Commission File Number: 001-34780

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FORWARD INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

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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)

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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 [ ] No [X][X]

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, on February 12,August 9, 2018, which is the latest practical date prior to the filing of this report, was 9,516,5549,533,850 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;

“IPS” refers to Forward Industries’ wholly owned subsidiary Intelligent Product Solutions, Inc., a New York 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 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;

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

“EMEA Region” refers 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.

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

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)

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

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)

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

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

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1      OVERVIEW

     Forward Industries, Inc. (“Forward” or the “Company”) designs and distributes carry and protective solutions, primarily for hand held electronic devices. The Company’s principal customer market is original equipment manufacturers, or “OEMs” (or the contract manufacturing firms of these OEM customers), that either package their products as accessories “in box” together with their branded product offerings, or sell them through their retail distribution channels. The Company’s 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). The Company’s OEM customers are located in: (i) the Asia-Pacific Region, which we refer to as the “APAC Region”; (ii) Europe, the Middle East, and Africa, which we refer to as the “EMEA Region”; and (iii) the Americas. The Company does not manufacture any of its OEM products and sources substantially all of its OEM products from independent suppliers in China, through Forward China (refer to Note 69 – Buying Agency and Supply Agreement).

     On January 18, 2018, the Company acquired Intelligent Product Solutions, Inc. (“IPS”), a single source solution for the full spectrum of hardware and software product design and engineering services. The acquisition gives Forward the opportunity to introduce proprietary product to the market from concepts brought to them from a number of different sources. The Forward/IPS combination provides clients, both big and small, a true, authentic “one-stop-shop” for product design, development, manufacturing, and distribution (See Note 8).distribution.

     In the opinion of management, the accompanying condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q reflect all normal recurring adjustments necessary to present fairly the financial position and results of operations and cash flows for the interim periods presented herein, but are not necessarily indicative of the results of operations for the year ending September 30, 2018 nor do they include the impact of the IPS acquisition.2018. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2017, and with the disclosures and risk factors presented therein. The September 30, 2017 condensed consolidated balance sheet has been derived from the audited consolidated financial statements.

NOTE 2      ACCOUNTING POLICIES

Accounting Estimates

     The preparation of the Company’s condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.

Basis of Presentation

     The accompanying condensed consolidated financial statements include the accounts of Forward Industries, Inc. and its wholly owned subsidiaries (Forward US, Forward Switzerland and Forward Switzerland)recently acquired IPS from the date of acquisition). All significant intercompany transactions and balances have been eliminated in consolidation. Intercompany revenues of approximately $97,000 and $153,000 for the three and nine months ended June 30, 2018 related to design and marketing work performed by IPS for Forward has been eliminated in consolidation.

Segment Reporting

Operating segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated by a chief operating decision maker, or Forward management, in deciding how to allocate resources and in assessing performance. As a result of the acquisition of IPS, management conducts business through two distinct operating segments, which are also our reportable segments: distributionand design. Forward US and Forward Switzerland comprise the distribution operating segment and IPS is the design operating segment. It should be noted that the segment reporting for design for the nine months ended June 30, 2018 only covers the period following the closing of the acquisition of IPS on January 18, 2018 through third quarter end on June 30, 2018.

     Organizing our business through two operating segments allows us to align our resources and manage the operations. Our management team regularly reviews operating segment revenue and operating income (loss) when assessing financial results of operating segments and allocating resources.

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2      ACCOUNTING POLICIES (Continued)

     We measure the performance of our operating segments based upon operating segment revenue and operating income (loss). Segment operating income (loss) includes revenue and expenses incurred directly by the operating segment, including cost of sales and selling, marketing, and general and administrative costs.

Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill was recognized as a result of the acquisition of IPS in January 2018.

Goodwill is reviewed for impairment at least annually, and when triggering events occur, in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, Intangibles – Goodwill and Other. We have two reporting units for purposes of evaluating goodwill impairment and perform our annual goodwill impairment test on December 31. We have the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If we can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then we would not need to perform the two-step impairment test for the reporting unit. If we cannot support such a conclusion or do not elect to perform the qualitative assessment, then the first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of the reporting unit with its carrying amount, including goodwill.

If the fair value of the reporting unit exceeds its carrying value, then the second step of the impairment test (measurement) does not need to be performed. If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the entity must perform the second step of the impairment test. Under the second step, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to an acquisition price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. A significant amount of judgment is required in performing goodwill impairment tests including estimating the fair value of a reporting unit and the implied fair value of goodwill. (See Notes 3 and 4 for further discussion of goodwill).

Intangible assets include trademark and customer relationships, which were acquired as part of the acquisition of IPS in January 2018 and are recorded based on the estimated fair value in purchase price allocation. The intangible assets are amortized over their estimated useful lives, which are periodically evaluated for reasonableness.

Our intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In assessing the recoverability of our intangible assets, we must make estimates and assumptions regarding future cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and also the magnitude of any such charge. Fair value estimates are made at a specific point in time, based on relevant information. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. If these estimates or material related assumptions change in the future, we may be required to record impairment charges related to its intangible assets. (See Notes 3 and 4 for further discussion of intangible assets).

Income Taxes

     The Company recognizes future tax benefits and liabilities measured at enacted rates attributable to temporary differences between financial statement and income tax bases of assets and liabilities and to net tax operating loss carryforwards to the extent that realization of these benefits is more likely than not. As of December 31, 2017,June 30, 2018, there was no change to our assessment that a full valuation allowance was required against all net deferred tax assets. Accordingly, any deferred tax provision or benefit was offset by an equal and opposite change to the valuation allowance. However, a deferred income tax benefit was recorded in conjunction with the acquisition of IPS in the second quarter and related to deferred tax liabilities created upon acquisition of the subsidiary on January 18, 2018. This resulted in a reduction in the Company’s valuation allowance for the existing deferred tax asset to offset the newly recorded deferred tax liability and accordingly a tax benefit has been recognized of $747,000. No current book income tax provision was recorded against book net income due to the existence of significant net operating loss carryforwards.

