** **

** **

 

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

________________

**FORM 10-Q**

________________

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

**            For the quarterly period ended June30, 2012.**

**OR**

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

**            For the transition period from____ to ____.**

**Commission File Number: 0-6669**

________________

**FORWARD INDUSTRIES, INC.**

(Exact name of registrant as specified in its charter)

________________

**                                      **
| **New York**                    | **13-1950672**                      |
|---------------------------------|-------------------------------------|
| (State or other jurisdiction of | (I.R.S.Employer Identification No.) |
| incorporation or organization)  |                                |

 

 

**477 Rosemary Ave., Suite 217-219, West Palm Beach, FL33410**

(Address of principal executive offices, including zipcode)

**(310) 526-3005**________________

(Registrant’s telephone number, including area code)

| **3110 Main Street, Suite 400, Santa  Monica, CA 90405**

**(310) 526-3005  ______________________________________________________________** |
|----------------------------------------------------------------------------------------------------------------------------------------------|
| (Former  name, former address, and former fiscal year if changed since last report)                                                          |
|                                                                                                                                         |

 

 

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

Indicate bycheck mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files). 

Yes [ **X**]                  No[  ]

1

 

 

----

 

 

 

 

 

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and“smaller reporting company” in Rule 12b-2 of the Exchange Act.
| [   ]		Large accelerated filer [**  **] Non-accelerated filer (Do not check if a smaller		reporting company)
[  ] Accelerated filer              [**X**] Smaller reporting company          

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).          [**  **] Yes   [**X**] No

Thenumber of shares outstanding of the registrant’s common stock, par value $0.01per share, at the latest practical date August 8, 2012, was 8,105,185 shares.

 

 

 

 

 

 

	 

2

 

 
****
 

 

 

 

**Forward Industries, Inc.**

**INDEX**

**PART  I.**

** **

**FINANCIAL  INFORMATION**

Page No.

 

 

 

 

 

**Item  1.**

**Financial  Statements**

 

 

 

     - Consolidated Balance Sheets as of June 30, 2012 (unaudited)

 

 

 

     and September 30, 2011............................................................................................................ 

4

 

 

 

 

 

 

     - Consolidated Statements of Operations (unaudited) for the Three and Nine  Months

 

 

 

Ended June 30, 2012 and 2011................................................................................................. 

5

 

 

 

 

 

 

     - Consolidated Statements of Cash Flows (unaudited) for the Nine Months

 

 

 

     Ended June 30, 2012 and 2011................................................................................................. 

6

 

 

 

 

 

 

     - Notes to Consolidated Financial Statements (unaudited)...............................................	

7

 

 

 

 

 

**Item  2.**

**Management’s  Discussion and Analysis of Financial Condition and Results of Operations**..................................................................................................................................... 

  25

 

** **

** **

 

 

**Item  3.**

**Quantitative  and Qualitative Disclosures About Market Risk**........................................... 

36

 

 

** **

**Item  4.**

** **

**Controls  and Procedures**............................................................................................................ 

 

36

 

** **

 

 

**PART  II.**

** **

**OTHER  INFORMATION**

** **

 

** **

 

 

 

**Item  1.**

**Legal  Proceedings**....................................................................................................................... 

37

 

** **

** **

 

 

**Item  1A.**

**Risk  Factors**................................................................................................................................. 

38

 

** **

** **

 

 

**Item  2**

**Unregistered  Sales of Equity Securities and Use of Proceeds**............................................ 

38

 

** **

** **

 

 

**Item  3**

**Defaults  Upon Senior Securities**.............................................................................................. 

38

 

** **

** **

 

 

**Item  4.**

**Mine  Safety Disclosures**............................................................................................................ 

38

 

** **

** **

 

 

**Item  5.**

**Other  Information**........................................................................................................................ 

38

 

** **

** **

 

 

**Item  6.**

**Exhibits**.......................................................................................................................................... 

38

 

** **

** **

 

 

 

**Signatures..................................................................................................................................... 
38

 

 

** **

 

 

 

**Certifications**................................................................................................................................ 

40

** **

3

 

 

 
****
 

 

 

 

**Note Regarding Use of Certain Terms**

Inthis Quarterly Report on Form 10-Q, unless the context otherwise requires, the followingterms have the meanings assigned to them as set forth below: "we", "our", and the "Company" refer to ForwardIndustries, Inc., a New York corporation, together with its consolidatedsubsidiaries; “Forward” or “Forward Industries” refers to Forward Industries, Inc.; “common stock” refers to the common stock, $.01 par value per share, of ForwardIndustries, Inc.; "Forward US" refers to Forward Industries’ wholly owned subsidiaryForward Industries (IN), Inc. (formerly Koszegi Industries, Inc.), an Indianacorporation; “Forward HK” refers to Forward Industries’ wholly owned subsidiary ForwardIndustries HK, Ltd., a Hong Kong corporation (formerly Koszegi Asia Ltd.);“Forward Switzerland” refers to Forward Industries’ wholly owned subsidiary ForwardIndustries (Switzerland) GmbH (formerly Forward Innovations GmbH), a Swisscorporation;

“ForwardJAFZA” refers to Forward Industries’ registered branch office in the Jebel AliFree Zone of the United Arab Emirates; 

“ForwardAPAC” refers to Forward Industries’ wholly owned subsidiary Forward AsiaPacific Limited, a Hong Kong corporation; 

“ForwardUK” refers to Forward Industries’ wholly owned subsidiary Forward Ind. (UK)Limited, a limited company of England and Wales; 

“GAAP”refers to accounting principles generally accepted in the United States; “Commission” refers to the United States Securities and Exchange Commission; “Exchange Act” refers to the United States Securities Exchange Act of 1934, asamended;

“2012Quarter” refers to the three months ended June 30, 2012; 

“2011Quarter” refers to the three months ended June 30, 2011;

“2012Period” refers to the nine months ended June 30, 2012; 

“2011Period” refers to the nine months ended June 30, 2011;

“Fiscal2012” refers to our fiscal year ending September 30, 2012; 

“Fiscal2011” refers to our fiscal year ended September 30, 2011; “Europe” refers to the countries included in the European Union; “EMEA Region” means the geographic area encompassing Europe, the Middle Eastand Africa; 

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

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

“OEM”refers to Original Equipment Manufacturer; 

“Retail”refers to the retail distribution channel; and

“Corporate”refers to the corporate distribution channel.

 

 

 

 

 

4

 

 

 

 

 

 

 

 

PART I.   FINANCIAL INFORMATION

**Item 1.  Financial Statements**

Forward Industries,Inc.

 

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

**June 30,**

** **

**September 30,**

 

**2012**

** **

**2011**

**Assets**

**(Unaudited)**

** **

**(Note 1)**

**Current assets:**

 

 

 

Cash and cash equivalents...........................................................................................	

$7,185,538

 

$14,911,844

Accounts receivable, net ..............................................................................................	

6,149,205

 

3,894,118

Inventories.......................................................................................................................	

2,152,071

 

1,014,195

Prepaid expenses and other current  assets................................................................ 

395,216

 

378,008

Current assets of discontinued  operations................................................................	

2,700,911

 

1,671,243

**Total current assets**..........................................................................................	

18,582,941

 

21,869,408

 

 

 

 

Property and equipment, net.........................................................................................	

234,847

 

302,158

Other assets.....................................................................................................................	

27,601

 

88,716

**Total Assets**........................................................................................................................	

$18,845,389

 

$22,260,282

 

 

 

 

**Liabilities and shareholders’ equity**

 

 

 

**Current liabilities:**

 

 

 

   Accounts payable...........................................................................................................	

$4,282,528

 

$2,787,263

   Accrued expenses and other current liabilities...........................................................	

1,327,439

 

465,995

Current liabilities of discontinued  operations............................................................. 

806,079

 

324,335

**Total liabilities**...................................................................................................	

6,416,046

 

3,577,593

 

 

 

 

**Commitments and contingencies**....................................................................................	

 

 

 

** **

 

 

 

**Shareholders’ equity:**

 

 

 

Preferred stock, par value  $0.01 per share; 4,000,000 shares authorized; 

no shares issued and outstanding.......................................................................	

 

--

 

 

--

Common stock, par value  $0.01 per share; 40,000,000 shares authorized, 

        8,811,595 and 8,794,296 shares  issued; and

8,105,185 and 8,087,886 shares outstanding,  respectively................................ 

 

 

88,116

 

 

 

87,943

Capital in excess of par value........................................................................................	

16,969,695

 

16,845,673

Treasury stock, 706,410 shares at cost........................................................................	

(1,260,057)

 

(1,260,057)

Retained earnings (accumulated deficit)......................................................................

(3,356,853)

 

3,009,130

Accumulated other comprehensive loss –  foreign currency translation................

(11,558)

 

--

**Total shareholders’ equity**...............................................................................................	

12,429,343

 

18,682,689

**Total liabilities and shareholders’ equity**......................................................................

$18,845,389

 

$22,260,282

 

 

The accompanying notes are an integral part of theconsolidated financial statements.

 

5

 

 

 

 

 

 

 

Forward Industries,Inc.

 

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(UNAUDITED)**

 

** **

** **

** **

 

**Three Months Ended June 30,**

** **

**Nine Months Ended June 30,**

 

**2012**

** **

**2011**

** **

**2012**

** **

**2011**

**Net  sales**............................................................................. 

$7,664,252

 

$6,156,543

 

$20,049,363

 

$17,121,017

**Cost of goods sold**..............................................................

6,906,769

 

4,713,959

 

16,989,281

 

13,140,385

**Gross profit**........................................................................

757,483

 

1,442,584

 

3,060,082

 

3,980,632

 

 

 

 

 

 

 

 

**Operating expenses:**

 

 

 

 

 

 

 

Selling...........................................................................

282,020

 

674,375

 

925,245

 

1,630,050

General  and administrative........................................

1,088,552

 

1,262,792

 

3,821,512

 

3,314,802

**Total operating expenses**..................................

1,370,572

 

1,937,167

 

4,746,757

 

4,944,852

** **

 

 

 

 

 

 

 

**Loss from operations**........................................................

	(613,089)

 

(494,583)

 

(1,686,675)

 

(964,220)

** **

 

 

 

 

 

 

 

**Other (expense) income:**

 

 

 

 

 

 

 

Interest  income........................................................... 

21,234

 

34,304

 

88,931

 

69,201

Other  income (expense), net..................................... 

(38,998)

 

(3,469)

 

(46,023)

 

8,871

**Total other (expense) income**...........................

(17,764)

 

30,835

 

42,908

 

78,072

** **

 

 

 

 

 

 

 

**Loss from continuing  operations...................................**

(630,853)

 

(463,748)

 

(1,643,767)

 

(886,148)

Benefit from income taxes.................................................

--

 

56,050

 

--

 

56,050

**Loss from continuing  operations...................................**

(630,853)

 

(407,698)

 

(1,643,767)

 

$(830,098)

Loss from discontinued  operations................................

(2,678,075)

 

(275,026)

 

(4,722,216)

 

(389,939)

**Net loss**..............................................................................

$(3,308,928)

 

$(682,724)

 

$(6,365,983)

 

$(1,220,037)

** **

 

 

 

 

 

 

 

**Net loss per basic and diluted common share:**

 

 

 

 

 

 

 

Loss  from continuing operations............................

$(0.08)

 

$(0.05)

 

$(0.20)

 

$(0.10)

Loss  from discontinued operations........................

$(0.33)

 

$(0.03)

 

$(0.58)

 

$(0.05)

**Net  loss per share.....................................................**

$(0.41)

 

$(0.08)

 

$(0.78)

 

$(0.15)

** **

 

 

 

 

 

 

 

**Weighted average number of common and		common  equivalent shares outstanding:**

 

 

 

 

 

 

 

Basic  and diluted.......................................................

8,105,185

 

8,087,139

 

8,100,478

 

8,077,803

 

 

 

The accompanying notes are an integral part of theconsolidated financial statements.

 

 

6

 

 

 

 

 

 

 

**Forward Industries, Inc.**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 

 

** **

 

 

**Nine Months Ended**

**June 30,**

 

 

**     2012**

** **

**2011**

**Operating activities:**

 

 

 

 

Net  loss.................................................................................................................................... 

 

$(6,365,983)

 

$(1,220,037)

Adjustments to reconcile net loss to net cash used  in operating activities:

 

 

 

 

Provision for obsolete inventory..................................................................................... 

 

964,423

 

15,692

Share-based compensation............................................................................................... 

 

124,195

 

270,792

Depreciation and amortization.......................................................................................... 

 

82,657

 

45,415

Loss on disposal of property and equipment................................................................ 

 

35,411

 

15,373

Bad debt expense................................................................................................................ 

 

26,311

 

1,222

Changes  in operating assets and liabilities:

 

 

 

 

Accounts  receivable.......................................................................................................... 

 

(3,324,422)

 

(312,834)

Inventories........................................................................................................................... 

 

(3,235,023)

 

(266,859)

Prepaid  expenses and other current assets.................................................................... 

 

120,614

 

(269,103)

Other  assets......................................................................................................................... 

 

61,115

 

(62,569)

Accounts  payable.............................................................................................................. 

 

1,553,434

 

411,341

Accrued  expenses and other current liabilities.............................................................. 

