** **

** **

 

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

________________

**FORM 10-Q**

________________

 

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

**            For the quarterly period ended December 31, 2008.**

**OR**

**[   ]       TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE 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)

________________

** **

**                                      **

| ** NewYork** | **13-1950672**
(State or other jurisdiction of

(I.R.S.Employer Identification No.)
incorporation or organization)
 
 

**1801 Green Rd., Suite E, Pompano Beach, FL  33064**

(Address of principal executive offices, including zipcode)

**(954) 419-9544**

(Registrant’s telephone number, including area code)

________________

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

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company.  Seethe 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 smallerreporting 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 February 9, 2009, was 7,923,189 shares.

1

 

 
****
 

 

 

 

**Forward Industries, Inc.**

**INDEX**

**PART  I.**

** **

**FINANCIAL  INFORMATION**

Page No.

 

 

 

 

 

**Item  1.**

**Financial  Statements**

 

 

 

     - Consolidated Balance Sheets as of December 31, 2008 (unaudited) and	September 30, 2008.................................................

 

 

 

     

4

 

 

     - Consolidated Statements of Operations (unaudited) for the Three Months Ended December 31, 2008 and 2007..............

 

 

 

 

5

 

 

     - Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended	December 31, 2008 and 2007.............

 

 

 

     

6

 

 

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

7

 

 

 

 

 

**Item  2.**

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

15

 

** **

** **

 

 

**Item  3.**

**Quantitative  and Qualitative Disclosures About Market Risk....................................................................................................... 
21

 

 

** **

**Item  4.**

** **

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

 

21

 

** **

 

 

**PART  II.**

** **

**OTHER  INFORMATION**

** **

 

** **

 

 

 

**Item  1.**

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

22

 

** **

** **

 

 

**Item  1A.**

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

22

 

** **

** **

 

 

**Item  2**

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

22

 

** **

** **

 

 

**Item  3**

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

22

 

** **

** **

 

 

**Item  4.**

**Submission  of Matters to a Vote of Security Holders**....................................................................................................................... 

22

 

** **

** **

 

 

**Item  5.**

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

22

 

** **

** **

 

 

**Item  6.**

**Exhibits...................................................................................................................................................................................................... 
23

 

** **

** **

 

 

 

**Signatures**................................................................................................................................................................................................ 

24

 

 

** **

 

 

 

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

25

** **

 

 

 

 

2

 

 
****
 

 

 

 

**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.; "Koszegi" refers to Forward Industries’ wholly owned subsidiaryKoszegi Industries, Inc., an Indiana corporation; “Forward HK” refers to Forward Industries’ wholly owned subsidiary ForwardIndustries HK, Ltd., a Hong Kong corporation;“Forward Innovations” refers to Forward Industries’ wholly owned subsidiaryForward Innovations GmbH, a Swiss corporation; “Forward APAC” refers to ForwardIndustries’ wholly owned subsidiary Forward Asia Pacific Limited, a Hong Kongcorporation; “GAAP” refers to accounting principles generally accepted in theUnited States; “Commission” refers to the United States Securities and Exchange Commission; “Exchange Act” refers to the United States Securities Exchange Act of 1934, asamended;

“2009Quarter” refers to the three months ended December 31, 2008; 

“2008Quarter” refers to the three months ended December 31, 2007; 

“Fiscal2009” refers to our fiscal year ending September 30, 2009; 

“Fiscal2008” refers to our fiscal year ended September 30, 2008; “Europe” refers to the countries included in the European Union and also, inthe context of the Motorola License territory, the following countries: Norway, Switzerland, Croatia, Russia, Ukraine, Albania, Belarus,Bosnia-Herzegovina,, Macedonia, and Uzbekistan; “APAC Region” 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 of certain consumer electronicproducts that are our customers

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 
PART I.   FINANCIAL INFORMATION**Item 1.  Financial Statements**
Forward Industries,Inc.

 

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

**December 31,**

** **

**September 30,**

 

**2008**

** **

**2008**

**Assets**

**(Unaudited)**

** **

** **

**Current assets:**

 

 

 

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

$18,403,988

 

$19,862,426

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

4,906,185

 

3,659,553

Inventories, net...............................................................................................................			

1,695,969

 

1,363,862

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

638,751

 

586,632

Deferred tax asset...........................................................................................................			

107,921

 

49,449

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

25,752,814

 

25,521,922

 

 

 

 

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

230,044

 

124,854

Deferred tax asset...............................................................................................................			

406,600

 

359,681

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

95,323

 

98,259

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

$26,484,781

 

$26,104,716

 

 

 

 

**Liabilities and shareholders’ equity**

 

 

 

Current liabilities:

 

 

 

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

$2,673,512

 

$2,206,630

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

260,774

 

189,827

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

2,934,286

 

2,396,457

 

 

 

 

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

 

 

 

** **

 

 

 

**Shareholders’ equity:**

 

 

 

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

no shares issued.................................................................................................			

--

 

--

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

8,621,932 shares issued (including 706,410  held in treasury)....................... 

 

86,219

 

 

86,219

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

15,940,143

 

15,893,480

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

(1,260,057)

 

(1,260,057)

Retained earnings.......................................................................................................			

8,784,190

 

8,988,617

**Total shareholders' equity**...............................................................................................			

23,550,495

 

23,708,259

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

$26,484,781

 

$26,104,716

 

 

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

 

4

 

 

 

 

 

 

Forward Industries,Inc.

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 

**(UNAUDITED)**

 

**Three Months Ended December 31,**

 

**2008**

** **

**2007**

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

$5,306,642

 

$4,953,090

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

4,362,639

 

3,835,270

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

944,003

 

1,117,820

 

 

 

 

**Operating expenses:**

 

 

 

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

676,088

 

779,705

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

666,034

 

934,924

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

1,342,122

 

1,714,629

** **

 

 

 

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

(398,119)

 

(596,809)

** **

 

 

 

**Other income:**

 

 

 

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

118,945

 

239,619

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

(30,641)

 

13,497

**Total other income**.........................................................................................			

88,304

 

253,116

** **

 

 

 

**Loss before benefit from income taxes**......................................................................			

(309,815)

 

 

(343,693)

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

(105,391)

 

(56,629)

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

($204,424)

 

$  (287,064)

** **

 

 

 

**Net loss per common and common equivalent share**

 

 

 

Basic.................................................................................................................			

($0.03)

 

($0.04)

Diluted..............................................................................................................			

($0.03)

 

($0.04)

** **

 

 

 

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

 

 

 

Basic.................................................................................................................			

7,915,522

 

7,855,439

Diluted..............................................................................................................			

