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, 2016. The following discussion and analysis compares our consolidated results of operations for the three and nine months ended June 30, 2017 (the “2017 Quarter” and “2017 Period”, respectively) with those for the three and nine months ended June 30, 2016 (the “2016 Quarter” and “2016 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.

Business Overview

      Forward Industries, Inc. designs and distributes carry and protective solutions, primarily for hand held electronic devices, including soft-sided carrying cases, bags, clips, hand straps, protective plates and other accessories made of leather, nylon, vinyl, plastic, PVC and other synthetic materials. Our 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. Our OEM products include carrying cases and other accessories for blood glucose monitoring kits and a variety of other portable electronic and non-electronic products (such as sporting and recreational products, bar code scanners, smartphones, GPS and location devices, tablets, firearms and other products). Our carrying cases are designed to enable these devices to be stowed in a pocket, handbag, briefcase, or backpack, clipped to a belt or shoulder strap, or strapped to an arm, while protecting the consumer’s electronic or other product from scratches, dust, and mishandling. Our 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. We do not manufacture any of our OEM products and source substantially all of our OEM products from independent suppliers in China, through Forward China (refer to Note 7 to the unaudited condensed consolidated financial statements – Buying Agency and Supply Agreement).

      During the second quarter of fiscal 2016, we began entering into supply agreements with our major healthcare customers. By the end of fiscal 2016, we had entered into supply agreements with all four of our major healthcare customers. Although there are no minimum purchase requirements, the agreements provide the framework and pricing for supplying the customers with our carrying cases.

Variability of Revenues and Results of Operations

      Because a high percentage of our net revenues is highly concentrated in four large customers, and because the volumes of these customers’ order flows to us are highly variable, having short lead times, our quarterly revenues, and consequently our results of operations, are susceptible to significant variability over a relatively short period of time.

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, 2016, 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 since September 30, 2016.

Recent Accounting Pronouncements

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

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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2017 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2016 Net Income

      Net income in the 2017 Quarter was approximately $552,000 compared to net income of approximately $78,000 in the 2016 Quarter. The 2017 Quarter increase in net income is primarily due to: (i) an increase in net revenues of approximately $668,000 as well as an increase in gross margin of 1.2%, which resulted in an increase in gross profit of approximately $200,000; (ii) a decrease in sales and marketing expenses of approximately $144,000; and (iii) a decrease in general and administrative expenses of approximately $120,000.

Net income per basic and diluted share was $0.06 per share for the 2017 Quarter and $0.01 per share for the 2016 Quarter.

Net Revenues

      Net revenues in the 2017 Quarter increased $0.7 million, or 10%, to $7.3 million from $6.7 million in the 2016 Quarter primarily due to a change in terms with two of our major Diabetic Products customers whereby products shipped to a shipping hub located in the United States will no longer be sold on consignment effective May 1, 2017. Prior to this change, products to these two major Diabetics Products customers were sold by both consignment and FOB shipping point. Going forward, all products sold to these two major Diabetics Products customers shall be sold FOB shipping point. As a result of this change, additional net revenues of approximately $808,000 were recognized in the 2017 Quarter that would not have been recognized if the change in terms had not occurred. Moreover, had the change in terms not occurred, our net revenues for the 2017 Quarter would have declined compared to the 2016 Quarter. It is important that investors understand that as a result of this change in terms from consignment to FOB shipping point for a portion of the revenues from two of our large Diabetics Products customers, the recognition of revenues for these two customers was permanently accelerated thereby increasing our revenues by approximately $808,000 this quarter. The remainder of the goods originally sold on consignment (prior to the change in terms) shall be recognized in the fourth quarter of fiscal 2017 and potentially increase revenues that quarter as well. By fiscal year end, it is expected there will be no more consignment goods for these two Diabetics Customers and thus revenues from these customers will revert to normal levels. Separately, net revenues from Other Products were higher as well during the 2017 Quarter. Excluding the effects of the aforementioned change in terms, the net revenues derived from our core diabetes kit cases continues to decline, primarily because our major customers face significant pricing pressure from competitors commercializing less expensive meters and also new innovative diabetic products which are not being sold with a meter case. As a result of the continued decrease in our net revenues, Forward China, which is controlled by our Chairman and Chief Executive Officer, has agreed to forgo its rights to the 4% portion of the service fee under the Forward China Supply Agreement (the “Agreement”) beginning with the third fiscal quarter until the end of fiscal year 2017. The base monthly service fee payment of $100,000 will still be due to Forward China. In the 2017 Quarter, the 4% portion of the service fee would have amounted to approximately $69,000. The Company and Forward China are currently negotiating a revised service fee under the Agreement.

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

Diabetic Product Revenues

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

      Revenues from Diabetic Products increased $0.4 million to $6.2 million in the 2017 Quarter, from $5.8 million in the 2016 Quarter. The increase was primarily due to higher revenues derived from two of our major Diabetic Products’ customers.