 

1,285,019

 

(298,304)

**Net cash  used in operating activities**

 

**(8,672,249)**

** **

**(1,669,871)**

 

 

 

 

 

**Investing activities:**

 

 

 

 

Issuance of note receivable.................................................................................................. 

 

--

 

(1,190,000)

Repayments received from  note receivable........................................................................ 

 

1,000,000

 

--

Purchases of property and  equipment................................................................................ 

 

(54,057)

 

(152,429)

**Net cash provided by  (used in) investing activities**

 

**945,943**

 

**(1,342,429)**

** **

 

** **

 

** **

** **

**Net decrease in cash and  cash equivalents.......................................................................**

 

**(7,726,306)**

** **

**(3,012,300)**

** **

**Cash and cash  equivalents at beginning of period**...........................................................	

 

**14,911,844**

** **

**18,471,520**

** **

 

** **

** **

** **

**Cash and  cash equivalents at end of period**.......................................................................	

 

**$7,185,538**

** **

**$15,459,220**

 

 

 

 

 

**Supplemental Disclosures  of Cash Flow Information:**

 

 

 

 

Cash  paid for:

 

 

 

 

Income  taxes.................................................................................................................. 

 

$--

 

$77,104

 

The accompanying notes are an integral part of theconsolidated financial statements.

 

7

 

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

** **

 

**NOTE 1     OVERVIEW                   **

ForwardIndustries, Inc. was incorporated under the laws of the State of New York andbegan operations in 1961 as a manufacturer and distributor of specialty andpromotional products. The Company designs, markets, and distributes carry andprotective solutions, primarily for hand held electronic devices. Its principalcustomer market is original equipment manufacturers, or “OEMs” (or the contractmanufacturing firms of these OEM customers), that either package the Company’sproducts as accessories “in box” together with their product offerings, or sellthem through their retail distribution channels, which the Company services inits OEM division. The Company’s OEM products include carrying cases and otheraccessories for medical monitoring and diagnostic kits, portable consumerelectronic devices (such as smartphones, tablets, personal computers,notebooks, and GPS devices), and a variety of other portable electronic andnon-electronic products (such as firearms, sporting, and other recreationalproducts). The Company’s OEM customers are located in the Americas, the EMEARegion, and the APAC Region.  

On June 21,2012, the Company determined to exit its global retail business (“discontinuedoperations”) and focus solely on growing its OEM business.  The decision toeliminate the retail division was primarily driven by the longer than estimatedpath to bring it to profitability and the strong top line growth and costrationalizations in the OEM business. As such, the Company has reflected theretail business as discontinued operations in the accompanying consolidatedfinancial statements.

TheCompany does not manufacture any of the products that it designs, markets, anddistributes.  The Company sources substantially all of its products fromindependent suppliers in China.  

In theopinion of management, the accompanying consolidated financial statementspresented in this Quarterly Report on Form 10-Q reflect all normal recurringadjustments necessary to present fairly the financial position and results ofoperations and cash flows for the interim periods presented herein, but are notnecessarily indicative of the results of operations for the fiscal year endingSeptember 30, 2012. These financial statements should be read in conjunctionwith the Company's audited consolidated financial statements included in its AnnualReport on Form 10-K for the fiscal year ended September 30, 2011, and with thedisclosures and risk factors presented herein and therein, respectively. TheSeptember 30, 2011 balance sheet has been derived from the audited consolidatedfinancial statements.

**NOTE 2     ACCOUNTINGPOLICIES**

**Accounting Estimates**

Thepreparation of the Company's consolidated financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosures of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting periods. Actual results could differfrom those estimates and assumptions.

**Basis of Presentation**

Theaccompanying consolidated financial statements include the accounts of ForwardIndustries, Inc. ("Forward") and its wholly owned subsidiaries (ForwardUS, Forward Switzerland, Forward HK, Forward APAC, and Forward UK). Allsignificant intercompany transactions and balances have been eliminated inconsolidation. 

**Reclassifications**

Certainprior period amounts have been reclassified, in addition to discontinuedoperations as disclosed in Note 3, to conform to the current periodpresentation.

 

 

8

 

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 2     ACCOUNTINGPOLICIES (CONTINUED)**

**Cash and CashEquivalents**

Cash andcash equivalents consist primarily of cash on deposit and highly liquid moneymarket accounts, short-term bonds, and certificates of deposit with originalcontractual maturities of three months or less, predominately in U.S. dollardenominated instruments. The Company may purchase these short-term bonds withanticipated maturity of 90 days or less at a premium or discount. The Companyrecords these investments as cash and cash equivalents net of amortizationof premium or discount. The Company minimizes its credit risk associated withcash and cash equivalents by investing in high quality instruments and byperiodically evaluating the credit quality of the primary financial institutionissuers of such instruments. The Company holds cash and cash equivalents atmajor financial institutions in the United States, at which cash amounts may significantlyexceed FDIC insured limits. At June 30, 2012, this amount was approximately $4.2million. Historically, the Company has not experienced any losses due to suchcash concentrations.

**AccountsReceivable**

Accountsreceivable consist of unsecured trade accounts with customers or their contractmanufacturers. The Company performs periodic credit evaluations of itscustomers including an evaluation of days outstanding, payment history, recentpayment trends, and perceived credit worthiness, and believes that adequateallowances for any uncollectible receivables are maintained. Credit terms to customersgenerally range from net thirty (30) days to net ninety (90) days. The Companyhas not historically experienced significant credit or collection problems withits OEM customers or their contract manufacturers. In addition, the Companymaintains credit insurance that provides up to 90% coverage on trade accountswith customers in the EMEA region. At June 30, 2012, no allowance for doubtfulaccounts relating to the Company’s continuing operations was deemed necessary.At September 30, 2011, the allowance for doubtful accounts was approximately $14,000.

**Inventories**

Inventories consist primarily of finished goods and are stated at thelower of cost (determined by the first-in, first-out method) or market.  Basedon management’s estimates, an allowance is made to reduce excess, obsolete, orotherwise un-saleable inventories to net realizable value. The allowance isestablished through charges to cost of goods sold in the Company’s consolidatedstatements of operations. As reserved inventory is disposed of, the Companycharges off the associated allowance.  In determining the adequacy of theallowance, management’s estimates are based upon several factors, includinganalyses of inventory levels, historical loss trends, sales history, andprojections of future sales demand. The Company’s estimates of the allowance maychange from time to time based on management’s assessments, and such changescould be material. At June 30, 2012, the allowance for obsolete inventory ofthe Company’s continuing operations was approximately $90,000. At September 30,2011, no allowance for obsolete inventory was deemed necessary.

9

 

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 2     ACCOUNTINGPOLICIES (CONTINUED)**

**Property and Equipment**

Property andequipment consist of furniture, fixtures, and equipment and leaseholdimprovements and are recorded at cost. Expenditures for major additions andimprovements are capitalized, and minor replacements, maintenance, and repairsare charged to expense as incurred. When property and equipment are retired orotherwise disposed of, the cost and accumulated depreciation are removed fromthe accounts and any resulting gain or loss is included in the results ofoperations for the respective period. Depreciation is provided over theestimated useful lives of the related assets using the straight-line method.The estimated useful life for furniture, fixtures and equipment ranges fromthree to ten years. Amortization of leasehold improvements is computed usingthe straight-line method over the shorter of the remaining lease term or theestimated useful lives of the improvements. For the three-month periods ended June30, 2012 and 2011, the Company recorded approximately $30,000 and $17,000 ofdepreciation and amortization expense, respectively, in continuing operations.For the nine-month periods ended June 30, 2012 and 2011, the Company recordedapproximately $83,000 and $45,000 of depreciation and amortization expense,respectively, in continuing operations. Depreciation and amortization forproduction related property and equipment is included as a component of costsof goods sold in the accompanying consolidated statements of operations.Depreciation and amortization for selling and general and administrativerelated property and equipment is included as a component of operating expensesof continuing operations in the accompanying consolidated statements ofoperations. 

**Income Taxes**

TheCompany accounts for its income taxes in accordance with accounting principlesgenerally accepted in the United States of America, which requires, among otherthings, recognition of future tax benefits and liabilities measured at enactedrates attributable to temporary differences between financial statement andincome tax bases of assets and liabilities and to net tax operating losscarryforwards to the extent that realization of these benefits is more likelythan not. The Company periodically evaluates the realizability of its netdeferred tax assets.   See Note 7 to these Notes to Consolidated FinancialStatements. The Company’s policy is to account for interest and penaltiesrelating to income taxes, if any, in “income tax expense” in its consolidated statementof operations and include accrued interest and penalties within “accruedliabilities” in its consolidated balance sheets. For the three and nine-monthperiods ended June 30, 2012 and 2011, no income tax related interest orpenalties were assessed or recorded.

**RevenueRecognition**

TheCompany generally recognizes revenue from product sales to its customers when:(1) title and risk of loss are transferred (in general, these conditionsoccur at either point of shipment or point of destination, depending on theterms of sale); (2) persuasive evidence of an arrangement exists;(3) the Company has no continuing obligations to the customer; and(4) collection of the related accounts receivable is reasonably assured.The Company offers certain of its customers a variety of sales and incentiveprograms, including discounts, allowances, and co-op advertising and marketing funds; such amounts areestimated and recorded as a reduction in revenue. 

**Shipping andHandling Costs**

TheCompany classifies certain shipping and handling costs (including inbound andoutbound freight charges, purchasing and receiving costs, inspection costs,warehousing costs, internal transfer costs, and other costs associated with theCompany’s Hong Kong distribution facility and network) as a component of costof goods sold in the accompanying consolidated statements of operations. 

 

10

 

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 2     ACCOUNTINGPOLICIES (CONTINUED)**

**Advertising andPromotion Costs**

Advertisingand promotion costs, consisting primarily of samples and tradeshow costs, areexpensed as incurred. Advertising and promotion costs are included in sellingexpenses in the accompanying consolidated statements of operations and amountedto approximately $14,000 and $42,000 for the three-month periods ended June 30,2012 and 2011, respectively; and $30,000 and $125,000 for the nine-monthperiods ended June 30, 2012 and 2011, respectively.  

**Foreign CurrencyTransactions**

Thefunctional currency of the Company and each of its wholly-owned foreignsubsidiaries is the U.S. dollar (except for Forward UK, which is the BritishPound). Transactions denominated in foreign currencies may generate accounts receivableor payable balances that are fixed in terms of the amount of foreign currencythat will be received or paid. Fluctuations in exchange rates between suchforeign currency and the functional currency increase or decrease the expectedamount of functional currency cash flows upon settlement of the transaction.These increases or decreases in expected functional currency cash flows areforeign currency transaction gains or losses that are included in “other income(expense), net” in the accompanying consolidated statements of operations. Forthe three-month periods ended June 30, 2012 and 2011, the Company recorded approximately$(26,000) and $11,000 in foreign currency transaction gains (losses),respectively. For the nine-month periods ended June 30, 2012 and 2011, theCompany recorded approximately $(46,000) and $21,000 in foreign currency transactiongains (losses),respectively.  Such foreign currency transaction losses were primarily theresult of Euro denominated sales to certain customers. 

**ComprehensiveLoss**

Wecalculate comprehensive loss as the total of our net income (loss) and allother changes in equity (other than transactions with owners), includingforeign currency translation adjustments. Comprehensive loss was $(3,316,000)and $(6,378,000) for the three and nine-month periods ended June 30, 2012,respectively. The Company did not have any material components of comprehensiveloss, other than net loss, for the three and nine-month periods ended June 30,2011.

**Fairvalue of financial instruments**

Forcertain of the Company’s financial instruments, including cash and cashequivalents, accounts receivable, note receivable, accounts payable, and otheraccrued liabilities, the carrying amount approximates fair value due to theshort-term maturities of these instruments. 

**Share-Based PaymentExpense**

TheCompany recognizes share-based equity compensation in its consolidatedstatements of operations at the grant-date fair value of stock options andother equity-based compensation. The determination of grant-date fair value isestimated using the Black-Scholes option-pricing model, which includes variablessuch as the expected volatility of the Company’s share price, the exercisebehavior of its grantees, interest rates, and dividend yields. These variablesare projected based on the Company’s historical data, experience, and otherfactors. Changes in any of these variables could result in material increasesto the valuation of options granted in future periods and increases in theexpense recognized for share-based payments. In the case of awards withmultiple vesting periods, the Company has elected to use the graded vestingattribution method, which recognizes compensation cost on a straight-line basisover each separately vesting portion of the award as if the award was,in-substance, multiple awards. Refer to Note 6 Share-Based Compensation. Inaddition, the Company recognizes share-based compensation to non-employees(refer to Note 6) based upon the fair value, using the Black-Scholes pricingmodel, determined at the deemed measurement dates over the related contractservice period.

