Forward Industries, Inc. 10-K

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 fully integrated design, development and manufacturing solution provider for top tier medical and technology customers worldwide. We have expanded our ability to design and develop solutions for our existing multinational client base and expand beyond the diabetic product line into a variety of industries with a full spectrum of hardware and software product design and engineering services. In addition to our existing design and distribution of carry and protective solutions, primarily for handheld electronic devices, we are now a one-stop shop for design, development and manufacturing solutions serving a wide range of clients in the industrial, commercial and consumer industries. We are now able to introduce proprietary products to the market from concepts brought to us from a number of different sources, both inside and outside the Company. The principal customer market in our distribution line of business has been original equipment manufacturers (“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, smartphones, GPS location devices, tablets and firearms. Our OEM customers are located in the Asia-Pacific region, which we refer to as the “APAC Region”, Europe, the Middle East, and Africa, which we refer to as the “EMEA Region” and the geographic area encompassing North America, Central America and South America, which we refer to as the “Americas”. In 2019, we invested in and began to build out a retail distribution network responsible for getting various products into big box retailers for retail consumption. This build out is a continuation of our strategy to be a one-stop shop for product development, manufacture and distribution solutions and represents a significant achievement in completing the strategic process of taking a product from concept to the consumer. The rollout of these products has been delayed by COVID-19 as discussed below. Our retail customers are generally located in the Americas. As we continued to expand our retail distribution network in 2020 and 2021, we have been able to sell a variety of products through retailers such as Best Buy, Wayfair, Walmart, Costco, and Amazon. The manufacturer representative model allows us to engage and support a large sales team and cover a larger territory with a variable cost model as these representatives work on commission only. We do not manufacture any of our products and source substantially all our products from independent suppliers in China through Forward Industries Asia-Pacific Corporation, a British Virgin Islands corporation (“Forward China”). Forward China is owned by the Company’s Chairman and Chief Executive Officer. The sale and distribution of products to OEM and retail customers is referred to in this report as our “distribution” line of business. We use the term “design” or “design and development” to describe the IPS and Kablooe engineering services line of business. The outbreak of the COVID-19 virus continues to impact our results of operations. While the most significant impact was in Fiscal 2020, the virus continued to impact our results of operations in Fiscal 2021. The business shutdowns resulting from the pandemic disrupted our supply chain and the manufacture or shipment of our products and delayed the rollout of our retail products. Additionally, demand for our design and development services was reduced or delayed as a result of the pandemic as certain customers reduced discretionary spending. While revenues for Fiscal 2021 increased as compared to Fiscal 2020, they were lower than anticipated due in part to the impact of COVID-19 and the resulting economic conditions. The impact of lower than anticipated revenue was further complicated by a significant increase in freight costs due to the global shipping container shortage. These challenges were partially offset by a reduction in certain selling and travel related expenses. Many government restrictions have been relaxed and the economy has continued to open in more jurisdictions. However, the emergence of new and transmittable variants of COVID-19 could lead to a possible resurgence of the virus, particularly in populations with low vaccination rates, and has resulted in new restrictions in certain geographies and among certain businesses. The long-term financial impact on our business cannot be reasonably estimated at this time. As a result, the effects of COVID-19 may not be fully reflected in our financial results until future periods. Refer to “Part I, Item 1A — Risk Factors” for a description of the material risks that we currently face in connection with COVID-19. 3 Until the pandemic is fully controlled, we expect business conditions to remain challenging. In response to these challenges, we will continue to focus on those factors that we can control: closely managing and controlling our expenses; aligning our design and development schedules with demand in a proactive manner as there are changes in market conditions to minimize our cash operating costs; pursuing further improvements in the productivity and effectiveness of our development, selling and administrative activities and, where appropriate, taking advantage of opportunities to enhance our business growth and strategy. To help mitigate the impact of these challenging business conditions, we implemented cost-cutting initiatives and reduced executive pay and Board of Directors compensation for the three months ended June 30, 2021. See “Liquidity and Capital Resources” section of Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further description of these cost-cutting measures. Corporate History Forward was incorporated in 1961 as a manufacturer and distributer of advertising specialty and promotional products. In 1989, we acquired Forward US, a manufacturer of soft-sided carrying cases. The carrying case business became our predominant business, and in September 1997, we sold the assets relating to the production of advertising specialty and promotional products, ceasing to operate in that segment. In May 2001, we formed Forward Switzerland to facilitate distribution of aftermarket products under our licenses for cell phone cases with a major North