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2      ACCOUNTING POLICIES (CONTINUED)(Continued)

     On December 20, 2017, Congress passed the Tax Cuts and Jobs Act. This bill includes, among other things, a reduction of the U.S. corporate tax rate from 35% to 21%. The change in the tax rates resulted in a decrease in the deferred tax assets. However, Forward maintains a full valuation allowance and the decrease in the deferred tax assets are offset by an equal adjustment to the valuation allowance. As a result of the 2017 Tax Cuts and Jobs Act, we expect no tax impact to the financial statements stemming from: (i) the mandatory deemed repatriation of cumulative earnings and profits for a controlled foreign corporation; or (ii) the change in the corporate income tax rate.

Revenue Recognition

Distribution Segment

     The Company generally recognizes revenue from its distribution segment from product sales to its customers when: (i) title and risk of loss are transferred (in general, these conditions occur at either point of shipment or point of destination, depending on the terms of sale); (ii) persuasive evidence of an arrangement exists; (iii) the Company has no continuing obligations to the customer; and (iv) collection of the related accounts receivable is reasonably assured. The Company defers revenue when it receives consideration before achieving the criteria previously mentioned.

Design Segment

     The Company generally recognizes revenue from design segment sales to customers based on: (i) time and material incurred; (ii) the performance of services as per the agreement; (iii) persuasive evidence that an arrangement exists and (iv) collection of the related accounts receivable is reasonably assured. The Company defers revenue when it receives consideration before achieving the criterion previously mentioned.

Reclassifications

     Certain amountsWe have reclassified deferred income of approximately $170,000 from accrued expenses and other current liabilities to deferred income within the current liabilities section of the balance sheet in the accompanying fiscal 2017 financial statements have been reclassified to conform to the fiscal 2018 presentation. These reclassifications did not affect total current liabilities, net income or accumulated deficit.

Share-Based Compensation Expense

     The Company recognizes employee and director share-based compensation in its condensed consolidated statements of operations and comprehensive income at the grant-date fair value of stock options and other equity-based compensation. The determination of stock option grant-date fair value is estimated using the Black-Scholes option pricing model, which includes variables such as the expected volatility of the Company’s share price, the exercise behavior of its grantees, interest rates, and dividend yields. These variables are projected based on the Company’s historical data, experience, and other factors. In the case of awards with multiple vesting periods, the Company has elected to use the graded vesting attribution method, which recognizes compensation cost on a straight-line basis over each separately vesting portion of the award as if the award was, in-substance, multiple awards. Refer to Note 36 - Share-Based Compensation. In addition, the Company recognizes share-based compensation to non-employees based upon the fair value, using the Black-Scholes option pricing model, determined at the deemed measurement dates over the related contract service period.

Recent Accounting Pronouncements

     In May 2014,August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting StandardsStandard Update (“ASU”) No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” providing additional guidance on several cash flow classification issues, with the goal of the update to reduce the current and potential future diversity in practice. The amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company early adopted ASU No. 2016-15 and the adoption did not have any impact on the Company’s consolidated financial statements.

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2      ACCOUNTING POLICIES (Continued)

     In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The amendment allows an entity to elect to reclassify the stranded tax effects resulting from the change in income tax rate from the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. The amendments in this update are effective for periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this new standard will have on its consolidated financial statements.

     In May 2014, FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605-Revenue Recognition and most industry-specific guidance throughout the ASC. ASU 2014-09 establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. In July 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods). Early adoption is permitted to the original effective date for annual reporting periods beginning after December 15, 20162017 (including interim reporting periods within those periods). The amendments may be applied retrospectively to each prior period (full retrospective) or retrospectively with the cumulative effect recognized as of the date of initial application (modified retrospective). The Company will adopt ASU 2014-09 in the first quarter of fiscal 2019 and plans to apply the full retrospective approach.2019. Because the Company's Distribution Segment’s primary source of revenues is from the sale of finished goods, the Company does not anticipate that the adoption of ASU 2014-09 will have a material impact on its existing business, consolidated financial statements, disclosures or process. Thethis segment. However, the Company is evaluating the potential impact of the acquired IPS business.business and the resulting Design Segment and ultimately the Company’s consolidated financial statements, disclosures and internal processes and controls. Management believes the adoption of the new standard may have an impact to the recognition of revenue as it relates to the fixed priced contracts with IPS customers. The materiality of the impact is unknown but management will have a better understanding once the evaluation is concluded. As of report date, management is actively assessing the potential impact and will have a conclusion before the fiscal year-end.

     In February 2016,2017, the FASB issued ASU 2016-02,2017-02, “Leases (Topic 842),” which will require lessees to report most leases as assets and liabilities on the balance sheet, while lessor accounting will remain substantially unchanged. This ASU requires a modified retrospective transition approach for existing leases, whereby the new rules will be applied to the earliest year presented. The new standard is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements.

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2      ACCOUNTING POLICIES (CONTINUED)

Recent Accounting Pronouncements (Continued)

In May 2017, the FASB issued ASU No. 2017-09, “Scope of Modification Accounting”, to provide guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This ASU is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. Adoption of this ASU is prospective. The Company does not believe the adoption of this ASU will have a significant impact on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04,Intangibles—Goodwill and Other (Topic 350)—Simplifying the Test for Goodwill Impairment(“ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test referenced in Accounting Standards Codification (“ASC”) 350,Intangibles -Goodwill and Other(“ASC 350”). As a result, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019, including any interim impairment tests within those annual periods, with early application permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We will perform future goodwill impairment tests according to ASU 2017-04.

Business Combinations and Asset Acquisitions

     We allocateThe Company allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, we makethe Company makes significant estimates and assumptions, especially with respect to intangible assets.

