** **

** **

 

 

 

 

**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 , 2007.**

**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)

________________

** **

**                                      **
| **New York**                    | **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, or a non-accelerated filer (see definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act).

[  ] Large accelerated filer                                   [   ] Acceleratedfiler                            [**X**] Non-accelerated filer

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 $0.01 pershare, at December 31, 2007, was 7,855,439  shares.

** **

1

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**Forward Industries, Inc.**

 

 

|           |                     |                                                                                            | **INDEX**  |
|----------------|--------------------------|-------------------------------------------------------------------------------------------------|------------|
|           |                     |                                                                                            |       |
| **PART  I.**   | ** **               | **FINANCIAL  INFORMATION**                                                                      | Page No.   |
|           |                     |                                                                                            |       |
|           | **Item  1.**             | **Financial  Statements**                                                                       |       |
|           |                     |      - Consolidated Balance Sheets as of December 31, 2007 (unaudited)           |       |
|           |                     |      and September 30, 2007                                                      | 4          |
|           |                     |                                                                                            |       |
|           |                     |      - Consolidated Statements of Operations (unaudited) for the Three Months    |       |
|           |                     | Ended December 31, 2007 and 2006                                                                | 5          |
|           |                     |                                                                                            |       |
|           |                     |      - Consolidated Statements of Cash Flows (unaudited) for the Three Months    |       |
|           |                     |      Ended December 31, 2007 and 2006                                            | 6          |
|           |                     |                                                                                            |       |
|           |                     |      - Notes to Consolidated Financial Statements (unaudited)                    | 7          |
|           |                     |                                                                                            |       |
|           | **Item  2.**             | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** | 16         |
|           | ** **               | ** **                                                                                      |       |
|           | **Item  3.**             | **Quantitative  and Qualitative Disclosures About Market Risk**                                 | 25         |
|  

  | ** **

**Item  4.** | ** **

**Controls  and Procedures**                                                        |  

25 |
|           | ** **               | ** **                                                                                      |       |
|           | **Item  4T.**            | **Controls  and Procedures**                                                                    | 26         |
|           | ** **               |                                                                                            |       |
| **PART  II.**  | ** **               | **OTHER  INFORMATION**                                                                          | ** ** |
|           | ** **               |                                                                                            |       |
|           | **Item  1.**             | **Legal  Proceedings**                                                                          | 27         |
|           | ** **               | ** **                                                                                      |       |
|           | **Item  1A.**            | **Risk  Factors**                                                                               | 27         |
|           | ** **               | ** **                                                                                      |       |
|           | **Item  2**              | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                | 29         |
|           | ** **               | ** **                                                                                      |       |
|           | **Item  3**              | **Defaults  Upon Senior Securities**                                                            | 30         |
|           | ** **               | ** **                                                                                      |       |
|           | **Item  4.**             | **Submission  of Matters to a Vote of Security Holders**                                        | 30         |
|           | ** **               | ** **                                                                                      |       |
|           | **Item  5.**             | **Other  Information**                                                                          | 30         |
|           | ** **               | ** **                                                                                      |       |
|           | **Item  6.**             | **Exhibits**                                                                                    | 30         |
|           | ** **               | ** **                                                                                      |       |
|           |                     | **Signatures**                                                                                  | 31         |
|           |                     | ** **                                                                                      |       |
|           |                     | **Certifications**                                                                              | 32         |
|  

  |                     | ** **                                                                                      |       |

 

 

 

2

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**Note Regarding Use ofCertain Terms**

In thisQuarterly Report on Form 10-Q, unless the context otherwise requires, the terms"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, ofForward Industries, Inc.; "Koszegi" refers to Forward Industries’wholly owned subsidiary Koszegi Industries, Inc., an Indiana corporation;“Koszegi Asia” refers to Forward Industries’ wholly owned subsidiary KoszegiAsia Ltd., a Hong Kong corporation; “Forward Innovations” refers to ForwardIndustries’ wholly owned subsidiary Forward Innovations GmbH, a Swisscorporation;  “GAAP” refers to accounting principles generally accepted in theUnited States; “Commission” refers to the United States Securities and ExchangeCommission; “Exchange Act” refers to the United States Securities Exchange Actof 1934; the “2008 Quarter” refers to the three months ended December 31, 2007;the “2007 Quarter” refers to the three months ended December 31, 2006; “Fiscal 2008”refers to our fiscal year ending September 30, 2008; “Fiscal 2007” refers toour fiscal year ended September 30, 2007; “EMEA Region” means the geographicarea encompassing Europe, the Middle East and Africa; APAC Region means theAsia Pacific Region, consisting of Australia, New Zealand, Hong Kong, Taiwan,China, South Korea, Japan, Singapore, Malaysia, Thailand, Indonesia, India, thePhilippines and Vietnam; and “Americas” refers to the geographic areaencompassing North, Central, and South America.

 

 

 

 

 

 

 

3

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# PART I.   FINANCIAL INFORMATION

### **ITEM 1.  FINANCIAL STATEMENTS**

Forward Industries,Inc.

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                    |             |       |              |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------------|------------|-------------------|
|                                                                                                                                    |             |       |              |
|                                                                                                                                    | **December 31,** | ** ** | **September 30,** |
|                                                                                                                                    | **2007**         | ** ** | **2007**          |
| **Assets**                                                                                                                              | **(Unaudited)**  | ** ** | ** **        |
| **Current assets:**                                                                                                                     |             |       |              |
| Cash and cash equivalents                                                                                                               | $21,298,124      |       | $20,267,791       |
| Accounts receivable, net                                                                                                                | 3,925,324        |       | 4,135,117         |
| Inventories, net                                                                                                                        | 1,355,400        |       | 1,072,360         |
| Prepaid expenses and other current  assets                                                                                              | 626,604          |       | 628,786           |
| Deferred tax asset                                                                                                                      | 309,461          |       | 279,741           |
| **Total current assets**                                                                                                                | 27,514,913       |       | 26,383,795        |
|                                                                                                                                    |             |       |              |
| Property, plant, and equipment, net                                                                                                     | 162,956          |       | 160,644           |
| Deferred tax asset                                                                                                                      | --               |       | 29,898            |
| Other assets                                                                                                                            | 77,409           |       | 57,538            |
| **Total Assets**                                                                                                                        | $27,755,278      |       | $26,631,875       |
|                                                                                                                                    |             |       |              |
| **Liabilities and shareholders’ equity**                                                                                           |             |       |              |
| Current liabilities:                                                                                                                    |             |       |              |
|    Accounts payable                                                                                                           | $ 3,176,938      |       | $1,904,946        |
|    Accrued expenses and other current liabilities                                                                             | 427,264          |       | 303,185           |
| **Total current liabilities**                                                                                                           | 3,604,202        |       | 2,208,131         |
|                                                                                                                                    |             |       |              |
| **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, 

