UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________

FORM 10-Q

FORM 10-Q_____________________

________________

[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

         For the quarterly period ended MarchDecember 31, 2017.2017

OR

[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

         For the transition period from _________ to ____._____.

Commission File Number: 001-34780

_____________________________________

FORWARD INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

________________

_____________________

477 S. Rosemary Ave., Suite 219, West Palm Beach, FL 33401

(Address of principal executive offices, including zip code)

(561) 465-0030

(Registrant’s telephone number, including area code)

_____________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes [X][X]     No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes [X][X]      No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by checkmark if the registrant has not elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes.   Yes [  ]     No [X][X]

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, on May 11, 2017,February 12, 2018, which is the latest practical date prior to the filing of this report, was 8,780,8309,516,554 shares.

Note Regarding Use of Certain Terms

In this Quarterly Report on Form 10-Q, unless the context otherwise requires, the following terms have the meanings assigned to them as set forth below:

“Forward”, “Forward Industries”, “we”, “our”, and the “Company” refer to Forward Industries, Inc., a New York corporation, together with its consolidated subsidiaries;

“Common stock” refers to the common stock, $.01 par value per share, of Forward Industries, Inc.;

“Forward US” refers to Forward Industries’ wholly owned subsidiary Forward Industries (IN), Inc., an Indiana corporation;

“Forward Switzerland” refers to Forward Industries’ wholly owned subsidiary Forward Industries (Switzerland) GmbH, a Swiss corporation;

“Forward China” refers to Forward Industries Asia-Pacific Corporation (f/k/a Seaton Global Corporation), a British Virgin Islands registered corporation that is Forward’s exclusive sourcing agent in the Asia Pacific Region;

“U.S. GAAP” refers to accounting principles generally accepted in the United States;States of America;

“Commission” refers to the United States Securities and Exchange Commission;

“Exchange Act” refers to the United States Securities Exchange Act of 1934, as amended;

“Fiscal 2018” refers to our fiscal year ending September 30, 2018;

“Fiscal 2017” refers to our fiscal year ended September 30, 2017;

“Fiscal 2016” refers to our fiscal year ended September 30, 2016;

“Europe” refers to the countries included in the European Union;

“EMEA Region” meansrefers to the geographic area encompassing Europe, the Middle East and Africa;

“APAC Region” refers to the Asia Pacific Region, consisting of Australia, New Zealand, Hong Kong, Taiwan, China, South Korea, Japan, Singapore, Malaysia, Thailand, Indonesia, India, the Philippines and Vietnam;

“Americas” refers to the geographic area encompassing North America, Central America, and South America; and

“OEM” refers to Original Equipment Manufacturer; and

“Retail” refers to the retail distribution channel.

Manufacturer.

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

The Company recognized compensation expense of approximately $1,000 and $6,000$2,000 during the three months ended March 31, 2017 and 2016, respectively, and approximately $3,000 and $10,000 during the six months ended MarchDecember 31, 2017 and 2016, respectively, for stock option awards in its condensed consolidated statements of operations and comprehensive income (loss).income.

As of MarchDecember 31, 2017, there was approximately $5,000$2,000 of total unrecognized compensation cost related to nonvested stock option awards. That cost is expected to be recognized over a weighted average period of 1.00.5 years.

The following table provides additional information regarding stock option awards that were outstanding and exercisable at MarchDecember 31, 2017:

NOTE 43     SHARE-BASED COMPENSATION (CONTINUED)

NOTE 65      CONCENTRATIONS

Concentration of Revenues and Accounts Receivable

For the three and six months ended MarchDecember 31, 2017 and 2016, the Company had significant customers with individual percentage of total revenues equaling 10% or greater as follows:

Net income (loss) per basicBasic and diluted earnings per share was ($0.03)$0.01 per share for the 20172018 Quarter and $0.02 per share for the 20162017 Quarter.

Net Revenues

Net revenues declined $0.3 million, or 4%, to $6.3 million in the 2018 Quarter from $6.6 million in the 2017 Quarter decreased $2.5 million, or 35%, to $4.5 million from $7.0 million in the 2016 Quarter primarily due to lowerreduced revenues in Other Products, partially offset by increased revenues from Diabetics Products. Revenues from Other Products declined $0.4 million whereas revenues from Diabetic Products partially offset by higher revenues from Other Products.increased $0.1 million. The net revenues derived from our core diabetes kit cases continues to decline, primarily because our major customers face significant pricing pressure from competitors bringing out less expensive meters and also new innovative diabetic products which are not being sold with a meter case. As a result of the continued decrease in our net revenues, Forward China, which is controlled by our Chairman and Chief Executive Officer, has agreed to forgo its rights to the 4% portion of the service fee under the Forward China Supply Agreement (the “Agreement”) beginning with the third fiscal quarter until the end of fiscal year 2017. The base monthly service fee payment of $100,000 will still be due to Forward China. In the 2017 Quarter, the 4% portion of the service fee amounted to approximately $44,000. The Company and Forward China are currently negotiating a revised service fee under the Agreement. 

