Forward Industries, Inc. - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2019
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)

(561) 465-0030
Registrant's Telephone Number, Including Area Code

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

Securities registered pursuant to Section 12(b) of the Act:

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 12 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 ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☑ No ☐

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

Large accelerated filer ☐                                                  Accelerated filer ☐

Non-accelerated filer ☑                                                   Smaller reporting company ☑

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 9,533,851 shares outstanding as of August 9, 2019

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

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 UK" refers to Forward Industries' wholly owned subsidiary Forward Industries UK Limited, a UK 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 2019" refers to our fiscal year ending September 30, 2019;

"Fiscal 2018" refers to our fiscal year ended September 30, 2018;

"2019 Quarter" refers to the three months ended June 30, 2019;

"2018 Quarter" refers to the three months ended June 30, 2018;

"2019 Period" refers to the nine months ended June 30, 2019;

"2018 Period" refers to the nine months ended June 30, 2018;

"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.

PART I.   FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS 

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

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

3

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

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

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

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

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

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

NOTE 1           OVERVIEW

Forward Industries, Inc. ("Forward" or the "Company") is a fully integrated design, development and manufacturing solution provider for top tier medical and technology customers worldwide. Through its acquisition of Intelligent Product Solutions, Inc. ("IPS") the Company has expanded its ability to design and develop solutions for our existing multinational client base and expand beyond the diabetic product line operations into a variety of industries with a full spectrum of hardware and software product design and engineering services. In addition to our existing design and distribution of carry and protective solutions, primarily for handheld electronic devices, the Company is now a one-stop shop for design, development and manufacturing solutions serving a wide range of clients in the industrial, commercial and consumer industries. The Company's previous principal customer market has been 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.

As a result of the expansion of the design development capabilities through its wholly-owned subsidiary, IPS (acquired in January 2018), the Company now plans to introduce proprietary products to the market from concepts brought to it from a number of different sources, both inside and outside the Company. The Company provides clients, both big and small, a true, authentic "one-stop-shop" for product design, development and manufacturing solutions.

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, 2019. 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, 2018, and with the disclosures and risk factors presented therein. The September 30, 2018 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, Forward UK and IPS). All significant intercompany transactions and balances have been eliminated in consolidation. Intercompany revenues of approximately $9,000 and $215,000, respectively, for the three and nine months ended June 30, 2019 and approximately $97,000 and $153,000, respectively, for the three and nine months ended June 30, 2018, related to design and engineering 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 in January 2018, management conducts business through two distinct operating segments, which are also our reportable segments: distribution and design. Forward US, Forward Switzerland and Forward UK comprise the distribution operating segment and IPS is the design operating segment.

7

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

NOTE 2                ACCOUNTING POLICIES (Continued)

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.

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

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." The Company has two reporting units for purposes of evaluating goodwill impairment and perform our annual goodwill impairment test on September 30th at the end of the fiscal year. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company 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 the Company would not need to perform the impairment test for the reporting unit. If the Company cannot support such a conclusion or does not elect to perform the qualitative assessment, then the Company will compare 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, no impairment charge is recognized. If the fair value of the reporting unit is less than its carrying value, an impairment charge will be recognized for the amount by which the reporting unit's carrying amount exceeds its fair value. 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. Management deemed there were no triggering events or impairments to Goodwill at June 30, 2019.

Intangible assets

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 our intangible assets. Management reviewed the values of intangible assets and determined there was no event or change in circumstances to give rise to an impairment charge for intangible assets at June 30, 2019.

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 June 30, 2019, there was no tax provision or benefit was offset by an equal and opposite change to the valuation allowance. 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)

Revenue Recognition

Distribution Segment

The Company generally recognizes revenue in its distribution segment when: (i) finished goods are shipped to our distribution customers (in general, these conditions occur at either point of shipment or point of destination, depending on the terms of sale); (ii) there are no other deliverables; and (iii) there are no further obligations to the customer after the title of the goods has transferred. The Company defers revenue when it receives consideration before achieving the criteria previously mentioned.