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2      ACCOUNTING POLICIES (Continued)

     We recognizeThe Company recognizes the purchase of assets and the assumption of liabilities as an asset acquisition, if the transaction does not constitute a business combination. The excess of the fair value of the purchase price is allocated on a relative fair value basis to the identifiable assets and liabilities. No goodwill is recorded in an asset acquisition.

     Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships and developed technology, discount rates and terminal values. Our estimate of fair value is based upon assumptions believed to be reasonable, but actual results may differ from estimates.

     Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed.

NOTE 3      ACQUISITION

     On January 18, 2018, the Company entered into a Stock Purchase Agreement (the “Agreement”) by and among the Company, IPS, the holders of all of the common stock of IPS, Inc. (the “Sellers”) and Mitchell Maiman, President of IPS, representing the Sellers. In consideration for the acquisition of all of IPS’ outstanding securities, the Company: (i) paid approximately $1.9 million in cash; (ii) assumed approximately $1.5 million of outstanding debt; (iii) issued a total of 401,836 shares of the Company’s common stock to the two owners of IPS; (iv) agreed to pay $1,000,000 of deferred cash consideration (with the first payment of $500,000 due and paid 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); and (v) agreed to pay up to $2.2 million of earnout payments based upon IPS meeting certain EBITDA milestones (as defined in the Agreement) over a three-year period. Additionally, the Company entered into three-year employment agreements with both Mitchell Maiman and Paul Severino (Chief Operating Officer of IPS), and agreed to pay them each $256,000 per year. In order to fund the acquisition of IPS, the Company issued a $1.6 million promissory note payable to Forward China Industries (Asia-Pacific) Corporation (“Forward China”) due January 18, 2019. The promissory note bears an interest rate of 8% per annum and requires monthly interest payments commencing February 18, 2018. Forward China is an entity which is principally owned by the Company’s Chairman and Chief Executive Officer. As part of the Agreement, IPS entered into at-will employment agreements with two additional key employees. Pursuant to the employment agreements, the employees were issued a total of 40,184 shares of the Company’s common stock of which 40% vested immediately with the remainder vesting in two equal increments on the six-month and twelve-month anniversary of the grant date, subject to continued employment on such vesting dates.

     At the date of acquisition, the purchase consideration consists of cash, equity in Forward’s (“Buyer’s”) stock, deferred cash and contingent consideration based on earn-out performance over a three-year period. Acquisition-related costs were expensed as incurred and are included in the general and administrative expenses within the condensed consolidated statements of operations. The purchase consideration components are summarized in the table below:

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3      ACQUISITION (Continued)

     The following table summarizes the allocation of the assets acquired and liabilities assumed based on their estimated fair values on the acquisition date and the related estimated useful lives of the amortizable intangible assets acquired (in thousands, except for estimated useful life):

Pro Forma Impact

     The following unaudited pro forma condensed consolidated financial information has been prepared to illustrate the effects of the acquisition of IPS as if the acquisition occurred on October 1, 2017 and 2016. The historical consolidated financial information has been adjusted in the unaudited pro forma condensed combined financial statements to give effect to pro forma events that are directly attributable to the acquisition, factually supportable and, with respect to the condensed consolidated statements of operations, expected to have a continuing impact on the results of operations.

     The unaudited pro forma condensed consolidated statements of operations does not reflect future events that may occur after the completion of the acquisitions, including, but not limited to, the anticipated realization of ongoing savings from operating synergies and certain one-time charges the Company expects to incur in connection with the acquisition, including, but not limited to, costs in connection with integrating the operations of IPS.

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3      ACQUISITION (Continued)

     These unaudited pro forma condensed consolidated financial statements are for informational purposes only. They do not purport to indicate the results that would actually have been obtained had the acquisition been completed on October 1, 2017 and 2016 or which may be realized in the future. There can be no assurance that such finalization will not result in material changes from the preliminary accounting for the IPS Acquisition included in the below pro forma condensed consolidated financial information.

NOTE 4      FAIR VALUE MEASUREMENTS

     We perform fair value measurements in accordance with the guidance provided by ASC 820. ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at their fair values, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the assets or liabilities, such as inherent risk, transfer restrictions, and risk of nonperformance.

     ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset's or liability's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value:

• Level 1: quoted prices in active markets for identical assets or liabilities;

• Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or

• Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities.

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4      FAIR VALUE MEASUREMENTS (Continued)

     The long-term portion of deferred cash consideration of $538,000 on our balance sheet includes a deferred cash component of $448,000 and an earn-out consideration component with a fair value of $90,000 measured using the Black-Scholes option pricing method, a Level 3 valuation technique. The value of the deferred cash consideration and the fair value of the earn-out consideration component at March 31, 2018 was $436,000 and $600,000, respectively. The fair value of the earn-out consideration was deemed to be only $90,000 at June 30, 2018 due to the low likelihood of reaching the projected actual EBITDA milestones as a result of lower gross margins and higher operating expenses than initially projected. Projected actual EBITDA in future earn-out periods are expected to fall short as cross-selling opportunities and cost synergies have not materialized as fast as expected. Per the guidance under ASC 805 – Business Combinations and Contingent Consideration, for contingent consideration classified as an asset or liability, any measured change in fair value shall be recognized in earnings. The fair value adjustments amount to $498,000 and are itemized under the Other income (expense) portion of the condensed consolidated statement of operations. The shortfall in expected EBITDA was also considered a triggering event with regards to the evaluation of the June 30, 2018 carrying value of our trademark and customer relationship intangible assets as well as the goodwill resulting from the acquisition of IPS. As such, the Company performed an assessment of the carrying values considering specific qualitative facts and circumstances, macroeconomic factors and utilizing the initial inputs and projections that supported the initial fair value valuations of the intangible assets acquired from IPS. Based on these assessments, the Company concluded that the trademark, customer list and goodwill were not impaired at June 30, 2018.