 

11

 

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 2     ACCOUNTINGPOLICIES (CONTINUED)**

**Recentaccounting pronouncements**

InDecember 2011, the Financial Accounting Standards Board (FASB) issuedAccounting Standards Update (ASU) No. 2011-12, Comprehensive Income (Topic220):  Deferral of the Effective Date for Amendments to the Presentationof Reclassifications of Items out of Accumulated Other Comprehensive Income inAccounting Standards Update No. 2011-05. ASU No. 2011-12, defers thespecific requirement to present items that are reclassified from accumulatedother comprehensive income to net income separately within their respectivecomponents of net income and other comprehensive income as describedby Comprehensive Income (Topic 220) - Presentation of Comprehensive Income(ASU N0. 2011-05).  The Company will continue to report anyapplicable reclassifications out of accumulated other comprehensive incomeconsistent with the presentation requirements in effect before ASU No. 2011-05.

**NOTE 3     DISCONTINUEDOPERATIONS**

On June 21,2012, the Company determined to exit its global retail business and focussolely on growing its OEM business.  The decision to eliminate the retaildivision was primarily driven by the longer than estimated path to bring it toprofitability and the strong top line growth and cost rationalizations in theOEM business.

Accordingly,the results of operations for the retail division have been recorded asdiscontinued operations in the accompanying consolidated financial statementsfor all periods presented. During the three and nine-month period ended June30, 2012, total discontinued operations include charges of $876,000 to writedown inventory to net realizable value, $681,000 related to sales returns andprice protection, and $150,000 to write-off forfeited advances made tosuppliers.

Summarizedoperating results and assets and liabilities of discontinued operations arepresented in the following tables:

 

** **
   
** **

 

**Three Months Ended June 30,**
   
**Nine Months Ended June 30,**

 

**2012**
   
**2011**
   
**2012**

** **

**2011**

**Net  sales............................................................**

$430,540
   
$             --
   
$2,093,718

 

$             --

**Gross  loss.......................................................**

(1,524,337)
   
--
   
(1,084,894)

 

--

**Operating  expenses......................................**

(1,138,487)
   
(275,026)
   
(3,594,979)

 

(389,939)

**Other  expense...............................................**

	(15,251)
   
 
   
(42,343)

 

 

**Net loss from  discontinued operations.......**

$(2,678,075)
   
$(275,026)
   
$(4,722,216)

 

$(389,939)

 

** **

**June 30,**

 

**September 30,**

** **

**2012**

 

**2011**

Accounts receivable, net...................................

$1,043,023

 

$             --

Inventory, net......................................................

1,152,190

 

31,024

Prepaid assets and other current receivables..

502,398

 

640,219

Note receivable....................................................

--

 

1,000,000

Property and equipment, net.............................

3,300

 

--

**Total assets of  discontinued operations.........**

$2,700,911

 

$1,671,243

** **

 

 

 

Accounts payable..............................................

$218,468

 

$160,300

Accrued liabilities...............................................

587,611

 

164,035

**Total liabilities of  discontinued operations**

$806,079

 

$324,335

 

 

 

12

 

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

 

 

**NOTE 3     DISCONTINUEDOPERATIONS (CONTINUED)**

The Companyexpects to complete its exit of its retail business by September 30, 2012 anddoes not expect to have any continuing involvement in the retail business afterthis date. The Company anticipates an additional loss from discontinued operationsof approximately $1.3 million, all of which the Company anticipates incurringin the fiscal quarter ending September 30, 2012.

**NOTE 4     NOTERECEIVABLE**

            On January 5,2011, the Company entered into a loan agreement with Flash Ventures, Inc.(“Flash”), an unrelated party, to provide a credit facility of up to $1,000,000that was originally due December 1, 2011.  Pursuant to the agreement Flash,executed an unsecured, unsubordinated term note in favor of the Company,bearing interest at 11% per annum on any unpaid principal, payable quarterlycommencing March 31, 2011.   On January 6, 2011 and January 19, 2011,Flash drew $600,000 and $400,000, respectively, in funds under the note,leaving no further funding available.  Effective December 1, 2011, the terms ofthe loan were amended to, among other things, extend the maturity date to April1, 2012 and provide the Company with a security interest and lien on all ofFlash’s assets.  In connection with such amendment, Flash made a principal paymentof $250,000 on December 1, 2011. Effective March 30, 2012, the terms of theloan were further amended to, among other things, extend the maturity date toJune 1, 2012. In connection with such second amendment, Flash made a principalpayment of $150,000 on March 30, 2012. On May 14, 2012, Flash paid theremaining principal balance of $600,000 and satisfied the loan in full. TheCompany recorded approximately $449,000 in sales to Flash under its customaryterms of sale during the nine-month period ended June 30, 2011. 

**NOTE 5     SHAREHOLDERS’EQUITY**

**Anti-takeoverProvisions**

TheCompany is authorized to issue up to 4,000,000 shares of "blankcheck" preferred stock. The Board of Directors has the authority anddiscretion, without shareholder approval, to issue preferred stock in one ormore series for any consideration it deems appropriate, and to fix the relativerights and preferences thereof including their redemption, dividend andconversion rights.

**Stock Repurchase**

In September2002 and January 2004, the Company’s Board of Directors authorized therepurchase of up to an aggregate of 486,200 shares of outstanding common stock.Under those authorizations, as of June 30, 2012, the Company had repurchased anaggregate of 172,603 shares at a cost of approximately $403,000, but noneduring the three and nine-month periods ended June 30, 2012 and 2011. 

13

 

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**Changes inShareholders’ Equity**

Changes in shareholders’ equity for the nine-monthperiod ended June 30, 2012 are summarized below:

 

 

**Common 	Stock**

** **

**Capital In 	Excess of 	Par Value**
   
**Retained 	Earnings 	(Accumulated  	Deficit)**
   
** **

** **

** **

**Treasury 	Stock**
   
** **

** **

**Accumulated 	Other 	Comprehensive 	Loss**
   
** **

** **

** **

** **

** **

**Totals**

**Balance at		October 1, 2011.**

 

 

$87,943

 

 

 

$16,845,673
   
 

 

$3,009,130
   
 

 

$(1,260,057)
   
 

 

$  --
   
 

 

$18,682,689

Share-based		compensation......

 

173

 

 

124,022
   
 

--
   
 

--
   
 

--
   
 

124,195

Foreign		currency 	translation.......... 

 

 

--

 

 

 

--
   
 

 

--
   
 

 

--
   
 

 

(11,558)
   
 

 

(11,558)

Net loss 

--

 

--
   
(6,365,983)
   
--
   
--
   
(6,365,983)

**Balance  at June 	30, 2012.................**

** **

**$88,116**

** **

** **

**$16,969,695**
   
** **

**$(3,356,853)**
   
** **

**$(1,260,057)**
   
** **

**$(11,558)**
   
** **

**$12,429,343**

** **

**NOTE 6     SHARE-BASEDCOMPENSATION**

**2011 Long-TermIncentive Plan**

InMarch 2011 shareholders of the Company approved the 2011Long Term Incentive Plan (the “2011 Plan”), which authorizes 850,000 shares ofcommon stock for grants of various types of equity awards to officers,directors, employees, consultants, and independent contractors. Under the 2011Plan, as of June 30, 2012, the Compensation Committee of the Company’sBoard of Directors (the “Compensation Committee”) has approved awards of stockoptions to purchase an aggregate of 965,000 shares of common stock to certainof the Company’s executive officers and employees (730,000 shares), aconsultant (160,000 shares), non-employee directors (70,000 shares), and to anon-employee executive officer (5,000).  Of these awards, 365,500 shares wereforfeited and reverted to, and are eligible for re-grant under, the 2011 Plan. As of June 30, 2012, the total shares of common stock available for grants ofequity awards under the 2011 Plan was 250,500. The prices at which equityawards may be granted and the exercise prices of stock options granted may notbe less than the fair market value of the common stock as quoted at the closeon the Nasdaq Stock Market on the grant date. The Compensation Committee administersthe plan.  Options generally expire ten years after the date of grant and vestone year from the date of grant for non-employee directors, and, in the case ofinitial grants to officers and employees, vest over five years with 50%, 25%and 25% vesting on the third, fourth, and fifth anniversary of the grant date,respectively. Options granted under a consulting agreement in November 2011expire three years after the grant date and vested equally over the term of theconsulting agreement, which concluded February 29, 2012. 

14

 

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**2007 EquityIncentive Plan**

The2007 Equity Incentive Plan (the “2007 Plan”), which was approved byshareholders of the Company in May 2007, and, as amended, in February 2010,authorizes an aggregate of 800,000 shares of common stock for grants ofrestricted common stock and stock options to officers, employees, andnon-employee directors of the Company. Under the 2007 Plan, the CompensationCommittee of the Company’s Board of Directors approved awards of restrictedcommon stock and stock options of 836,000, in the aggregate, to certainofficers, employees and non-employee directors. Of these awards, 78,366 shareswere forfeited and reverted to, and are eligible for re-grant under, the 2007Plan.  As of June 30, 2012, the total shares of common stock available forgrants of equity awards under the 2007 Plan was 42,366. The prices at whichrestricted common stock may be granted and the exercise price of stock optionsgranted may not be less than the fair market value of the common stock asquoted at the close on the Nasdaq Stock Market on the grant date. TheCompensation Committee administers the 2007 Plan.  Options generally expire tenyears after the date of grant, and in the case of non-employee directors, veston the first anniversary of the date of grant. In the case of officers andemployees, options either vest in equal amounts over three to five years orvest over five years with 50%, 25% and 25% vesting on the third, fourth, andfifth anniversary of the grant date, respectively. Restricted stock grantsgenerally vest in equal proportions over three years.

**1996 StockIncentive Plan**

TheCompany’s 1996 Stock Incentive Plan (the “1996 Plan”) expired in accordancewith its terms in November 2006.  The exercise price of incentive optionsgranted under the 1996 Plan to officers, employees, and non-employee directorsof the Company was required by 1996 Plan provisions to be equal at least to thefair market value of the common stock at the date of grant. In general, optionsunder this plan expire ten years after the date of grant and generally vest inequal proportions over three years.  Unexercised options granted  prior to 1996Plan expiration remain outstanding until the earlier of exercise or optionexpiration. Under the 1996 Plan 30,000 fully vested common stock options arethe only awards that remain outstanding and unexercised, all at exercise priceshigher than the fair market value of the common stock at June 30, 2012.

**NOTE 6     SHARE BASEDCOMPENSATION (CONTINUED)**

**Stock OptionAwards**

Under the 2011and 2007 Plans, the Compensation Committee has approved awards of stock optionsto purchase an aggregate of 1,617,500 shares of common stock to the Company’scurrent and certain former non-employee directors, to certain key employees, tocurrent and certain former Company officers, and to a consultant, of whichawards covering 55,000 shares from the 2007 Plan and 365,500 shares from the2011 Plan of common stock were forfeited, with such shares reverting to therespective plans and eligible for grant. The exercise prices of the awardsgranted was, in each case equal, to the closing market value of the Company’scommon stock on the Nasdaq Stock Market on the various grant dates. 

TheCompany recognized a recovery of approximately $(81,000) and an expense of $116,000of compensation in continuing operations for stock option awards in itsconsolidated statements of operations for the three-month periods ended June 30,2012 and 2011, respectively; and a recovery of approximately $(142,000) and anexpense of $16,000of compensation in discontinued operations for stock option awards in its consolidatedstatements of operations for the three-month periods ended June 30, 2012 and 2011,respectively.

TheCompany recognized approximately $170,000 and $251,000 of compensation incontinuing operations for stock option awards in its consolidated statements ofoperations for the nine-month periods ended June 30, 2012 and 2011,respectively; and a recovery of $(48,000) and an expense of $21,000 of compensation indiscontinued operations for stock option awards in its consolidated statementsof operations for the nine-month periods ended June 30, 2012 and 2011,respectively. 

As of June30, 2012, there was approximately $426,000 of total unrecognized compensationcost related to 740,500 shares of unvested stock option awards granted underthe 2007 and 2011 Plans, which is expected to be recognized over the remainderof the weighted average vesting period (extending to February 2017). 

15

 

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

The following table summarizes stock option activity under the 2011 Planand 2007 Plan from September 30, 2011 through June 30, 2012 (there was noactivity during such period in respect of 1996 Plan grants): 

 

**Shares**

** **

**Weighted 	Average  Exercise 	Price**

** **

**Weighted 	Average  Remaining 	Contractual 	Term (Years)**

** **

** **

** **

** **

**Aggregate 	Intrinsic 	Value**

**Outstanding at September 30, 2011**

1,007,500

 

$3.45

 

5.9

 

 

Granted.............................................. 

420,000

 

2.92

 

6.8

 

 

Exercised............................................ 

--

 

--

 

--

 

 

Forfeited............................................ 

(285,500)

 

3.20

 

--

 

 

Expired............................................... 

--

 

--

 

--

 

 

**Outstanding at June 30, 2012**

**1,142,000**

** **

**$3.32**

** **

**7.7**

** **

**--**

 

 

 

 

 

 

 

 

**Options  expected to vest at 	June 30, 2012...................................**

**387,450**

 

**$2.22**

 

**4.9**

 

**--**

** **

** **

 

** **

 

** **

 

 

**Options vested and exercisable at  	June 30, 2012..................................**

**401,500**

 

**$3.06**

 

**5.2**

 

**--**

 

**NOTE 6     SHARE-BASEDCOMPENSATION (CONTINUED)**

**Stock OptionAwards (continued)**

During the nine-month periods ended June 30, 2012 and 2011, the Company granted420,000 and 685,000 stock options at weighted average grant date fair values of$0.96 and $2.09, respectively.