8,488,932 shares issued (including 633,493  held in treasury) |  

84,889   |       |  

84,889    |
| Capital in excess of par value                                                                                                          | 15,560,442       |       | 15,546,046        |
| Treasury stock, 633,493 shares at cost                                                                                                  | (1,085,057)      |       | (1,085,057)       |
| Retained earnings                                                                                                                       | 9,590,802        |       | 9,877,866         |
| **Total shareholders' equity**                                                                                                          | 24,151,076       |       | 24,423,744        |
| **Total liabilities and shareholders’ equity**                                                                                     | $27,755,278      |       | $26,631,875       |

 

 

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

 

4

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Forward Industries,Inc.

**CONSOLIDATED STATEMENTS OF OPERATIONS**

|                                                                                                                 | **(UNAUDITED)**                     |
|----------------------------------------------------------------------------------------------------------------------|-------------------------------------|
|                                                                                                                 | **Three Months Ended December 31,** |
|                                                                                                                 | **2007**                            | ** ** | **2006** |
| **Net  sales**                                                                                                       | $4,953,090                          |   | $7,434,422   |
| **Cost of goods sold**                                                                                               | 3,835,270                           |   | 5,477,712 |
| **Gross profit**                                                                                                     | 1,117,820                           |   | 1,956,710 |
|                                                                                                                 |                                |   |   |
| **Operating expenses:**                                                                                              |                                |   |   |
| Selling                                                                                                              | 779,705                             |   | 850,911 |
| General  and administrative                                                                                          | 934,924                             |   | 895,114 |
| **Total operating expenses**                                                                                         | 1,714,629                           |   | 1,746,025 |
| ** **                                                                                                           |                                |   |   |
| **(Loss) income from  operations**                                                                                   | (596,809)                           |   | 210,685 |
| ** **                                                                                                           |                                |   |   |
| **Other income:**                                                                                                    |                                |   |   |
| Interest  income                                                                                                     | 239,619                             |   | 241,290 |
| Other  income, net                                                                                                   | 13,497                              |   | 10,733 |
| **Total other income**                                                                                               | 253,116                             |   | 252,023 |
| ** **                                                                                                           |                                |   |   |
| **(Loss) income before provision (benefit) for income  taxes**          |  

(343,693)                   |   | 462,708 |
| **(Benefit) provision for  income taxes**                                                                            | (56,629)                            |   | 90,000 |
| **Net (loss) income**                                                                                                | $  (287,064)                   |   | $   372,708 |
| ** **                                                                                                           |                                |   |   |
| **Net (loss) income per common and common equivalent  share**                                                        |                                |   |   |
| Basic                                                                                                                | $(0.04)                             |   | $0.05 |
| Diluted                                                                                                              | $(0.04)                             |   | $0.05 |
| ** **                                                                                                           |                                |   |   |
| **Weighted average number of common and common  equivalent shares outstanding**                                      |                                |   |   |
| Basic                                                                                                                | 7,855,439                           |   | 7,861,438 |
| Diluted                                                                                                              | 7,855,439                           |   | 7,978,869 |

 

 

 

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

 

|   |
|--------|

5

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**Forward Industries, Inc.**

**CONSOLIDATED STATEMENTS OFCASH FLOWS**

|                                                                                      |   | **(Unaudited)**                          |
|-------------------------------------------------------------------------------------------|--------|------------------------------------------|
|                                                                                      |   | **Three Months Ended**

**December 31,** |
|                                                                                      |   | **     2007**        | ** ** | **2006** |
| **Operating activities:**                                                                 |   |                                     |   |   |
| Net (loss)  income                                                                        |   | $(287,064)      |   | $372,708  |
| Adjustments to reconcile net (loss) income to net  cash provided by operating activities: |   |                                     |   |   |
| Provision  for obsolete inventory                                                         |   | 129,524                                  |   |     54,000 |
| Depreciation  and amortization                                                            |   | 16,580                                   |   | 22,210 |
| Share-based  compensation                                                                 |   | 14,396                                   |   | -- |
| Deferred  income taxes                                                                    |   | 178                                      |   | (5,000) |
|      Provision for bad debt expense                                        |   | (20,033)                                 |   | -- |
| Changes  in operating assets and liabilities:                                             |   |                                     |   |   |
| Accounts receivable                                                                       |   | 229,826                                  |   | 917,221   |
| Inventories                                                                               |   | (412,564)                                |   | (70,994) |
| Prepaid expenses and other  current assets                                                |   | 2,182                                    |   | (54,257) |
| Other assets                                                                              |   | (19,871)                                 |   |                 1,520 |
| Accounts payable                                                                          |   | 1,271,992                                |   | 1,610,809   |
| Accrued expenses and other  current liabilities                                           |   | 124,079                                  |   | (299,102) |
| **Net cash  provided by operating activities**                                            |   | 1,049,225                                | ** ** | 2,549,115 |
|                                                                                      |   |                                     |   |   |
| **Investing activities:**                                                                 |   |                                     |   |   |
| Purchases of property,  plant, and equipment                                              |   | (18,892)                                 |   | (5,190) |
| **Net cash used by  investing activities**                                                |   | (18,892)                                 |   | (5,190) |
|                                                                                      |   |                                     |   |   |
| **Net  cash (used) provided by financing activities**                                     |   | **--**                                   | ** ** |                 -- |
|                                                                                      |   |                                     |   |   |
| **Net increase in cash and  cash equivalents**                                            |   | 1,030,333                                |   |                        2,543,925 |
| ** **                                                                                |   |                                     |   |   |
| **Cash and  cash equivalents at beginning of period**                                     |   | 20,267,791                               |   | 18,609,371 |
| ** **                                                                                |   |                                     |   |   |
| **Cash and  cash equivalents at end of period**                                           |   | $21,298,124                              |   | $21,153,296 |
|                                                                                      |   |                                     |   |   |
|                                                                                      |   |                                     |   |   |