7,915,522

 

7,855,439

 

 

 

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

 
 
 

5 

 

 

 

 

 

**Forward Industries, Inc.**

 

**CONSOLIDATED STATEMENTS OFCASH FLOWS**

 

 

**(Unaudited)**

 

 

**Three Months Ended**

**December 31,**

 

 

**     2008**

** **

**2007**

**Operating activities:**

 

 

 

 

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

 

($204,424)

 

($287,064)     			

Adjustments to reconcile net loss to net cash (used  in) provided by operating activities:

 

 

 

 

Deferred  income taxes................................................................................................			

 

(105,391)

 

178

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

 

86,794

 

129,524

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

 

46,660

 

14,396

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

 

19,767

 

16,580

     Provision for bad debt expense...............................................................................			

 

--

 

(20,033)

Changes  in operating assets and liabilities:

 

 

 

 

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

 

(1,246,632)

 

229,826

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

 

(418,901)

 

(412,564)

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

 

(52,119)

 

2,182

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

 

2,936

 

(19,871)

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

 

466,882

 

1,271,992

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

 

70,947

 

124,079

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

 

**(1,333,481)**

** **

1,049,225

 

 

 

 

 

**Investing activities:**

 

 

 

 

Purchases of property,  plant, and equipment................................................................			

 

(124,957)

 

(18,892)

**Net cash used in  investing activities**

 

**(124,957)**

 

(18,892)

 

 

 

 

 

**Financing activities:**

 

** **

** **

 

**Net cash provided by (used  in) financing activities**....................................................			

 

**--**

 

**--**

 

 

 

 

 

**Net (decrease) increase  in cash and cash equivalents**....................................................			

 

**(1,458,438)**

** **

1,030,333

** **

 

** **

** **

** **

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

 

**19,862,426**

** **

20,267,791

** **

 

** **

** **

** **

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

 

**$18,403,988**

** **

$21,298,124

 

 

 

 

 

 

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

			 

6

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

** **

 

**NOTE 1     OVERVIEW                   **

ForwardIndustries, Inc. was incorporated under the laws of the State of New York and began operations in 1961.  The Company is engaged in the design, marketing,and distribution of custom-designed, soft-sided carrying cases and other carrysolutions products made from leather, nylon, vinyl, and other syntheticfabrics.  The cases and other products are used primarily by consumers for theprotection and transport of portable electronic devices such as medical devicesand cellular phones. The Company markets its products as a direct seller tooriginal-equipment-manufacturers (“OEMs”) and as a distributor to retailers andwholesalers.  Sales to OEM customers are made in Europe, the APAC Region, andthe Americas. Sales to retailers and distributors are made in the United States, Canada, and Europe. 

In theopinion of management, the accompanying consolidated financial statementsreflect all normal recurring adjustments necessary to present fairly thefinancial position and results of operations and cash flows for the interimperiods presented herein, but are not necessarily indicative of the results ofoperations for the full fiscal year ending September 30, 2009. These financial statements should be read in conjunction with the Company's audited consolidatedfinancial statements included in its annual report on Form 10-K for the fiscalyear ended September 30, 2008, and with the disclosures and risk factorspresented herein and therein, respectively.

**NOTE 2     ACCOUNTINGPOLICIES**

**Accountingestimates**

Preparingthe Company's financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting periods. Actual results could differ from those estimates.

**Basis ofpresentation**

Theaccompanying consolidated financial statements include the accounts of ForwardIndustries, Inc. ("Forward") and its wholly owned subsidiaries(together, the "Company"). All significant intercompany transactionsand balances have been eliminated in consolidation.

**RevenueRecognition**

Inaccordance with the requirements of Staff Accounting Bulletin (SAB) No. 104, RevenueRecognition in Financial Statements, the Company generally recognizes revenuefrom product sales to customers when: products that do not require furtherservices by the Company are shipped, there are no uncertainties surroundingcustomer acceptance, and collectibility is reasonably assured. 

 

 

 

 

7

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE2     ACCOUNTING POLICIES (CONTINUED)**

**Supplier Rebates**

EmergingIssues Task Force (EITF) Issue No. 02-16, Accounting by a Customer (Including aReseller) for Certain Consideration Received from a Vendor, permits recognitionof a rebate or refund of a specified amount of cash consideration that ispayable if the customer completes a specified cumulative level of purchases. The Company entered into agreements with several of its suppliers that grantedthe Company a rebate based on its level of purchases made during fiscal quartersprior to October 1, 2008. In lieu of a cash payment from these suppliers theCompany received a credit memo. The Company reduced accounts payable to thesupplier, inventory, and cost of goods sold each quarter as the Company earned therebates.  For the three-month period ended December 31, 2007, the cumulative amount of such quarterly rebate was approximately $102,000. The quarterlyrebate is net of amounts allocated to unsold inventories and are reflected inthe accompanying consolidated statement of operations as a reduction of cost ofgoods sold for the three-month period ended December 31, 2007. No such rebateswere agreed to or recorded for the three-month period ended December 31, 2008.

**Foreign CurrencyTransactions**

Thefunctional currency of the Company's wholly owned foreign subsidiaries is theU.S. dollar. Foreign currency transactions may generate receivables or payablesthat are fixed in terms of the amount of foreign currency that will be receivedor paid. Fluctuations in exchange rates between the functional currency and thecurrency in which a transaction is denominated increases or decreases theexpected amount of functional currency cash flows upon settlement of thetransaction. These increases or decreases in expected functional currency cashflows are foreign currency transaction gains or losses that are included in“other income (expense), net” in the accompanying consolidated statements of operations.The net (losses) gains from foreign currency transactions were approximately ($31,000)and $10,000 for the three-month periods ended December 31, 2008 and 2007, respectively. 

**Comprehensive (Loss)Income**

 For the threemonth periods ended December 31, 2008 and 2007, the Company did not have anycomponents of comprehensive (loss) income other than net (loss) income.

**RecentAccounting Pronouncements**

InDecember 2007, the FASB issued FASB Statement No. 141 (revised 2007),Business Combinations ("SFAS 141(R)"). SFAS 141(R) requiresthat the fair value of the purchase price of an acquisition including theissuance of equity securities be determined on the acquisition date; requiresthat all assets, liabilities, non-controlling interests, contingentconsideration, contingencies, and in-process research and development costs of anacquired business be recorded at fair value at the acquisition date; requiresthat acquisition costs generally be expensed as incurred; requires thatrestructuring costs generally be expensed in periods subsequent to theacquisition date; and requires that changes in deferred tax asset valuationallowances and acquired income tax uncertainties after the measurement period bereflected in income tax expense.SFAS 141(R) also expands disclosures related to business combinations.SFAS 141(R) must be applied prospectively to business combinationsoccurring after the beginning of the Company's fiscal year 2010, except thatbusiness combinations consummated prior to the effective date must applySFAS 141(R) income tax requirements immediately upon adoption. 