The fairvalue of each stock option on the date of grant was estimated using the Black-Scholesoption-pricing formula applying the following assumptions for each respectiveperiod: 

 
   
**For the Nine-Month Periods Ended June 30,**

 
   
**2012**
   
**2011**

	Expected term (in years)...................................................
   
3.0 to 5.0
   
5.0

	Risk-free interest	rate.......................................................
   
0.04% to 0.83%
   
0.3% to 2.2%

	Expected	volatility............................................................
   
63% to 69%
   
66% to 69%

	Expected dividend yield..................................................
   
0%
   
0%

Estimated  Annual Forfeiture rate................................. .
   
13%
   
--

 

16

 

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

The expected term represents theperiod over which the stock option awards are expected to be outstanding. TheCompany based the risk-free interest rate used in its assumptions on theimplied yield currently available on U.S. Treasury zero-coupon issues with aremaining term equivalent to the award’s expected term. The volatility factorused in the Company’s assumptions is based on the historical price of its stockover the most recent period commensurate with the expected term of the award.The Company historically has not paid any dividends on its common stock and hadno intention to do so on the date the share-based awards were granted.Accordingly, the Company used a dividend yield of zero in its assumptions. TheCompany estimates the expected term, volatility and forfeitures of share-basedawards based upon historical data. The Company adjusted its estimatedforfeiture rate effective October 1, 2011 and recognized a recovery ofapproximately $46,000 during the three-month period ended December 31, 2011. Inaddition, the Company recognized a recovery for actual forfeitures in theamount of $305,000 during the three-month period June 30, 2012.

**Restricted StockAwards**

Under the2007 Plan, the Compensation Committee has approved and granted awards of183,500 shares of restricted stock, in theaggregate, to certain key employees. Of these awards, 152,634 have vested and 23,366shares of restricted stock were forfeited and reverted to, and are eligible forre-grant under, the 2007 Plan. No awards of restricted stock were made duringthe three and nine-month periods ended June 30, 2012.  Vesting of restrictedstock awards is generally subject to a continued service condition withone-third of the awards vesting each year on the three successive anniversarydates of the grant date, typically commencing on the first such anniversarydate.  The fair value of the awards granted was equal to the closing marketvalue of the Company’s common stock as quoted on the Nasdaq Stock Market on thegrant date. During the three-month periods ended June 30, 2012 and 2011, theCompany recognized approximately $1,000 and $(15,000), respectively, of compensationexpense (recovery) in continuing operations in its consolidated statements ofoperations related to restricted stock awards; and $4,000 and $(1,000) for thenine-month periods ended June 30, 2012 and 2011, respectively. 

**NOTE 6     SHARE-BASEDCOMPENSATION (CONTINUED)**

**Restricted StockAwards (Continued)**

The following table summarizes restricted stock activity under the 2007Plan from September 30, 2011, through June 30, 2012.

 
   
** **

** **

** **

**Shares**
   
**Weighted 	Average  	Grant Date 	Fair Value**

Non-vested balance at September 30, 2011..........................................
   
25,799
   
$2.04

Changes during the period:
   
 
   
 

Shares granted.................................................................................
   
--
   
--

Shares vested...................................................................................
   
17,299
   
2.05

Shares forfeited................................................................................
   
1,000
   
2.02

Non-vested balance at June 30, 2012...................................................
   
7,500
   
$2.02

                As of June 30, 2012, there wasapproximately $3,000 of total unrecognized compensation cost related to 7,500shares of unvested restricted stock awards (reflected in the table above)granted under the 2007 Plan. That cost is expected to be recognized over theremainder of the requisite service (vesting) periods (approximately 6 months).The total grant date fair value of restricted stock that vested during thenine-month period ended June 30, 2012 was approximately $35,000.

**Warrants**

    Asof June 30, 2012, warrants to purchase 75,000 shares of the Company’s commonstock at an exercise price of $1.75 issued in fiscal 1999 were outstanding. Bytheir terms these warrants expire 90 days after a registration statementregistering common stock (other than pursuant to employee benefit plans) isdeclared effective by the Securities and Exchange Commission. As of June 30, 2012,no such registration statement has been filed with the Securities and ExchangeCommission.

17

 

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 7  INCOME TAXES**

The Company’s provision (benefit) for income taxes from continuingoperations consists of the following United States Federal and State, andforeign components:

 

**For the Three-Month Periods 	Ended June 30,**

** **

**For the Nine-Month Periods 	Ended June 30,**

 

**2012**
   
**2011**
   
**2012**

 

**2011**

U.S.  Federal and State

 
   
 
   
 
   
 

Current................................... 

$          --
   
      $56,050
   
$             --
   
$56,050

Deferred................................. 

388,265
   
(271,354)
   
(469,705)
   
(511,677)

 

 
   
 
   
 
   
 

Foreign:

 
   
 
   
 
   
 

Current................................... 

--
   
--
   
--
   
--

Deferred................................. 

(144,343)
   
10,056
   
(188,495)
   
30,027

** **

** **
   
** **
   
** **
   
** **

Change  in valuation allowance 

(243,922)
   
261,298
   
658,200
   
481,650

**Benefit from income taxes.......**

**$         --**
   
**$56,050**
   
**$            --**
   
**$56,050**

**                             **Foreach period presented, there was no income tax provision related todiscontinued operations.

**NOTE 7  INCOME TAXES(CONTINUED)**

At June30, 2012, the Company had available net operating loss carryforwards for U.S.Federal and state income tax purposes of approximately $6,342,000 and $7,287,000,respectively, expiring through 2031, resulting in deferred tax assets inrespect of U.S. Federal and state income taxes of approximately $2,156,000 and$196,000, respectively. In addition, at June 30, 2012, the Company hadavailable net operating loss carryforwards for foreign income tax purposes of approximately$3,805,000 resulting in a deferred tax asset of approximately $335,000,expiring through 2017.  Total net deferred tax assets, before valuationallowances, was $2,739,000 and $1,381,000 at June 30, 2012 and September 30,2011, respectively. Undistributed earnings of the Company’s foreignsubsidiaries are considered to be permanently invested; therefore, inaccordance with generally accepted accounting principles in the U.S., noprovision for U.S. Federal and state income taxes would result. As of June 30,2012, there were no accumulated earnings of any of the Company’s foreignsubsidiaries. 

As of June 30, 2012, as part ofits periodic evaluation of the necessity to maintain a valuation allowanceagainst its deferred tax assets, and after consideration of all factors, bothpositive and negative (including, among others, projections of future taxableincome, current year net operating loss carryforward utilization and the extentof the Company’s cumulative losses in recent years), the Company determinedthat, on a more likely than not basis, it would not be able to use its remainingdeferred tax assets (except in respect of United States income taxes in theevent the Company elects to effect the repatriation of certain foreign sourceincome of its Swiss subsidiary, which income is currently considered to bepermanently invested and for which no United States tax liability has beenaccrued). Accordingly, the Company has determined to maintain a full valuationallowance against its deferred tax assets. As of June 30, 2012 and September30, 2011, the valuation allowances were approximately $2,739,000 and$1,381,000, respectively.  If the Company determines in a future reportingperiod that it will be able to use some or all of its deferred tax assets, theadjustment to reduce or eliminate the valuation allowance would reduce its tax expenseand increase after-tax income. Changes in deferred tax assets and valuationallowance are reflected in the “Benefit from income taxes” line item of theCompany’s consolidated statements of operations. 

18

 

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

As of June 30,2012 and September 30, 2011, the Company has not accrued any interest andpenalties related to uncertain tax positions. It is the Company’s policy torecognize interest and/or penalties, if any, related to income tax matters inincome tax expense in the statement of operations. For the periods presented inthe accompanying statements of operations, no income tax related interest orpenalties were assessed or recorded. All fiscal years prior to the fiscal yearended September 30, 2009 are closed to Federal and State examination, except withrespect to net operating losses generated in prior fiscal years.

**NOTE 8     LOSS PER SHARE**

Basic per share data foreach period presented is computed using the weighted-average number of sharesof common stock outstanding during each such period.  Diluted per share data iscomputed using the weighted-average number of common and dilutivecommon-equivalent shares outstanding during each period. Dilutivecommon-equivalent shares consist of shares that would be issued upon theexercise of stock options and warrants, computed using the treasury stockmethod. Diluted loss per share data for the three-month and nine-month periodsended June 30, 2012 exclude 1,224,500 of outstanding common equivalent sharesas inclusion of such shares would be anti-dilutive. Diluted loss per share datafor the three-month and nine-month periods ended June 30, 2011 exclude 539,299and 108,798, respectively, of outstanding common equivalent shares as inclusionof such shares would be anti-dilutive.

 

 

 

 

 

 

 

 

 

 

19

 

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

 

  

**NOTE 9     OPERATINGSEGMENT INFORMATION**

As of June30, 2012, and during its 2011 fiscal year, the Company reported and managed itscontinuing operations based on a single operating segment: the design anddistribution of carry and protective solutions, primarily for hand heldelectronic devices. Products designed and distributed by this segment include carryingcases and other accessories for medical monitoring and diagnostic kits, portableconsumer electronic devices (such as smartphones, tablets, personnel computers,notebooks, and GPS devices), and a variety of other portable electronic andnon-electronic products (such as firearms, sporting, and other recreationalproducts). This segment operates in geographic regions that include primarilyAPAC, the Americas, and Europe. Geographic regions are defined by referenceprimarily to the location of the customer or its contract manufacturer.  Thefollowing table presents net sales related to these geographic segments:

*                                                                            (all amounts in thousands of dollars)*

 
**Three Months Ended**

**June 30,**

** **

**Nine Months Ended**

**June 30,**

 

**2012**

** **

**2011**

** **

**2012**

** **

**2011**

APAC..................................................... 

$3,262

 

$2,744

 

$8,870

 

$7,944

Americas................................................ 

3,184

 

1,768

 

7,028

 

5,054

Europe ................................................... 

1,218

 

1,643

 

4,151

 

4,122

**Total net sales*....................................**

**$7,664**

** **

**$6,156**

** **

**$20,049**

** **

**$17,121**

*Totals may not totaldue to rounding

On June 21, 2012,the Company determined to wind down its Retail segment, which commenced duringthe three-month period ended December 31, 2011, and focus solely on growing itsOEM business.  The decision to eliminate the retail division was primarilydriven by the longer than estimated path to bring it to profitability and thestrong top line growth and cost rationalizations in the OEM business. TheCompany expects to complete its exit of its retail business by September 30,2012 and does not expect to have any continuing involvement in the retailbusiness after this date.

**NOTE 10   COMMITMENTS ANDCONTINGENCIES**

**Employment Agreements**

On April 2, 2012, the Company appointed Robert GarrettJr. and Brett Johnson as Co-Chief Executive Officers of the Company.  Mr.Garrett has served as a consultant to the Company pursuant to a consultingagreement since October 1, 2011. In connection with Mr. Garrett’s appointmentas the Company’s Co-Chief Executive Officer, the consulting agreement wasterminated effective as of February 29, 2012. As of August 1, 2012, Forward andCo-CEO, Mr. Johnson, have opted not to renew Mr. Johnson’s employment contract,with his employment to end August 31, 2012.

*Robert Garrett Employment Agreement*

Under his employment agreement, Mr. Garrett isemployed as the Company’s Co-Chief Executive Officer, effective as of March 1,2012, at an annual salary of $250,000. In executing his employmentagreement, Mr. Garrett received a signing bonus of $9,167. During Mr. Garrett’sfirst year of employment he shall receive a bonus not less than $50,000.  Inaddition, during each year of his employment, Mr. Garrett is eligible toreceive an annual bonus at the discretion of the Compensation Committee in acombination of cash or equity based compensation. Mr. Garrett’s employmentagreement also entitles him to awards of stock options to purchase an aggregateof 200,000 shares of the Company’s common stock pursuant to the 2011 Long TermIncentive Plan. 

20

 

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 10   COMMITMENTS ANDCONTINGENCIES (CONTINUED)**

**Employment Agreements (Continued)**

Mr. Garrett’s employment agreement provides forsuccessive one-year renewal terms, unless either party provides written noticeof its intention not to renew the agreement not later than 90 days prior to theend of the term (or renewal period). In the event of the termination of Mr.Garrett’s employment, depending on the circumstances, Mr. Garrett could beentitled to receive a severance payment which could be up to (12) twelve monthsof his salary, and under certain circumstances, the immediate vesting of anyunvested options pursuant to applicable equity compensation plans, as well asany accrued discretionary bonus. 

Mr. Garrett’s employment agreement binds him to customarynon-competition and non-solicitation covenants of up to one year following theexpiration of the employment term.