 

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

|   |
|--------|

6

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**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 for the protectionand transport of portable electronic devices such as cellular phones andmedical devices. The Company markets products as a direct seller tooriginal-equipment-manufacturers in the EMEA Region (meaning the geographicarea encompassing Europe, the Middle East and Africa), the APAC Region (meaningthe Asia Pacific Region, encompassing Australia, New Zealand, Hong Kong,Taiwan, China, South Korea, Japan, Singapore, Malaysia, Thailand, Indonesia,India, the Philippines and Vietnam) and  the Americas (meaning the geographicarea, encompassing North, Central, and South America) and as a seller toretailers and wholesalers in Europe, the Middle East and Africa undernon-exclusive licenses for certain trademarks.  This license expired December 31, 2007.  See Note 9.  

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, 2008. 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, 2007, and with the disclosures and risk factorspresented therein.

**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 anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. 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 recognizes revenue fromproduct sales to customers when: products that do not require further servicesby the Company are shipped, there are no uncertainties surrounding customeracceptance, and collectibility is reasonably assured.

**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 has entered into agreements with several of its suppliers thatgrant the Company a rebate based on its level of purchases made during eachquarter. In lieu of a cash payment from these suppliers the Company generallyreceives a credit memo. The Company reduces accounts payable to the supplierand cost of goods sold each quarter as the Company earns the rebates.  For thethree-month periods ended December 31, 2007 and 2006, the cumulative amounts ofsuch quarterly rebates were approximately $102,000 and $193,000, respectively.The quarterly rebates are net of amounts allocated to unsold inventories andare reflected in the accompanying consolidated statements of operations as areduction of cost of goods sold.

7

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**Forward Industries, Inc.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE2     ACCOUNTING POLICIES (CONTINUED)**

**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, net” in the accompanying unaudited consolidated statements of operations.The net gains from foreign currency transactions were approximately $10,000 and$11,000 for the three-month periods ended December 31, 2007 and 2006, respectively. 

**Comprehensive (Loss)Income**

 For the three-monthperiods ended December 31, 2007 and 2006, the Company did not have anycomponents of comprehensive (loss) income other than net (loss) income.

**RecentAccounting Pronouncements**

On July 13, 2006 the Financial Accounting Standards Board (FASB) issued FASB InterpretationNo. 48, Accounting for Uncertainty in Income Taxes, as amended by FASBInterpretation No. 48-1, Definition of Settlement in FASB Interpretation No. 48on May 2, 2007 (FIN 48). FIN 48, clarifies the accounting for income taxes byprescribing the minimum recognition threshold a tax position is required tomeet before being recognized in the financial statements. It also providesguidance on de-recognition, measurement, classification, interest and penalties,accounting in interim periods, disclosure and transition, and clarifies thatincome taxes are outside the scope of FASB Statement No. 5, Accounting forContingencies.

FIN 48applies to all tax positions related to income taxes subject to FASB StatementNo. 109, Accounting for Income Taxes, (FAS 109). This includes tax positionsconsidered to be “routine” as well as those with a high degree of uncertainty.

TheCompany adopted FIN 48 effective October 1, 2007.  The adoption of FIN 48 did not have a material impact on its consolidated financial statements.

**NOTE 3     INVENTORIES**

Inventoriesconsist primarily of finished goods and are stated at the lower of cost(determined by the first-in, first-out method) or market.  Provision has beenmade to reduce excess, obsolete, or otherwise un-saleable inventories to netrealizable value. Changes in this provision are reflected in the cost of goods soldline of the Company’s consolidated statements of operations.  

**NOTE 4     DEBT**

In February 2007, Forward and itswholly-owned U.S. subsidiary, Koszegi Industries, Inc. renewed their creditfacility with a U.S. bank that provides for a committed line of credit in themaximum amount of $3.0 million, including a $1.5 million sub-limit for lettersof credit.  This credit facility expires March 30, 2008. Forward and Koszegi are required to eliminate borrowings for thirty consecutive days during theterm of the facility and are required to comply with certain financialcovenants, including the maintenance of current and tangible net worth ratios,as defined. Amounts drawn under the credit facility bear interest at LIBOR plus2.5% and are secured by substantially all of Koszegi’s assets and certainassets of Forward.  There were no borrowings or letter of credit obligations outstandingunder this facility during the three-month period ended December 31, 2007. 

8

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**Forward Industries, Inc.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 4     DEBT(CONTINUED)**

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 bank (5.5%as December 31, 2007).  At December 31, 2007, Forward Innovations iscontingently liable to the bank in respect of a letter of credit issued on itsbehalf in the amount of €224,000 (equal to approximately $327,000 as at December 31, 2007) 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.  

                **NOTE5     OPERATING SEGMENT INFORMATION**

The Company operates in a singlesegment that provides carrying solutions for portable electronic devices. Thiscarrying-solution segment designs, markets, and distributes products to itscustomers that include manufacturers of consumer hand held wirelesstelecommunications and medical monitoring devices. The carrying solutionsegment operates in geographic regions that include primarily the Americas, EMEA, and APAC regions. 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,**

 

**2007**

** **

**2006**

APAC

$2,295

 

          $3,356

Americas

1,524

 

2,462

EMEA

1,134

 

1,617

**Total net sales**

**$4,953**

** **

**$7,435**

 

 

 

 

9

 

 

 

**Forward Industries, Inc.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 6     INCOME TAXES**

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

 

**Three Months Ended**

**December 31,**

U.S. Federal and State

**2007**

 

**2006**

    Current

$           --

 

$68,000

    Deferred

(50,229)

 

5,000

 

 

 

 

Foreign:

 

 

 

    Current

--

 

17,000

    Deferred

(6,400)

 

--

**Income  tax (benefit) provision**

**$(56,629)**

** **

**$90,000**

For the three-month periods ended December 31, 2007 and 2006, the Company recorded a (benefit) provision for income taxes ofapproximately $(57,000) and $90,000, respectively. The Company’s effective taxrate does not approximate the statutory United States federal income tax rateprimarily due to tax rate differentials in respect of United States state andforeign taxes.  