     The following table presents the placement in the fair value hierarchy and summarizes the change in fair value of the deferred cash consideration during the quarter ended June 30, 2018:

     The fair value of the deferred cash consideration will be measured on a recurring basis at each reporting date. The following table provides the unobservable inputs and assumptions used to measure the deferred cash consideration at June 30, 2018:

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5      SEGMENT INFORMATION

     The Company, post IPS acquisition, conducts its business through two operating segments, which are also its reportable segments:

• Distribution and

• Design

     Segment operating income (loss) reflects results before shared corporate and unallocated administrative expenses and income taxes. Shared corporate and unallocated administrative expenses principally consist of costs for corporate and administrative support functions.

    The following table presents total assets by operating segment: 

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 36      SHARE-BASED COMPENSATION

Stock Options

     The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the following assumptions. The expected term represents the period over which the stock option awards are expected to be outstanding. The Company utilizes the “simplified” method to develop an estimate of the expected term of “plain vanilla” employee option grants. The expected volatility used is based on the historical price of the Company’s stock over the most recent period commensurate with the expected term of the award. The risk-free interest rate used is based on the implied yield of U.S. Treasury zero-coupon issues with a remaining term equivalent to the award’s expected term. The Company historically has not paid any dividends on its common stock and had no intention to do so on the date the share-based awards were granted. The estimated annual forfeiture rate is based on management’s expectations and will reduce expense ratably over the vesting period. The forfeiture rate will be adjusted periodically based on the extent to which actual option forfeitures differ, or are expected to differ, from the previous estimate, when it is material.

     In applying the Black-Scholes option pricing model to options granted, the Company used the following assumptions:

     On February 23, 2018, the Company granted five-year options to employees to purchase an aggregate of 68,000 shares of common stock at an exercise price of $1.67 per share. The shares vest ratably over three years on the grant date anniversaries. The options had had an aggregate grant date fair value of $77,128, which is being amortized over the vesting period of the options.

     On April 25, 2018, the Company granted immediately vested ten-year options to purchase an aggregate of 40,816 shares of common stock to two former directors and immediately vested five-year options to purchase 214,000 shares of common stock to a director, all at an exercise price of $1.44 per share. The options had had an aggregate grant date fair value of $190,890, which was recognized immediately.

There were no options granted during the threenine months ended December 31, 2017 and 2016.June 30, 2017.

     The following table summarizes stock option activityoptions granted during the three and nine months ended December 31, 2017:June 30, 2018 had a weighted average grant date value per share of $0.75 and $0.83, respectively.

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 36      SHARE-BASED COMPENSATION (CONTINUED)(Continued)

The following table summarizes stock option activity during the nine months ended June 30, 2018:

     The Company recognized compensation expense of approximately $1,000$203,000 and $2,000 during the three months ended December 31,June 30, 2018 and 2017, respectively, and 2016,approximately $208,000 and $5,000 during the nine months ended June 30, 2018 and 2017, respectively, for stock option awards in its condensed consolidated statements of operations and comprehensive income.operations.

     As of December 31, 2017,June 30, 2018, there was approximately $2,000$61,000 of total unrecognized compensation cost related to nonvested stock option awards. That costawards that is expected to be recognized over a weighted average period of 0.51.7 years.

     The following table provides additional information regarding stock option awards that were outstanding and exercisable at December 31, 2017:June 30, 2018:

Restricted Stock Awards

     TheOn January 18, 2018, the Company recognized compensation expensegranted 40,184 shares of approximately $(5,000) and $48,000 during the three months ended December 31, 2017 and 2016, respectively, for restricted stock to two employees. The shares vest as follows: 16,072 shares vested immediately, 12,056 shares vest on July 18, 2018 and 12,056 shares vest on January 18, 2019. The awards in its condensed consolidated statementshad an aggregate grant date value of operations and comprehensive income.$49,828, which is been recognized over the vesting period of the awards.

     AsOn April 25, 2018, the Company granted 20,832 shares of December 31, 2017, there was approximately $15,000 of total unrecognized compensation cost related to nonvestedimmediately vested restricted stock awards. That cost is expected to betwo former directors. The awards had an aggregate grant date value of $29,998, which was recognized over a weighted average period of 0.2 years.

      The following table summarizes restricted stock activity during the three months ended December 31, 2017:immediately.

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 36      SHARE-BASED COMPENSATION (CONTINUED)(Continued)

     The Company recognized compensation expense of approximately $33,000 and $15,000 during the three months ended June 30, 2018 and 2017, respectively, and approximately $69,000 and $92,000 during the nine months ended June 30, 2018 and 2017, respectively, for restricted stock awards in its condensed consolidated statements of operations. As of June 30, 2018, there was approximately $6,000 of total unrecognized compensation cost related to non-vested restricted stock awards that is expected to be recognized over a weighted average period of 0.4 years.

    The following table summarizes restricted stock activity during the nine months ended June 30, 2018:

NOTE 47     EARNINGS PER SHARE

     Basic earnings per share data for each period presented is computed using the weighted-average number of shares of common stock outstanding during each such period. Diluted earnings per share data is computed using the weighted-average number of common and dilutive common-equivalent shares outstanding during each period. Dilutive common-equivalent shares consist of: (i) shares that would be issued upon the exercise of stock options and warrants, computed using the treasury stock method; and (ii) shares of nonvested restricted stock. The Company calculated the potential diluted earnings per share in accordance with ASC 260, as follows:

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7      EARNINGS PER SHARE (Continued)

     The following securities were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive:

NOTE 8CONCENTRATIONS

Concentration of Revenues and Accounts Receivable

     For the three and nine months ended June 30, 2018 and 2017, the Company had significant customers with individual percentage of total segment revenues equaling 10% or greater. The concentrations outlined below for the design segment for the nine month period ended June 30, 2018 is a shortened period commencing on January 19, 2018, the date of acquisition. The concentration of revenues and accounts receivable for each reporting segment are as follows:

Distribution Segment

     At June 30, 2018 and September 30, 2017, concentration of accounts receivable with significant customers representing 10% or greater of segment accounts receivable was as follows:

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 58     CONCENTRATIONS (Continued)