*Brett Johnson Employment Agreement*

Under his employment agreement, Mr. Johnson wasemployed as the Company’s Co-Chief Executive Officer, effective March 1, 2012,at an annual salary of $250,000.  During Mr. Johnson’s first year ofemployment, he was eligible to earn a bonus of up to $50,000, based onachievement of certain performance goals defined in his employment agreement. Inaddition, during each year of his employment, Mr. Johnson was eligible toreceive an annual bonus at the discretion of the Compensation Committee in acombination of cash or equity based compensation. Mr. Johnson’s employmentagreement provided for successive one-year renewal terms, unless either partyprovides written notice of its intention not to renew the agreement not laterthan 90 days prior to the end of the term (or renewal period). In the event oftermination of Mr. Johnson’s employment, depending on the circumstances, Mr.Johnson could be entitled to receive a severance payment which could be up to(12) twelve months of his salary, and under certain circumstances the immediatevesting of any unvested options pursuant to applicable equity compensationplans, as well as any accrued discretionary bonus. Mr. Johnson’s employmentagreement binds him to customary non-competition and non-solicitation covenantsof up to one year following the expiration of the employment term. As of August1, 2012, Forward and Co-CEO, Mr. Johnson, have opted not to renew Mr. Johnson’semployment contract, with his employment to end August 31, 2012.

*James McKenna Employment Agreement*

James O. McKenna serves as the Company’s ChiefFinancial Officer, Treasurer and Assistant Secretary pursuant to an AmendedEmployment Agreement, dated as of April 1, 2011 (the “Employment Agreement”),between the Company and Mr. McKenna.  The Employment Agreement provides for anannual salary of $225,000 and Mr. McKenna will be eligible to earn bonus compensationbased on achievement of targets set by the Board’s Compensation Committee inrespect of each fiscal year during the term.  Under the Employment Agreement,Mr. McKenna is entitled to reimbursement of reasonable out-of-pocket costsincurred in relocation to the Los Angeles area, and payment of a housingallowance of $7,500 per month, to be phased out over time.  The term of theEmployment Agreement expires on December 31, 2012, with automatic renewal forsuccessive terms of one year each.  Pursuant to the Employment Agreement, Mr.McKenna is entitled to a payment equal to one year of his salary as severancein the event of his termination “without cause” and termination for “goodreason” (as such terms are defined in the Employment Agreement).  In addition,in case of termination for good reason or without cause, in either case withinthe first 36 months after relocation to the Los Angeles area, Mr. McKenna isentitled to reimbursement of reasonable out-of-pocket costs incurred inconnection with relocation of his primary residence back to Florida.

 

 

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**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 10   COMMITMENTS ANDCONTINGENCIES (CONTINUED)**

**Letters of Intent**

*Waterproof CaseLicense*

In September 2011, the Company entered into a Letter of Intent with aFlorida corporation (“FloridaCo”) that has invented a patent pending waterproofelectronics case. Under the Letter of Intent, the Company will be granted theexclusive worldwide license to manufacture, develop, distribute, and otherwiseuse the waterproof case, subject to maintaining certain minimum monthly saleslevels, in exchange for making certain royalty payments to FloridaCo. Inaddition, the Company agreed to make four quarterly payments of advanceroyalties to FloridaCo, in the amount of $25,000 each, commencing December 1,2011.  In July 2012, upon mutual agreement, the Company withdrew its Letter ofIntent with FloridaCo. As of the date of such termination, the Company had paidFloridaCo $50,000 of advance royalties, which are non-refundable and interestfree. The Company included these royalty payments in its “selling expenses” inthe accompanying consolidated statements of operations during the three andnine-month period ended June 30, 2012. 

**Guarantee Obligation**

In February 2010, Forward Switzerland and its Europeanlogistics provider (freight forwarding and customs agent) entered into aRepresentation Agreement whereby, among other things, the European logisticsprovider agreed to act as such subsidiary's Fiscal representative in TheNetherlands for the purpose of providing services in connection with any valueadded tax matters. As part of this agreement, which succeeds a substantiallysimilar agreement (except as to the amount and term of the undertaking) betweenthe parties that expired June 30, 2009, the subsidiary agreed to provide an undertaking(in the form of a bank letter of guarantee) to the logistics provider withrespect to any value added tax liability arising in The Netherlands that thelogistics provider is required to pay to Dutch tax authorities on thesubsidiary's behalf. As of February 1, 2010, such subsidiary entered into aguarantee agreement with a Swiss bank relating to the repayment of any amountup to €75,000 (equal to approximately $100,000 as of June 30, 2012) paid bysuch bank to the logistics provider in order to satisfy such undertakingpursuant to the bank letter of guarantee.  The subsidiary would berequired to perform under the guarantee agreement only in the event that: (i) avalue added tax liability is imposed on the Company's sales in The Netherlands,(ii) the logistics provider asserts that it has been called upon in itscapacity as surety by the Dutch Receiver of Taxes to pay such taxes, (iii) thesubsidiary or the Company on its behalf fails or refuses to remit the amount ofvalue added tax due to the logistics provider upon its demand, and (iv) thelogistics provider makes a drawing under the bank letter of guarantee. Underthe Representation Agreement the subsidiary agreed that the letter of guaranteewould remain available for drawing for three years following the date that itsrelationship terminates with the logistics provider to satisfy any value addedtax liability arising prior to expiration of the Representation Agreement butasserted by The Netherlands after expiration. The initial term of the bankletter of guarantee expired February 28, 2011, but renews automatically forone-year periods until February 28, 2014, unless the subsidiary provides theSwiss bank with written notice of termination at least 60 days prior to therenewal date. It is the intent of the subsidiary and the logistics providerthat the bank letter of guarantee amount be adjusted annually. In considerationof the issuance of the letter of guarantee, the subsidiary has granted theSwiss bank a security interest on all of the subsidiary’s assets on depositwith, held by, or credited to the subsidiary’s accounts with, the Swiss bank (approximately$300,000 at June 30, 2012). As of June 30, 2012, the Company had not incurred aliability in connection with this guarantee.

 

 

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**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 10   COMMITMENTS ANDCONTINGENCIES (CONTINUED)**

**Buying Agency and Supply Agreement**

On March 12, 2012, the Company, entered into a BuyingAgency and Supply Agreement (the “Agreement”) with Seaton Global Corporation, aBritish Virgin Islands corporation (“SGC”), dated as of March 7,2012.  The Agreement provides that, upon the terms and subject to theconditions set forth therein, SGC shall act as the Company’s exclusive buyingagent and supplier of Products (as defined in the Agreement) in the AsiaPacific region.  The Company shall purchase products at SGC’s cost,and shall pay a service fee on the net purchase price.  The Agreementshall terminate on March 11, 2014, subject to renewal.  Terence Wise,a director of the Company, is a principal of SGC. During the three andnine-month periods ended June 30, 2012, the Company recorded $270,000 and $332,000of SGC service fees, respectively, which are included as a component of costsof goods sold in continuing operations in the accompanying consolidatedstatements of operations. As a result of this agreement, the Company is engagedin shutting down its legacy Hong Kong sourcing, logistics and quality assuranceoperations and expects to complete such activities by September 30, 2012.

**NOTE 11   BINDING MEMORANDUM OFUNDERSTANDING**

In August 2011, the Company entered into a bindingMemorandum of Understanding (the “Prior MOU”) with G-Form LLC (“G-Form”), amanufacturer of consumer and athletic products incorporating proprietaryextreme protective technology.  Under the Prior MOU, the Company was grantedthe exclusive right to use G-Form’s protective technology in the Company’sdesignated territory, subject to meeting certain minimum annual sales levels(or at the Company’s option, the making of royalty payments at correspondinglevels) commencing with the twelve-month period after shipment of the firstForward-branded licensed product that used this technology, with the minimumlevels increasing in the subsequent second and third twelve-month periods.  Asof September 30, 2011, the Company had paid G-Form a $490,000 non-refundableadvance against the first year’s royalties to be offset by cancellation of the$500,000 of loans made by the Company to G-Form in its capacity as aprospective joint venture partner. This amount increased to $500,000 as ofMarch 30, 2012.  

On June 21, 2012, in connection with the Company’sdetermination to exit its global retail business, the Company entered into asecond Memorandum of Understanding (the “New MOU”) with G-Form.  The New MOUcontemplates, among other things, (i) that G-Form will repurchase from theCompany certain G-Form inventory held by the Company, (ii) that the Companywill assist G-Form on a short-term basis with certain operational and salesfunctions previously performed by Forward for G-Form products, (iii) thatG-Form may offer employment to certain of Forward’s non-US based employees,(iv) that the Company and G-Form have agreed to work together to distribute theCompany’s remaining inventory of products and to transition the Company’sdistribution channels relating to G-Form products to G-Form, and (v) theCompany and G-Form have agreed on the settlement of advanced royalties paidunder the Prior MOU.  Pursuant to the New MOU, the Prior MOU was terminated.The remaining balance of the advanced royalties as of June 30, 2012 wasapproximately $116,000 and included in “Current assets of discontinuedoperations” in the Company’s consolidated balance sheets.

 

 

 

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**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 12 LEGAL PROCEEDINGS**

**Targus Group International, Inc., et al. v. ForwardIndustries, Johnson, et al.**

On September 19, 2011, the Company, Brett Johnson (our President andChief Executive Officer), and one of our employees were named in a Complaintfiled in Orange County Superior Court by Targus Group International, Inc. andtwo of its affiliates.  The Complaint alleged a claim for breach of contractagainst Mr. Johnson.  The Complaint further alleged a “breach of fiduciaryduty/duty of loyalty” against the employee, and it asserted claims against Mr.Johnson and the Company for allegedly aiding and abetting that alleged breach. The Complaint also asserted a cause of action against all Defendants for unfaircompetition.  An Amended Complaint was filed on October 11, 2011.  In additionto the claims asserted in the original Complaint, the Amended Complaint addedan additional Targus affiliate as a plaintiff and named an additional employeeof the Company as a defendant.  The Amended Complaint asserted a claim againstthat employee for breach of contract and for “breach of fiduciary duty/duty ofloyalty, ” and it added new claims against the Company and Mr. Johnson forallegedly interfering with that employee’s contract and for allegedly aidingand abetting his breach of duty.  The claim for unfair competition in theAmended Complaint relies on these new allegations as well.  All of the claimsasserted in this action arise out of the decisions of former employees of oneor more of the plaintiffs to accept offers of employment with the Company.  Theamount of damages sought is not specified.  On November 11, 2011, the Company,Brett Johnson, and James Berberian filed a demurrer with respect to certain ofthe claims asserted in the Amended Complaint.  On January 30, 2012, thedistrict court sustained the demurrer in part and ruled that Plaintiffs had notpled a valid cause of action against Mr. Johnson with respect to its claimagainst him for breach of contract.  The court permitted Plaintiffs to amendthis defective claim and on February 10, 2012, Plaintiffs filed a SecondAmended Complaint. On March 12, 2012, Mr. Johnson filed a demurrer to thebreach of contract claim that was re-pled against him in the Second AmendedComplaint.  The court overruled Mr. Johnson’s demurrer in an order dated June11, 2012.  The Company believes it has substantial defenses to these claims andintends to vigorously defend the action. The Company has not recorded a lossprovision for these complaints as of June 30, 2012. 

**Other Litigation**

            From time to time,the Company may become a party to other legal actions or proceedings in theordinary course of its business.  As of June 30, 2012, there were no suchactions or proceedings, either individually or in the aggregate, that, ifdecided adversely to the Company’s interests, the Company believes would bematerial to its business.

 

 

 

 

 

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**Forward Industries, Inc.**

 

 

**ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS  **

*Thefollowing discussion and analysis should be read in conjunction with ourunaudited consolidated financial statements, and the notes thereto, and otherfinancial information appearing elsewhere in this Quarterly Report on Form 10-Qand the audited consolidated financial statements and notes thereto included inour Annual Report on Form 10-K for the fiscal year ended September 30, 2011. The following discussion and analysis compares our consolidated results ofoperations for the three months ended June 30, 2012 (the “2012 Quarter”), withthose for the three months ended June 30, 2011 (the “2011 Quarter”) and ourconsolidated results of operations for the nine months ended June 30, 2012 (the“2012 Period”) with the nine months ended June 30, 2011 (the “2011 Period”).  Allfigures in the following discussion are presented on a consolidated basis. Alldollar amounts and percentages presented herein have been rounded toapproximate values.*

**CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFEHARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995**

Thefollowing management’s discussion and analysis includes “forward-lookingstatements”, as such term is used within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  These “forward-looking statements” are notbased on historical fact and involve assessments of certain risks,developments, and uncertainties in our business looking to the future.  Suchforward-looking statements can be identified by the use of forward-lookingterminology such as “may”, “will”, “should”, “expect”, “anticipate”,“estimate”, “intend”,  “continue”, or “believe”, or the negatives or othervariations of these terms or comparable terminology.  Forward-lookingstatements may include projections, forecasts, or estimates of futureperformance and developments.  Forward-looking statements contained in thisQuarterly Report on Form 10-Q are based upon assumptions and assessments thatwe believe to be reasonable as of the date of this Quarterly Report on Form10-Q.  Whether those assumptions and assessments will be realized will bedetermined by future factors, developments, and events, which are difficult topredict and may be beyond our control.  Actual results, factors, developments,and events may differ materially from those we assumed and assessed.  Risks,uncertainties, contingencies, and developments, including those discussed inthis Management’s Discussion and Analysis of Financial Condition and Results ofOperations and those identified in “Risk Factors” in Item 1A of Forward’sAnnual Report on Form 10-K for the fiscal year ended September 30, 2011, couldcause our future operating results to differ materially from those set forth inany forward-looking statement.  There can be no assurance that any such forward-lookingstatement, projection, forecast or estimate contained can be realized or thatactual returns, results, or business prospects will not differ materially fromthose set forth in any forward-looking statement.

