Item 1. Business
ITEM 1. BUSINESS
General
Forward Industries, Inc. (“Forward”,
“we”, “our” or the “Company”), through its wholly-owned subsidiaries, Forward Industries (IN), Inc.
(“Forward US”), Forward Industries (Switzerland) GmbH (“Forward Switzerland”), Forward Industries UK Limited (“Forward
UK”), Intelligent Product Solutions, Inc. (“IPS”), and Kablooe, Inc. (“Kablooe”), is a global design, manufacturing,
sourcing and distribution group serving top tier medical and technology customers worldwide. As a result of the continued expansion of
our design development capabilities through our wholly-owned subsidiaries, IPS and Kablooe, we are able to introduce proprietary products
to the market from concepts brought to us from a number of different sources, both inside and outside the Company.
The principal customer market
in our original equipment manufacturer (“OEM”) distribution business has been OEMs or the contract manufacturing firms of
these OEM customers, that either package our products as accessories “in box” together with their branded product offerings
or sell them through their retail distribution channels. Our OEM products include carrying cases and other accessories for medical monitoring
and diagnostic kits and a variety of other portable electronic and non-electronic products such as sporting and recreational products,
bar code scanners, GPS location devices, tablets and firearms. Our OEM customers are located in various regions worldwide.
Our retail distribution business,
which we began in 2019, sources and sells smart-enabled furniture, hot tubs and a variety of other products through various online retailer
websites to customers predominantly located in the U.S. The rollout of many of these products was delayed by COVID-19 as discussed below.
As we expanded our retail distribution network, we have been able to sell a variety of products through retailers such as Best Buy, Wayfair,
Walmart, Costco, and Amazon. The manufacturer representative model allows us to engage and support a large sales team and cover a larger
territory with a variable cost model as these representatives work on commission only.
We do not manufacture any of
our OEM or retail distribution products and source substantially all these products from independent suppliers in China through Forward
Industries Asia-Pacific Corporation, a British Virgin Islands corporation (“Forward China”). Forward China is owned by our
Chairman and Chief Executive Officer.
Our design business provides
a full spectrum of hardware and software product design and engineering services to customers predominantly located in the U.S. Our expertise
in various disciplines enables us to serve a wide variety of industries and provide clients with a single source solution for concepts,
industrial design, mechanical engineering, embedded software and systems architecture, mobile and enterprise application software, and
optical engineering.
The outbreak of the COVID-19
virus had a significant impact on our business. In Fiscal 2020, the business shutdowns resulting from the pandemic disrupted our supply
chain and the manufacture and shipment of our OEM products and delayed the rollout of our retail products. Demand for our design and development
services was reduced or delayed because of the pandemic as certain customers reduced discretionary spending. In Fiscal 2021, the economy
began to open across the world, and consumer demand grew much faster than manufacturers could satisfy, leading to extensive shipping delays,
a global shipping container shortage and higher ocean freight costs. This continued to reduce the availability of many of our products
and increased their cost of importation. The increase in consumer demand continued in Fiscal 2022, which dramatically increased demand
for ocean freight, particularly from the Asia-Pacific region. Labor shortages at U.S. ports and in ground transportation services caused
container ships to spend a significant amount of time waiting to be unloaded and to arrive at our warehouses, which caused an increase
in the demand for and cost of ground transportation. These factors resulted in further cost increases and delayed consumer availability
for many of our products. The impact of inflation in Fiscal 2022 caused an increase in the cost of acquiring and retaining employees in
our design business.
The effects of COVID-19 may further
impact our business in ways we cannot predict, and such impacts could be significant. The current economic conditions may continue to
negatively impact our results of operations, cash flows and financial position in future periods as well as that of our customers, including
their ability to pay for our products and services and to choose to allocate their budgets to new or existing projects which may or may
not require our products and services. The long-term financial impact on our business cannot be reasonably estimated at this time. As
a result, the effects of COVID-19 may not be fully reflected in our financial results until future periods.
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Until the effects of the pandemic
have fully receded, we expect business conditions to remain challenging. In response to these challenges, we will continue to focus
on those factors that we can control: closely managing and controlling our expenses and inventory levels; aligning our design and development
schedules with demand in a proactive manner to minimize our cash operating costs; pursuing further improvements in the productivity and
effectiveness of our development, selling and administrative activities and, where appropriate, taking advantage of opportunities to enhance
our business growth and strategy.
Corporate History
Forward was incorporated in 1961
as a manufacturer and distributer of advertising specialty and promotional products. In 1989, we acquired Forward US, a manufacturer of
soft-sided carrying cases. The carrying case business became our predominant business, and in September 1997, we sold the assets relating
to the production of advertising specialty and promotional products, ceasing to operate in that segment.