Concentration of Revenues and Accounts Receivable

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

     At December 31, 2017 and September 30, 2017, concentration of accounts receivable with significant customers representing 10% or greater of accounts receivable was as follows:

NOTE 69      RELATED PARTY TRANSACTIONS

Buying Agency and Supply Agreement

     On March 12, 2012, the Company entered into a Buying Agency and Supply Agreement (the “Supply Agreement”) with Forward Industries Asia-Pacific Corporation, a British Virgin Islands corporation (“Forward China”).China. The Supply Agreement, as amended, provides that, upon the terms and subject to the conditions set forth therein, Forward China will act as the Company’s exclusive buying agent and supplier of Products (as defined in the Supply Agreement) in the Asia Pacific region. The Company purchases products at Forward China’s cost and also pays to Forward China a monthly service fee equal to the sum of: (i) $100,000; and (ii) 4% of “Adjusted Gross Profit”, which is defined as the selling price less the cost from Forward China. The amended Supply Agreement expires on March 8, 2019, subject to renewal. Terence Bernard Wise, Chief Executive Officer and Chairman of the Company, is a principal of Forward China. In addition, Jenny P. Yu, a Managing Director of Forward China, beneficially owns more than 5% of the Company’s shares of common stock. The Company has a balance of $3.8 million due to Forward China in the current liabilities section of the balance sheet at June 30, 2018 for the purchase of inventory. The Company recognized approximately $360,000$355,000 and $363,000$300,000 during the three months ended December 31,June 30, 2018 and 2017, respectively, and 2016,approximately $1,073,000 and $1,007,000 during the nine months ended June 30, 2018 and 2017, respectively, in service fees paid to Forward China, which are included as a component of cost of goods sold in the accompanying condensed consolidated statements of operations and comprehensive income.operations. During the threenine months ended December 31,June 30, 2018 and 2017, and 2016, the Company received commissions from Forward China of $0 and $12,904, respectively, which is included in net revenues. The Company did not receive commissions from Forward China for the three months ended June 30, 2018 and 2017.

Promissory Note

     See Note 8 below regardingOn January 18, 2018, the Company issued a $1.6 million promissory note issuedpayable to Forward China as partin order to fund the acquisition of IPS. The note is due and payable in full on January 18, 2019. The promissory note bears an interest rate of 8% per annum. Monthly interest payments commenced on February 18, 2018. For the IPS acquisition.three and nine months ended June 30, 2018, the Company made $32,001 and $53,335, respectively, in interest payments associated with the note.

NOTE 710      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 December 31, 2017,June 30, 2018, 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.

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8      SUBSEQUENT EVENTS11      WARRANT EXERCISE

     On January 18, 2018, the Company entered into a Stock Purchase Agreement (the “Agreement”) by and among the Company, Intelligent Product Solutions, Inc. (“IPS”), the holders of all of the common stock of IPS, Inc. (the “Sellers”) and Mitchell Maiman, President, representing the Sellers. In consideration for the acquisition of all of IPS’ outstanding securities, the Company: (i) paid approximately $1.9 million in cash; (ii) assumed approximately $1.5 million of outstanding debt; (iii) issued a total of 401,836 shares of the Company’s common stock to the two owners of IPS; (iv) 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); and (v) agreed to pay up to $2.2 million of earnout payments based upon IPS meeting certain EBITDA milestones (as defined in the Agreement) over a three-year period. Additionally, the Company entered into three-year employment agreements with both Mitchell Maiman (President of IPS) and Paul Severino (Chief Operating Officer of IPS), and agreed to pay them each $256,000 per year. In order to fund the acquisition of IPS, the Company issued a $1.6 million promissory note payable to Forward China due January 18, 2019. The promissory note bears an interest rate of 8% per annum and requires monthly interest payments commencing February 18, 2018. Forward China is an entity which is principally owned by the Company’s Chairman and Chief Executive Officer. As part of the Agreement, IPS entered into at-will employment agreements with two additional key employees. Pursuant to the employment agreements, the employees were issued a total of 40,184 shares of the Company’s common stock of which 40% vested immediately with the remainder vesting in two equal increments on the six-month and twelve-month anniversary of the grant date, subject to continued employment on such vesting dates.

     Effective January 22, 2018 through February 12,January 24, 2018, tennine warrant holders exercised (via cashless exercises) an aggregate of 521,621 warrants with an exercise price of $1.84 per share and were issued an aggregate of 223,704 shares of the Company’s common stock.

     Effective June 26, 2018, a warrant holder exercised (via a cashless exercise) 50,890 warrants with an exercise price of $1.84 per share and was issued 8,520 shares of the Company’s common stock.

NOTE 12      LINE OF CREDIT

     The Company, specifically IPS, has a $1,000,000 revolving line of credit with TD Bank which matures on August 31, 2018, and will likely be extended for another year. The interest rate on the line of credit is 0.75% above the Wall Street Journal prime rate. As of the filing of this report, the company has $800,000 available under the line of credit. The Company is subject to certain debt-service ratio requirements which are measured annually and the Company is expected to meet.

ITEM 2.      MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

     The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements, and the notes thereto, and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017. The following discussion and analysis compares our consolidated results of operations for the three and nine months ended December 31, 2017June 30, 2018 (the “2018 Quarter”) and “2018 Period”, respectively) with those for the three and nine months ended December 31, 2016June 30, 2017 (the “2017 Quarter”) and “2017 Period”, respectively). All figures in the following discussion are presented on a consolidated basis. All dollar amounts and percentages presented herein have been rounded to approximate values.

Updated Information

     As previously disclosed, the Company received a letter from the Financial Industry Regulatory Authority (“FINRA”) notifying the Company that FINRA was investigating trading in the Company’s securities surrounding the January 18, 2018 announcement that the Company had acquired Intelligent Product Solutions, Inc. (the “FINRA Investigation”). On May 8, 2018, the Company received notice from FINRA that the FINRA Investigation had been completed and that the matter had been referred to the SEC. As of the date of this filing, the Company has not received any communication from the SEC on this matter. The Company will cease providing updates with respect to this matter in its Quarterly and/or Annual Reports until there is a material update to report as required by the SEC disclosure rules and regulations.