Given theseuncertainties, readers are cautioned not to place undue reliance on suchforward-looking statements.  The Company disclaims any obligation to update anysuch factors or to publicly announce the results of any revisions to any of theforward-looking statements contained herein to reflect future results, eventsor developments.

**BUSINESS OVERVIEW**

We design,market, and distribute carry and protective solutions, primarily for hand-heldelectronic devices. Our primary customer market is original equipmentmanufacturers, or “OEMs” (or the contract manufacturing firms of these OEMcustomers), that either package our products as accessories “in box” togetherwith their product offerings, or sell them through their retail distributionchannels. Our OEM products include carrying cases and accessories for medicalmonitoring and diagnostic kits, portable electronic devices (such assmartphones, tablets, personnel computers, notebooks, and GPS devices), and avariety of other portable electronic and non-electronic products (such asfirearms, sporting, and other recreational products). Our OEM customers arelocated in the Americas, EMEA Region, and the APAC Region.  We sourcesubstantially all our products from independent suppliers in China.Historically, our suppliers custom manufacture our OEM carry and protectivesolutions to our order, based on our designs and know-how, and to our OEMcustomer’s specifications. 

25

 

 

 

 

 

**Forward Industries, Inc.**

 

 

**TRENDS AND ECONOMIC ENVIRONMENT**

On June 21, 2012, we determined to exit our global retailbusiness and focus solely on growing our OEM business.  Our decision toeliminate our retail division was based primarily on the longer than estimatedpath to bring it to profitability and the strong top-line growth and costrationalizations achieved in the OEM business over the past two years. 

Inconnection with the exit of our retail business, we entered into a secondMemorandum of Understanding (the “New MOU”) with G-Form.  In accordance withthis New MOU we have assisted G-Form on a short term basis with transitioning certainoperational and sales functions previously performed by Forward for G-Formproducts. We continue to work with G-Form to distribute our remaining retailproduct inventory and are working with them to settle on the amount of fundsowed to us as a result of the net effect of certain transactions between G-Formand us, as contemplated under the New MOU. 

In restructuring our business, we expect to eliminate asignificant level of annualized operating expense by: i) reducing headcount;ii) closing our Santa Monica, London, Dubai, and Saarbrucken offices, andre-establishing our corporate headquarters in Florida, where costs of operationsare lower, and iii) rationalizing other overhead cost components.  In addition,we have implemented a contracted, variable, lower cost sourcing and qualityassurance solution by partnering with an Asia-based sourcing agent. We believethat this partnership will also yield meaningful longer-term benefits, in termsof negotiating favorable material costs, improving the quality of our products,and diversifying our supplier base.  We have absorbed the majority of thecharges associated with our restructuring efforts in the 2012 Quarter. We alsoexpect to implement a rigorous cost rationalization plan that aims tostreamline and improve our operations on a go forward basis. 

Our OEMbusiness remains highly concentrated by customer and product type, especially withrespect to our Diabetic Products line, where we continue to operate in a verychallenging price sensitive environment. We continue to experience pricingpressure from our major Diabetic Products customers, but especially withrespect to certain of our longer-lived programs for which price concessions areexpected to be granted to them over an extended period of time.  Moreover, weare encountering higher costs from our China-based suppliers due to materialsand labor price increases that place continuing pressure on our profit margins. In many cases, we are not able to pass these higher costs through to customers,particularly when replacement program products resemble their predecessors orhistorically similar products, for which customers have become accustomed to anarrow price range. We are actively looking at alternative sources of supply toexpand and diversify our manufacturing capabilities in order to mitigate thistrend. 

Wewere recently awarded several large programs by two major Diabetic Productscustomers that contributing meaningfully to our revenues and overall productmix. As we expected, these new programs increased our sales volume, butdepressed our overall gross margin in the 2012 Quarter, as the gross margins onthese programs are lower than those seen in Fiscal 2011. We expect that thesenew programs will continue to represent a significant portion of our overallproduct mix for the remainder of Fiscal 2012 and anticipate that our overallgross margin for will continue reflect this.

Our gross margin inthe 2012 Quarter was further negativelyimpacted by a significant level of quality remediation charges, as well astransition and termination costs in respect of the restructure of our sourcingand quality operations. We believe these to be non-reoccurring and whenstripped out from the 2012 Quarter results, we estimate our gross profit marginwould be closer to those seen in the first half of Fiscal 2012. 

*Variability of Revenues and Results of Operations*

Because a high percentage of our sales revenues ishighly concentrated in a few large customers, and because the volumes of thesecustomers’ order flows to us are highly variable, with short lead times, ourquarterly revenues, and consequently our results of operations, are susceptibleto significant variability over a relatively short period oftime.   

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**Forward Industries, Inc.**

 

 

*Critical AccountingPolicies and Estimates*

Thismanagement’s discussion and analysis of financial condition and results ofoperations is based upon or derived from the unaudited consolidated financialstatements included in this Quarterly Report on Form 10-Q, which have beenprepared in accordance with accounting principles generally accepted in theUnited States of America. The preparation of these financial statementsrequires us to make estimates and assumptions that are believed to bereasonable under the circumstances. There can be no assurance that actualresults will not differ from those estimates and such differences could besignificant.

Wediscuss the material accounting policies that are critical in making these estimatesand judgments in our Annual Report on Form 10-K for the fiscal year ended September30, 2011, under the caption “Management’s Discussion and Analysis—CriticalAccounting Policies and Estimates”.  There has been no material change incritical accounting policies or estimates since September 30, 2011.    

Thenotes to our audited consolidated financial statements contained in our AnnualReport on Form 10-K for the year ended September 30, 2011, and the notes to ourunaudited consolidated financial statements included in Part I, Item 1 of this QuarterlyReport on Form 10-Q contain additional information related to our accountingpolicies and should be read in conjunction with the following discussion andanalysis relating to our overall financial performance, operations andfinancial position.

**RESULTS OF CONTINUING OPERATIONS FOR THE 2012 QUARTER COMPARED TOTHE 2011 QUARTER**

**Loss fromcontinuing operations**

Lossfrom continuing operations increased $0.2 million, or 55%, to $0.6 million inthe 2012 Quarter from $0.4 million in the 2011 Quarter. The increase is primarilydue to decreased gross profit on a higher sales base, which was offset, inpart, by lower sales and marketing expenses and general and administrativeexpenses, as reflected in the table below:    

**Main  Components of Net Loss from Continuing Operations**

 
(thousands of dollars)

 

 

2012

Quarter

 

2011		Quarter

Increase		(Decrease)*

Net  Sales 

$7,664

$6,157

1,508

 

 

 

 

Gross  Profit    

757

1,443

(685)

Sales  and Marketing Expenses.............................................................

(282)

(674)

(392)

General  and Administrative Expenses

(1,089)

(1,263)

(175)

Other  (Expense) Income......................................................................

(18)

31

(49)

Benefit  from Income Taxes..................................................................

--

56

(56)

**Loss from Continuing  Operations*................................................**

**$(631)**

**$(408)**

(223)

* Table may not total due to rounding.

Loss from continuing operations per basic and diluted sharewas $(0.08) and $(0.05) for the 2012 Quarter and 2011 Quarter, respectively. 

**Net Sales**

Netsales increased $1.5 million, or 25%, to $7.7 million in the 2012 Quarter from$6.2 million in the 2011 Quarter due to higher sales of Diabetic Products,which increased $1.8 million. The increase in Diabetic Products sales wasoffset, in part, by a decrease in Other Products sales of $0.3 million. Thetables below set forth sales by channel, product line, and geographic locationof our customers for the periods indicated.

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**Forward Industries, Inc.**

 

 

**Net Sales for 2012 Quarter**

**3 Months**ended **June 30, 2012**

**(millions of dollars)**

** **

**APAC**

**Americas**

Europe

Total*

Diabetic Products.............................

$3.1

$2.0

$1.0

$6.1

Other Products.................................	

0.2

1.2

0.3

1.6

**Total net sales*....................**

**$3.3**

**$3.2**

**$1.2**

**$7.7**

 

                                

**Net Sales for 2011 Quarter**

**3 Months ended June  30, 2011**

**(millions of dollars)**

** **

**APAC**

**Americas**

Europe

Total*

Diabetic Products.............................	

$2.3

$0.7

$1.3

$4.3

Other Products.................................	

0.4

1.1

0.4

1.9

**Total net sales*....................**

**$2.7**

**$1.8**

**$1.6**

**$6.2**

* Tables maynot total due to rounding.

*Diabetic Product Sales*

Wedesign to the order of, and sell carrying cases for blood glucose diagnostickits directly to, OEMs (or their contract manufacturers).  The OEM customer orits contract manufacturer packages our carry cases “in box” as a customaccessory for the OEM’s blood glucose testing and monitoring kits, or to alesser extent, sell them through their retail distribution channels. 

Salesof Diabetic Products increased $1.8 million, or 41%, to $6.1 million in the 2012Quarter, from $4.3 million in the 2011 Quarter. This increase was primarily dueto the addition of a new major Diabetic Products customer in Fiscal 2012, andto higher sales to our largest Diabetic Products customer. The following tablesets forth our sales by Diabetic Products customer for the periods indicated.

 
** **(millions of dollars)

 

2012 	Quarter

2011 	Quarter

 

Increase

Diabetic Customer	A...................................................................

$2.6

$2.0

$0.6

Diabetic Customer	B....................................................................

1.0

0.9

0.1

Diabetic Customer	C....................................................................

0.9

1.1

(0.2)

Diabetic Customer	D...................................................................

1.2

--

1.2

All other Diabetic Product	Customers.....................................

0.5

0.3

0.2

**Totals*..................................................................................**

**$6.1**

**$4.3**

**$1.8**

* Table may not totaldue to rounding.

Sales of Diabetic Products represented 79% of our totalnet sales in the 2012 Quarter compared to 69% of our total net sales in the2011 Quarter. This increase is due to the growth of our Diabetic Product salesin the 2012 Quarter, combined with the lower sales contribution of Otherproducts to our total net sales in the 2012 Quarter.

*Other Product Sales*

Wedesign and sell cases and protective solutions to OEMs for a diverse array ofportable electronic devices (such as smartphones, GPS devices, and bar codescanners), as well as a variety of other products (such as firearms, sporting,and other recreational products) on a made-to-order basis that are customizedto fit the products sold by our OEM customers. 

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Salesof Other Products decreased $0.3 million, or 17%, to $1.6 million in the 2012Quarter from $1.9 million in the 2011 Quarter. This decrease was primarily dueto the loss of a major Other Products customer in the 2012 Quarter, which had contributed$0.3 million to our net sales in the 2011 Quarter, and to lower sales to ourlargest Other Products customer in the 2012 and 2011 Quarters, which decreased$0.3 million. We experienced smaller changes in a number of Other Productscustomers, none of which changes were individually material, but in theaggregate, the net effect increased net sales in the 2012 Quarter by $0.3million, which offset, in part, the decreases from the two major Other Productscustomers. 

In the2011 Quarter, we sold $72 thousand of products to Flash Ventures, Inc. (referto Note 4 – Note Receivable in the Notes to Financial Statements), under theirbrand, which we considered as non-recurring business. 

Salesof Other Products represented 21% of our net sales in the 2012 Quarter comparedto 31% of our net sales in the 2011 Quarter. 

**Gross Profit**

Grossprofit decreased $0.7 million, or 48%, to $0.8 million in the 2012 Quarter from$1.4 million in the 2011 Quarter. As a percentage of sales, our gross profitdeclined to 10% in the 2012 Quarter, compared to 23% in the 2011 Quarter.

In the2012 Quarter, our materials costs, as a percentage of net sales, was approximately7% higher than the 2011 Quarter. This increase was primarily driven by our DiabeticProducts business, and in particular, factors specific to three of our majorDiabetic Customers, as discussed more fully below:
-  Our total unit sales to Diabetic Customer B increased in the 2012Quarter; however, we are experiencing lower average sales prices as a result ofprice concessions granted on two large longer-lived programs. In addition, weare generally experiencing higher average materials, labor, and other productioncosts from our suppliers, which we have been unable to pass on to DiabeticCustomer B for these two large programs.
-  Our total unit sales to Diabetic Customer C decreased in the 2012Quarter; however, our average sales price in respect of several new andreplacement programs are significantly higher than the average sales price oftheir predecessor programs in the 2011 Quarter. In addition, our average costfor such new and replacement programs have also increased, partly as a resultof product mix, and partly as a result of the general increase in materials,labor, and other production costs we are experiencing from our APAC suppliers. 
-  Several large programs that we were recently awarded by CustomerD contributed meaningfully to our net sales in the 2012 Quarter. However, asexpected, our gross margins on these new programs are lower than average grossmargins seen from our other major Diabetic Products customers in the 2011Quarter.