Design Segment

Under ASC 606, the Company applies the "cost to cost" and "right to invoice" methods of revenue recognition to the contracts with customers in the design segment. The design segment typically engages in two types of contracts: (i) Time and Material and (ii) Fixed Price contracts. The Company recognizes revenue over time on time and material contracts utilizing a "right to invoice" method. Revenues from fixed price contracts that require performance of services that are not related to the production of tangible assets are recognized by using cost inputs to measure progress toward the completion of its performance obligations or the "cost to cost" method. Revenues from contracts that contain specific deliverables are recognized when the performance obligation has been satisfied or the transfer of goods to the customer has been completed and accepted.

Recognized revenues that will not be billed until a later date, or contract assets, are recorded as an asset and classified as a component of accounts receivable in the accompanying condensed consolidated balance sheets. Contract assets at June 30, 2019 and September 30, 2018 were approximately $216,000 and $0, respectively. Contracts where collections to date have exceeded recognized revenues, or contract liabilities, are recorded as a liability and classified as a component of deferred income in the accompanying condensed consolidated balance sheets. Contract liabilities at June 30, 2019 and September 30, 2018 were approximately $148,000 and $125,000, respectively.

Reclassifications

Certain amounts in the accompanying fiscal 2018 financial statements have been reclassified to conform to the fiscal 2019 presentation.

Share-Based Compensation Expense

The Company recognizes employee and director share-based compensation and other equity-based compensation in its condensed consolidated statements of operations and comprehensive income (loss) at the grant date fair value of stock options. 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 (See Note 6 - 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.

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

NOTE 2                ACCOUNTING POLICIES (Continued)

Accounts Receivable

Accounts receivable consist of unsecured trade accounts with customers or their contract manufacturers. The Company performs periodic credit evaluations of its customers including an evaluation of days outstanding, payment history, recent payment trends, and perceived creditworthiness, and believes that adequate allowances for any uncollectible receivables are maintained. Credit terms to customers generally range from net thirty (30) days to net one hundred twenty (120) days. At September 30, 2018, the Company had allowances for doubtful accounts of approximately $0 and $126,000 related to the Company's distribution segment and design segment accounts receivable, respectively. At June 30, 2019, there were allowances for doubtful accounts of approximately $159,000 and $384,000 relating to the Company's distribution segment and design segment accounts receivable, respectively.

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers," ("ASU 2014-09"). ASU 2014-09 supersedes the revenue recognition requirements in ASC 605, "Revenue Recognition" ("ASC 605") and most industry-specific guidance throughout ASC 605. 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. The guidance in ASU 2014-09 was revised in July 2015 to be effective for interim periods beginning on or after December 15, 2017 and should be applied on a transitional basis either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. In 2016, FASB issued additional ASUs that clarify the implementation guidance on principal versus agent considerations (ASU 2016-08), on identifying performance obligations and licensing (ASU 2016-10), and on narrow-scope improvements and practical expedients (ASU 2016-12) as well as on the revenue recognition criteria and other technical corrections (ASU 2016-20). These new standards became effective first quarter of fiscal 2019 and were adopted using the modified retrospective method. The Company has performed a review of ASU 2014-09 as compared to its previous accounting policies for our products and services revenues and did not identify any material impact to revenue. Therefore, there was no adjustment to retained earnings for a cumulative effect.

Effective October 1, 2018, the Company adopted ASC 606 and has elected the modified retrospective method on existing contracts at the date of adoption. The Company has implemented the necessary changes to such business processes, controls and systems to effectively review and account for the new contracts under this standard.

Revenues recognized from the distribution segment under ASC 606 are consistent with previous revenue recognition standards under ASC 605, whereby revenue is typically recognized at either the point of shipment or point of destination, depending on the terms of the sale.

Regarding the Company's design segment, the Company has evaluated the changes from adopting this new standard on its financial reporting, disclosures and its various revenue streams. The Company now recognizes revenue over time on its time and material contracts utilizing a "right to invoice" method which is similar to previous revenue recognition standards under ASC 605. Revenues from fixed-price type contracts that require performance of services that are not related to the production of tangible assets are recognized by using cost inputs to measure progress toward the completion of its performance obligations. This method is similar to the method formerly applied to certain of the Company's contracts covered by the previous revenue recognition standards under ASC 605. In some cases, contracts contain an arrangement of specific deliverables or production of prototypes, or a distinct performance obligation, and the Company allocates the transaction price to the performance obligation on a relative standalone selling price basis.

In February 2016, the FASB issued ASU 2016-02, "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 fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company has determined the new standard will have a significant impact on our condensed consolidated financial statements and we are currently evaluating the level of impact.