In May 2001, we formed Forward
Switzerland to facilitate distribution of aftermarket products under our licenses for cell phone cases with a major North American multinational
and to further develop our OEM European business presence. After the expiration of the last of these licenses in March 2009, staff at
Forward Switzerland was significantly reduced and in recent years has primarily served our OEM customers in Europe.
In January 2018, Forward acquired
IPS, an engineering design company, and in August 2020, Forward acquired the assets of Kablooe Design, a medical and consumer design and
development company. We believe that the design and engineering service capabilities of Kablooe will complement the IPS business and further
diversify the industries and customers with which we do business.
Customers
Our OEM distribution customers
are located in all geographic regions worldwide. Our retail distribution customers are predominantly located in the U.S.
Our design business provides
product development services for Fortune 500 companies, established mid-level companies, and start-ups. The wide range of industries served
includes industrial electronics, medical and dental equipment, food/beverage, certain luxury brands, and oil/gas. Our design customers
are located primarily in the U.S.
Products
Our products include carrying
cases and other accessories for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic products
(such as sporting and recreational products, bar code scanners, GPS location devices, tablets, and firearms). Our products also include
smart-enabled furniture, hot tubs and a variety of other products sold through our retail distribution network. We do not manufacture
any of our products and we source substantially all our products from independent suppliers in China through Forward China, a related
party (see Note 13 to the consolidated financial statements).
Diabetic Products
We sell carrying cases for blood
glucose diagnostic kits directly to OEM customers, or their contract manufacturers. These electronic monitoring kits are made for use
by diabetics. The diabetic products customer (or its contract manufacturer) packages our carry cases “in box” as a custom
accessory for the customer’s blood glucose testing and monitoring kits, or to a much lesser extent, sells them through their retail
distribution channels. These kits typically include a small, electronic blood glucose monitor, testing strips, lancets for drawing a drop
of blood and our carrying case, customized with the manufacturer’s logo and designed to fit and secure the glucose monitor, testing
strips, and lancets in separate straps, pouches, and holders. As the kits and technology change, our carrying case designs change to accommodate
the changes in size, shape and layout of the electronic monitoring device, strips and lancet.
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Other Products
We also sell carrying and protective
solutions to customers for a diverse array of other portable electronic and other products, including sporting and recreational products,
bar code scanners, GPS location devices, tablets, and firearms, on a made-to-order basis that are customized to fit the products sold
by our customers. Our selling prices for these products vary across a broad range, depending on the size and nature of the product for
which we design and sell the carry solution.
Retail Products
In Fiscal 2020, as a result of
the build out and growth of our retail distribution network, we began selling smart-enabled products, such as speakers and lamps that
provide lighting and sound with Bluetooth® connectivity. In Fiscal 2021, we began expanding our retail product offerings to include
additional smart-enabled furniture, such as desks and side tables, as well as hot tubs and various other products that are sold through
retailer websites.
Our design business provides
a complete range of design, engineering and development services with respect to a diverse array of consumer and industrial electronics
products. These include but are not limited to medical products, smart displays, beverage vending, enterprise and mobile software applications,
lighting, security and detections systems, cameras, wearables and vehicle controls. Solutions in these and other areas are designed and
developed in-house, beginning at product concept, extending through design, engineering and prototype, and final design for manufacturing
and computer-aided design files.
Product Development
In the OEM division, we typically
receive requests to submit product designs in connection with a customer’s introduction and rollout to market of a new product.
We collaborate with clients to determine functionality, size and other basic specifications and requirements for products. Our design
and production resources develop more detailed product specifications and design options for our customers’ evaluation. We provide
documentation of each phase to the client and gain approval of a working prototype. Working with our suppliers and the customer, samples
are modified and refined. Once approved for commercial introduction and order by our customer, we work with our suppliers to ensure conformity
of commercial production to the definitive product samples and specifications. Manufacture and delivery of products in production quantities
are coordinated with the customer’s manufacturing and shipment schedules so that our products are available to be packaged with
the customer’s additional product components prior to shipment and sale, or to make the product available to the customer for direct
sale through its retail distribution channels.
In the retail division, we work
with various retailers to understand their product requirements and specifications and consumer demand and utilize our sourcing resources
to obtain products that meet these needs. Additionally, we have a portfolio of retail products that we share with retailers to gauge the
level of consumer interest. We receive design and marketing services for some retail products from The Justwise Group Ltd., a company
owned by Terence Wise, our Chairman, Chief Executive Officer and largest shareholder.