Throughoutthe 2012 Quarter, we continued to implement a restructuring plan with respectto our Asia-based sourcing and quality assurance operations (refer to “Buyingand Sourcing Agreement” under Note 10 – Commitments and Contingencies to ourconsolidated financial statements). As a result of such implementation, duringthe 2012 Quarter, we continued to incur operating costs and severance costs, inaddition to service fees to our agent, which raised our costs of suchoperations above levels incurred in recent reporting periods. As such, ourgross profit margin was negatively impacted by nearly 4% in the 2012 Quarter.

Duringthe 2012 Quarter, we experienced several quality issues with two of our majorDiabetic Products customers. As a result, we incurred a significantly higherlevel of inspection, warehousing, handling, and freight costs in connectionwith our efforts to remediate these quality issues, which negatively impactedour gross profit margin by approximately 4% in the 2012 Quarter.

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**Forward Industries, Inc.**

 

 

**Sales and Marketing Expenses**

Salesand marketing expenses decreased $0.4 million, or 58%, to $0.3 million in the2012 Quarter compared to $0.7 million in the 2011 Quarter due primarily to thefollowing:
-  $0.3 million decrease in personnel expense resulting from therestructure of our sales, marketing, and product development team, as well asthe recovery of share-based compensation for stock option awards we estimatewill be forfeited.
-  $29 thousand decrease in travel and entertainment expensesresulting from reduced travel and related costs by our restructured and scaleddown sales and design team during the 2012 Quarter and cost control actions,generally.
-  $28 thousand decrease in advertising, promotion and samplesexpenses resulting from narrowing our focus on primarily supporting our majorDiabetic Product customers. 
-  $22 thousand decrease in telecommunication cost resulting fromcost reduction measures taken and the reduction in sales, marketing and productdevelopment personnel.

Lesser fluctuations inother components of sales and marketing expenses were immaterial. 

**Generaland Administrative Expenses**

Generaland administrative expenses decreased $0.2 million, or 14%, to $1.1 million inthe 2012 Quarter from $1.3 million in the 2011 Quarter due primarily to thefollowing: 
-  $73 thousand decrease in telecommunication costs resulting fromcost reduction measures taken in conjunction with our restructuring of ourglobal IT infrastructure.
-  $57 thousand decrease in office expenses due to lower computerand postage costs, and a result of our cost reduction efforts, generally. 
-  $54 thousand decrease in public costs resulting from lowermeeting fees and share-based compensation to directors, as well as lower filingfees.
-  $28 thousand decrease in personnel costs resulting from lowerrelocation, contract employee, and share based compensation costs.

These decreases in general and administrativeexpenses were offset, in part, by a $46 thousand increase in professional fees,primarily legal, relating to litigation, Board of Directors matters, andpreparation of filings with the Commission. Lesser fluctuations in othercomponents of general and administrative expenses were immaterial. 

**Other Income (Expense)**

Otherincome (expense), consisting primarily of interest income on cash and cashequivalent balances and on short term notes receivable (refer to Note 4 – NoteReceivable in Notes to Financial Statements), as well as foreign currencytransaction gains and losses, changed $49 thousand, to $18 thousand of expensein the 2012 Quarter from $31 thousand of income in the 2011. This declineresulted primarily from a $24 thousand decrease in interest income and, to alesser extent, higher foreign currency transaction in the 2012 Quarter comparedto the 2011 Quarter. 

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**Forward Industries, Inc.**

 

 

**RESULTS OF DISCONTINUED OPERATIONS FOR THE 2012 QUARTER COMPARED TOTHE 2011 QUARTER**

**Loss fromDiscontinued Operations**

Loss from discontinued operations increased $2.4million to $2.7 million in the 2012 Quarter from $0.3 million in the 2011Quarter. The increase is due to a $1.5 million gross loss and a $0.8 millionincrease in operating expenses. Loss from discontinued operations per basic anddiluted share was $(0.33) and $(0.03) for the 2012 Quarter and 2011 Quarter,respectively. 

**Net Sales**

Netsales from discontinued operations was $0.4 million in the 2012 Quarter as aresult of first time sales of Retail Products to several new customers in theAmericas and EMEA regions of which none were individually material. There wereno sales from discontinued operations in the 2011 Quarter.

**Gross Loss**

Inthe 2012 Quarter, we realized a gross loss on sales from discontinuedoperations of $1.5 million primarily as a result of a provision of $0.9 milliontaken against Retail Product inventory to mark it down to estimated netrealizable value; a provision for sales returns and credits of $0.7 million;and $0.2 million of write-downs against advances made to suppliers for RetailProduct inventory that are forfeited. There was no gross profit fromdiscontinued operations in the 2011 Quarter.

**Operating Expenses**

Operatingexpenses of discontinued operations were $1.1 million in the 2012 Quartercompared to $0.3 million in the 2011 Quarter. This increase was due primarilyto higher personnel expenses, which increased $0.6 million in the 2012 Quarter;and to a lesser extent, higher royalties and commission, which increased $0.1million in the 2012 Quarter. Lesser fluctuations in other components ofoperating expenses were immaterial.

**Other Income (Expense)**

Otherincome (expense) of discontinued operations was $15 thousand of expense in the2012 Quarter. There was no operating income (expense) from discontinuedoperations in the 2011 Quarter. 

**RESULTS OF OPERATIONS FOR THE 2012 PERIOD COMPARED TO THE 2011PERIOD**

**Loss fromContinuing Operations**

Lossfrom continuing operations increased $0.8 million to $1.6 million in the 2012Period from $0.8 million in the 2011 Period. The increase is primarily due todecreased gross profit on a higher sales base, and to a lesser extent, highergeneral and administrative expenses, which were offset, in part, by lower salesand marketing expenses, as reflected in the table below:

 

 

 

31

 

 

 

 

 

**Forward Industries, Inc.**

 

 

**Main Components of Net Loss from Continuing  Operations**

 
(thousands of dollars)

 

2012

Period

2011 	Period

Increase 	(Decrease)

Net	Sales.................................................................................................

$20,049

$17,121

2,928

 

 

 

 

Gross	Profit.............................................................................................

3,060

3,981

(921)

Sales and Marketing	Expenses............................................................

(925)

(1,630)

(705)

General and Administrative Expenses

(3,822)

(3,315)

507

Other	Income..........................................................................................

44

78

(34)

Benefit from Income	Taxes...................................................................

--

56

(56)

**Net Loss from Continuing Operations*...........................................**

**$(1,644)**

**($830)**

814

* Table may not total due to rounding.

Net loss from continuing operations per basic anddiluted share was $(0.20) and $(0.10) for the 2012 Period and 2011 Period,respectively. 

**Net Sales**

Netsales increased $2.9 million, or 17%, to $20.0 million in the 2012 Period from$17.1 million in the 2011 Period due primarily to higher sales of Diabetic Products,which increased $2.4 million, and to a lesser extent, higher sales of OtherProducts, which increased $0.5 million. The tables below set forth sales by channel,product line, and geographic location of our customers for the periodsindicated.

**Net Sales for 2012 Period**

**9 Months**ended **June 30, 2012**

**(millions of dollars)**

** **

**APAC**

**Americas**

**Europe**

**Total***

Diabetic products.............................	

$8.3

$3.4

$3.2

$14.8

Other products.................................	

0.6

3.7

0.9

5.2

**Total net sales*....................**

**$8.9**

**$7.0**

**$4.1**

**$20.0**

 

                                

**Net Sales for 2011 Period**

**9 Months ended June  30, 2011**

**(millions of dollars)**

** **

**APAC**

**Americas**

**Europe**

**Total***

Diabetic products.............................	

$7.1

$2.0

$3.3

$12.4

Other products.................................	

0.8

3.0

0.8

4.7

**Total net sales*....................**

**$7.9**

**$5.1**

**$4.1**

**$17.1**

* Tables maynot total due to rounding.

*Diabetic Product Sales*

Wedesign to the order of, and sell carrying cases for blood glucose diagnostickits directly to, OEMs (or their contract manufacturers).  The OEM customer orits contract manufacturer packages our carry cases “in box” as a customaccessory for the OEM’s blood glucose testing and monitoring kits, or to alesser extent, sell them through their retail distribution channels. 

Salesof Diabetic products increased $2.4 million, or 19%, to $14.8 million in the2012 Period, from $12.4 million in the 2011 Period. This increase was primarilydue to the addition of a new major Diabetic Products customer in the 2012Period, and to higher sales to our largest Diabetic Products customer. Thefollowing table sets forth our sales by Diabetic Products customer for theperiods indicated.

32

 

 

 

 

 

**Forward Industries, Inc.**

 

 

 
** **(millions of dollars)

 

2012 	Period

2011 	Period

Increase 	(Decrease)

Diabetic Customer	A.................................................................

$7.6

$6.7

$0.9

Diabetic Customer	B.................................................................

2.4

2.7

(0.3)

Diabetic Customer	C.................................................................

2.4

2.5

(0.1)

Diabetic Customer	D.................................................................

1.3

--

1.3

All other Diabetic Product	Customers...................................

1.1

0.5

0.6

**Totals*................................................................................**

**$14.8**

**$12.4**

**$2.4**

* Table may not totaldue to rounding.

Sales of Diabetic Products represented 74% of our totalnet sales in the 2012 Period compared to 73% of our total net sales in the 2011Period. 

*Other Product Sales*

Salesof Other products increased $0.5 million, or 11%, to $5.2 million in the 2012 Periodfrom $4.7 million in the 2011 Period. This increase was primarily due to highersales to several major Other Products customers, the largest of which was to along-standing cellular customer, to which our sales increased $0.7 million to$1.1 million in the 2012 Period. During the 2012 Period, we experienced theloss of a major GPS device customer, which offset, in part, the increase inOther Products sales by $0.5 million. In addition, in the 2011 Period, we sold$0.4 million of products to Flash Ventures, Inc. (refer to Note 4 – NoteReceivable in the Notes to Financial Statements), under their brand, which weconsidered as non-recurring business. Smaller changes in a number of Other Productscustomers largely offset each other, none of which changes individually was material.

Salesof Other Products represented 26% of our net sales in the 2012 Period comparedto 27% of our total net sales in the 2011 Period. 

**Gross Profit**

Grossprofit decreased $0.9 million, or 23%, to $3.1 million in the 2012 Period from$4.0 million in the 2011 Period. As a percentage of sales, our gross profitdeclined to 15% in the 2012 Period, compared to 23% in the 2011 Period.

In the2012 Period, our materials costs, as a percentage of net sales, was approximately5% higher than the 2011 Period. This increase was primarily driven by our DiabeticProducts business, and in particular, factors specific to three of our majorDiabetic Customers, as discussed more fully below:
-  Our total unit sales to Diabetic Customer B decreased in the 2012Period. In addition, we are experiencing lower average sales prices as a resultof price concessions granted on two large longer-lived programs. We are, ingeneral, also experiencing higher average materials, labor, and other productioncosts from our suppliers, which we have been unable to pass on to DiabeticCustomer B for these two large programs.
-  Our total unit sales to Diabetic Customer C decreased in the 2012Period; however, our average sales price in respect of several new andreplacement programs are significantly higher than the average sales price oftheir predecessor programs in the 2011 Period. In addition, our average costfor such new and replacement programs have also increased, partly as a resultof product mix, and partly as a result of the general increase in materials,labor, and other production costs we are experiencing from our APAC suppliers. 

33

 

 

 

 

 

**Forward Industries, Inc.**

 

 
-  First time sales under several large programs that we wererecently awarded by Customer D contributed meaningfully to our net sales in the2012 Period. However, as expected, our gross margins on these new programs arelower than average gross margins seen from our other major Diabetic Productscustomers in the 2011 Period.

Throughoutthe 2012 Quarter, we continued to implement a restructuring plan with respectto our Asia-based sourcing and quality assurance operations (refer to “Buying Agencyand Supply Agreement” under Note 10 – Commitments and Contingencies to ourconsolidated financial statements). As a result of such implementation, duringthe 2012 Quarter, we continued to incur operating costs and severance costs, inaddition to service fees to our agent, which raised our costs of suchoperations above levels incurred in recent reporting periods. As such, ourgross profit margin was negatively impacted by nearly 2% in the 2012 Period.

Duringthe 2012 Quarter, we experienced several quality issues with two of our majorDiabetic Products customers. As a result, we incurred a significantly higherlevel of inspection, warehousing, handling, and freight costs in connectionwith our efforts to remediate these quality issues, which negatively impactedour gross profit margin by approximately 2.5% in the 2012 Quarter.

**Sales and Marketing Expenses**

Salesand marketing expenses decreased $0.7 million, or 43%, to $0.9 million in the2012 Period compared to $1.6 million in the 2011 Period due primarily to thefollowing:
-  $0.6 million decrease in personnel expense resulting from therestructure of our sales, marketing, and product development team, as well asthe recovery of share-based compensation for stock option awards we estimatewill be forfeited.
-  $95 thousand decrease in advertising, promotion and samplesexpenses resulting from narrowing our focus on primarily supporting our majorDiabetic Product customers.

Lesser fluctuations inother components of sales and marketing expenses were immaterial. 

