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, 2023
☐ 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)547-3055
(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. ☐
If
securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included in the fi ling reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error
corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s
executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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, 2023, the aggregate market
value of the registrant’s common stock held by non-affiliates of the registrant was approximately $7,800,000 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 8, 2023.
Documents Incorporated by Reference
Portions of the registrant's Proxy Statement for
the 2024 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, 2023.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
Page No.
PART I
Item 1. Business 1
Item 1A. Risk Factors 6
Item 1B. Unresolved Staff Comments 16
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Mine Safety Disclosures 16
PART II
Item 6. Reserved 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 24
Item 8. Financial Statements and Supplementary Data 24
Item 9A. Controls and Procedures 24
Item 9B. Other Information 24
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 24
PART III
Item 10. Directors, Executive Officers and Corporate Governance 25
Item 11. Executive Compensation 25
Item 14. Principal Accountant Fees and Services 25
PART IV
Item 15. Exhibits and Financial Statement Schedules 26
Signatures 27
i
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, sourcing and distribution company serving top tier medical and technology customers worldwide.
The principal customer 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.
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
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.
Discontinued Operations
Considering the recurring losses incurred by the
retail segment, in July 2023, the Company decided to cease operations of our retail distribution segment and we are presenting the results
of operations for this segment within discontinued operations in the current and prior periods presented herein. The discontinuation of
the retail segment represents a strategic shift in the Company’s business. The primary assets of the retail segment are inventory
and accounts receivable. The Company expects to sell, liquidate, or otherwise dispose of remaining retail inventory by June 30, 2024,
and to collect remaining retail accounts receivable by the end of fiscal 2024. After this time, we expect to have no further significant
continuing involvement with the retail distribution segment. The inventory of the retail segment is presented as discontinued assets held
for sale on the balance sheets at September 30, 2023 and 2022 and the results of operations for the retail segment have been classified
as discontinued operations on the consolidated statements of operations for the years ended September 30, 2023 and 2022. All information
and results in this annual report on Form 10-K exclude the discontinued operations unless otherwise noted. See Note 3 to our consolidated
financial statements for additional information on discontinued operations.
COVID-19
On May 11, 2023, the U.S.
Department of Health and Human Services declared the end of the Public Health Emergency for COVID-19; however, the effects of COVID-19
continue to linger throughout the global economy and our businesses. Though the severity of COVID-19 has subsided, new variants, or the
outbreak of a new pathogen, could interrupt business, cause renewed labor and supply chain disruptions, and negatively impact the global
and US economy, which could materially and adversely impact our businesses.
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 has complemented the IPS business
and further diversified the industries and customers with which we do business.
Customers
Our OEM distribution customers
are located in all geographic regions worldwide. Our design business provides services to 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). We do not manufacture any
of our products and we source substantially all our products from independent suppliers in China through Forward China, a related party
(see Note 14 to the consolidated financial statements).
Diabetic Products
We sell carrying cases for
blood glucose diagnostic kits 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.
Design Products
Our design business provides
a complete range of design, engineering and development services with respect to a diverse array of consumer and industrial electronics
products. These include but are not limited to medical products, smart displays, beverage vending, enterprise and mobile software applications,
lighting, security and detections systems, cameras, wearables and vehicle controls. Solutions in these and other areas are designed and
developed in-house, beginning at product concept, extending through design, engineering and prototype, and final design for manufacturing
and computer-aided design files.
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.
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
· IT Support
Distribution
Channels of Distribution
We ship the majority of 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.
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.
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.
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 through March 2023 paid 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. Considering the loss
of a significant OEM distribution customer (see Note 16 to the consolidated financial statements), effective April 1, 2023, the Company
and Forward China agreed to reduce the fixed portion of the sourcing fee from $100,000 to $83,333 per month for the remaining term of
the Supply Agreement, which expired in October 2023, resulting in cash savings of $100,000 in Fiscal 2023. Effective October 2023, the
Company and Forward China entered into a new sourcing agreement under which the fixed portion of the sourcing fee was further reduced
to $65,833 per month. Other terms in the agreement are substantially the same as the prior agreement. Due to the Company’s decision
to cease operations of its retail distribution segment and the decline in the OEM distribution segment business, the new sourcing agreement
expires October 31, 2024. Terence Wise, our Chairman, Chief Executive Officer and largest shareholder, is the owner of Forward China.