Services
Services offered in our design
business vary from full development utilizing a wide range of in-house design and engineering functions, to targeted design and engineering
support for clients with in-house development teams. Our in-house capabilities include the following:
·
Electrical Engineering
·
Mechanical Engineering
·
Software Engineering
·
Industrial Design
·
User Experience/User Interface (UX/UI) Design and Development
·
Optical Engineering
·
Program Management
·
IoT System Architecture
·
Marketing
·
IT Support
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Distribution
Channels of Distribution
We primarily ship our OEM distribution
products directly to our customers (or their contract manufacturers), who package our accessory products “in box” with their
branded products. Some of our customers also purchase certain of our products and offer them for sale as stand-alone accessories to complement
their product offerings.
We primarily ship our retail
distribution products directly to end customers from distribution centers located in the U.S. and Canada. We may also ship certain retail
products directly to some larger retailers. We continue to evaluate our strategy for the retail distribution business in an effort to
increase profitability and match our product offerings with consumer demand.
Distribution Hubs for Customers
We have arrangements with certain
customers’ distribution hubs. These arrangements obligate us to supply our products to our customers’ distribution hubs where
their products are manufactured, kitted, and/or warehoused pending sale, and where our products are packaged “in box” with
the distribution customers’ products. The product quantities we are required to supply to each distribution hub are based on the
distribution customer’s purchase orders and forecasts. We do not recognize revenue for product shipped to a customer’s hub
until we have been notified by our customer that our product has been used by the distribution hub. Hub arrangements have had the general
effect of providing financing for our customers’ inventory purchases by extending the time between our placement of orders to our
suppliers and the time that we are able to recognize revenue. The corollary effect is an increase in our inventory levels.
Third-Party and Consignment Warehouses
We also have arrangements with
third-party warehouses and consignment warehouses of major retailers in the U.S. and Canada to store, manage and ship our retail products.
We do not recognize revenue for retail products shipped to any of these warehouses until the product has been shipped to the end customer
and our performance obligation is complete.
Product Supply
Manufacturing
The manufacture of custom carrying
cases and other carry and protective solutions generally consists of die cutting fabrics and heat sealing, gluing, sewing, and affixing
logos to the cut-outs by means of silk screening, hot-stamping, embroidering or embossing. The principal materials used in the manufacture
of our products are vinyl, nylon, leather, metal and plastic parts (for clips, buckles, loops, hinges and other hardware), foam padding
and cardboard, all of which are obtained from suppliers based on our specifications.
The manufacture of smart furniture
consists of laser cutting, punching, welding and powder coating the various parts and finished product, including lamination, board cutting
and drilling for certain products. The main materials used include particle board, engineered wood composite, tempered glass and metal.
The manufacture of certain other retail products includes mold creation and assembly and uses various plastics and light components.
We do not believe that any of
the component materials or parts used in the manufacture of our products are supply constrained. We believe that there are adequate available
alternative sources of supply for all of the materials used to manufacture, package, and ship our products.
Dependence on Sourcing Agent
We have a Buying Agency and Supply
Agreement (the “Supply Agreement”) with Forward China. The Supply Agreement provides that Forward China acts as our exclusive
buying agent for the products we sell. Forward China also arranges for sourcing, manufacture and exportation of such products. We purchase
products at Forward China’s cost and pay them a monthly service fee calculated at $100,000 plus 4% of “Adjusted Gross Profit”,
which is defined as the selling price less the cost from Forward China. The Supply Agreement has been extended to October 22, 2023. Terence
Wise, our Chairman, Chief Executive Officer and largest shareholder, is the owner of Forward China. See “Item 1A. – Risk Factors”
regarding our dependence on Forward China.
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Suppliers
We procure substantially all
our OEM and retail distribution products from independent suppliers in China through Forward China. Depending on the product, we may require
several different suppliers to furnish component parts or pieces. We place orders for particular products and do not have minimum supply
requirement agreements to guarantee a supply of finished product, nor have we made purchase commitments to purchase minimum amounts. However,
from time to time, we may order certain OEM products in advance of receiving a customer purchase order, or in quantities in excess of
those forecasted to us by our customer, for which they are contractually obligated to us, in order to meet our customers’ anticipated
delivery demands.
There are very few suppliers
required for the design segment of the business as it is a service-based business. We do, however, purchase supplies and equipment to
develop prototypes or “mock-ups” for design and development projects. Design business suppliers are predominantly based in
the United States.
Quality Assurance
Forward’s quality assurance
manager oversees the process to ensure that our distribution products manufactured in China meet our quality assurance standards. The
quality assurance manager independently verifies and supervises the inspection of products provided by independent contractors in China.
In July 2015, Forward China received its ISO 9001:2008 quality certification, which was renewed and is valid until July 2024.