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, 2007, the Company’s Swiss subsidiary hadapproximately $4,708,000 of accumulated undistributed earnings.  

**NOTE 7     (LOSS) EARNINGSPER 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 the period. Dilutivecommon-equivalent shares consist of shares that would be issued upon theexercise of stock options, computed using the treasury stock method. For thispurpose, the average quoted market prices on the NASDAQ SmallCap Market for theCompany's common stock for the three-month periods ended December 31, 2007 and 2006, were $2.66 and $4.88, respectively. 

Loss pershare data for the three-month period ended December 31, 2007, excludes all outstanding options as inclusion of such shares would be anti-dilutive. Incomeper share data for the three-month period ended December 31, 2006, excludes optionsto purchase a total of 70,000 shares of common stock from the computation ofdiluted earnings per share because the exercise prices were greater than theaverage quoted market price of the Company’s common stock, and therefore, theireffect would be anti-dilutive as calculated under the treasury method promulgatedby the Statement of Financial Accounting Standard No. 128, Earnings per Share(“SFAS 128”). 

Inaccordance with the contingently issuable shares provision of SFAS 128, 21,999shares of service-based common stock awards (“restricted stock”) were excluded fromthe calculation of diluted loss per share for the three-month period endedDecember 31, 2007.

 

 

10

 

 

 

**Forward Industries, Inc.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 8     STOCK BASEDCOMPENSATION**

In May 2007, shareholders of the Companyapproved the 2007 Equity Incentive Plan (the 2007 Plan), pursuant to which upto 400,000 shares of common stock can be issued to officers, employees andnon-employee directors of the Company upon the grant of restricted common stockand the exercise of stock options granted 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.   

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 in accordance with the original terms of the grants.

**Stock OptionAwards**

All stockoption awards granted under the 1996 Plan and the 2007 plan are fully vested. Duringthe three-month period ended December 31, 2007, the Company did not grant anystock option awards under the 2007 Plan. Accordingly, the Company did not recognizeany compensation cost related to stock option awards in its consolidated statementsof operations for the three-month period ended December 31, 2007.

A summary of the stock optionactivity under the 2007 Plan and the 1996 Plan during the three-month periodended December 31, 2007 is presented below: 

 

 

 

**Shares**

** **

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

** **

** **

**Aggregate 	Intrinsic 	Value**

**Outstanding at September 30, 2007**

**232,000**

** **

**$4.51**
   
**4.68**
   
**$233,000**

Granted

--

 

  --
   
 
   
 

Exercised

--

 

--
   
 
   
 

Forfeited

--

 

--
   
 
   
 

Expired

--

 

--
   
 
   
 

**Outstanding at December 31, 2007**

**232,000**

** **

**$4.51**
   
**4.17**
   
**$76,000**

 

 

 

 
   
 
   
 

Options vested  at December 31, 2007. 

232,000

 

$4.51
   
4.17
   
$76,000

Options exercisable at December 31   , 2007

 

232,000

 

 

$4.51
   
 

4.17
   
 

$76,000

 

 

11

 

**Forward Industries, Inc.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

 

**NOTE 8     STOCK BASEDCOMPENSATION (CONTINUED)**

**Stock OptionAwards (Continued)**

The tablebelow provides additional information regarding stock option awards that wereoutstanding and exercisable at December 31, 2007.

 

**Stock Options Outstanding and  Exercisable**

**Range of Exercise Prices**

**Outstanding at 	December 31, 2007**

** **

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

** **

**Weighted 	Average 	Exercise Price**

$1.75 to $2.85

162,000

 

2.56

 

$2.02

$6.02

40,000

 

8.34

 

$6.02

$15.91

30,000

 

7.31

 

$15.91

** **

232,000

 

 

 

 

**Restricted Stock Awards**

Under the2007 Plan as of December 31, 2007, the Compensation Committee had approvedawards of 56,000 shares of restricted stock (including 23,000 shares ofrestricted stock the grant date for which is January 2, 2008), in theaggregate, to certain key employees, one of whom also serves as a director,pursuant to the 2007 Plan.  Vesting of the restricted stock is generally subjectto a continued service condition with one-third of the awards vesting each yearon the anniversary date the awards were granted commencing on the first suchanniversary date.  The fair value of the awards was equal to the market valueof the Company’s common stock on the grant date. During the three-month periodended December 31, 2007 the Company recognized approximately $14,000 ofcompensation cost in its consolidated statements of operations related torestricted stock awards vesting under the 2007 Equity Plan.

The following table summarizes restricted stock activity from September30, 2007 through December 31, 2007 (restricted stock grants approved duringthis period but having a grant date of January 2, 2008, are not reflected inthe table).

 

 

** **

** **

** **

**Shares**

** **

**Weighted 	Average  	Grant Date 	Fair Value**

Nonvested balance at September 30, 2007

 

21,999

 

$3.49

Changes during the period:

 

 

 

 

Shares granted

 

--

 

--

Shares vested

 

--

 

--

Shares forfeited

 

--

 

--

Nonvested balance at December 31   , 2007

 

21,999

 

$3.49

As of December 31, 2007, there wasapproximately $34,000 of total unrecognized compensation cost related to 21,999of restricted stock awards (reflected in the table above) granted under the2007 Equity Incentive Plan. That cost is expected to be recognized over theremainder of the requisite service period.