Business Overview

     Forward Industries, Inc. (“Forward” or the “Company”) designs and distributes carry and protective solutions, primarily for hand held electronic devices. The Company’s principal customer market is original equipment manufacturers, or “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. The Company’s 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, firearms). The Company’s OEM customers are located in: (i) the Asia-Pacific Region, which we refer to as the “APAC Region”; (ii) Europe, the Middle East, and Africa, which we refer to as the “EMEA Region”; and (iii) the Americas. The Company does not manufacture any of its OEM products and sources substantially all of its OEM products from independent suppliers in China, through Forward China.

     On January 18, 2018, wethe Company acquired Intelligent Product Solutions, Inc. (“IPS”). This was a significant strategic acquisition for Forward and creates noteworthy cross selling opportunities for the combined companies. Both companies have a reputation for achieving a very high level of customer satisfaction by providing excellent customer service in both design for IPS and the sourcing of manufactured finished goods.goods for Forward. The acquisition allows us to bring design and development solutions to our existing multinational client base and expand beyond the diabetic product line. Similarly, IPS can now position themselves as a fully integrated design, development and manufacturing solution to their existing top tier customers and the considerable new projectsthose in theirthe pipeline. Additionally, the acquisition gives Forward the opportunity to introduce proprietary product to the market from concepts brought to them from a number of different sources. The Forward/IPS combination provides clients, both big and small, a true, authentic “one-stop-shop” for product design, development, manufacturing, and distribution.

     As a result of our acquisition of IPS on January 18, 2018, our business has been augmented. Key terms of the acquisition are contained in a Form 8-K filed with the SEC on January 18, 2018. IPS’ financialThe operating results for IPS are not included in this report. Our resultsthe consolidated financial statements from the effective date of operations in this report solely relate to our historical business.the acquisition of January 18 through June 30, 2018.

Variability of Revenues and Results of Operations

     Because a high percentage of our net revenues is highly concentrated in a few large customers, and because the volumes of these customers’ order flows to us are highly variable, with short lead times, our quarterly revenues, and consequently our results of operations, are susceptible to significant variability over a relatively short period of time. We believe this variability will be less in the future when IPS’ financial results are consolidated withas a result of the Company’s financial results.IPS acquisition.

Critical Accounting Policies and Estimates

     We discuss the material accounting policies that are critical in making the estimates and judgments in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017, under the caption “Management’s Discussion and Analysis—Critical Accounting Policies and Estimates”. There has been no material change in critical accounting policies or estimates during the period covered by this report.

Segment Reporting

As a result of the acquisition of IPS, management will conduct business through two distinct operating segments, which are also our reportable segments: distributionand design. Forward US and Forward Switzerland comprise the distribution operating segment and IPS is the design operating segment. It should be noted that financial performance and results of operations in the design segment for the nine months ended June 30, 2018 only covers the period following the closing of the acquisition of IPS on January 18, 2018 through third quarter end on June 30, 2018.

Goodwill

Goodwill was acquired through the IPS acquisition on January 18, 2018. The value of goodwill acquired was $2.182 million. There was no impairment as of June 30, 2018.

Intangible Assets

Intangible assets were acquired through the IPS acquisition on January 18, 2018. The intangible assets include trademark and customer relationships. The value at acquisition date of January 18, 2018 was $475,000 for the trademark and $1,050,000 for the customer relationships. The intangible assets are amortized over the useful life which is 15 years for the trademark and 8 years for the customer relationships. Amortization of intangibles is recognized in the general & administrative expenses within the design segment of operations for the periods presented. The net value of the intangible assets was approximately $991,000 and $461,000 for the customer relationships and trademark, respectively.

Recent Accounting Pronouncements

     For information on recent accounting pronouncements, see Note 2 to the unaudited condensed consolidated financial statements.statements, herein.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2017JUNE 30, 2018 COMPARED TO THE THREE MONTHS ENDED DECEMBER 31, 2016JUNE 30, 2017

     The results of operations disclosed below is based upon the historicalpresents Forward’s distribution business of Forward (prior to the acquisition of IPS) and does not include the financial results of IPS and is not indicative nor representative of the results of operations of Forward when it is consolidated with the results of IPS’ operations.design segments as distinct operating units.

Net Income

     NetDistribution Segment

     Distribution segment net income was approximately $47,000$295,000 in the 2018 Quarter compared to net income of approximately $151,000$552,000 in the 2017 Quarter. Net income in the 2018 Quarter was due to the non-cash FMV adjustments explained in Note 4 (see Note 4 to the unaudited condensed consolidated financial statements contained herein). The distribution segment incurred an operating loss of approximately ($166,000) in the 2018 Quarter compared to an operating income of approximately $549,000 in the 2017 Quarter. The declinedrop in netoperating income in the 2018 Quarter was primarily due to a decline in both net revenues and gross profit andsales combined with an increase in general and administrative expenses, partially offset by a decrease in sales and marketingoperating expenses, as reflected in the table below.

Design Segment

Design segment net loss was approximately ($59,000) in the 2018 Quarter.

     Basic and diluted earnings (loss) per share was $0.01$0.02 per share for the 2018 Quarter and $0.02$0.06 per share for the 2017 Quarter.

Net Revenues

Distribution Segment

     Net revenues in the distribution segment declined $0.3$1.4 million, or 4%20%, to $6.3$5.9 million in the 2018 Quarter from $6.6$7.3 million in the 2017 Quarter dueprimarily as a result of decreased Diabetic product line revenue, and to reduced revenuesa lesser extent, a decline in Other Products, partially offset by increased revenues from Diabetics Products. Revenues from Other Products declined $0.4 million whereas revenues from Diabetic Products increased $0.1 million.Product revenue. The following tables set forth revenues by channel, product line and geographic location of our Distribution segment customers for the periods indicated:

Diabetic Product Revenues

     We designForward’s distribution segment manufactures to the order of, and sellsells 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, sellsells them through their retail distribution channels.