In August 2016, the FASB issued ASU 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 condensed consolidated financial statements.

10

FORWARD INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2                ACCOUNTING POLICIES (Continued)

In the first quarter of 2019, the Company adopted FASB ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory ("ASU 2016-16"), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The adoption of ASU 2016-16 did not have an impact to the financial statements due to the Company's maintenance of a full valuation allowance on the Company's net deferred tax asset.

In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment." 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 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. The Company adopted ASU 2017-04 in the first quarter of Fiscal 2019 and the adoption did not have any impact on the Company's condensed consolidated financial statements.

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. The Company adopted ASU No. 2017-09 in the first quarter of Fiscal 2019 and the adoption did not have any impact on the Company's condensed consolidated financial statements.

In March 2018, the FASB issued ASU 2018-05, "Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118." The ASU adds various Securities and Exchange Commission ("SEC") paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, "Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118")", which was effective immediately. The SEC issued SAB 118 to address concerns about reporting entities' ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Cuts and Jobs Act in the period of enactment. SAB 118 allows disclosure that determination of some or all of the income tax effects from the Tax Cuts and Jobs Act may be incomplete by the due date of the financial statements and, if possible, provide a reasonable estimate. The Company has accounted for the tax effects of the Tax Cuts and Jobs Act under the guidance of SAB 118.

In June 2018, the FASB issued ASU 2018-07, "Compensation - Stock Compensation." ASU 2018-07 is an accounting pronouncement which expands the scope of ASC Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We are currently in the process of evaluating the effects of this pronouncement on our condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement - Disclosure Framework (Topic 820)." The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the timing and impact of adopting the updated provisions.

Business Combinations

The 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, the Company makes significant estimates and assumptions, especially with respect to intangible assets.

The 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.

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

NOTE 2                ACCOUNTING POLICIES (Continued)

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.

Investments

Equity investments that the Company has determined do not meet the criteria for accounting under the equity method are accounted for using the cost method and are classified as non-current assets on the condensed consolidated balance sheets. Under the cost method, investments are carried at cost and are adjusted only for other-than-temporary declines in fair value, certain distributions and additional investments. The carrying amount of investments is reviewed if events or changes in circumstances indicate that the carrying value may not be recoverable.

During the nine months ended June 30, 2019, the Company and a customer entered into an agreement, whereby the Company received common stock in the customer as compensation for product design services provided by the Company. The shares represent less than 2% ownership interest in the customer. Pursuant to ASC 820, management has estimated the fair value of the common stock consideration to be $326,941, based on recent private placement round of common stock issued to third party private investors of the customer for cash, and has recognized revenue and a cost method investment for that amount.

In connection with the Company's credit agreement, the Company received the required approval from the lender for common stock received from the customer.

As of June 30 2019, outstanding accounts receivable from the aforementioned customer was approximately $729,000.

NOTE 3                ACQUISITION

On January 18, 2018, the Company acquired Intelligent Product Solutions, Inc. ("IPS"). The details of the acquisition are included in our Annual Report on Form 10-K.

Pro Forma Impact

The following unaudited pro forma consolidated financial information has been prepared to illustrate the effects of the acquisition of IPS as if the acquisition occurred on October 1, 2017.

These unaudited pro forma condensed consolidated financial statements are for informational purposes only to provide comparative consolidated financial results for the three and nine months ended June 30, 2019 and 2018, respectively. They do not purport to indicate the results that would actually have been obtained had the acquisition actually been completed on October 1, 2017.

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

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.

The short and long-term portions of deferred cash consideration of $538,000 on our condensed consolidated balance sheets include a deferred cash component with a present value 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. For the three and nine months ended June 30, 2019, there were no changes in the valuation of the deferred cash consideration or the earn-out consideration.

During the nine months ended June 30, 2019, the Company and a customer entered into an agreement, whereby the Company received common stock in the customer as compensation for product design services provided by the Company. The shares represent approximately a less than 2% ownership interest in the customer. Pursuant to ASC 820, management has estimated the value of the common stock consideration to be $326,941, based on a recent private placement round of common stock issued to third party private investors of the customer for cash, and has recognized revenue and a cost method investment for that amount. Management has determined that the inputs used to value the common stock are observable, either directly or indirectly, and therefore classified as a Level 2 valuation. Pursuant to ASC 820, the transaction price of the cash financing round establishes the fair value of the Common Stock issued as consideration unless one of the following conditions exists:

a.    The transaction is between related parties,

b.    The transaction takes place under duress or the seller is forced to accept the price in the transaction,

c.    The unit of account represented by the transaction price is different from the unit of account for the asset or liability measured at fair value, or

d.    The market in which the transaction takes place is different from the principal market (or most advantageous market).