 

12

 

 

 

**Forward Industries, Inc.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 8     STOCK BASEDCOMPENSATION (CONTINUED)**

**Warrants**

As ofDecember 31, 2007, warrants to purchase 75,000 shares of the Company’s commonstock at an exercise price of $1.75 were outstanding. These warrants arescheduled to expire 90 days after a registration statement is declaredeffective by the Securities and Exchange Commission. As of December 31, 2007, no such registration statement has been filed with the Securities and ExchangeCommission.

**NOTE 9     COMMITMENTSAND CONTINGENCIES**

**RoyaltyCommitments**

The Companywas granted a license for the use of certain trademarks by Motorola, Inc.("Motorola") for the distribution and sale of carry solution productsthroughout the EMEA Region under a non-exclusive license agreement effective October 1, 2004.  The license agreement expired by its terms on December 31, 2007, with the Company being obligated to pay a royalty on sales effected through theexpiration date.  The Company and licensor are in negotiations to extend orrenew the license.  Subject to successful conclusion of such negotiations, asto which there can be no assurance, the Company has limited sell-through rightswith respect to unsold inventory on hand as of December 31, 2007, as to which it is also obligated to pay royalties.

Under theterms of the license agreement, the Company is required to pay Motorola aroyalty based upon a percentage of the Company's net sales to third parties oflicensed products within the EMEA Region, subject to payment of minimumroyalties (irrespective of actual net sales) to Motorola over three contractperiods, the last two of which were calendar 2006 (Contract Period 2) andcalendar 2007 (Contract Period 3). 

The licenseterms provided that, prior to commencement of the latter two contract periods, theparties would attempt to negotiate a new minimum royalty amount for the ensuingcontract period, in the absence of which a default formula would apply.  Thedefault formula provided that the minimum royalty payment for the ensuingContract Period may not be less than seventy-five per cent (75%) of theannualized royalties payable in respect of actual sales for the previousContract Period, provided, however, that in no event may the minimum royalty insuch ensuing Contract Period be less than seventy-five percent (75%) nor morethan one-hundred-twenty-five percent (125%) of the amount of such priorContract Period’s annual minimum royalty. The Company and Motorola were unableto negotiate new agreed minimum royalty payment amounts for Contract Period 2and Contract Period 3. Consequently, application of the default formularesulted in fixing the minimum royalty amounts at $225,000 for Contract Period2 and $281,000 for Contract Period 3.

In July2005, the license agreement with Motorola was amended to expand the licensedterritory to include the APAC Region as well as the EMEA Region inconsideration for payment of additional royalties on sales in such licensedterritory, subject to payment of minimum royalties, separate and apart fromroyalties payable in respect of sales in the EMEA Region.  

Under the licensethe Company recorded royalty expense of approximately $89,000 and $137,000 forthe three-month periods ended December 31, 2007 and 2006, respectively. Theseamounts are included in selling expenses in the accompanying consolidatedstatements of operations.  These amounts represent minimum royalty in respectof the 2008 Quarter and royalties paid in respect of actual sales in respect ofthe 2007 Quarter. The minimum royalties for the three-month periods ended December 31, 2007 and 2006 were $89,000 and $69,000, respectively.

13

 

 

 

**Forward Industries, Inc.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 9     COMMITMENTSAND CONTINGENCIES (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$327,000 as of December 31, 2007) paid by such bank to the logistics providerpursuant to a letter of credit that was issued by the bank in favor of thelogistics 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. As of December 31, 2007, the Company has not incurred aliability in connection with this guarantee.

**EmploymentAgreements**

EffectiveOctober 1, 2005, the Company entered into an employment agreement with each ofJerome E. Ball, Michael M. Schiffman, and Douglas W. Sabra in order to securetheir services to Forward during the terms of their respective agreements.  Mr.Ball’s and Mr. Schiffman’s agreement expired December 31, 2007 (see Note 11Subsequent Events, below, with respect to Mr. Schiffman’s separationarrangements).  Mr. Sabra’s agreement expires December 31, 2008. Mr. Sabra’s agreement, provides 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). If Forward givessuch notice, subject to certain conditions, the executive would be entitled toreceive six months salary, at the rate then in effect, as severance.  No stockoptions or other equity compensation is granted to any such executive pursuantto these agreements.  

Under hisemployment agreement, which was amended in connection with his appointment tosucceed Mr. Ball as Chief Executive Officer, Mr. Sabra is employed as Presidentand Chief Executive Officer at an annual salary of $250,000, increased from$225,000.   At the time of this appointment and salary increase theCompensation Committee of the Company’s Board of Directors also determined togrant Mr. Sabra 20,000 shares of restricted stock under the 2007 Plan, with agrant date of January 2, 2008, vesting in equal proportions over three yearsfrom the grant date.

Inaddition, under his agreement Mr. Sabra is eligible to receive bonuscompensation in each year of the term of his agreement based on financialincentives.  The formula, as amended, that determines the amount of bonus thatmay be earned in each year during the term of the agreement is based on apercentage of, Forward’s Pre-Tax Income (defined to exclude “other income”).

Mr. Sabra isentitled to receive customary benefits including health, life and disabilityinsurance, auto allowances and participation in the Company's 401K retirementplan.  

14

 

 

 

**Forward Industries, Inc.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 9     COMMITMENTSAND CONTINGENCIES (CONTINUED)**

**ConsultingArrangement**

The Companyentered into a two-year consulting agreement with its Chairman of its Board ofDirectors, Jerome E. Ball, effective upon his retirement as Chief ExecutiveOfficer on January 1, 2008.  Under this consulting agreement the Company hasretained him to advise the Company as to its principal customer relationships,development and strategies under its business plan, and potential acquisitionsand/or business combinations. In exchange for such services, the Company hasagreed to pay Mr. Ball $10,000 per month during the term of the consultingagreement, which commenced January 1, 2008 and is scheduled to expire on December 31, 2009. If the agreement is terminated due to Mr. Ball’s permanent disabilityor death during the term of the agreement, the Company has agreed to pay Mr.Ball or his estate, as the case may be, one half the payments remaining underthe agreement as a termination benefit.  In addition, if during the term of theagreement Mr. Ball is re-elected to the Board of Directors and serves as itsChairman, he will be entitled to a fee of $25,000 per annum, payable in monthlyinstallments.