 

 

 

 

8

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 3     INVENTORIES**

Inventories consist primarily offinished goods and are stated at the lower of cost (determined by the first-in,first-out method) or market.  Based on management’s estimates, an allowance ismade to reduce excess, obsolete, slow-moving, or otherwise un-saleableinventories to net realizable value. The allowance is established throughcharges to cost of goods sold on the Company’s consolidated statements ofoperations. Reserved inventory that is disposed of is charged against theallowance. Management’s estimates in determining the adequacy of the allowanceare based upon several factors, including analyses of inventory levels,historical loss trends, sales history, and projections of future sales demand.The Company’s estimates of the allowance, as well as recoveries of reservedinventory, may change from time to time based on management’s assessments, andsuch changes could be material. At December 31, 2008 and September 30, 2008, the allowances for obsolete inventory were approximately $228,000 and$168,000, respectively. 

**NOTE 4     DEBT**

In March 2008, Forward and itswholly-owned U.S. subsidiary, Koszegi Industries, Inc., elected not to renew theircredit facility with a U.S. bank that provided for a committed line of creditin the maximum amount of $3.0 million, including a $1.5 million sub-limit forletters of credit.  Accordingly, this credit facility expired March 30, 2008. There were no borrowings or letter of credit obligations outstanding underthis facility during either of the three month periods ended December 31, 2008 and December 31, 2007. 

In 2003, Forward’s wholly-ownedSwiss subsidiary, Forward Innovations GmbH (Forward Innovations), established acredit facility with a Swiss bank that provides for an uncommitted line ofcredit in the maximum amount of $400,000.  Amounts borrowed under the facilitymay be structured as a term loan or loans, with a maximum repayment period of12 months, as a letter of credit facility, or as a guarantee facility, or anycombination of the foregoing.  Either party may terminate the facility at anytime; however, such termination would not affect the stated maturity of anyterm loans outstanding.  Amounts borrowed other than as a term loan must besettled quarterly or converted into term loans.  In connection with thisfacility, Forward Innovations agreed to certain covenants. Amounts drawn underthis credit facility bear interest at variable rates established by the Swiss bank(5.35% as December 31, 2008).  At December 31, 2008, Forward Innovations is contingently liable to the Swiss bank in respect of a letter of credit issued onits behalf in the amount of €224,000 (equal to approximately $315,000 as at December 31, 2008) in favor of Forward Innovations’ freight forwarder and customs agent inconnection with its logistics operations in The Netherlands.  The effect of theissuance of the letter of credit is to reduce the availability of the creditline in an amount equal to the face amount of the letter of credit.  See Note10.

**NOTE 5     SHAREHOLDERS’EQUITY**

**Anti-takeoverProvisions**

The Company is authorized to issueup to 4,000,000 shares of "blank check" preferred stock. The Board ofDirectors has the authority and discretion, without shareholder approval, toissue preferred stock in one or more series for any consideration it deemsappropriate, and to fix the relative rights and preferences thereof includingtheir redemption, dividend and conversion rights.

 

 

9

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**Stock Repurchase**

On September 27, 2002, the Company’s Board of Directors authorized the repurchase of up to 400,000 shares of theCompany’s outstanding common stock (approximately 7% of the number of sharesthen outstanding). On January 21, 2004, the Company’s Board increased theamount of shares authorized for repurchase to 486,200.  Under these authorizations,as of December 31, 2008, the Company had repurchased an aggregate of 172,603shares at a cost of approximately $0.4 million, but none during the 2009 Quarter,leaving a balance of 313,597 shares (approximately 4% of the shares outstandingat December 31, 2008) under those authorizations.  Separately, on March 5, 2008, the Company accepted 72,917 outstanding shares of common stock from theCompany’s former Chairman of the Board and principal executive officer asconsideration for his exercise of options to purchase 100,000 shares of commonstock as part of a cashless exercise.   See Note 9.  

**NOTE 6     OPERATINGSEGMENT INFORMATION**

The Company operates in a singlesegment: the supply of carrying solutions for portable electronic devices. Thiscarrying-solution segment includes the design, marketing, and distribution ofproducts to its customers that include manufacturers of consumer hand heldwireless telecommunications and medical monitoring devices. The Company’s carryingsolution segment operates in geographic regions that include primarily the APAC, Americas, and Europe. Geographic regions are defined based primarily on thelocation of the customer.  The following table presents net sales related tothese geographic segments:
 
* (all amounts in thousands of dollars)*
 
**Three Months Ended**

**December 31,**

 

**2008**

** **

**2007**

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

$2,064

 

$1,524

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

1,695

 

2,295

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

1,548

 

1,134

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

**$5,307**

** **

**$4,953**

 

**NOTE 7     INCOME TAXES**

The Company’s income tax benefit consists of the following United States and foreign components.

 
**Three Months Ended**

**December 31,**

 

**2008**

** **

**2007**

U.S. Federal and State:

 

 

 

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

 $          --

 

$           --

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

(97,356)

 

(50,229)

 

** **

** **

 

Foreign:

** **

** **

 

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

**--**

** **

--

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

(8,035)

 

(6,400)

**Income  tax benefit........................................................................................**

**($105,391)**

** **

**($56,629)**

 

TheCompany’s effective tax rate does not approximate the statutory United Statesfederal income tax rate primarily due to tax rate differentials in respect ofUnited States state and foreign taxes.   

 

 

10

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

EffectiveJune 2001, undistributed earnings of the Company’s Swiss subsidiary areconsidered to be permanently invested; therefore, in accordance with SFAS No.109, no provision for U.S. Federal and state income taxes on those earnings hasbeen provided.  At December 31, 2008, the Company’s Swiss subsidiary hadapproximately $4,220,000 of accumulated undistributed earnings.  

**NOTE 8     LOSS PER SHARE**

Basic pershare data for each period presented is computed using the weighted-averagenumber of shares of common stock outstanding during each period.  Diluted pershare data is computed 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 the exerciseof stock options and warrants, computed using the treasury stock method. Forthis purpose, the average quoted market prices on the NASDAQ SmallCap Marketfor the Company's common stock for the three-month periods ended December 31, 2008 and 2007, were $2.36 and $2.66, respectively. Loss per share data forthe three month periods ended December 31, 2008 and 2007, excludes alloutstanding common equivalent shares as inclusion of such shares would be anti-dilutive.

Inaccordance with the contingently issuable shares provision of SFAS 128, 100,331and 21,999 shares of service-based common stock awards (“restricted stock”)were excluded from the calculation of diluted loss per share for the three monthperiods ended December 31, 2008 and 2007, respectively.

