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
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 money market or other cash, 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, 2023. 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.
Because we are currently non-compliant with
Nasdaq’s minimum bid price requirement, it could result in delisting of our common stock, negatively affect the price of our common
stock and limit investors’ ability to trade in our common stock.
Our common stock is listed
on Nasdaq. Nasdaq rules impose certain continued listing requirements, including the minimum $1 bid price, corporate governance standards
and number of public stockholders. On July 31, 2023, we were notified by Nasdaq that we are not compliant with its closing bid price requirement
because the closing bid price of our common stock was below $1.00 per share for 30 consecutive trading days. We have until January
29, 2024 (the “Deadline Date”) to become compliant. We have since remained non-compliant with the closing bid price
requirement as our stock price has remained below $1.00 since we received the notice. We are assessing all options to regain compliance.
At our annual stockholders’ meeting, which is customarily held in February, we have the option to ask our stockholders to approve
a reverse stock split in an amount that would satisfy Nasdaq listing requirements. In addition to the risk described below that we do
not receive stockholder approval, reverse splits are often perceived negatively and announcements of or implementation of a reverse split
may cause the market price of our common stock to decline.
If we continue to fail to
meet these continued listing requirements through the Deadline Date and are unable to get an extension to regain compliance, Nasdaq may
delist our common stock. Reverse splits require approval by stockholders who hold a majority of our voting power. Because many of our
shares are held in street name and brokers do not necessarily vote unvoted shares, we may not receive approval of a reverse split. Additionally,
a reverse stock split typically has the effect of reducing the number of holders of shares in “round lots,” meaning those
holding 100 or more shares. Another requirement for being listed on Nasdaq is that the Company have a minimum of 300 round lot holders,
so if our stock price falls too low, a reverse split may not be sufficient to solve our Nasdaq non-compliance based on the minimum round
lot requirement. If our common stock is delisted, 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
● a limited ability to raise capital in the future.
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 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 $31,000 per month during Fiscal 2023.
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 $11,000 per month during Fiscal 2023.
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, 2023, and through the filing
date of this Form 10-K, 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 8, 2023, the
closing price for our common stock was $0.74.
Holders of Common Stock
At November 30, 2023, 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, 2023 (“Fiscal
2023”) with those for the year ended September 30, 2022 (“Fiscal 2022”). 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, sourcing and distribution Company serving top tier medical and technology customers worldwide.
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.
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.
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.
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: (i) 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.
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
As a result of discontinuing
our retail reportable segment, we now have two reportable segments: OEM 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 design segment consists of two operating segments
(IPS and Kablooe, which have been aggregated into one reportable segment) that provide a full spectrum of hardware and software product
design and engineering services to customers predominantly located in the U.S.
Our chief operating decision
maker (“CODM”) regularly reviews revenue and operating income for each segment to assess financial results and allocate resources.
For our OEM distribution segment, we exclude general and administrative and general corporate expenses from its measure of profitability
as these expenses are not allocated to the segments and therefore not included in the measure of profitability used by the CODM. For the
design segment, general and administrative expenses directly attributable to that segment are included in its measure of profitability
as these expenses are included in the measure of its profitability reviewed by the CODM. We do not include intercompany activity in our
segment results to be consistent with the information that is presented to the CODM. Segment assets consist of accounts receivable and
inventory, which are regularly reviewed by the CODM, as well as goodwill and intangible assets resulting from design segment acquisitions (see
Note 16 to the consolidated financial statements).
Inventory Valuation
Inventories consist primarily
of finished goods and are stated at the lower of cost (determined by the first-in, first-out method) or net realizable value. Based on
management’s estimates, an allowance is made to reduce excess, obsolete, or otherwise unsellable inventories to net realizable value.
The allowance is established through charges to cost of sales in the Company’s consolidated statements of operations. In determining
the adequacy of the allowance, management’s estimates are based upon several factors, including analyses of inventory levels, historical