**NOTE 10   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, 2007, 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.

**NOTE 11   SUBSEQUENTEVENTS**

On January28, 2008, the Company entered into severance arrangements with Mr. Michael M.Schiffman, whose employment as President and Chief Operating Officer expired December 31, 2007.  Under these arrangements, in addition to other customary terms andconditions, Mr. Schiffman was granted a severance package consisting of$162,500, or six months salary at the annual rate under his employmentagreement at expiration, vested benefits under the Company’s health andretirement plans in accordance with plan terms, and a release by the Company ofpotential claims,  Mr. Schiffman released the Company from potential claims andagreed to certain modifications of the non-competition and non-solicitationcovenants contained in the employment agreement. 

 

 

 

 

15

 
****
 

 

**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 in our Annual Report on Form 10-K for the fiscal year ended September 30,2007.  The following discussion and analysis compares our consolidated resultsof operations for the three months ended December 31, 2007 (the “2008Quarter”), with the three months ended December 31, 2006 (the “2007 Quarter”),and is based on or derived from the Unaudited Consolidated Financial Statementsincluded elsewhere in this Quarterly Report. There have been no materialchanges in critical accounting estimates since September 30, 2007.  All figuresin the following discussion are presented on a consolidated basis. All dollaramounts and percentages presented herein have been rounded to approximatevalues.*

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

Thisquarterly report contains forward-looking statements that are not based onhistorical fact and that involve assessments of certain risks, developments,and uncertainties.  Such forward looking statements, within the meaning of thePrivate Securities Litigation Reform Act of 1995, can be identified by the useof forward-looking terminology such as “may”, “will”, “should”, “expect”,“anticipate”, estimate”, “intend”,  “continue”, or “believe”, or the negativesor other variations of these terms or comparable terminology.  Forward lookingstatements may include projections, forecasts, or estimates of futureperformance.  Forward looking statements are based upon assumptions that webelieve to be reasonable at the time such forward looking statements are made. Whether those assumptions will be realized will be determined by futurefactors, developments, and events, which are difficult to predict and may bebeyond our control.  Actual factors, developments, and events may differmaterially from those assumed.  Such risk factors, developments, uncertainties,and contingencies developments, including those discussed in this Management’sDiscussion and Analysis of Financial Condition and Results of Operations andthose identified in “Risk Factors” in Item 1A of Part II of this QuarterlyReport on Form 10-Q and in our annual report on Form 10-K for the fiscal yearended September 30, 2007, could cause our future operating results to differmaterially from those set forth in any forward looking statement.  Such factorsinclude, among other, the following: our success in winning new business fromour customers and against competing vendors; whether replacement programs thatwe win will be as successful as those that are replaced; the loss of a key salesmanwho has significant influence on our relationships with certain OriginalEquipment Manufacturer (“OEM”) diabetic customers; levels of demand and pricinggenerally for cellular handsets and blood glucose monitoring devices sold byour customers for which we supply carry solutions; variability in order flowfrom our OEM customers; general economic and business conditions, nationallyand internationally in the countries in which we do business; the expiration ofour license agreement with Motorola by its terms on December 31, 2007, and theuncertainty as to whether such agreement will be renewed or extended on termsacceptable to us; the need to add materially to our inventory allowance,including the impact on inventory levels or saleability of inventory arisingout of hub agreements we have entered into with two of our OEM customers; demographicchanges; changes in technology, including developments affecting cellularhandsets; developments in the treatment or control of diabetes that affect theincidence of use of handheld blood glucose monitors by diabetics; increasedcompetition in the business of distribution of carry solutions for handheldelectronic devices generally or increased competition to include carrysolutions with products manufactured by our OEM customers in particular;changes affecting the business or business prospects of one or more of ourprincipal OEM customers; governmental regulations and changes in, or thefailure to comply with, governmental regulations; and other factors includedelsewhere in this report and our other reports filed with the Commission,including without limitation, those described under the caption Risk Factorscontained in our Annual Report on Form 10-K for the year ended September 30, 2007. Accordingly, there can be no assurance that any such forward looking statement,projection, forecast or estimate can be realized or that actual returns orresults will not differ materially from those set forth in any forward lookingstatement.

16

 

 

 

**Forward Industries, Inc.**

 

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.

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

Thismanagement’s discussion and analysis of financial condition and results ofoperations is based upon our unaudited consolidated financial statements, whichhave been prepared in accordance with accounting principles generally acceptedin the United States. The preparation of these financial statements requires usto make estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingentliabilities. We base these estimates on our historical experience and onvarious other assumptions that we believe to be reasonable under thecircumstances, and these estimates form the basis for our judgments concerningthe carrying values of assets and liabilities that are not readily apparentfrom other sources. We periodically evaluate these estimates and judgmentsbased on available information and experience. Actual results could differ fromour estimates under different assumptions and conditions. If actual resultssignificantly differ from our estimates, our financial condition and results ofoperations could be materially impacted. Please refer to “Management’sDiscussion and Analysis—Critical Accounting Policies and Estimates” included inour Annual Report on Form 10-K for the fiscal year ended September 30, 2007,for further information regarding our critical accounting policies andestimates. 

The notesto our audited consolidated financial statements and “Management’s Discussionand Analysis” included in our Annual Report on Form 10-K for the year endedSeptember 30, 2007 (including the information under “Risk Factors” therein),the notes to our consolidated financial statements included in Part I, Item 1of this Quarterly Report on Form 10-Q, the factors and events describedelsewhere in the “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” that follows below, as well as the informationcontained under the caption “Risk Factors” in Item 1A of Part II of thisQuarterly Report on Form 10-Q  contain additional information related to ouraccounting policies and should be read in conjunction with the followingdiscussion and analysis relating to our overall financial performance,operations and financial position. 

**Revenue Recognition**

Inaccordance with the requirements of Staff Accounting Bulletin (SAB) No. 104, RevenueRecognition in Financial Statements, the Company recognizes revenue fromproduct sales to customers when: products that do not require further servicesby the Company are shipped; there are no uncertainties surrounding customeracceptance; and collectibility is reasonably assured.