**NOTE 9     STOCK BASEDCOMPENSATION**

In May 2007, shareholders of the Companyapproved the 2007 Equity Incentive Plan (the 2007 Plan), which authorized theissuance of up to 400,000 shares of common stock to officers, employees, andnon-employee directors of the Company upon the grant of restricted common stockand the exercise of stock options awarded to such persons. This plan was adoptedby the Board of Directors in February 2007.  The price at which restrictedcommon stock may be granted and the exercise price of stock options granted maynot be less than the fair market value of the common stock at the date ofgrant. The Company’s Compensation Committee administers the plan.  Optionsgenerally expire ten years after the date of grant and restricted stock grants generallyvest in equal proportions over three years.   As of December 31, 2008, 190,000 shares of common stock remain available for grants of awards of restrictedstock and options to purchase common stock under the 2007 Plan.

TheCompany’s 1996 Stock Incentive Plan (the 1996 Plan) expired in accordance withits terms in November 2006.  The exercise price of incentive options grantedunder the 1996 Plan to officers, employees, and non-employee directors of theCompany were required by its provisions to be equal at least to the fair marketvalue of the common stock at the date of grant. Options expire ten years afterthe date of grant and generally vest in equal proportions over three years. Unexercised options granted pursuant to the 1996 Plan prior to expirationremain outstanding until the earlier of exercise or option expiration.

**Stock OptionAwards**

Under the1996 Plan 30,000 fully vested stock options remain outstanding and unexercised,all at exercise prices higher than the fair market value of the stock at December 31, 2008.  

Under the2007 Plan, the Compensation Committee has granted stock option awards topurchase 100,000 shares of common stock, in the aggregate, to the Company’s non-employeedirectors, of which awards covering 20,000 shares of common stock expiredunexercised, with such shares reverting to the 2007 Plan.  No option awardswere granted during the 2009 Quarter. These awards are subject to a continuedservice condition and vest on the anniversary date the awards were granted.During the three month-period ended December 31, 2008, the Company recognized approximately $23,000 of compensation cost related to these stock option awardsin its consolidated statements of operations. No such costs were recognizedduring the three month period ended December 31, 2007.

11

  

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 9     STOCK BASEDCOMPENSATION (CONTINUED)**

Thefollowing table summarizes stock option activity under the 2007 Plan and the1996 Plan from September 30, 2008 through December 31, 2008: 

 

**Shares**

** **

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

** **

** **

**Aggregate 	Intrinsic Value**

**Outstanding at September 30, 2008**

110,000

 

$4.26
   
8.35
   
$0

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

--

 

 
   
 
   
 

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

--

 

 
   
 
   
 

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

--

 

 
   
 
   
 

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

--

 

 
   
 
   
 

**Outstanding at December 31, 2008**

**110,000**

** **

**$4.26**
   
**8.10**
   
**$0**

 

 

 

 
   
 
   
 

**Options  vested and exercisable at December 31, 2008.........................**

** **

**60,000**

 

** **

**$5.98**
   
** **

**6.41**
   
 

--

**Restricted Stock Awards**

Under the2007 Plan as of December 31, 2008, the Compensation Committee had approved andgranted awards of 130,000 shares ofrestricted stock, in the aggregate, to certain key employees, one of whom alsoserves as a director, pursuant to the 2007 Plan.  Vesting of the restrictedstock is generally subject to a continued service condition with one-third ofthe awards vesting each year on the anniversary date the awards were granted typicallycommencing on the first such anniversary date.  The fair value of the awards grantedwas equal to the market value of the Company’s common stock on the grant date.During the three month periods ended December 31, 2008 and 2007, the Company recognized approximately $24,000 and $14,000,respectively, of compensation cost in its consolidated statements of operationsrelated to restricted stock awards vesting under the 2007 Plan.

The following table summarizes restricted stock activity under the 2007Plan from September 30, 2008, through December 31, 2008.

 

 

** **

** **

** **

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

Non-vested balance at September 30, 2008........................................ 

 

47,498
   
$2.65

Changes during the period:

 

 
   
 

Shares granted................................................................................ 

 

60,500
   
$2.07

Shares vested.................................................................................. 

 

--
   
--

Shares forfeited............................................................................... 

 

--
   
--

Non-vested balance at December 31, 2008......................................... 

 

107,998
   
$2.33

As of December 31, 2008, there was approximately $167,000 of total unrecognized compensation cost related to 107,998shares of unvested restricted stock awards (reflected in the table above)granted under the 2007 Equity Incentive Plan. That cost is expected to berecognized over the remainder of the requisite service (vesting) periods.

12

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 9     STOCK BASEDCOMPENSATION (CONTINUED)**

**Warrants**

As of December 31, 2008, warrants to purchase 75,000 shares of the Company’s common stock at anexercise price of $1.75 were outstanding. These warrants are scheduled toexpire 90 days after a registration statement is declared effective by theSecurities and Exchange Commission. As of December 31, 2008, no such registration statement has been filed with the Securities and Exchange Commission.

**NOTE 10   COMMITMENTS ANDCONTINGENCIES**

**Royalty Commitments**

On May 22,2008, the Company entered into a non-exclusive license agreement with Motorola,Inc. (“Motorola”) that grants the Company the right to distribute certainMotorola trademarked carry solution accessory products to wholesale and retailcustomers in the United States, Canada, and Europe through March 31, 2009,subject to renewal by mutual agreement.  The license agreement was made effectiveretroactive to January 1, 2008, the date subsequent to expiration of a priorlicense agreement on December 31, 2007.  In consideration of the grant, theCompany agreed to pay to Motorola a royalty based upon a percentage of actualnet sales of branded accessory products, subject to payment of minimumroyalties (irrespective of actual net sales) in the amount of $650,000 over the15-month term of the agreement. 

On December 22, 2008, the Company and Motorola entered into a retroactive Amendment to theLicense Agreement pursuant to which the (i) royalty was reduced from 15% of NetSales to 7% of Net Sales; and (ii) Minimum Royalty in respect of the threecalendar quarters from September 2008 through March 31, 2009 was reduced to zero. All other terms of the license continue unchanged and in full force andeffect.

Accordingly,for the three months ended December 31, 2008, the Company did not record anyroyalty expense. For the three months ended December 31, 2007, the Company recorded $89,000 (representing the minimum royalty for the period) of royaltyexpense under the prior license. This amount is included in selling expenses inthe accompanying consolidated statements of operations.

On December 31, 2008, in accordance with the Term and Termination and Notice provisions ofits License Agreement with Motorola, the Company provided Motorola writtennotice of its intention not to renew the current terms and conditions of theLicense Agreement upon expiration of the initial term on March 31, 2009.