Thefollowing tables below set forth revenues by channel, product line and geographic location of our customers for the periods indicated:

Revenues from Diabetic Products represented 84%89% of our total net revenues in the 20172018 Quarter compared to 92%84% of our total net revenues in the 20162017 Quarter.

Other Product Revenues

We design and sell cases and protective solutions to OEMs for a diverse array of portable electronic devices (such as bar code scanners, GPS devices, cellular phones, tablets and cameras), as well as a variety of other products (such as sporting and recreational products and firearms) on a made-to-order basis that are customized to fit the products sold by our OEM customers.

Revenues offrom Other Products increased $0.2declined $0.4 million to $0.7 million in the 20172018 Quarter from $0.5$1.1 million in the 20162017 Quarter. This is primarily due to overall net increasesdecreases of $0.1$0.6 million from several existing customers, as well aspartially offset by the addition of $0.1$0.2 million from some new customers. We will continue to focus on our sales and sales support teams in our attempt to expand and diversify our Other Products customer base.

Revenues from Other Products represented 11% of our net revenues in the 2018 Quarter compared to 16% of our net revenues in the 2017 Quarter compared to 8% of our total net revenues in the 2016 Quarter.

Gross Profit

     Gross profit decreased $0.2 million, or 13%, to $1.0 million in the 2018 Quarter from $1.2 million in the 2017 Quarter. As a percentage of revenues, our gross margin declined to 15.8% in the 2018 Quarter, compared to 17.6% in the 2017 Quarter.

The decrease in gross profit of approximately $484,000decline was driven primarily by a year over year declinedecrease in netvolumes related to global revenues. Quarter 2018 revenues of 35% as well as a decline in gross margins.  The decline in gross margins results from pricing pressures from our customers.  Our gross margin decreased to 15.8% in the 2017Americas declined 17% to $1.9 million primarily due to decreased revenues from Diabetic Products Customers C and D, partially offset by increased revenues from Diabetic Products Customer A and Other Products customers. Quarter compared to 17.1%2018 revenues in the 2016 Quarter.APAC Region declined 6% to $2.0 million primarily due to decreased revenues from Other Products customers, partially offset by increased revenues from Diabetic Products Customer B. Quarter 2018 revenues in the EMEA Region increased 12% to $2.4 million primarily due to increased revenues from Diabetic Products Customer A and other Diabetic Products customers, partially offset by decreased revenues from Diabetic Products Customers C and D and Other Products customers.

Sales and Marketing Expenses

Sales and marketing expenses decreased approximately $42,000,$140,000, or 10%33%, to approximately $390,000$278,000 in the 20172018 Quarter compared tofrom approximately $432,000$418,000 in the 20162017 Quarter, primarily due to decreased personnel expenses of approximately $53,000, partially offset by increased$94,000, decreased other expenses of approximately $13,000.$23,000 and decreased travel expenses of approximately $22,000. Fluctuations in other components of “Sales and Marketing Expenses” were not material individually or in the aggregate.

General and Administrative Expenses

General and administrative expenses decreasedincreased approximately $60,000,$81,000, or 10%14%, to approximately $563,000$674,000 in the 2018 Quarter from approximately $593,000 in the 2017 Quarter, from approximately $623,000 in the 2016 Quarter, primarily due to decreasedincreased professional fees (stemming from the IPS Acquisition) of approximately $25,000, personnel expenses$116,000 and director reimbursement costs of approximately $20,000, and depreciation$33,000, partially offset by decreased director share-based compensation of approximately $10,000.$52,000 and directors and officers insurance of approximately $12,000. Fluctuations in other components of “General and Administrative Expenses” were not material individually material.or in the aggregate.

Other Expense (Income), NetIncome (Expense)

Other expense (income)income (expense), net, consisting primarily of foreign exchange losses, waschanged to approximately $0$(4,000) for the 2018 Quarter from approximately $3,000 in the 2017 Quarter, comparedprimarily due to income from the property subleased in Santa Monica, California that expired in September 2016 of approximately $1,000 in the 2016 Quarter.  $11,000, partially offset by decreased realized losses on foreign currency transactions of approximately $3,000.