Accounts Receivable

We recordan allowance for doubtful accounts for all receivables judged by us to beunlikely to be collected. The effect of the allowance is to reduce the accountsreceivable reported on our balance sheet to an amount that we believe willactually be collected.  Significant management judgments and estimates must bemade and used in connection with establishing this valuation account, based ona combination of factors:  Our analysis includes, among other factors, of theage of receivable balances, our historical bad debts write-off experience, andour respective customer’s creditworthiness to determine the appropriateallowance for doubtful accounts. At December 31, 2007 and September 30, 2007, our allowance for doubtful accounts was approximately $27,000 and $47,000,respectively.  Changes to this account are reflected in the general andadministrative expense line of our consolidated statements of operations. Although we consider our allowance for doubtful accounts to be adequate andproper, changes in economic conditions, the assessments of new customers’creditworthiness, changes in customer circumstances, or other factors couldhave a material effect on the recorded allowance.

 

17

 

 

 

**Forward Industries, Inc.**

 

 

**Inventory Valuation**

We make estimatesand judgments to value our inventory. Our inventory is recorded at the lower ofcost or market. The majority of our inventory consists of finished goods thatare custom made by our suppliers based on firm orders from our OEM customersand held for our account.  We also supply custom manufactured inventory to our OEMcustomers’ distribution hubs in anticipation of their draw-downs to fulfillorders; we also periodically stock inventory in anticipation of orders from ourOEM customers when it appears to us commercially advantageous to do so. We alsohold inventory in support of our license agreement. At the end of each fiscalquarter, we evaluate our ending inventories, and we establish an allowance forinventory that is considered obsolete, slow moving, or otherwise un-saleable.  Thisevaluation includes, among other factors, analyses of inventory levels,historical loss trends, sales history, and projections of future sales demand.  Wephysically dispose of inventory once its marketability has been determined tobe zero.  Inventory allowances were approximately $0.7 and $0.6 million at December 31, 2007 and September 30, 2007, respectively.  Changes to this account arereflected in the cost of goods sold line of our consolidated statements ofoperations.  

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 

In thepreparation of our consolidated financial statements, we are required toestimate income taxes in each of the jurisdictions in which we are subject totaxation. This process involves estimating actual current income tax expensetogether with assessing temporary differences resulting from differing treatmentof revenue and expense items for tax and accounting purposes. These differencesresult in deferred tax assets and liabilities, which are included in ourconsolidated balance sheet. We had approximately $0.3 million of deferred taxassets at December 31, 2007, and September 30, 2007, respectively. No valuation allowances were recorded in respect of these deferred tax assets as ofsuch dates.

Managementevaluates our deferred tax assets on a quarterly basis and assesses the needfor valuation allowances. Our deferred tax assets are evaluated by consideringhistorical levels of income, estimates of future taxable income, and the impactof our tax planning strategies. We record a valuation allowance to reducedeferred tax assets when it is determined, on a more likely than not basis,that we will not be able to use all or part of our deferred tax assets. 

In theevent that it should be subsequently determined that we can not, on a morelikely than not basis, realize all or part of our deferred tax assets, if any,in the future, an adjustment to establish (or record an increase in) thedeferred tax asset valuation allowance would be charged to income in the periodin which such determination is made. Changes in our deferred tax assets arereflected in the tax (benefit) expense line of our consolidated statements of operations.

**Variability of Revenues and Results of Operation**

Because oursales revenues are highly concentrated in a few large customers, and becausethe volumes of these customers’ order flows to us are highly variable, withshort lead times, our quarterly revenues, and consequently our results ofoperations, are susceptible to significant variability over a relatively shortperiod of time.

18

 

 

 

**Forward Industries, Inc.**

 

 

We dependfor the predominant proportion of our sales revenues on OEM orders from our threelargest customers, each of which is a large, multinational corporation.  Eachof these customers launches many different products and purchases productsaccessories, such as carrying cases, from many different vendors.  When we areselected to supply a carry solution “in-box” for a specific product and launch,we may not be in a position to know the frequency or volumes of our customers’orders, or the duration of such orders (which will depend on the OEM customerproduct’s life cycle), all of which depend on our customers’ ongoingassessments of the product’s relative contribution to their businesses, as wellas other factors.  Our OEM customers may keep products for which our carrysolutions have been selected to be packaged “in-box” in active promotion formany months, or for a very short period of time, depending on the popularity ofthe product, product development cycles and new product introductions, and ourcustomers’ competitors’ product offerings.  Short product life cycles and/orsignificant variability in product pricing are particularly characteristic ofthe cellular handset market, where new functionality is constantly introduced,competition among vendors is high, and industry technical standards are subjectto continuing change.  When “in-box” programs end, and to the extent that theintroduction of new programs does not include our products as an accessory“in-box”, or such new programs do include our products as an accessory “in-box”but do not result in a comparable level of demand for our products, the levelof our OEM product sales is susceptible to significant and rapid change.  

All of thismakes our quarterly revenue levels susceptible to a high degree of variabilityand difficult to predict.  Significant, rapid shifts in our operating resultsmay occur if and when one or more of these customers increases or decreases thesize(s) of, or eliminates, its orders from us by amounts that are material toour business.