 

 

 

13

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 10   COMMITMENTS ANDCONTINGENCIES (CONTINUED)**

**Bank Guarantee**

In July2002, Forward Innovations and its European logistics provider (freightforwarding and customs agent) entered into a Representation Agreement whereby,among other things, the European logistics provider agreed to act as suchsubsidiary's fiscal representative in The Netherlands for the purpose ofproviding services in connection with any value added tax matters. As part ofthis agreement, the subsidiary agreed to provide an undertaking to thelogistics provider with respect to any value added tax liability arising in TheNetherlands that the logistics provider paid on the subsidiary's behalf. InFebruary 2004, such subsidiary entered into a guarantee agreement with a Swissbank relating to the repayment of any amount up to €224,000 (equal to approximately$315,000 as of December 31, 2008) paid by such bank to the logistics providerpursuant to a letter of credit that was issued by the Swiss bank in favor ofthe logistics provider in order to satisfy such undertaking.  The subsidiarywould be required to perform under the guarantee 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) the subsidiary or the Company on its behalf fails or refuses to remit theamount of value added tax due to the logistics provider, and (iv) the logisticsprovider makes a drawing under the letter of credit. Commencing December 31, 2004, and on each anniversary thereafter until December 31, 2009, it is intended that the bank letter of credit will be renewed automatically for one-yearperiods. The subsidiary has agreed to keep a letter of credit guarantee inplace for five years following the date its relationship terminates with thelogistics provider to satisfy any value added tax liability arising prior toexpiration of the Representation Agreement but asserted by The Netherlandsafter expiration. As of December 31, 2008, the Company has not incurred aliability in connection with this guarantee. 

**NOTE 11   LEGALPROCEDINGS**

            From time to time,the Company may become a party to legal actions or proceedings in the ordinarycourse of its business.  As of December 31, 2008, there were no such actions orproceedings, either individually or in the aggregate, that, if decidedadversely to the Company’s interests, the Company believes would be material toits business.

 

 

 

 

 

14

 

 
****
 

 

**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 included in ourAnnual Report on Form 10-K for the fiscal year ended September 30, 2008.  The followingdiscussion and analysis compares our consolidated results of operations for thethree months ended December 31, 2008 (the “2009 Quarter”), with those for thethree months ended December 31, 2007 (the “2008 Quarter”).  All figures in thefollowing discussion are presented on a consolidated basis. All dollar amountsand percentages presented herein have been rounded to approximate values.*

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

Thisquarterly report contains forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995 that are not based onhistorical fact. Such forward looking statements, can be identified by the useof forward-looking terminology such as “may”, “might”, “will”, “should”, “likely”,“possible”, “seek”, “expect”, “anticipate”, estimate”, “plan”, “intend”, “continue”, or “believe”, or the negatives or other variations of these termsor comparable terminology.  Forward looking statements may include projections,forecasts, or estimates of future performance.  Forward looking statements arebased upon assumptions that we believe to be reasonable at the time suchforward looking statements are made.  Whether those assumptions will be borneout will be determined by future factors, developments, and events, which aredifficult to predict and may be beyond our control.  These forward-lookingstatements involve assessments of known and unknown risks, uncertainties andother factors that may cause our actual results, levels of activity, performanceor achievements to be materially different from any future results, levels ofactivity, performance or achievements expressed or implied by suchforward-looking statements.  Such factors include, among others: the durationand severity of the current economic conditions and their impact on consumerdemand and spending, demand for our products, and uncertainties in thefinancial markets; a significant change of the Company’s relationship with itscustomers (including changes affecting their businesses) in channels whereconcentration of sales to a certain number of customers exists; our ability tocontrol operating expenses during periods of declining sales and or grossmargins; the impact on our business of an acquisition or the failure to make anacquisition; whether our important OEM customers continue to include carrysolutions “in box” with their electronic products; our success in winning newbusiness from existing and new customers and against competing vendors; theloss of a key salesman who has significant influence on our relationships withcertain OEM customer makers of diabetic test kits; levels of demand and pricinggenerally for electronic devices sold by our customers for which we supplycarry solutions; variability in order flow from our OEM customers; the adverseimpact of pricing factors on gross margins; obsolescence of inventory,including the impact on inventory allowance arising out of hub agreements wehave entered into; developments in the treatment or control of diabetes that mayreduce the usage of handheld blood glucose monitors; increased competition in ourbusiness; changes in, governmental regulations; and other factors set forthunder the caption “risk factors” included elsewhere in this quarterly report onForm 10-Q and in our Annual Report on Form 10-K for the year ended September30, 2008.  

Given theseuncertainties, readers are cautioned not to place undue reliance on suchforward-looking statements.  Forward looking statements speak only as of thedate made.  We undertake no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise, after the date of this Form 10-Q

**BUSINESS OVERVIEW**

                We design,market, and distribute custom-designed, soft-sided carrying cases and othercarry solutions for consumer electronic products primarily to originalequipment manufacturers (OEMs) of blood glucose monitoring kits for diabeticpatients.  Our OEM distribution channel is relatively concentrated by productline and customer.  During the past three years, cell phone revenue in the OEMand aftermarket channel (sales to distributors and retailers), whichhistorically was our largest revenue source by product line and was dependenton one or two major OEM customers,, has declined very significantly, such thatwe no longer present such revenues separately but include them as part of“other products”.

15

 

 

 

 

**Forward Industries, Inc.**

 

 

                *Trends andEconomic Environment:*  We believe that deteriorating economic conditionsand heightened uncertainty in financial markets have adversely impacteddiscretionary consumer spending, including spending on the types of electronicdevices for which consumers might typically purchase our products.  We expectthe challenging business environment to continue in the foreseeable future. The deterioration in general economic conditions worldwide has increased thechallenges in the carry solution market, which for us has been characterized bydeclining gross profit and gross profit percentage for the past several years. We have attempted to limit increases in operating expenses except where wethink increases are critical to potential future growth.

                *Variabilityof Revenues and Results of Operations*.  Because our sales revenues arehighly concentrated in a few large customers, and because the volumes of thesecustomers’ order flows to us are highly variable, with short lead times, our quarterlyrevenues, and consequently our results of operations, are susceptible tosignificant variability over a relatively short period of time.  