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

NOTE 4                  FAIR VALUE MEASUREMENTS (Continued)

The following table presents the placement in the fair value hierarchy and summarizes the establishment of fair value of the cost method investment during the quarter ended June 30, 2019:

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.

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

NOTE 5                   SEGMENT INFORMATION (Continued)

The following table presents total assets by operating segment:

NOTE 6              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.

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

NOTE 6              SHARE-BASED COMPENSATION (Continued)

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

On February 5, 2019, the Company granted five-year options to directors to purchase an aggregate of 150,021 shares of common stock at an exercise price of $1.54 per share. The shares vest one year from the grant date. The options had an aggregate grant date fair value of $120,000, which is being amortized over the vesting period of the options.

On February 5, 2019, the Company granted five-year immediately vested options to directors to purchase an aggregate of 140,460 shares of common stock at an exercise price of $1.54 per share. The options had an aggregate grant date fair value of $107,800, which was recognized immediately.

The options granted during the nine months ended June 30, 2019 had a weighted average grant date value of $0.78 per share. There were no options granted during the three months ended June 30, 2019. The options granted during the three and nine months ended June 30, 2018 had a weighted average grant date value per share of $0.75 and $0.83, respectively.

The following table summarizes stock option activity during the nine months ended June 30, 2019:

The Company recognized compensation expense of approximately $33,000 and $203,000 during the three months ended June 30, 2019 and 2018, respectively, and approximately $178,000 and $208,000 during the nine months ended June 30, 2019 and 2018, respectively, for stock option awards in its condensed consolidated statements of operations and comprehensive income (loss).

As of June 30, 2019, there was approximately $95,000 of total unrecognized compensation cost related to nonvested stock option awards that is expected to be recognized over a weighted average period of 0.8 years.

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

NOTE 6              SHARE-BASED COMPENSATION (Continued)

The following table provides additional information regarding stock option awards that were outstanding and exercisable at June 30, 2019:

Restricted Stock Awards

The Company recognized compensation expense of approximately $0 and $33,000 during the three months ended June 30, 2019 and 2018, respectively, and approximately $3,000 and $69,000 during the nine months ended June 30, 2019 and 2018, respectively, for restricted stock awards in its condensed consolidated statements of operations and comprehensive income (loss). As of June 30, 2019, there was no unrecognized compensation expense related to nonvested restricted stock awards.

The following table summarizes restricted stock activity during the nine months ended June 30, 2019:

NOTE 7                  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 are 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 8                  CONCENTRATIONS

Concentration of Revenues and Accounts Receivable

For the three and nine months ended June 30, 2019 and 2018, the Company had significant customers with individual percentage of total revenues equaling 10% or greater. The concentration of revenues and accounts receivable for each reporting segment are as follows:

Distribution Segment Revenues Concentration

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

NOTE 8                  CONCENTRATIONS (Continued)

Design Segment Revenues Concentration

At June 30, 2019 and September 30, 2018, concentration of accounts receivable with significant customers representing 10% or greater of segment accounts receivable was as follows:

Distribution Segment Accounts Receivable Concentration

Design Segment Accounts Receivable Concentration

NOTE 9                  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"). 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. On April 22, 2019, the parties agreed to extend the expiration date of the Supply Agreement until October 22, 2019 under the same terms. Terence Bernard Wise, Chief Executive Officer and Chairman of the Company, is the owner 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 recognized approximately $353,000 and $355,000 during the three months ended June 30, 2019 and 2018, respectively, and approximately $1,056,000 and $1,073,000 during the nine months ended June 30, 2019 and 2018, 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 (loss).