In addition, Jenny P. Yu, a Managing Director of Forward China, beneficially owns more than 5% of the Company’s common stock. See
“Item 1A. – Risk Factors” regarding our dependence on Forward China.
Suppliers
We procure substantially
all our OEM 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 project
contracts and we work closely with the customer to identify and correct any quality issues that arise.
Competition
Distribution Business
Our OEM distribution business
is 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, 2023,
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).
Regulation and Environmental Protection
Our OEM distribution business
is subject to various regulations in various jurisdictions, including the U.S., Canada 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, or any other future
pandemic, has had, and may continue to have, a material and adverse effect on our business and results of operations.
On May 11, 2023, the U.S.
Department of Health and Human Services declared the end of the Public Health Emergency for COVID-19; however, the effects of COVID-19
continue to linger throughout the global economy and our businesses. Though the severity of COVID-19 has subsided, new variants or any
other future pandemic could interrupt business, cause renewed labor and supply chain disruptions, and negatively impact the global and
US economy, which could materially and adversely impact our business. During the height of COVID-19 our supply chain experienced significant
disruptions which, together with other factors such as the increase in global consumer demand and the global shipping container shortage,
resulted in longer delivery times and higher importation costs for most of our products. While our supply chain appears to generally be
stable at this time, should a resurgence of COVID-19 occur, our supply chain could again be negatively impacted; for example, the factories
that manufacture our products could be required by government authorities to temporarily cease operations or might be limited in their
production capacity. If governments take protective actions in response to a resurgence of COVID-19 or the outbreak of a new pandemic,
it may have a material adverse impact on our business, financial condition and operating results for the reasons described above.
During Fiscal 2023, we generated a net loss.
We cannot assure you that we will regain profitability in the future.
In Fiscal 2023, we generated
a net loss of approximately $3,737,000. While we generated income from continuing operations, we can provide no assurance that we will
not experience operating losses in the future. 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 $1,100,000 note which is due December 31, 2024. Additionally,
we owe Forward China $8,246,000 in accounts payable. See Note 14 to the consolidated financial statements for a discussion on these payables.
Forward China, which is owned by our Chief Executive Officer and Chairman of the Board, has previously agreed to extend the note numerous
times to assist the Company with its liquidity. We cannot provide 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 business, there can be no assurances that we will be successful.
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.
In Fiscal 2023, revenues
from diabetic products accounted for 84% of our OEM distribution revenues and OEM distribution revenue accounted for 38% of our consolidated
net revenue. 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. In Fiscal 2023, our largest design
customer accounted for 27.9% of our consolidated net revenue and one OEM distribution customer accounted for 11.2% of our
consolidated net revenue. In Fiscal 2022, our largest design customer accounted for 11.8% of our consolidated net revenue and two
OEM distribution customers represented 25.5% of our consolidated net revenue. Recently, two of our employees left the Company to
become full-time employees of our largest design customer. If this continues, it may result in the customer sending us less
business which will adversely affect our revenues.
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 has 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. In May 2022 the U.S. Trade Representative (the “USTR”) announced a statutory four-year review
of the tariffs against China. The USTR also announced in May 2022 that it reinstated or extended various eligible tariff exclusions on
certain products from China through December 2023. 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.
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 2023, we continued
to experience significant pricing pressure from many customers, including some of our largest distribution customers, to reduce the prices
we charge them. When we are unable to extract comparable concessions from our suppliers on prices they charge us, our product sales margins
erode. In Fiscal 2023, due to increased pricing pressure, we did not renew our contract with one major OEM distribution customer, which
expired in March 2023. The recent inflationary environment in the U.S. and globally has caused production costs to increase in Fiscal
2023. 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 a Buying
Agency and Supply Agreement with Forward China under which 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. 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 2024, 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
would 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 more than one segment.
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 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