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

Thismanagement’s discussion and analysis of financial condition and results ofoperations is based upon or derived from our unaudited consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues, and expenses, and related disclosureof contingent liabilities. We base these judgments and estimates on ourhistorical experience and on various other assumptions that we believe to bereasonable under the circumstances, and these judgments form the basis for our estimatesconcerning the carrying values of assets and liabilities that are not readilyapparent from other sources. We periodically re-evaluate these estimates andjudgments based on available information and experience. Actual results coulddiffer from our estimates under different assumptions and conditions. If actualresults significantly differ from our estimates, our financial condition andresults of operations could be materially impacted. We discuss the materialpolicies that are critical in making these estimates and judgments in ourAnnual Report on Form 10-K for the fiscal year ended September 30, 2008, under the caption “Management’s Discussion and Analysis—Critical AccountingPolicies and Estimates”.  There have been no material changes in criticalaccounting policies and estimates since September 30, 2008, except as may be noted below.* *

The notesto our audited consolidated financial statements in our Annual Report on Form10-K for the year ended September 30, 2008, and the notes to our consolidatedfinancial statements included in Part I, Item 1 of this Quarterly Report onForm 10-Q contain additional information related to our accounting policies andshould be read in conjunction with the following discussion and analysisrelating to our overall financial performance, operations and financialposition. 
Accounts Receivable
At December31, 2008, and September 30, 2008, our allowance for doubtful accounts wasapproximately $10 thousand, respectively.  
Inventory Valuation
Inventory allowanceswere approximately $0.2 million at December 31, 2008, and September 30, 2008,respectively and primarily relates to product held for sale in the aftermarketunder our license with Motorola.  See Notes 3 and 10 to the FinancialStatements. Changes to this account are reflected in the cost of goods soldline of our consolidated statements of operations.  

 

16

 

 

 

 

**Forward Industries, Inc.**

 

 

The vastmajority of our production is made to customer specifications.  If a customerelects not to accept delivery, or defaults on a purchase order or commitment, orreturns inventory from its hub without payment in violation of the hubarrangements, additional inventory write-downs or reserves may be required andwould be reflected in cost of goods sold in the period the revision is made.Historically, actual inventory valuation results have not deviatedsignificantly from those previously estimated by us. 
Deferred IncomeTaxes 
We hadapproximately $0.5 million and $0.4 million of deferred tax assets at December31, 2008, and September 30, 2008, respectively. The increase in deferred taxassets results primarily from temporary differenced between book and tax incomeand net loss incurred in respect of the 2009 Quarter.  No valuation allowanceswere recorded in respect of these deferred tax assets as of such dates.

**RESULTS OFOPERATIONS FOR THE 2009 QUARTER COMPARED TO THE 2008 QUARTER**

**Net loss**

Weincurred a net loss of $0.2 million in the 2009 Quarter compared to $0.3million in the 2008 Quarter. The $0.1 million improvement is a result of lower operatingexpenses and an increase in tax benefit in the 2009 Quarter compared to the2008 Quarter, offset in part by declines in gross profit and “other income”, asshown in the table below:  

 
(millions of dollars)

 

2009 Quarter

2008 Quarter

Increase (Decrease)

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

$5.3

$5.0

$0.3

 

 

 

 

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

0.9

1.1

(0.2)

Selling, General and Administrative	Expenses.............

(1.3)

(1.7)

0.4

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

0.1

0.3

(0.2)

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

**0.1**

**0.1**

**--**

**Net Loss*...........................................................................**

**($0.2)**

**($0.3)**

**$0.1**

* Table may nottotal due to rounding.

Basic and diluted loss per share data was ($0.03) forthe 2009 Quarter, compared to ($0.04) for the 2008 Quarter. The reduction in lossper share in the 2009 Quarter was due to the decrease in net loss.

**Net Sales**

Netsales increased $0.4 million, or 7%, to $5.3 million in the 2009 Quarter from$5.0 million in the 2008 Quarter, due to an increase in sales of diabeticproducts of $0.6 million, or 16%. This increase was offset, in part, by a declinein sales of other products of $0.2 million, substantially all of which declinewas in cell phone revenues.  Cell phone revenues, including OEM and aftermarketsales, are now included in sales of “other products”. The tables below setforth sales by product line and geographic location of our customers for theperiods indicated.

 

17

 

 

 

 

**Forward Industries, Inc.**

 

 

**Net Sales for 2009 Quarter**

**3 Months**ended **December 31, 2008**

**(millions of dollars)**

** **

**APAC**

**Americas**

**Europe**

Total*

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

$1.5

$1.1

$1.5

$4.1

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

0.2

1.0

--

1.2

**Total***

**$1.7**

**$2.1**

**$1.5**

**$5.3**

                                

**Net Sales for 2008 Quarter**

**3 Months ended December 31, 2007**

**(millions of dollars)**

** **

**APAC**

**Americas**

**Europe**

Total*

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

$1.9

$0.7

$0.9

$3.5

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

0.4

0.8

0.2

1.4

**Total***

**$2.3**

**$1.5**

**$1.1**

**$5.0**

* Tables maynot total due to rounding.

*Diabetic Product Sales*

Wedesign to the order of and sell directly to our OEM customers carrying casesused by diabetics to carry their personal electronic, blood glucose monitoringkits. In the 2009 Quarter, OEM customers for these carrying cases included AbbottLabs, Bayer, Lifescan and Roche Diagnostics (including their subsidiaries,affiliates and contract manufacturers) as well as other customers. Our carryingcases are packaged as an accessory "in-box" with the monitoring kitsthat are sold by our OEM customers.

Salesof cases and related accessories for blood glucose monitoring kits increased $0.6million, or 16%, to $4.1 million in the 2009 Quarter, from $3.5 million in the2008 Quarter.  These results were driven by higher sales to two of our largestcustomers, which increased by $1.1 million and $0.1 million, respectively, inthe 2009 Quarter compared to the 2008 Quarter.  The increases in sales wereprimarily attributable to several new in-box programs as well as higher volumesof existing in box programs.  These increases were offset, in part, by declinesin sales to Lifescan, our largest customer, and one other customer, of $0.5million and $0.2 million, respectively, in the 2009 Quarter from the 2008Quarter. We believe the decline in sales for Lifescan was due to the widespreadeconomic weakness and customer deferrals of purchases of new blood glucosemonitors.

Salesof carrying cases for blood glucose monitoring kits represented 77% of ourtotal net sales in the 2009 Quarter compared to 71% of our total net sales inthe 2008 Quarter due primarily to the continuing significant decline in cellphone product sales. 

*OtherProduct Sales*

Wedesign and sell a number of other carrying solutions for items such as cellphones, cameras, portable oxygen tanks, bar code scanners, MP3 players, and othercarrying solutions for an assortment of products on a made-to-order basis thatare customized to meet the individual needs of our smaller OEM customers.  In general, sales of “other products” to order are made to numerous customersand typically vary from period to period without necessarily reflecting asignificant trend in our business in this product line. 