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

NOTE 9                  RELATED PARTY TRANSACTIONS (Continued)

Promissory Note

On January 18, 2018, the Company issued a $1.6 million promissory note payable to Forward China in order to fund the acquisition of IPS. The note was due and payable in full on January 18, 2019. On January 14, 2019, the Company and Forward China agreed to extend the due date of the note by three months to April 18, 2019. On April 18, 2019, the Company and Forward China agreed to extend the due date of the note by another three months under the same terms. On July 16, 2019, the Company and Forward China agreed to extend the maturity date of the note by another three months. The note is now due October 17, 2019. The promissory note bears an interest rate of 8% per annum. Monthly interest payments commenced on February 18, 2018. For the three months ended June 30, 2019 and 2018, the Company paid approximately $32,000 and $32,000, respectively, and for the nine months ended June 30, 2019 and 2018 the Company paid approximately $96,000 and $53,000, respectively, in interest payments to Forward China associated with the note. The $1.6 million note payable is included as a component of the notes payable - short-term portion line of the accompanying condensed consolidated balance sheets.

NOTE 10              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 June 30, 2019, 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.

NOTE 11              LINE OF CREDIT

The Company, through the IPS subsidiary, has a $1,300,000 revolving line of credit with TD Bank which was renewed on May 7, 2019 with a maturity date of May 31, 2020. The line of credit was amended and modified on September 28, 2018 to extend the line of credit limit from $1,000,000 to $1,300,000 and was also undersigned by Forward Industries, Inc. as the guarantor and is secured by all of IPS' assets. The interest rate on the line of credit is 0.75% above The Wall Street Journal prime rate. The effective interest rate at June 30, 2019 was 6.25%. As of June 30, 2019, the Company had $1,100,000 outstanding under the line of credit. The Company is subject to certain debt-service ratio requirements which are measured annually. As of September 30, 2018, the Company was in compliance with the required covenants. With a net loss for the nine months ending June 30, 2019 of approximately $0.78 million for IPS, there is a likely risk of failing covenant testing at year end. As such, the lender may demand payment in full upon default.

NOTE 12              DEBT

On January 8, 2014, IPS entered into a term loan with a lender in the amount of $1,000,000. The loan bears interest at a rate of 4.230% per annum. The loan matured and was paid in full on January 8, 2019. Interest and principal of $18,546 was paid on a monthly basis through maturity. This loan was secured by all of IPS' assets and was guaranteed by the Company. Outstanding balance as of June 30, 2019 and September 30, 2018 was $0 and $73,523, respectively.

On April 1, 2016, IPS entered into a term loan with a lender in the amount of $325,000. The loan matures on April 1, 2020 and bears interest at a rate of 4.215% per annum. Interest and principal of $7,378 is paid on a monthly basis through maturity. This loan is secured by all of the IPS' assets and is guaranteed by the Company. Outstanding balance as of June 30, 2019 and September 30, 2018 was $72,359 and $135,317, respectively. The agreement contains certain restrictive covenants measured annually, all of which the Company was in compliance as of September 30, 2018. With a net loss for the nine months ending June 30, 2019 of approximately $0.78 million for IPS, there is a likely risk of failing covenant testing at year end. As such, the lender may demand payment in full upon default.

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

NOTE 13               MOONI AGREEMENT

On January 29, 2019, the Company entered into a three-year Distribution Agreement (the "Agreement") with Mooni International AB and its owner, Staffan Bern (the "Owner"). In accordance with the Agreement, the Company: (i) was appointed as the exclusive distributor of Mooni's current and future products (including future products developed or offered by Mooni and/or the Owner) in North America, (ii) subject to certain repayment requirements, the Company paid $400,000 to Mooni, and (iii) was granted an option to purchase a controlling interest of Mooni at a valuation not to exceed $5 million which, if exercised, would be effective on the 12 month anniversary of the effective date of the Agreement. Additionally, Forward China, a company owned by Terence Wise, the Company's Chairman and Chief Executive Officer, was named the designated supplier under the Agreement. As of June 30, 2019, the unamortized fee of approximately $344,000 is included in prepaid and other current assets and other assets for the short-term and long-term components, respectively, in the accompanying condensed consolidated balance sheet. Amortization of the cost for the three and nine months ended June 30, 2019 of approximately $56,000 is included in the Sales and Marketing expenses in the accompanying condensed consolidated statement of operations and comprehensive income (loss).

ITEM 2.            MANAGEMENT'S DISCUSSION 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, 2018. The following discussion and analysis compares our consolidated results of operations for the three and nine months ended June 30, 2019 (the "2019 Quarter" and "2019 Period", respectively) with those for the three and nine months ended June 30, 2018 (the "2018 Quarter" and "2018 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.