     Revenues from Diabetic Products increased $0.1declined $1.03 million, or 17%, to $5.6$5.2 million in the 2018 Quarter from $5.5$6.2 million in the 2017 Quarter. This increasedecline was primarily due to higherlower revenues derived from twoall of our major Diabetic Products customers (Diabetics Products Customers A and B) and a slight increase in revenues from our Other Diabetic Products customers. The increase was offset, in part, by a decrease in revenues from two of our major Diabetic Products customers (Diabetic Products Customers C and D).

     The following table sets forth our distribution segment net revenues by Diabetic Products customer for the periods indicated:

     Revenues from Diabetic Products represented 89%88% of our distribution segment net revenues in the 2018 Quarter compared to 84%85% of our distribution segment net revenues in the 2017 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 from Other Products declined $0.4 millionapproximately $396,000 to $0.7 millionapproximately $714,000 in the 2018 Quarter from $1.1 millionapproximately $1,110,000 in the 2017 Quarter. This is primarily due to overall net decreasesa decrease of $0.6 millionapproximately $227,000 in sales to a navigation and wireless device customer, in addition to declining sales from existingother customers, partially offset by the addition of $0.2 million from some new customers.not individually material. 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 distribution segment net revenues in the 2018 Quarter compared to 16% of our distribution segment net revenues in the 2017 Quarter.

Design Segment

     Net revenues in the design segment were approximately $3.63 million for the quarter ended June 30, 2018 as compared to approximately $2.83 million for the shortened period ended March 31, 2018. There are two primary service revenue types within our design services segment: Engineering design services and Software design services. Design segment customers are primarily located in the Americas. The following tables set forth revenues by service type of our Design segment customers for the quarter ended June 30, 2018:

Engineering Services Revenue

     IPS offers expert industrial, mechanical and electrical engineering designs and solutions for a wide array of products including, but not limited to, wearables, medical devices, smart displays, vending machines, security screening equipment, home security systems and energy storage devices. Engineering services revenue was nearly $3.0 million for the quarter.

Software Services Revenue

     IPS software designers and engineers provide development and design solutions in data software for IoT (“Internet of Things”), search-oriented solutions, custom analytics, application stacks, integration, hosting, cloud services and support. Software development revenues was $0.6 million for the quarter.

     The following table sets forth our design segment net revenues by major customers for the quarter from April 1, 2018 to June 30, 2018:

Gross Profit

Distribution Segment

     Gross profit decreased $0.2 million,for the distribution segment declined approximately $305,000, or 13%24%, to $1.0 millionapproximately $973,000 in the 2018 Quarter from $1.2approximately $1.278 million in the 2017 Quarter. As a percentage of revenues, our gross margin declineddecreased to 15.8%16.5% in the 2018 Quarter, compared to 17.6%17.4% in the 2017 Quarter.

     The fall in gross profit declinerise was driven primarily by a year over year decreasesubstantial decline in volumes relatedsales volume to global revenues. Quarter 2018 revenuesa higher-margin customer located in both in AMER and EMEA. APAC was the only region where we saw an upward movement in sales volume in the Americas declined 17% to $1.9 million primarilydiabetic product division from the prior year due to decreased revenuespositive sales to a longstanding diabetic customer.

Design Segment

     Gross Profit for the design segment was approximately $940,000 for the quarter ended June 30, 2018. Gross Profit as a percentage of revenue was 25.9% for the design segment which was a slight decrease from Diabetic Products Customers C and D, partially offset by increased revenues from Diabetic Products Customer A and Other Products customers.the prior shortened period ended March 31, 2018. Depreciation expense was approximately $35,000 for the 2018 Quarter 2018 revenuesas compared to approximately $28,000 for the prior shortened period ended March 31, 2018. Depreciation expense is allocated to Cost of Sales in the 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.design segment.

Sales and Marketing Expenses

Distribution Segment

     Sales and marketing expenses decreasedfor the distribution segment remained steady, quarter over quarter, with a slight increase of approximately $140,000,$18,000, or 33%6%, to approximately $278,000$327,000 in the 2018 Quarter from approximately $418,000$309,000 in the 2017 Quarter. The increase was primarily due to a rise in management’s business travel expenses related to the acquisition and integration of IPS of approximately $36,000, offset by a decrease in other expenses of approximately $21,000. Fluctuations in other components of “Sales and Marketing Expenses” were not material individually or in the aggregate.

Design Segment

     Sales and marketing expenses for the design segment were approximately $221,000 for the quarter from April 1, 2018 to June 30, 2018 as compared to approximately $135,000 for the prior shortened period ended March 31, 2018.

General and Administrative Expenses

Distribution Segment

     General and administrative expenses for the distribution segment increased approximately $392,000, or 93%, to approximately $812,000 in the 2018 Quarter from approximately $420,000 in the 2017 Quarter, primarily due to increased director’s share-based compensation expense of approximately $209,000, an increase in legal fees primarily related to the FINRA investigation of approximately $66,000, an increase in salaries for management of approximately $33,000, an increase in accounting, audit and tax fees of approximately $60,000. Fluctuations in other components of “General and Administrative Expenses” were not material individually or in the aggregate.

Design Segment

     General and administrative expenses for the design segment were approximately $764,000 for the 2018 Quarter as compared to approximately $512,000 for the prior shortened period ended March 31, 2018. Amortization of intangible assets was approximately $41,000 for the 2018 Quarter as compared to approximately $32,000 for the prior shortened period ended March 31, 2018. Amortization of intangible assets is allocated to general and administrative expenses in the design segment.