Salesof other products declined $0.2 million to $1.2 million in the 2009 Quarterfrom $1.4 million in the 2008 Quarter. This decline was the result of lowersales of cell phone carry solutions in the 2009 Quarter, which decreased $0.2million from the 2008 Quarter. Sales to one customer in this product lineincreased $0.1 million in the 2009 Quarter compared to the 2008 Quarter, butwere offset by declines in sales to other smaller customers for these products.

18

  

 

 

 

**Forward Industries, Inc.**

 

 

Salesof other products represented 23% of our net sales in the 2009 Quarter comparedto 29% of net sales in the 2008 Quarter (which for that period, as we thenbroke out sales for our cell phone product line, represents the sum of “otherproduct” and “cell phone” sales).

**Gross Profit**

Grossprofit decreased $0.2 million, or 16%, to $0.9 million in the 2009 Quarter from$1.1 million in the 2008 Quarter primarily due to higher costs incurred inconnection with the relocation of our Hong Kong facility and staffing changes therethat increased Hong Kong personnel expense. Higher compliance, warehouse, rent,and travel costs in the 2009 Quarter also contributed to the higher level of Hong Kong costs.

Gross profit as apercentage of net sales was 18% in the 2009 Quarter compared to 23% in the 2008Quarter.  

**Selling, General, and Administrative Expenses**

Operatingexpenses decreased $0.4 million, or 23%, to $1.3 million in the 2009 Quarterfrom $1.7 million in the 2008 Quarter due primarily to a $0.3 million reductionin personnel costs as a result of the expiration at December 31, 2007, ofemployment agreements of two executives. Accordingly, compensation expense(including severance of $0.2 million) for these two executives was reflected inthe 2008 Quarter but not the 2009 Quarter. Additionally, we incurred no royaltyand commission expense in the 2009 Quarter as a result of the amendment of the Motorolalicense in December 2008, which eliminated all minimum royalty obligationsunder the current agreement, compared to $0.1 million of expense in the 2008Quarter under the prior agreement. Lesser decreases in professional fees and otheroperating expenses also contributed to the improvement.

**Other Income**

Otherincome, primarily interest income on cash balances, declined 65% to $0.1 millionin the 2009 Quarter, from $0.3 million in the 2008 Quarter due primarily tolower average interest rates in the 2009 Quarter on slightly lower cashbalances compared to the 2008 Quarter. Other income also  declined to a lesserextent as a result of foreign currency losses incurred in respect of the 2009Quarter compared to the 2008 Quarter.

**Pretax Loss**

Pretaxloss narrowed 10% to $0.3 million in the 2009 Quarter compared to the 2008Quarter as a result of the changes as described above.

**Income Taxes**

Werecorded a benefit from income taxes of $0.1 million in the 2009 Quartercompared to a benefit of $57 thousand in the 2008 Quarter due primarily to increaseddeferred tax expense resulting primarily from temporary differences betweenbook and tax income.  The effective income tax rate increased as a percentageof pre-tax income primarily as a result of adjustments to Federal and state netoperating loss carryforwards which were booked in the prior year after the taxreturns were filed. The benefit consists primarily of estimated U.S. federal income taxes, and to a lesser extent, current state and foreign income taxes. See Note 7 to the Financial Statements. 

AtDecember 31, 2008, we had approximately $4.2 million of earnings attributableto our foreign subsidiaries for which not provisions have been recorded forincome tax that could occur upon repatriation. Except to the extent suchearnings can be repatriated tax efficiently, they are permanently investedabroad. It is not practicable to determine the amount of income taxes payablein the event all such foreign earnings are repatriated.

19

 

 

 

 

**Forward Industries, Inc.**

 

 

**LIQUIDITY AND CAPITALRESOURCES**

 

During the 2009 Quarter, we used $1.3 million of cashin operations compared to generating $1.0 million in the 2008 Quarter. Ouroperating cash flows in the 2009 Quarter consisted of a net loss of $0.2 million,reduced by $48 thousand for non-cash items, and $1.2 million for net changes inworking capital items. Changes in accounts receivable, inventories, and prepaidand other current assets of $1.2 million, $0.4 million, and $52 thousand,respectively, contributed to the net cash used by operating activities. Thesewere partially offset by changes in accounts payable and accrued expenses andother current liabilities of $0.5 million and $71 thousand, respectively. Thechange in accounts receivable is attributable to the higher sales levels in the2009 Quarter and the timing in which these accounts receivable were originated.The change in inventories and accounts payable is in support of sales ordersreceived and the ramping up of production in anticipation of the Chinese NewYear. The change in prepaid expenses and other current assets is primarily aresult of an increased amount of deposits on hand with certain newer suppliersin support of purchase orders we have placed with them.

 

Duringthe 2008 Quarter, we generated $1.0 million of cash from operations consistingof a net loss of $0.3 million, increased by $0.1 million for non-cash items,and $1.2 million for net changes in working capital items, consisting primarilyof changes in accounts receivable and accounts payable of $0.2 million and $1.3million, respectively, offset, in part, by changes in inventories of $0.4million.

Investingactivities used $0.1 million in the 2009 Quarter for purchases of property,plant and equipment, primarily leasehold improvements and furniture andfixtures for our new Hong Kong procurement and quality control facility. In the2008 Quarter, net investing activities used $19,000 for purchases of property,plant and equipment, primarily computer and telecommunications hardware andsoftware. 

Therewere no financing activities in the 2009 Quarter or the 2008 Quarter.

At December 31, 2008, our current ratio (current assets divided by current liabilities) was 8.78;our quick ratio (current assets less inventories divided by currentliabilities) was 8.20; and our working capital (current assets less currentliabilities) was $22.8 million.  As of such date, we had no short or long-termdebt outstanding. 

Ourprimary source of liquidity is our cash on hand. The primary demands on ourworking capital are: operating losses and accounts payable arising in theordinary course of business, the most significant of which arise when ourcustomers place orders and we order from our suppliers. Historically, oursources of liquidity have been adequate to satisfy working capital requirementsarising in the ordinary course of business. We anticipate that our liquidityand financial resources for the twelve months will be adequate to manage ourfinancial requirements. See “Trends in Results of Operations” for a discussionof anticipated increases in selling, general, and administrative expense.

ForwardInnovations maintains a credit facility with a Swiss bank that provides for anuncommitted line of credit in the maximum amount of $400,000.  Amountsborrowed under the facility may be structured as a term loan or loans, with amaximum repayment Period of 12 months, or as a guarantee facility, or anycombination of the foregoing.  Either party may terminate the facility atany time; however, such termination would not affect the stated maturity of anyterm loan outstanding under the facility.  Amounts borrowed other than asa term loan must be settled quarterly or converted into term loans. Amountsdrawn under this credit facility bear interest at variable rates established bythe bank (5.35% as December 31, 2008). At December 31, 2008, Forward Innovations is contingently liable to the bank under a letter of credit issued onits behalf in the amount of €224,000 (equal to approximately $315,000 as of December 31, 2008) in favor of Forward Innovations' freight forwarder and customs agent.  The effect of the issuance of the letter of credit is to reduce the availability ofthe credit line in an amount equal to the face amount of the letter of credit. See Notes 4 and 10 to the unaudited consolidated Financial Statements set forthin Item 1.