American multinational and to further develop our OEM European business presence. After the expiration of the last of these licenses in March 2009, staff at Forward Switzerland was significantly reduced and in recent years has primarily served our OEM customers in Europe. In January 2018, Forward acquired IPS, an engineering design company, and in August 2020, Forward acquired the assets of Kablooe Design, a medical and consumer design and development company. We believe that the design and engineering service capabilities of Kablooe will complement the IPS business and further diversify the industries and customers with which we do business. Customers Our OEM distribution customers are located in the APAC Region, the EMEA Region and the Americas. Our retail distribution customers are predominantly located in the Americas. Our design business provides product development services for Fortune 500 companies, established mid-level companies, and start-ups. The wide range of industries served includes industrial electronics, medical and dental equipment, food/beverage, certain luxury brands, and oil/gas. Our design customers are located primarily in the Americas. 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, smartphones, GPS location devices, tablets, and firearms). In Fiscal 2020 and 2021, our products also include smart-enabled furniture and a variety of other products sold through our retail distribution network. We do not manufacture any of our products and we source substantially all our products from independent suppliers in China through Forward China, a related party (see Note 14 to the consolidated financial statements). Diabetic Products We sell carrying cases for blood glucose diagnostic kits (“Diabetic Products”) 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. 4 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, smartphones, GPS and 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 also vary across a broad range, depending on the size and nature of the product for which we design and sell the carry solution. Retail Products In Fiscal 2020, as a result of the build out and growth of our retail distribution network, we began selling smart-enabled products, such as speakers and lamps that provide lighting and sound with Bluetooth® connectivity. In Fiscal 2021, we expanded our retail product offerings to include additional smart-enabled furniture, such as desks and side tables, as well as hot tubs and various other products. 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. As a combined company, we are able to provide manufacturing sourcing and final product support and delivery services for initial short-run, low volume products. Product Development In the OEM division, we typically receive requests to submit product designs in connection with a customer’s introduction and rollout to market of a new product. We collaborate with clients to determine functionality, size and other basic specifications and requirements for products. Our design and production resources develop more detailed product specifications and design options for our customers’ evaluation. We provide documentation of each phase to the client and gain approval of a working prototype. Working with our suppliers and the customer, samples are modified and refined. Once approved for commercial introduction and order by our customer, we work with our suppliers to ensure conformity of commercial production to the definitive product samples and specifications. Manufacture and delivery of products in production quantities are coordinated with the customer’s manufacturing and shipment schedules so that our products are available to be packaged with the customer’s additional product components prior to shipment and sale, or to make the product available to the customer for direct sale through its retail distribution channels. In the retail division, we work with various retailers to understand their product requirements and utilize our sourcing resources to obtain products. Additionally, we have a portfolio of retail products that we share with retailers to gauge the level of consumer interest. Services Services offered for each engagement 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 5 · User Experience/User Interface (UX/UI) Design and Development · Optical Engineering · Program Management · IoT System Architecture · Marketing Distribution Channels of Distribution We primarily ship our OEM distribution products directly to our customers (or their contract manufacturers), who package our accessory products “in box” with their branded products. Some of our customers also purchase certain of our products and offer them for sale as stand-alone accessories to complement their product offerings. We primarily ship our retail distribution products directly to customers from one of our distribution centers located in the U.S. We may also ship certain retail products directly to some larger retailers. We continue to invest in and build out a distribution network for retail products as we expect this part of our business to grow in the future. The retail distribution network is responsible for placing products with major retailers for consumption both in store and online. 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 withdrawn or 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 in order to ship and supply the hubs and the time that we are able to recognize revenue. The corollary effect is an increase in our inventory levels. Third-Party Warehouses We also have arrangements with third-party warehouses in the U.S. to store, manage and ship our retail products. We do not recognize revenue for retail products shipped to any of these warehouses until the product has been shipped to the end-user customer. 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. 