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

      Revenues from Diabetic Products represented 85% of our total net revenues in the 2017 Quarter compared to 87% of our total net revenues in the 2016 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 of Other Products increased $0.2 million to $1.1 million in the 2017 Quarter from $0.9 million in the 2016 Quarter. This is primarily due to the addition of $0.3 million from some new customers, partially offset by overall net decreases of $0.1 million from existing customers. We will continue to focus on our sales and sales support teams in our attempt to expand and diversify our Other Products customer base.

      Revenues from Other Products represented 15% of our net revenues in the 2017 Quarter compared to 13% of our total net revenues in the 2016 Quarter.

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Gross Profit

      The increase in gross profit of approximately $200,000 was driven by a year over year increase in net revenues of 10% as well as an increase in gross margins. The increase in gross margins results primarily from the election of Forward China, which is controlled by our Chairman and Chief Executive Officer, to forgo its rights to the 4% portion of the service fee under the Forward China Supply Agreement beginning with the third fiscal quarter until the end of fiscal year 2017. Our gross margin increased to 17.4% in the 2017 Quarter compared to 16.2% in the 2016 Quarter. We believe gross margin will decrease in the event that Forward China does not continue to forgo the 4% portion of its service fee.

Sales and Marketing Expenses

      Sales and marketing expenses decreased approximately $144,000, or 32%, to approximately $309,000 in the 2017 Quarter compared to approximately $453,000 in the 2016 Quarter, primarily due to decreased personnel expenses of approximately $131,000 and decreased travel expenses of approximately $23,000, partially offset by increased other expenses of approximately $11,000. Fluctuations in other components of “Sales and Marketing Expenses” were not material individually or in the aggregate.

General and Administrative Expenses

      General and administrative expenses decreased approximately $120,000, or 22%, to approximately $420,000 in the 2017 Quarter from approximately $540,000 in the 2016 Quarter, primarily due to New York State tax refunds of approximately $49,000 stemming from amended returns as well as decreased director share based compensation of approximately $39,000, directors and officers insurance of approximately $14,000, professional fees of approximately $12,000, and depreciation of approximately $10,000. Fluctuations in other components of “General and Administrative Expenses” were not individually material.

Other Expense (Income), Net

      Other expense (income), net, consisting primarily of foreign exchange losses (gains), was approximately $(3,000) in the 2017 Quarter compared to approximately $7,000 in the 2016 Quarter.

      For the three months ended June 30, 2017, the Company generated net income of approximately $552,000. While the Company maintains significant net operating loss carryforwards, no income tax expense (benefit) was recognized as the Company’s deferred tax provision is completely offset by a full valuation allowance.

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Net income per basic and diluted share was $0.05 per share for the 2017 Period and the 2016 Period.

Net Revenues

      Net revenues in the 2017 Period decreased $2.4 million, or 11%, to $18.4 million from $20.8 million in the 2016 Period primarily due to lower revenues from Diabetic Products, partially offset by higher revenues from Other Products. As mentioned above, there was a change in terms with two of our major Diabetic Products customers whereby products shipped to a shipping hub located in the United States will no longer be sold on consignment effective May 1, 2017. Prior to this change, products to these two major Diabetics Products customers were sold by both consignment and FOB shipping point. Going forward, all products sold to these two major Diabetics Products customers shall be sold FOB shipping point. As a result of this change, additional net revenues of approximately $808,000 were recognized in the 2017 Period that would not have been recognized if the change in terms had not occurred. It is important that investors understand that as a result of this change in terms from consignment to FOB shipping point for a portion of the revenues from two of our large Diabetics Products customers, the recognition of revenues for these two customers was permanently accelerated thereby increasing our revenues by approximately $808,000 this Period. The remainder of the goods originally sold on consignment (prior to the change in terms) shall be recognized in the fourth quarter of fiscal 2017 and potentially increase revenues that quarter as well. By fiscal year end, it is expected there will be no more consignment goods for these two Diabetics Customers and thus revenues from these customers will revert to normal levels. Moreover, had the change in terms not occurred, our net revenues for the 2017 Period would have declined further when compared to the 2016 Period. The net revenues derived from our core diabetes kit cases continues to decline, primarily because our major customers face significant pricing pressure from competitors bringing out less expensive meters and also new innovative diabetic products which are not being sold with a meter case. As mentioned above, as a result of the continued decrease in our net revenues, Forward China, which is controlled by our Chairman and Chief Executive Officer, has agreed to forgo its rights to the 4% portion of the service fee under the Agreement beginning with the third fiscal quarter until the end of fiscal year 2017. The base monthly service fee payment of $100,000 will still be due to Forward China. In the 2017 Period, the 4% portion of the service fee amounted to approximately $107,000, but would have been greater by approximately $69,000. The Company and Forward China are currently negotiating a revised service fee under the Agreement.