Income Taxes

For the three months ended MarchDecember 31, 2017, the Company generated a net lossincome of approximately $238,000.$47,000. While the Company maintains significant net operating loss carryforwards, no income tax expense (benefit) was recognized as the Company’s deferred tax provision is completely offset by a full valuation allowance.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2017 COMPARED TO THE SIX MONTHS ENDED MARCH 31, 2016

Net Income (Loss)

Net loss in the 2017 Period was approximately ($86,000) compared to net income of approximately $388,000 in the 2016 Period. The 2017 Period change from net income to a net loss is primarily due to a decrease in net revenues of approximately $3,039,000 as well as a decline in gross margin of 2.3%, which resulted in a decrease in gross profit of approximately $848,000.  This was partially offset by a decrease in general and administrative expenses of approximately $308,000 and a decrease in sales and marketing expenses of approximately $58,000.

Net income (loss) per basic share was ($0.01) per share for the 2017 Period and $0.05 per share for the 2016 Period. Net income (loss) per diluted share was ($0.01) per share for the 2017 Period and $0.04 per share for the 2016 Period.

Net Revenues

Net revenues in the 2017 Period decreased $3.0 million, or 21%, to $11.1 million from $14.2 million in the 2016 Period primarily due to lower revenues from Diabetic Products, partially offset by higher revenues from Other Products. The net revenues derived from our core diabetes kit cases continues to decline, primarily because our major customers face significant pricing pressure from competitors bringing out less expensive meters and also new innovative diabetic products which are not being sold with a meter case. As mentioned above, as a result of the continued decrease in our net revenues, Forward China, which is controlled by our ChairmanThe 2017 Tax Cuts and Chief Executive Officer, has agreed to forgo its rightsJobs Act, we expect no tax impact to the 4% portionfinancial statements stemming from: (i) the mandatory deemed repatriation of cumulative earnings and profits for a controlled foreign corporation; or (ii) the service fee under the Agreement beginning with the third fiscal quarter until the end of fiscal year 2017. The base monthly service fee payment of $100,000 will still be due to Forward China. In the 2017 Period, the 4% portion of the service fee amounted to approximately $107,000. The Company and Forward China are currently negotiating a revised service fee under the Agreement. 

The tables below set forth revenues by channel, product line, and geographic location of our customers for the periods indicated:

Diabetic Product Revenues

We design and sell carrying cases for blood glucose diagnostic kits directly to OEMs (or their contract manufacturers).  The OEM customer or its contract manufacturer packages our carry cases “in box” as a custom accessory for the OEM’s blood glucose testing and monitoring kits, or to a lesser extent, sells them through its retail distribution channels.

Revenues from Diabetic Products decreased $3.4 million to $9.3 millionchange in the 2017 Period, from $12.7 millioncorporate income tax rate.  However, the reduction in the 2016 Period. The decrease was primarily due to lower revenues derived from threecorporate income tax rate will reduce the amount of our major Diabetic Products’ customers (Diabetic Products Customers B, C and D). The decrease was offset, in part, by higher revenues derived from our largest major Diabetic Products’ customers (Diabetic Products Customer A).

The following table sets forth our revenues by Diabetic Products’ customersnet operating losses available for the periods indicated:

Revenues from Diabetic Products represented 84% of our total net revenuesuse in the 2017 Period compared to 90% of our total net revenues in the 2016 Period.future.

Other Product Revenues

We design and sell cases and protective solutions to OEMs for a diverse array of portable electronic devices (such as bar code scanners, GPS devices, cellular phones, tablets and cameras), as well as a variety of other products (such as sporting and recreational products and firearms) on a made-to-order basis that are customized to fit the products sold by our OEM customers.

Revenues of Other Products increased $0.3 million to $1.8 million in the 2017 Period from $1.5 million in the 2016 Period. This is primarily due to overall net increases of $0.2 million from several existing customers as well as the addition of $0.1 million from some new customers.  We will continue to focus on our sales and sales support teams in our attempt to expand and diversify our Other Products customer base.

Revenues from Other Products represented 16% of our net revenues in the 2017 Period compared to 10% of our total net revenues in the 2016 Period.

Gross Profit

The decrease in gross profit of approximately $848,000 was driven by a year over year decline in net revenues of 21% as well as a decline in gross margins.  The decline in gross margins results from pricing pressures from our customers.  Our gross margin decreased to 16.9% in the 2017 Period compared to 19.2% in the 2016 Period.

Sales and Marketing Expenses

Sales and marketing expenses decreased approximately $58,000, or 7%, to approximately $807,000 in the 2017 Period compared to approximately $865,000 in the 2016 Period, primarily due to decreased personnel expenses of approximately $112,000, partially offset by increased other expenses of approximately $36,000 and increased travel and entertainment expenses of approximately $18,000. Fluctuations in other components of “Sales and Marketing Expenses” were not material individually or in the aggregate.