On February 13, 2019, the SEC served certain of the Company's executive officers and the Custodian of Record (the Company's Chief Financial Officer) with subpoenas related to its investigation on this matter. The Company's officers and the Custodian of Record who received subpoenas are currently working with legal representation to comply with all subpoena requests and demands.

Business Overview

Forward Industries, Inc. ("Forward" or the "Company") is a fully integrated design, development and manufacturing solution to top tier medical and technology customers worldwide. Through its acquisition of Intelligent Product Solutions, Inc. ("IPS") the Company has expanded its ability to design and develop solutions for our existing multinational client base and expand beyond the diabetic product line into a variety of industries with a full spectrum of hardware and software product design and engineering services. In addition to our existing designs and distribution of carry and protective solutions, primarily for handheld electronic devices, the Company now provides one stop shopping for the design, development and manufacturing opportunities from a variety of sources. The Company's previous principal customer market has been 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.

As a result of the expansion of the design development capabilities through its wholly owned subsidiary, IPS, the Company now plans to introduce proprietary products to the market from concepts brought to it from a number of different sources. The Company provides clients, both big and small, a true, authentic "one-stop-shop" for product design, development, distribution and manufacturing solutions.

On January 29, 2019, the Company entered into a distribution agreement with Mooni AB International. By virtue of our strategic collaboration and distribution agreement with Mooni AB International, we have secured a portfolio of smart enabled products which we anticipate will be distributed to retail outlets in the United States. As a result of this acquisition and other product initiatives, the Company began to invest in and build out a distribution network for retail. The distribution network will be responsible for getting products into big box retailers for retail consumption. This build out is a continuation of our strategy to be a one-stop shop for product development, manufacture and distribution and represents a significant achievement in completing the strategic process of taking a product from concept to the consumer. We anticipate having a minimum of two products in retail outlets by the second fiscal quarter of 2020. We have built out a sales team that covers North America by leveraging the manufacturer's representative model. We have identified and signed agreements with long standing firms that have years of experience and relationships with the big box retailers that we are targeting in both United States and Canada.

Through the seven manufacture rep agreements we currently have in place, we hope to gain sales coverage to retailers such as Best Buy, Target, Walmart, Costco, CVS, Walgreens, Staples, Office Depot and many others. The manufacture rep model allows us to on board a large sales team and cover a lot of ground with a variable cost model as these reps work on commission only.

As a result of the IPS acquisition, the Company now manages and measures its operations over two operating segments: distribution and design. The distribution segment refers to what has historically been described as the "OEM" business. The design segment refers to the IPS design and development business.

The comparative financial results presented for the design segment for the nine months ended June 30, 2018 represents less than nine months of operations and should not be directly compared to the nine months ended June 30, 2019 as an accurate measurement of performance.

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 as IPS' financial results continue to be consolidated with the Company's financial results.

Critical Accounting Policies and Estimates

In response to the SEC's financial reporting release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, the Company has selected its most subjective accounting estimation processes for purposes of explaining the methodology used in calculating the estimate, in addition to the inherent uncertainties pertaining to the estimate and the possible effects on the Company's financial condition. These estimates involve certain assumptions that if incorrect could create a material adverse impact on the Company's results of operations and financial condition.

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There were no material changes to our principal accounting estimates during the period covered by this report.

Recent Accounting Pronouncements

Effective October 1, 2018, the Company adopted Accounting Standards Codification Topic 606, "Revenue from Contracts with Customers" ("ASC 606"), using the modified retrospective method. The adoption had no impact to the current quarter nor was there a cumulative effect adjustment for previous periods. The Company has performed a review of ASU 2014-09 as compared to its previous accounting policies for our products and services revenues and did not identify any material impact to revenue. See Note 2 for more details around the revenue recognition guidelines under ASC 606 adopted in the first quarter of Fiscal 2019.

In January 2017, the FASB issued ASU 2017-04, "Intangibles-Goodwill and Other (Topic 350)-Simplifying the Test for Goodwill Impairment." 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 ASC 350, "Intangibles - Goodwill and Other ("ASC 350")." The Company adopted the standard in the first quarter of Fiscal 2019 and it had no impact on the Company's condensed consolidated financial statements.

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

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2019 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2018

The results of operations disclosed below presents Forward's distribution business and IPS' design segments as distinct operating units.