6 The manufacture of smart furniture consists of laser cutting, punching, welding and powder coating the various parts and finished product, including lamination, board cutting and drilling for certain products. The main materials used include particle board, engineered wood composite, tempered glass and metal. The manufacture of certain other retail products includes mold creation and assembly and uses various plastics and light components. We do not believe that any of the component materials or parts used in the manufacture of our products are supply constrained. We believe that there are adequate available alternative sources of supply for all of the materials used to manufacture, package, and ship our products. Dependence on Sourcing Agent We have a Buying Agency and Supply Agreement (the “Supply Agreement”) with Forward China. The Supply Agreement provides that Forward China acts as our exclusive buying agent for the products we sell. Forward China also arranges for sourcing, manufacture and exportation of such products. We purchase products at Forward China’s cost and pay them a service fee calculated at $100,000 monthly plus 4% of “Adjusted Gross Profit”, which is defined as the selling price less the cost from Forward China. The Supply Agreement has been extended to October 22, 2023. Terence Wise, our Chairman, Chief Executive Officer and largest shareholder, is the owner of Forward China. See “Item 1A. – Risk Factors” regarding our dependence on Forward China. Suppliers We procure substantially all our distribution OEM and 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 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 required 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. He independently verifies and supervises the inspection of products provided by independent contractors in China. In July 2015, Forward China received its ISO 9001:2008 quality certification, which was renewed and is valid until July 2024. Our design business follows general industry standard practices for review and corrective actions related to its design services. There are no independent quality assurance standards in place for its design and engineering work. Customer specifications and scope of services are laid out in the project contracts and we work closely with the customer to identify and correct any quality issues that arise. Competition Distribution Business Our OEM and retail distribution businesses are highly competitive in terms of product pricing, design, delivery terms, and customer service. In the production of our distribution products, we compete with numerous U.S. and foreign producers and distributors. Some of our competitors are substantially larger than we are and have greater financial and other resources. We believe that we sustain our competitive position through maintenance of an effective product design capability, rapid response time to customer requests for proposals and product shipment, reliable product delivery and product quality, and competitive pricing. We believe that our ability to compete based on product quality assurance considerations is enhanced by Forward China’s local presence, quality control, shipment capabilities and expertise in sourcing. 7 Design and Engineering Business The depth and breadth of the 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 competitive advantages. Human Capital/Employees Our key human capital management objectives are to attract, retain and develop the highest quality talent. To support these objectives, our human resources programs are designed to: · develop talent to prepare them for critical roles and leadership positions for the future; · reward and support employees through competitive pay and benefits; · enhance our culture through efforts aimed at making the workplace more engaging and inclusive; · acquire talent and facilitate internal talent mobility to create a high-performing and diverse workforce. None of our employees are covered by a collective bargaining agreement. As of November 30, 2021, we employed approximately 90 employees. We hire consultants on an as-needed basis. Regulation and Environmental Protection Our retail and OEM distribution businesses are subject to various regulations in various jurisdictions, including the U.S. and member states of the European Union, that restrict the use or importation of products manufactured with compounds deemed to be hazardous. We work with our suppliers to ensure compliance with such regulations. In addition, from time to time, one or more customers may require testing of our products to ensure compliance with applicable consumer safety rules and regulations or the customer’s safety or packaging protocols. Because we do not manufacture the products that we sell and distribute, compliance with federal, state and local laws and regulations pertaining to the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had, and is not anticipated to have, any direct material effect upon our capital expenditures, earnings, or competitive position. However, compliance with such laws and regulations on the part of our suppliers may result in increased costs of supply to us, particularly if domestic environmental regulations in China become more prevalent. We have not been engaged in any environmental litigation or incurred any material costs related to compliance with environmental or other regulations. From time to time, we incur chemical and/or safety laboratory testing expenses in order to address customer requests regarding our product materials or method of manufacture or regarding their packaging methods and standards. There are no specific regulatory or environmental requirements imposed upon the design segment of our business. As a paid service provider, customers are assisted in securing regulatory certifications including UL (Underwriters Laboratories – a U.S. based safety certification organization), FCC (Federal Communications Commission – U.S. governmental certification department for electronic goods), CE (Conformité Européenne – a European certification for health, safety and environmental protection standards) and others depending on needs, product types and locations of customers’ product markets. Available Information Our corporate website is www.ForwardIndustries.com. On our website under “Investors” "SEC Filings", we make available access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements on Schedule 14A and amendments to those materials filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), free of charge. The contents of the website are not incorporated into this filing. 8