Our design business follows general
industry standard practices for review and corrective actions related to its design services. There are no independent quality assurance
standards in place for its design and engineering work. Customer specifications and scope of services are laid out in the project contracts
and we work closely with the customer to identify and correct any quality issues that arise.
Competition
Distribution Business
Our OEM and retail distribution
businesses are highly competitive in terms of product pricing, design, delivery terms, and customer service. In the production of our
distribution products, we compete with numerous U.S. and foreign producers and distributors. Some of our competitors are substantially
larger than we are and have greater financial and other resources. We believe that we sustain our competitive position through maintenance
of an effective product design capability, rapid response time to customer requests for proposals and product shipment, reliable product
delivery and product quality, and competitive pricing. We believe that our ability to compete based on product quality assurance considerations
is enhanced by Forward China’s local presence, quality control, shipment capabilities and expertise in sourcing.
Design Business
The depth and breadth of services
offered and industries served by our design segment are unique. Our management team is aware that there are very few competitive firms
that have the full set of capabilities that our design segment has under one roof. There are, however, numerous design and engineering
companies that compete with us in specific industries and/or with specific targeted skills or have competitive advantages.
Human Capital/Employees
As of November 30, 2022, we had approximately
100 employees, substantially all of whom work full-time, none of which are covered by a collective bargaining agreement. We hire consultants
on an as-needed basis.
Human capital management is critical
to our ongoing business success, which requires investing in our people. Our aim is to create a highly engaged and motivated workforce
where employees are inspired by leadership, engaged in purpose-driven, meaningful work and have opportunities for growth and development.
We are committed to creating and maintaining a work environment in which employees are treated with respect and dignity. We
value our diverse employees and provide career and professional development opportunities that foster the success of our company.
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An effective approach to human
capital management requires that we invest in talent, development, culture and employee engagement. We aim to create an environment where
our employees are encouraged to make positive contributions and fulfill their potential. We emphasize our core values of innovation, encouragement,
motivation, and curiosity with our employees to instill our culture and create an environment of growth and positivity.
Our Compensation Committee is
also actively involved in reviewing and approving executive compensation, and succession plans so that we have leadership in place with
the requisite skills and experience to deliver results the right way. We offer fair, competitive compensation and benefits that support
our employees’ overall wellbeing. In addition to health benefits, we contribute to employees’ 401(k) plans and offer student
tuition reimbursement (if certain requirements are met).
Impact of COVID-19
The health and well-being of
our employees is of utmost importance to us. Starting in March 2020, the majority of our employees transitioned to a remote workforce.
Since that time, our employees have demonstrated resilience, wisdom, commitment, and compassion in working with our customers. As conditions
improved, employees in the U.S. were encouraged to return to their offices. We encourage all employees to follow Centers for Disease Control
and Prevention and local guidelines and recommendations.
Regulation and Environmental Protection
Our retail and OEM distribution
businesses are subject to various regulations in various jurisdictions, including the U.S. and member states of the European Union, that
restrict the use or importation of products manufactured with compounds deemed to be hazardous. We work with our suppliers to ensure compliance
with such regulations. In addition, from time to time, one or more customers may require testing of our products to ensure compliance
with applicable consumer safety rules and regulations or the customer’s safety or packaging protocols. Because we do not manufacture
the products that we sell and distribute, compliance with federal, state and local laws and regulations pertaining to the discharge of
materials into the environment, or otherwise relating to the protection of the environment, has not had, and is not anticipated to have,
any direct material effect upon our capital expenditures, earnings, or competitive position. However, compliance with such laws and regulations
on the part of our suppliers may result in increased costs of supply to us, particularly if domestic environmental regulations in China
become more prevalent.
We have not been engaged in any
environmental litigation or incurred any material costs related to compliance with environmental or other regulations. From time to time,
we incur chemical and/or safety laboratory testing expenses in order to address customer requests regarding our product materials or method
of manufacture, or regarding their packaging methods and standards.
There are no specific regulatory
or environmental requirements imposed upon the design segment of our business. As a paid service provider, customers are assisted in securing
regulatory certifications including UL (Underwriters Laboratories – a U.S. based safety certification organization), FCC (Federal
Communications Commission – U.S. governmental certification department for electronic goods), CE (Conformité Européenne
– a European certification for health, safety and environmental protection standards) and others depending on needs, product types
and locations of customers’ product markets.
Available Information
Our corporate website is www.forwardindustries.com.
On our website under “Investors” "SEC Filings", we make available access to our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements on Schedule 14A and amendments to those materials filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), free of charge. The contents
of the website are not incorporated into this report.
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