Net Income (loss) before Taxes

Distribution Segment

Distribution segment loss before taxes was approximately $(304,000) in the 2019 Quarter compared to income before taxes of approximately $294,000 in the 2018 Quarter. Loss in the 2019 Quarter was primarily due to a deterioration of margins and an increase in operating expenses and a decline in sales, as reflected in the table below.

Design Segment

Design segment income before taxes was approximately $200,000 in the 2019 Quarter compared to loss before taxes of approximately $(59,000) in the 2018 Quarter. The return to profitability in the 2019 Quarter was due to an increase in revenues and a reduction in operating expenses resulting from better expense control.

Basic and diluted earnings (loss) per share were $0.01 per share for the 2019 Quarter and $0.02 per share for the 2018 Quarter.

Net Revenues

Distribution Segment

Net revenues in the distribution segment increased approximately $112,000, or 2%, to $6.0 million in the 2019 Quarter from $5.9 million in the 2018 Quarter primarily as a result of increased Diabetic product line 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

Forward's distribution segment primarily manufactures to the order of and sells 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 their retail distribution channels.

Revenues from Diabetic Products increased approximately $246,000, or 4.7%, to approximately $5.4 million in the 2019 Quarter from approximately $5.2 million in the 2018 Quarter. This increase was due to higher revenues from two major Diabetic Products customers, Diabetic Products customers B and C, partially offset by declining sales for Diabetic Products customer A and D and all other Diabetic Products customers. Management believes that revenues from diabetic customers will continue to see pricing pressure and potential further decline due to changing technology.

25

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

Revenues from Diabetic Products represented 90% of our net revenues in the 2019 Quarter compared to 88% of our net revenues in the 2018 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 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 $134,000 to $580,000 in the 2019 Quarter from $714,000 in the 2018 Quarter. The decline is due to a reduction in sales of $136,000 to a recreation products customer, a decline of $81,000 to an aeronautics communications device customer, partially offset by an increase in sales to a medical devices customer of $58,000 and an increase in sales to an optical devices customer of $44,000. Fluctuations in sales to other customers were 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 10% of our net revenues in the 2019 Quarter compared to 12% of our net revenues in the 2018 Quarter.

Design Segment

Net revenues in the design segment increased approximately $259,000, or 7.1% to approximately $3.9 million for the 2019 Quarter compared to approximately $3.6 million in the 2018 Quarter. This increase was primarily due to two major Design Segment customers, Design Segment Customer E and Design Segment Customer A, partially offset by a decline in sales to three major Design Segment customers, Design Segment Customer B, C and D. The following table sets forth our design segment net revenues by major customers for periods indicated:

Gross Profit

Distribution Segment

Gross profit for the distribution segment decreased approximately $52,000, or 5.3%, to approximately $921,000 in the 2019 Quarter from approximately $973,000 in the 2018 Quarter. As a percentage of revenues, our gross margin decreased to 15.3% in the 2019 Quarter from 16.5% in the 2018 Quarter as a result of pricing pressures from customers and product mix. We are working on expanding our product offering to include higher margin products as well as enhancing our sales efforts to raise top side gross sales to raise total gross profit.

Design Segment

Gross Profit for the design segment increased approximately $33,000, or 3.5%, to approximately $973,000 in the 2019 Quarter from approximately $940,000 in the 2018 Quarter. Gross margin as a percentage of revenue was 25.0% for the design segment in the 2019 Quarter versus 25.9% in the 2018 Quarter. Depreciation expense was approximately $35,000 for both the 2019 Quarter and 2018 Quarter. Depreciation expense is allocated to Cost of Sales in the design segment.

Sales and Marketing Expenses

Distribution Segment

Sales and marketing expenses for the distribution segment increased approximately $83,000, or 25%, to approximately $410,000 in the 2019 Quarter from approximately $327,000 in the 2018 Quarter. The increase was primarily due to additional expenses related to a sales initiative to market and sell our other non-diabetic product lines through retail distribution.

Design Segment

Sales and marketing expenses for the design segment declined approximately $92,000, or 42%, to approximately $129,000 in the 2019 Quarter from approximately $221,000 in the 2018 Quarter. Sales and marketing expenses in the design segment declined in the 2019 Quarter from the 2018 Quarter primarily as a result of a reduction in salesperson headcount.