Other Income (Expense)

Distribution Segment

     Other income, net, for the distribution segment increased to approximately $460,000 of income for the 2018 Quarter from approximately $3,000 of income in the 2017 Quarter, primarily due to the non-cash FMV adjustment to the earn-out consideration and deferred cash consideration related to the obligations resulting from the IPS acquisition (see Note 4 to the unaudited condensed consolidated financial statements contained herein). The shortfall in expected EBITDA was also considered a triggering event with regards to the evaluation of the June 30, 2018 carrying value of our trademark and customer relationship intangible assets as well as the goodwill resulting from the acquisition of IPS. As such, the Company performed an assessment of the carrying values considering specific qualitative facts and circumstances, macroeconomic factors and utilizing the initial inputs and projections that supported the initial fair value valuations of the intangible assets acquired from IPS. Based on these assessments, the Company concluded that the trademark, customer list and goodwill were not impaired at June 30, 2018.

Design Segment

     Other income (expense), net, for the design segment was approximately $15,000 of expense composed of net interest expense, primarily, for the quarter from April1, 2018 to June 30, 2018.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 2018 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 2017 Net Income (Loss)

Distribution Segment

     Distribution net income in the 2018 Period was approximately $1.23 million compared to a net income of approximately $466,000 in the 2017 Period. The 2018 Period fluctuation from the prior year is primarily due to a $747,000 tax benefit recognized as a result of the IPS acquisition and a non-cash FMV adjustment (see Note 4 to the unaudited condensed consolidated financial statements contained herein). The distribution segment incurred operating income of approximately $34,000 in the 2018 Period compared to an operating income of approximately $460,000 in the 2017 Period. The decline in operating income was primarily due to the increase in general and administrative expenses of approximately $476,000, as reflected in the table below.

Design Segment

     Design segment net income was approximately $15,000 in the shortened 2018 Period, from January 19, 2018 to June 30, 2018.

     Basic and diluted earnings (loss) per share was $0.13 per share for the 2018 Period and $0.05 per share for the 2017 Period.

Net Revenues

Distribution Segment

     Distribution segment net revenues in the 2018 Period slightly declined by approximately $16,000, or 0.1%, to $18.441 million from $18.457 million in the 2017 Period. The increase in sales from Diabetic Products of approximately $844,000, partially offset the decline in Other Product sales of approximately $860,000. The following tables set forth revenues by channel, product line and geographic location of our Distribution segment customers for the periods indicated:

Diabetic Product Revenues

     Revenues from Diabetic Products increased approximately $844,000 to $16.4 million in the 2018 Period from $15.5 million in the 2017 Period. The increase was primarily due to greater revenues from two of our major Diabetic Products customers (Diabetic Products customers B and C) and our other Diabetic Products customers. The decrease was offset, in part, by lower revenues from our other major Diabetic customers (Diabetic Products customers A and D).

    The following table sets forth our revenues by Diabetic Products’ customers for the periods indicated:

     Revenues from Diabetic Products represented 89% of our distribution segment net revenues in the 2018 Period compared to 84% of our distribution net revenues in the 2017 Period.

Other Product Revenues

     Revenues of Other Products decreased approximately $0.9 million to $2.06 million in the 2018 Period from $2.92 million in the 2017 Period. This is primarily due to a decline in sales to two legacy customers of approximately $0.7 million. Forward has shown promise in booking sales orders for new customers in this division and we will continue to focus on our sales and sales support teams in an attempt to expand and diversify our Other Products customer base within our distribution segment. The acquisition of IPS expands our potential product offering in this segment of our distribution business.

     Revenues from Other Products represented 11% of our distribution segment net revenues in the 2018 Period compared to 16% of our total net revenues in the 2017 Period.

Design Segment

     Net revenues in the design segment were approximately $6.4 million for the period from January 19, 2018 to June 30, 2018. The following tables set forth revenues by service type of our Design segment customers for the shortened period from January 19, 2018 to June 30, 2018:

     The following table sets forth our design segment net revenues by major customers for the shortened period from January 19, 2018 to June 30, 2018:

Gross Profit

Distribution Segment

     The decline in gross profit in our distribution segment of approximately $132,000 is mostly driven by product mix and pricing pressures from customers. Gross profit percentage of net revenue declined to 16.4% in the 2018 Period from 17.1% in the 2017 Period. The decline in gross margins results from pricing pressures from our customers.

Design Segment

     Gross Profit for the design segment was approximately $1.67 million for the shortened period from January 18, 2018 to June 30, 2018. Gross Profit as a percentage of revenue was 25.3% for the design segment. Depreciation expense of approximately $63,000 for the period is allocated to Cost of Sales.

Sales and Marketing Expenses

Distribution Segment

     Sales and marketing expenses for the distribution segment decreased approximately $181,000, or 16%, to approximately $935,000 in the 2018 Period compared to approximately $1.116 million in the 2017 Period, primarily due to decreased personnel expenses of approximately $94,000,$134,000 and decreased other expensesadvertising and promotional events fees of approximately $23,000 and decreased travel expenses of approximately $22,000.$65,000. Fluctuations in other components of “Sales and Marketing Expenses” were not material individually or in the aggregate.

Design Segment

     Sales and marketing expenses for the design segment was approximately $356,000 for the shortened period from January 19, 2018 to June 30, 2018.

General and Administrative Expenses

Distribution Segment

     General and administrative expenses for the distribution segment increased approximately $81,000,$476,000, or 14%30%, to approximately $674,000$2,052,000 in the 2018 QuarterPeriod from approximately $593,000$1,576,000 in the 2017 Quarter,Period, primarily due to increasedhigher professional fees (stemming fromof approximately $235,000 (accounting and legal fees related to the IPS Acquisition)acquisition), higher director’s share-based compensation expense of approximately $116,000$142,000, higher accounting review and director reimbursement costsaudit fees of approximately $33,000,$46,000 and higher travel reimbursement expenses, partially offset by decreased director share-based compensationa reduction in director’s board fees of approximately $52,000$69,000 and directors and officersa reduction in D&O insurance expense of approximately $12,000.$36,000. Fluctuations in other components of “General and Administrative Expenses” were not material individually or inmaterial.