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

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Diabetic Product Revenues

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

      Revenues from Diabetic Products decreased $2.9 million to $15.5 million in the 2017 Period, from $18.4 million in the 2016 Period. The decrease was primarily due to lower revenues derived from three of our major Diabetic Products’ customers (Diabetic Products Customers A, B and D). The decrease was offset, in part, by higher revenues derived from our largest major Diabetic Products’ customers (Diabetic Products Customer C).

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

      Revenues from Diabetic Products represented 84% of our total net revenues in the 2017 Period compared to 89% of our total net revenues in the 2016 Period.

Other Product Revenues

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

      Revenues of Other Products increased $0.6 million to $2.9 million in the 2017 Period from $2.3 million in the 2016 Period. This is primarily due to the addition of $0.5 million from some new customers and overall net increases of $0.1 million from existing customers. We will continue to focus on our sales and sales support teams in our attempt to expand and diversify our Other Products customer base.

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

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Gross Profit

      The decrease in gross profit of approximately $648,000 was driven by a year over year decline in net revenues of 11% as well as a decline in gross margins. The decline in gross margins results from pricing pressures from our customers. Our gross margin decreased to 17.1% in the 2017 Period compared to 18.3% in the 2016 Period. We believe gross margin will decrease further in the event that Forward China does not continue to forgo the 4% portion of its service fee.

Sales and Marketing Expenses

      Sales and marketing expenses decreased approximately $202,000, or 15%, to approximately $1,116,000 in the 2017 Period compared to approximately $1,318,000 in the 2016 Period, primarily due to decreased personnel expenses of approximately $244,000, partially offset by increased other expenses of approximately $48,000. Fluctuations in other components of “Sales and Marketing Expenses” were not material individually or in the aggregate.

General and Administrative Expenses

      General and administrative expenses decreased approximately $428,000, or 21%, to approximately $1,577,000 in the 2017 Period from approximately $2,005,000 in the 2016 Period, primarily due to decreased professional fees of approximately $91,000, personnel expenses of approximately $67,000, director share-based compensation of approximately $61,000, director fees of approximately $52,000, directors and officers insurance of approximately $43,000, director expense reimbursement of approximately $38,000, and depreciation of approximately $27,000 as well as New York State tax refunds of approximately $49,000 stemming from amended returns. Fluctuations in other components of “General and Administrative Expenses” were not individually material.

Other Expense (Income), Net

      Other expense (income), net, consisting primarily of foreign exchange losses (gains), was approximately $(6,000) in the 2017 Period compared to approximately $12,000 in the 2016 Period.

      For the nine months ended June 30, 2017, the Company generated net income of approximately $466,000. While the Company maintains significant net operating loss carryforwards, no income tax expense (benefit) was recognized as the Company’s deferred tax provision is completely offset by a full valuation allowance.

LIQUIDITY AND CAPITAL RESOURCES

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

      At June 30, 2017, our current ratio (current assets divided by current liabilities) was 3.2; our quick ratio (current assets less inventories divided by current liabilities) was 2.7; and our working capital (current assets less current liabilities) was $8.7 million. As of June 30, 2017, we had no short or long-term debt outstanding. We do not anticipate the need to purchase additional material capital assets in order to carry out our business.

During the nine months ended June 30, 2017 and 2016, our sources and uses of cash were as follows:

Cash Flows from Operating Activities

      During the 2017 Period, cash used in operating activities of approximately $699,000 resulted primarily from an increase in accounts receivable of approximately $1,773,000, a decrease in accrued expenses and other current liabilities of approximately $248,000, and an increase in prepaid expenses and other current assets of approximately $64,000, partially offset by a decrease in inventories of approximately $744,000, net income of approximately $466,000, the add back of non-cash share-based compensation of approximately $97,000, and an increase in accounts payable (including due to Forward China) of approximately $71,000.

      During the 2016 Period, cash provided operating activities of approximately $1,243,000 resulted primarily from a decrease in accounts receivable of approximately $725,000, net income of approximately $466,000, a decrease in inventories of approximately $208,000, the add back of non-cash share-based compensation of approximately $185,000, the add back of depreciation and amortization of approximately $44,000, partially offset by a decrease in accounts payable (including due to Forward China) of approximately $345,000, and a decrease in other liabilities of approximately $34,000.

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Cash Flows from Investing Activities

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

      In the 2016 Period, cash used in investing activities of approximately $48,000 resulted from purchases of property and equipment.

Cash Flows from Financing Activities

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

      In the 2016 Period, cash used in financing activities of approximately $2,000 resulted from the repurchase of restricted stock.

Related Party Transactions

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

Cautionary Note Regarding Forward-Looking Statements

      This report contains “forward-looking statements”, as such term is used within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our liquidity and working capital. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include the failure to receive material orders, failure to diversify the industries in which we sell our products, potential imposed tariffs or other restrictions placed on Chinese imports by the U.S. government, and continued pricing pressure on our products. Further information on our risk factors is contained in our filings with the SEC, including our Form 10-K for the year ended September 30, 2016. Any forward-looking statement made by us speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

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