General and Administrative Expenses

Distribution Segment

General and administrative expenses in the distribution segment decreased approximately $31,000, or 4%, to approximately $781,000 million in the 2019 Quarter from approximately $812,000 in the 2018 Quarter, primarily due to a decline in share-based compensation fees for directors of approximately $191,000 plus a reduction in legal fees of approximately $72,000 associated with the acquisition of IPS, partially offset by an increase in legal fees related to the SEC investigation of approximately $204,000 and an increase in personnel costs of approximately $36,000 due to the addition of a Chief Operating Officer. Fluctuations in other accounts were not material individually or in the aggregate.

Design Segment

General and administrative expenses for the design segment decreased approximately $140,000, or 18%, to approximately $624,000 in the 2019 Quarter from approximately $764,000 in the 2018 Quarter. The decline is due to a reduction in legal and accounting professional fees and a reduction in accounting personnel fees.

Other Income (Expenses)

Distribution Segment

Other expenses for the distribution segment were approximately $(34,000) in the 2019 Quarter compared to approximately $460,000 of other income in the 2018 Quarter. Other income in the 2018 Quarter primarily resulted from adjustments to the fair value of the deferred cash consideration and deferred earn-out consideration of $510,000 and $(12,000). There were no fair value adjustments in the 2019 Quarter that impacted other income (expense). Other expense in the distribution segment for the 2019 Quarter is primarily composed of interest expense on the note payable to Forward China.

27

Design Segment

Other expenses in the design segment were approximately $20,000 for the 2019 Quarter compared to $14,000 in the 2018 Quarter. Other expense in the design segment is composed of interest incurred on the line of credit and other debt instruments held within the design segment.

Income Taxes

For the three months ended June 30, 2019, the Company generated a net income of approximately $101,000. The U.S. statutory tax rate for the fiscal year ending September 30, 2019 is 21%. The Company maintains significant net operating loss carryforwards and does not recognize income tax expense (benefit) as the Company's deferred tax provision is typically offset by maintaining a full valuation allowance on the Company's net deferred tax asset.

On December 20, 2017, Congress passed the Tax Cuts and Jobs Act ("TCJA"). The TCJA includes, among other things, a reduction of the U.S. corporate tax rate from 35% to 21% and a one-time mandatory deemed repatriation of cumulative earnings and profits from foreign subsidiaries. The Company completed its accounting for the income tax effects of the TCJA during the first quarter of 2019, in accordance with the SEC Staff Accounting Bulletin No. 118. As a result of the TCJA, there was no tax impact to the financial statements due to the Company's maintenance of a full valuation allowance on the Company's net deferred tax asset.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 2019 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 2018

Net Income (loss) before Taxes

Distribution Segment

Distribution segment loss before taxes was approximately $(987,000) in the 2019 Period compared to income before taxes of approximately $469,000 in the 2018 Period. Net loss in the 2019 Period compared to the net income in the 2018 Period was primarily due to a decline in sales volume and a rise in operating expenses including approximately $159,000 in bad debt expense, approximately $350,000 in legal expenses related to the SEC investigation, and approximately $110,000 for share-based compensation expense related to the vesting of shares for directors among other less significant rises in operating expenses in the 2019 Period, whereas in the 2018 Period, the Company booked a positive fair value adjustment of $498,000 (see table below).

Design Segment

Design segment loss before taxes was approximately $(779,000) in the 2019 Period compared to income before taxes of approximately $15,000 in the 2018 Quarter. Net loss in the 2019 Period was primarily due to a decline in sales volume and project overruns and an increase in the bad debt provision. We believe the shortfall for the two customers is not an ongoing issue. The projects were completed in the second quarter of Fiscal 2019 and gross margins returned to historical percentages, above 20%, for the three months ended June 30, 2019 and we expect that to be sustained for the remainder of Fiscal 2019 and forward.

Basic and diluted earnings (loss) per share were $(0.16) per share for the 2019 Period and $0.13 per share for the 2018 Period.

Net Revenues

Distribution Segment

Net revenues in the distribution segment declined approximately $1.4 million, or 7.4%, to approximately $17.1 million in the 2019 Period from approximately $18.5 million in the 2018 Period primarily as a result of decreased Diabetic product line revenue. The following tables set forth revenues by channel, product line and geographic location of our Distribution segment customers for the periods indicated: