
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.
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 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 Distribution Segment
The OEM distribution segment
recognizes revenue when finished goods are shipped to its 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. If the Company receives consideration
before achieving the criteria previously mentioned, it records a contract liability, which is classified as a component of deferred income
in the accompanying consolidated balance sheets.
Retail Distribution Segment
The retail distribution segment
sells products primarily through online websites operated by authorized third-party retailers. Revenue is recognized when control, as
defined in Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers”, of the related
goods is transferred to the retailer, which generally occurs upon shipment to the end customer. Other than product delivery, the retail
distribution segment does not typically have other deliverables or performance obligations associated with its products. Revenue is measured
as the amount of consideration expected to be received in exchange for the products provided, net of allowances taken by retailers for
product returns and any taxes collected from customers that will be remitted to governmental authorities. When the Company receives consideration
before achieving the criteria previously mentioned, it records a contract liability, which is classified as a component of deferred income
in the accompanying consolidated balance sheets.
Design Segment
The design segment applies the
“cost to cost” and “right to invoice” methods of revenue recognition to its contracts with customers. The design
segment typically engages in two types of contracts: (i) time and material and (ii) fixed price. The Company recognizes revenue over time
on its time and material contracts utilizing a “right to invoice” method. Revenues from fixed price contracts that require
performance of services that are not related to the production of tangible assets are recognized by using cost inputs to measure progress
toward the completion of its performance obligations, or the “cost to cost” method. Revenues from fixed price 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. 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.
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 worldwide. The retail distribution segment sources and sells smart-enabled furniture, hot tubs and a variety of