20

 

 

 

 

**Forward Industries, Inc.**

 

 

On September 27, 2002, our Board of Directors authorized the repurchase of up to 400,000shares of our outstanding common stock, or approximately 7% of the number ofshares then outstanding. On January 21, 2004, our Board increased the amount ofshares authorized for repurchase to 486,200. Under that authorization, as of December 31, 2008, we had repurchased an aggregate of 172,603 shares at a cost ofapproximately $0.4 million. In addition, in connection with an exercise ofoutstanding stock options, 72,917 shares were purchased during Fiscal 2008 in anon-cash transaction, which was outside the foregoing authorizations.  Norepurchases were made during the 2009 Quarter.  The repurchase program may bediscontinued or terminated at any time.

**CONTRACTUAL OBLIGATIONS ANDCOMMERCIAL COMMITMENTS**

TheCompany has entered into various contractual obligations and commercial commitmentsthat, under accounting principles generally accepted in the United States, are not recorded as a liability.   The following is a summary of such contractualcash obligations as of December 31, 2008:

**Contractual  Obligation or Commitment**

**Jan 09 – Dec 09**

**Jan 10 – Dec 11**

**Jan 12 – Dec 13**

**Thereafter**

Employment Agreements

$425,000   

$            -- 

$           --

$         --

Operating Leases

313,000

565,000

68,000

--

**Totals**

**$738,000**

**$ 565,000**

**$68,000**

**    $        --**

The Company has not guaranteed thedebt of any unconsolidated entity and does not engage in derivativetransactions or maintain any off-balance sheet special purpose entities. 

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

Notapplicable.

**ITEM4. CONTROLS AND PROCEDURES **

**Evaluationof Disclosure 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 theExchange Act is recorded, processed, summarized and reported, within the timespecified 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.

Inaccordance with Exchange Act Rule 13a-15(b), our management, under thesupervision and with the participation of our Chief Executive Officer and ChiefFinancial Officer, performed an evaluation of the effectiveness of theCompany's disclosure controls and procedures as of the end of the fiscal quartercovered by this Quarterly Report. Based on that evaluation, the Company's ChiefExecutive Officer and Chief Financial Officer concluded that the Company'sdisclosure controls and procedures were effective, as of the end of the 2009 Quarter,to provide reasonable assurance that information required to be disclosed inthe Company's reports filed or submitted under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theCommission's rules and forms. 

**Changesin internal controls**

Ourmanagement, with the participation our Chief Executive Officer and ChiefFinancial Officer, performed an evaluation as to whether any change in ourinternal controls over financial reporting  occurred during the 2009 Quarter. Based on that evaluation, our Chief Executive Officer and our Chief FinancialOfficer concluded that no change occurred in the Company's internal controlsover financial reporting during the 2009 Quarter that has materially affected,or is reasonably likely to materially affect, the Company's internal controlsover financial reporting.

21

  

 

 

 

**Forward Industries, Inc.**

 
 PART II.   OTHER INFORMATION
**ITEM1. LEGAL PROCEEDINGS**

Fromtime to time, the Company may become a party to legal actions or proceedings inthe ordinary course of its business.  As of December 31, 2008, there were no such actions or proceedings, either individually or in the aggregate, that,if decided adversely to the Company’s interests, the Company believes would bematerial to its business.

**ITEM1A. RISK FACTORS**

Thefollowing risk factor is new or has been expanded or updated from those setforth in our Annual Report on Form 10-K for the fiscal year ended September 30,2008, but the factor below does not constitute all the risk factors thatpertain to our business.  Please review our Annual Report on Form 10-K for a completelisting of “Risk Factors” that pertain to our business. Please refer to ITEM 2.“Cautionary statement for purposes ofthe “Safe Harbor” provisions of the Private Securities Litigation Reform Act of1995 on page 15 of this Quarterly Report on Form 10-Q.

**Deteriorationof economic conditions could negatively impact our business**.

Ourbusiness may be adversely affected by changes in domestic and/or internationaleconomic conditions, including changes in consumer preferences or consumerspending rates, inflation, interest or exchange rates, and the effects ofgovernmental initiatives to manage economic conditions. In the 2009 Quarter, weexperienced continuing sales declines in certain product categories as well asa decline in sales to our largest customer for blood glucose monitors, aproduct line we believed might be relatively insulated from the deterioratingeconomy. Changes in economic conditions could continue to adversely affect the demandfor our products, our OEM customer relationships in channels with high customerconcentration, the cost of needed raw materials, or transportation-relatedcosts, thereby adversely affecting our business, operating results andfinancial condition.

Therecent disruptions in credit and other financial markets and deterioration ofnational and global economic conditions could, among other things: impair thefinancial condition of some of our customers and suppliers thereby increasingcustomer bad debts or non-performance by suppliers; or make it more difficultor costly for us to obtain financing in connection with an acquisition.  We areunsure of the duration and severity of this economic crisis. If the crisispersists or worsens and economic conditions remain weak over a long period, thelikelihood of the crisis having a significant impact on our business increases.

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

**IssuerPurchases of Equity Securities**

During the 2009 Quarter we did not purchase any commonstock or other equity securities pursuant to publicly announced plans orprograms or otherwise. 

**ITEM3. DEFAULTS UPON SENIOR SECURITIES**

None.

**ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

None

**ITEM5. OTHER INFORMATION**

None

22

 

 

 

 

**Forward Industries, Inc.**

 

 

 
 
**ITEM 6. EXHIBITS**
 
31.1
Certification of the		Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of		2002 
 
  
31.2
Certification of the		Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of		2002 
 
  
32.1
Certification of the		Chief Executive Officer and Chief Financial Officer under Section 906 of		the Sarbanes-Oxley Act of 2002
 

 

 

 

23

  

 

 

 

**Forward Industries, Inc.**

 

 

 

**SIGNATURES**

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

 

Dated:  February 10, 2009

 
 
 FORWARDINDUSTRIES, INC.
 
(Registrant)
 
 
 
 
 
By:/s/ Douglas W. Sabra 
 
DouglasW. Sabra
 
 ChiefExecutive Officer
 
(PrincipalExecutive Officer)
 
 
 
 
 
By:/s/James O. McKenna
 
 JamesO. McKenna
 
ChiefFinancial Officer
 
(PrincipalFinancial and Accounting Officer)

                                                                                

 

 

 

 

 

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