General and Administrative Expenses

General and administrative expenses decreased approximately $308,000, or 21%, to approximately $1,157,000 in the 2017 Period from approximately $1,465,000 in the 2016 Period, primarily due to decreased personnel expenses of approximately $75,000, director fees (including share-based compensation) of approximately $75,000, director expense reimbursement of approximately $47,000, professional fees of approximately $44,000, directors and officers insurance of approximately $29,000, other costs of approximately $26,000, and depreciation of approximately $17,000. Fluctuations in other components of “General and Administrative Expenses” were not individually material.

Other Expense (Income), Net

Other expense (income), net, consisting primarily of foreign exchange losses, was approximately ($3,000) in the 2017 Period compared to approximately $5,000 in the 2016 Period. 

For the six months ended March 31, 2017, the Company generated a net loss of approximately $86,000. While the Company maintains significant net operating loss carryforwards, no income tax expense (benefit) was recognized as the Company’s deferred tax provision is completely offset by a full valuation allowance.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sourcessource of liquidity areis our operations. OurThe primary demand on our working capital would be adversely affected by any:will be: (i) additional operating losses;losses, should they occur; (ii) any increases in accounts receivable and inventories arising in the ordinary course of business; and (iii) material increases in expenses.repayments of debts as they mature. Historically, our sources of liquidity have been adequate to satisfy working capital requirements arising in the ordinary course of business. We anticipate that our liquidity and financial resources for the next twelve months from the date of thethis filing of this Form 10-Q will be adequate to manage our operating and financial requirements.

At MarchDecember 31, 2017, our current ratio (current assets divided by current liabilities) was 3.9;2.9; our quick ratio (current assets less inventories divided by current liabilities) was 2.9;2.5; and our working capital (current assets less current liabilities) was $8.2$9.0 million. As of MarchDecember 31, 2017, we had no short or long-term debt outstanding. As part of the IPS acquisition, (i) we borrowed $1.6 million from Forward China and issued them an 8% one-year note (due January 18, 2019) with interest due monthly; (ii) we assumed approximately $1.5 million of debt (due at various dates through 2020) some of which was in default as a result of a covenant violation; and (iii) we agreed to pay $1,000,000 of deferred cash compensation (with the first payment of $500,000 due on May 31, 2018, the second payment of $200,000 due on September 30, 2019, and third payment of $300,000 due on September 30, 2020).

We do not anticipate the need to purchase additional material capital assets in order to carry out our business.

During the sixthree months ended MarchDecember 31, 2017 and 2016, our sources and uses of cash were as follows:

Cash Flows from Operating Activities

During the 2017 Period,2018 Quarter, cash used inprovided by operating activities of approximately $1,111,000$1,300,000 resulted primarily from a decreasean increase in accounts payable (including due to Forward China) of approximately $1,083,000,$736,000, a decrease in accounts receivable of approximately $619,000, a decrease in inventories of approximately $60,000, a decrease in prepaid expenses and other current assets of approximately $52,000 and net income of approximately $47,000, partially offset by a decrease in accrued expenses and other current liabilities of approximately $296,000, an increase in inventories of approximately $156,000 and a net loss of approximately $86,000, partially offset by a decrease in accounts receivable of approximately $439,000, and the add back of non-cash share-based compensation of approximately $79,000.$211,000.

During the 2016 Period,2017 Quarter, cash used in operating activities of approximately $725,000$520,000 resulted primarily from an increase in accounts receivable of approximately $532,000, a decrease in accounts payable (including due to Forward China) of approximately $527,000,$902,000 and a decrease in accrued expenses and other current liabilities of approximately $357,000,$246,000, partially offset by an increase in accounts payable (including due to Forward China) of approximately $389,000, net income of approximately $388,000, a decrease in inventories of approximately $180,000,$151,000, and the add back of non-cash share-based compensation of approximately $134,000.$50,000.

Cash Flows from Investing Activities

     In the 2018 Quarter, cash used in investing activities of approximately $19,000 resulted from purchases of property and equipment.

In the 2017 Period,Quarter, there was no cash used in investing activities.

In the 2016 Period, cash used in investing activities of approximately $46,000 resulted from purchases of property and equipment.

Cash Flows from Financing Activities

In the 2017 Period,2018 Quarter, there was no cash used in financing activities.

In the 2016 Period,2017 Quarter, there was no cash used in financing activities of approximately $2,000 resulted from the repurchase of restricted stock.activities.

Related Party Transactions

For information on related party transactions and their financial impact, see Note 7Notes 6 and 8 to the unaudited condensed consolidated financial statements contained herein.

ITEM 3.QUANTITATIVE3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.CONTROLS4.      CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and ProceduresProcedures.. Our management carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, required by Rule 13a-15 and Rule 15d-15 of the Securities Exchange Act of 1934 (the “Exchange Act”) of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act. Based on their evaluation, our management has concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations of the Effectiveness of Controls and Procedures. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations of any control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.