**Generaland Administrative Expenses**

Generaland administrative expenses increased $0.5 million, or 15%, to $3.8 million inthe 2012 Period from $3.3 million in the 2011 Period due primarily to thefollowing: 
-  $0.4 million increase in professional fees including $0.3 millionin fees, share-based compensation and expense reimbursements to an executiveofficer that served in a consulting capacity (refer to Note 10 –EmploymentAgreements in Notes to Financial Statements); and $0.3 million in higher legalfees relating to litigation, board of directors matters, and preparation offilings with the Commission, which were offset, in part, by a $0.2 millionreduction in accounting fees and investment banking fees.
-  $0.2 million increase in personnel costs due to the restructuringand expansion of our finance and information technology departments, as well asthe hire of an executive officer (refer to Note 10 –Employment Agreements inNotes to Financial Statements).
-  $73 thousand increase in occupancy costs resulting from: higherrent and related expense in respect of the Company’s relocation of its executiveoffices from Pompano Beach, Florida to Santa Monica, California.

These increases in general and administrative expenseswere offset, in part, by $0.1 million decrease in office expenses due to lowercomputer and postage costs, and an $88 thousand decrease in public costsresulting from lower meeting fees and share-based compensation to directors, aswell as lower filing fees. Lesser fluctuations in other components of generaland administrative expenses were immaterial. 

**Other Income (Expense)**

Other income (expense), consisting of interest income on cash and cashequivalent balances and on short term notes receivable (refer to Note 4 – NoteReceivable in Notes to Financial Statements), as well as foreign currencytransaction gains and losses, declined $35 thousand, to $43 thousand of incomein the 2012 Period from $78 thousand of income in the 2011. This declineresulted primarily from a $67 thousand change in foreign currency losses, whichwas offset, in part by an insurance claim recovery and lower losses on disposal.

34

 

 

 

 

 

**Forward Industries, Inc.**

 

 

**RESULTS OF DISCONTINUED OPERATIONS FOR THE 2012 PERIOD COMPARED TOTHE 2011 PERIOD**

**Loss fromDiscontinued Operations**

Loss from discontinued operations increased $4.3million to $4.7 million in the 2012 Period from $0.4 million in the 2011 Period.The increase is due to a $1.1 million gross loss and a $3.2 million increase inoperating expenses. Loss from discontinued operations per basic and diluted sharewas $(0.58) and $(0.05) for the 2012 Period and 2011 Period, respectively. 

**Net Sales**

Netsales from discontinued operations was $2.1 million in the 2012 Quarter as aresult of first time sales of Retail Products to several new customers in theAmericas and EMEA regions of which none were individually material. There wereno sales from discontinued operations in the 2011 Quarter.

**Gross Loss**

Inthe 2012 Quarter, we realized a gross loss on sales from discontinuedoperations of $1.1 million primarily as a result of a provision of $0.9 milliontaken against Retail Product inventory to mark it down to estimated netrealizable value; a provision for sales returns of $0.5 million; and $0.2million of write-downs against advances made to suppliers for Retail Productinventory that are forfeit. There was no gross profit from discontinuedoperations in the 2011 Period.

**Operating Expenses**

Operatingexpenses of discontinued operations were $3.6 million in the 2012 Periodcompared to $0.4 million in the 2011 Period. This increase was due primarily tohigher personnel expenses, which increased $2.1 million in the 2012 Period; andto a lesser extent, increases in travel and entertainment expenses, royaltiesand commissions, and product development and design costs of $0.2 million, $0.2million, and $0.1 million, respectively. Lesser fluctuations in other componentsof operating expenses were immaterial.

**Other Income (Expense)**

Other income (expense) of discontinued operations, consisting primarily offoreign currency losses, was $42 thousand of expense in the 2012 Period. There was nooperating income (expense) from discontinued operations in the 2011 Period. 

**LIQUIDITY AND CAPITALRESOURCES**

During the 2012 Period, we used $8.7 million of cash in operations,which consisted of a net loss of $6.4 million, adjusted by $1.2 million fornon-cash items (primarily write-downs of retail inventory), and a net use inworking capital items of $3.5 million. As to working capital items, cash usedin operating activities consisted of increases in accounts receivable and inventoriesof $3.3 million and $3.2 million, respectively. These changes were offset, inpart, by increases in accounts payable and accrued expenses and other currentliabilities of $1.6 million and $1.3 million, respectively, and a decrease inprepaid and other current assets of $0.2 million, which had the effect ofgenerating cash from operating activities. The increase in accounts receivableis primarily due to the timing and higher volume of sales recorded in the 2012Quarter compared to the three months ended September 30, 2011. The increases ininventories and accounts payable are due to higher materials purchases made inthe 2012 Quarter in support of sales orders received from our customers,compared to the three months ended September 30, 2011. The decrease in prepaidand other current assets is due primarily to utilization of advances made to aprospective joint venture partner (refer to “Binding Memorandum ofUnderstanding” in Note 11 – in our Notes to Consolidated Financial Statements)and amortization of annual general casualty insurance premiums. The increase inaccrued expenses and other current liabilities is primarily due to receipts ofinventory from our APAC based suppliers; incurrence of third party inspectionservices; and incurrence of professional fees, which we had not yet received aninvoice as of June 30, 2012.  

35

 

 

 

 

 

**Forward Industries, Inc.**

 

 

In the 2011 Period, we used $1.7 million of cash in operations. Netcash used in operating activities in the 2011 Period consisted of net loss of$1.2 million, adjusted by $0.3 million for non-cash items (primarily share-basedcompensation), and a net use in working capital items of $0.8 million. As toworking capital items, cash used in operating activities consisted of increasesin accounts receivable, inventories and prepaid and other assets (current andlong-term) of $0.3 million, $0.3 million, and $0.3 million, respectively. Adecrease in accrued expenses and other current liabilities of $0.3 million alsocontributed to uses of cash. These changes were offset, in part, by an increasein accounts payable of $0.4 million, which had the effect of generating cashfrom operating activities. 

In the 2012 Period, net investing activities generated $0.9 million ofcash, which consisted of $1.0 million in payments received on a loan made toFlash Ventures, Inc. (refer to Note 4 – Note Receivable – in Notes to FinancialStatements), and $54 thousand used for purchases of property and equipment,primarily computer and telecommunications hardware and software. In the2011 Period, net investing activities used $1.3 million of cash, primarily inshort-term loans of $1.2 million made to prospective strategic or joint ventureentities (refer to Note 4 – Notes Receivable – in Notes to FinancialStatements), and to a lesser extent, in purchases of $0.2 million of propertyand equipment, primarily computer and telecommunications hardware and software.

There were no financing activities in the 2012 or 2011 Period.

At June 30, 2012, our current ratio (current assets divided by currentliabilities) was 2.9; our quick ratio (current assets less inventories dividedby current liabilities) was 2.6; and our working capital (current assets lesscurrent liabilities) was $12.2 million.  As of such date, we had noshort or long-term debt outstanding. 

Ourprimary source of liquidity is our cash and cash equivalents on hand. Theprimary demands on our working capital currently are: i) operating losses andii) accounts payable arising in the ordinary course of business, the mostsignificant of which arise when we order products from our suppliers.Historically, our sources of liquidity have been adequate to satisfy workingcapital requirements arising in the ordinary course of business.  We anticipatethat our liquidity and financial resources for the next twelve months will beadequate to manage our operating and financial requirements, including anadditional loss from discontinued operations of approximately $1.3 million thru the expected exit date of September 30, 2012. Wedo not expect there to be any further changes to the wind down of our retailsegment that would have a material impact on our operations or liquidity. 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

Notapplicable.

**ITEM 4. CONTROLS AND PROCEDURES **

Ourmanagement is responsible for establishing and maintaining a system ofdisclosure controls and procedures (as defined in Rule 13a-15(e)) under theExchange Act) that is designed to ensure that information required to bedisclosed by the Company in the reports that we file or submit under the ExchangeAct is recorded, processed, summarized and reported within the time periodsspecified in the Commission's rules and forms. Disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed by an issuer in the reportsthat it files or submits under the Exchange Act is accumulated and communicatedto the issuer's management, including its principal executive officer orofficers and principal financial officer or officers, or persons performingsimilar functions, as appropriate to allow timely decisions regarding requireddisclosure.

 

 

36

 

 

 

 

 

**Forward Industries, Inc.**

 

 

In accordancewith Exchange Act Rule 13a-15(b), our management, under the supervisionand with the participation of our Principal Executive Officer and PrincipalFinancial Officer, performed an evaluation of the effectiveness of theCompany's disclosure controls and procedures as of the end of the fiscalquarter covered by this Quarterly Report on Form 10-Q. Based on thatevaluation, the Company's Principal Executive Officer and Principal FinancialOfficer concluded that the Company's disclosure controls and procedures wereeffective, as of the end of the 2012 Quarter, to provide reasonable assurancethat information required to be disclosed in the Company's reports filed orsubmitted under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Commission's rules and forms.

**Changesin internal control**

Ourmanagement, with the participation of our Principal Executive Officer and PrincipalFinancial Officer, performed an evaluation required by Rule 13a-15(d) of theExchange Act as to whether any change in our internal control over financialreporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred duringthe 2012 Quarter.  Based on that evaluation, our Principal Executive Officerand our Principal Financial Officer concluded that no change occurred in theCompany's internal control over financial reporting during the 2012 Quarter thathas materially affected, or is reasonably likely to materially affect, theCompany's internal control over financial reporting.

PART II.   OTHER INFORMATION

**ITEM1. LEGAL PROCEEDINGS**

*Targus GroupInternational, Inc., et al. v. Forward Industries, Johnson, et al.*

On September 19, 2011, the Company, Brett Johnson (our President andChief Executive Officer), and one of our employees were named in a Complaintfiled in Orange County Superior Court by Targus Group International, Inc. andtwo of its affiliates.  The Complaint alleged a claim for breach of contractagainst Mr. Johnson.  The Complaint further alleged a “breach of fiduciaryduty/duty of loyalty” against the employee, and it asserted claims against Mr.Johnson and the Company for allegedly aiding and abetting that alleged breach. The Complaint also asserted a cause of action against all Defendants for unfaircompetition.  An Amended Complaint was filed on October 11, 2011.  In additionto the claims asserted in the original Complaint, the Amended Complaint addedan additional Targus affiliate as a plaintiff and named an additional employeeof the Company as a defendant.  The Amended Complaint asserted a claim againstthat employee for breach of contract and for “breach of fiduciary duty/duty ofloyalty, ” and it added new claims against the Company and Mr. Johnson forallegedly interfering with that employee’s contract and for allegedly aidingand abetting his breach of duty.  The claim for unfair competition in theAmended Complaint relies on these new allegations as well.  All of the claimsasserted in this action arise out of the decisions of former employees of oneor more of the plaintiffs to accept offers of employment with the Company.  Theamount of damages sought is not specified.  On November 11, 2011, the Company,Brett Johnson, and James Berberian filed a demurrer with respect to certain ofthe claims asserted in the Amended Complaint.  On January 30, 2012, thedistrict court sustained the demurrer in part and ruled that Plaintiffs had notpled a valid cause of action against Mr. Johnson with respect to its claimagainst him for breach of contract.  The court permitted Plaintiffs to amendthis defective claim and on February 10, 2012, Plaintiffs filed a SecondAmended Complaint. On March 12, 2012, Mr. Johnson filed a demurrer to thebreach of contract claim that was re-pled against him in the Second AmendedComplaint.  The court overruled Mr. Johnson’s demurrer in an order dated June11, 2012.  The Company believes it has substantial defenses to these claims andintends to vigorously defend the action. The Company has not recorded a lossprovision for these complaints as of June 30, 2012. 

Fromtime to time, the Company may become a party to legal actions or proceedings inthe ordinary course of its business.  As of June 30, 2012, there were no othersuch actions or proceedings, either individually or in the aggregate, that, ifdecided adversely to the Company’s interests, the Company believes would bematerial to its business.

**ITEM 1A. RISK FACTORS**

Please review our Annual Reporton Form 10-K for the fiscal year ended September 30, 2011, for a completestatement of “Risk Factors” that pertain to our business. Please refer to ITEM2. “CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THEPRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 on page 24 of this QuarterlyReport on Form 10-Q as well as Management’s Discussion and Analysis ofFinancial Condition and Results of Operations for further discussion of certainof such risk factors. 

37

 

 

 

 

 

**Forward Industries, Inc.**

 

 

 

**ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

None

**ITEM3. DEFAULTS UPON SENIOR SECURITIES**

None

**ITEM4. MINE SAFETY DISCLOSURES**

Notapplicable

**ITEM5. OTHER INFORMATION**

None

**ITEM 6. EXHIBITS**

10.1    Memorandum of Understanding, dated June 21, 2012,between Forward Industries, Inc. and  G-Form LLC.

31.1    Certification of theChief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002

31.2    Certification of the Chief Financial Officer underSection 302 of the Sarbanes-Oxley Act of 2002

32.1    Certification of the Chief Executive Officerand Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

 

**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, hereunto dulyauthorized.

 
Dated:  August 20, 2012
 
 
FORWARDINDUSTRIES, INC.
 
             (Registrant)
 
                                                                        
 
 
 
By:/s/ Robert Garrett Jr.                               
   
RobertGarrett Jr.                  
 
ChiefExecutive Officer
 
(PrincipalExecutive Officer)
   By: /s/James		O. McKenna                               James O. McKenna  Chief Financial Officer 
(Principal Financial andAccounting Officer)

 

 

38

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