**TRENDS IN RESULTS OF OPERATIONS**
-  *We foresee a continuation ofweak results from our major cell phone OEM customer*.  Revenue from Motorola, historically our largestcustomer, has trended down on a comparable quarter basis since the firstquarter of Fiscal 2007.  This downtrend accelerated in the third and fourthquarters of Fiscal 2007, and in the 2008 Quarter, revenue from Motorola fellprecipitously from the lower levels of Fiscal 2007*.*  We believe as partof the economics accompanying our customer’s cell phone launch cycle thatMotorola has reduced and/or eliminated the inclusion of accessories in-box forformerly high-price handset models that have transitioned to mid- andlower-price handsets, with consequent revenue loss for us. We have not receivedawards of significant new “in-box” programs to make up for higher revenueprograms in previous reporting periods.  Currently, we foresee no imminent new“in-box” programs or developments to reverse this trend in the immediatefuture.  The uncertainties relating to a reversal of this trend toward more positivedevelopments have increased with Motorola’s disclosures that it is evaluatingstrategic alternatives for its wireless handset business unit.  Absent areversal of this trend, which we do not foresee in the immediate future, andabsent a material increase in sales revenues from other product markets, wewill continue to incur operating losses, and possibly net losses, throughout Fiscal2008.  See “Risk Factors” in Part II, Item 1A, for a discussion of recentdevelopments relating to our relationship with Motorola.
-  *We anticipate that gross profitand gross profit percentage will continue to be impacted by several factors.*First, reduction in volume demand (particularly withrespect to our cell phone products) in the 2008 Quarter was, and we anticipate forFiscal 2008 likely will be, the most significant factor in the level of grossprofit. Second, we anticipate that our gross profit will continue to bepressured by a difficult pricing environment for our cell phone and bloodglucose carry solution product lines, combined with inflationary cost pressureson our cost of goods sold, as described below. Third, while revenues fromLifescan, our largest customer, and certain other OEM customers in this productline have trended higher, gross margin on these sales is relatively narrow.  Asrevenue from these programs accounts for an overall higher percentage of our revenuemix, we expect gross profit percentage may further decline.  Finally,aftermarket sales under the Motorola license have tended to carry higher profitmargins than OEM sales on certain products.  If we are not successful inrenewing or extending the license agreement, and if net sales under any suchlicense are not material, gross profit percentage will be further pressured. 
-  *Our customer base is becomingmore concentrated.*Four customers,accounted for 78% of our net sales in the 2008 Quarter. In Fiscal 2007, threecustomers, including their subsidiaries, affiliates, or their contractmanufacturers, accounted for 72% of our net sales.  We continue to pursueopportunities with several new OEM suppliers of handheld devices.  

19
 
 

 

**Forward Industries, Inc.**

 

 
-  *We believe that recent,macro-economic developments in or affecting China’s economy will continue to  contributeto rising costs of goods sold, which will pressure gross profit.*  We source 100% of the products we sell anddistribute from vendors located in China.  We continue to face rising laborcosts (particularly in South China, where we source the majority of ourproducts), higher fuel costs, and the rising value of the Renminbi incomparison to the U.S. dollar in Fiscal 2008.  The appreciation of the Renminbiversus the US dollar may accelerate in Fiscal 2008. While our cost of goodssold is denominated in US dollars, higher labor costs and Chinese currencyappreciation are reflected in our vendors’ prices to us. We believe thatcurrently we have relatively little ability to pass these higher costs on toour larger customers.
-  *Our 2008 Quarter and Fiscal2007 operating results led to a pre-tax net loss that would have been significantlylarger but for the substantial level of “other income”, which consistsprimarily of interest income on cash balances. *We anticipate that these conditions will likelypersist in the foreseeable future absent any significant reductions in selling,general, and administrative expense or improvements to our gross profit. 
-  *Our inventory remains athistorically high levels primarily as a result of supporting hub agreementsentered into with two of our largest OEM customers.  We expect inventory toremain at higher levels in the foreseeable future in large part because of therecent entry into additional hub agreements with these customers.*  Under these agreements, we are required to sourceand ship our products to our OEM customers’ distribution hubs at multiplelocations, but do not invoice the OEM customers until they withdraw our productfrom the hub for sale through their chain of distribution. The implementationof these arrangements negatively affects our liquidity. 

**RESULTS OF OPERATIONS FOR THE 2008 QUARTER COMPAREDTO THE 2007 QUARTER**

**Net (loss)income**

We incurred a net loss of $0.3 million in the 2008 Quarter compared to netincome of $0.4 million in the 2007 Quarter, a decrease of $0.7 million. Thisdecrease was due to a 43% decline in gross profit resulting from a significantdecline in sales of cell phone products, as detailed below. Our operatingexpenses (higher general and administrative expense offset by lower selling expense) and otherincome remained essentially flat. Income taxes swung $150,000 to a benefit inthe 2008 Quarter from a provision in the 2007 Quarter, which had the effect ofreducing the net loss. Basic and diluted per share data was ($0.04) for the2008 Quarter, compared to $0.05 for the 2007 Quarter. The decrease in earningsper share in the 2008 Quarter was due to the decrease in net income.

**Net Sales**

Netsales decreased $2.5 million or 33% to $5.0 million in the 2008 Quartercompared to $7.4 million in the 2007 Quarter due to a decline in sales of cellphone products of $3.7 million, or 87%. This decline was offset in part by increasesin sales of diabetic products of $1.0 million, or 42%, and sales of otherproducts of $0.2 million, or 22%.  The tables below set forth sales by productline and geographic location of our customers for the periods indicated.

 

 

 

20

 

 

 

**Forward Industries, Inc.**

 

 

**Net Sales for 2008 Quarter**

**3 Months ended December 31, 2007**

**(millions of dollars)**

** **

**APAC**

**Americas**

**EMEA**

Total

Diabetic Products

$1.9

$0.7

$0.9

$3.5

Other Products

0.1

0.7

--

0.9

Cell Phone Products

0.2

0.1

0.2

0.5

**Total***

**$2.3**

**$1.5**

**$1.1**

**$5.0**

                                

**Net Sales for 2007 Quarter**

**3 Months ended December 31, 2006**

**(millions of dollars)**

** **

**APAC**

**Americas**

**EMEA**

Total

Diabetic Products

$1.4

$0.8

$0.3

$2.5

Other Products

0.1

0.6

--

0.7

Cell Phone Products

1.9

1.1

1.3

4.2

**Total***

**$3.4**

**$2.5**

**$1.6**

**$7.4**

* Tables maynot total due to rounding.

**Diabetic Product Sales**

Wedesign to the order of and sell directly to OEMs carrying cases used bydiabetics to carry their personal electronic, blood glucose monitoring kits. Inthe 2008 Quarter, OEM customers for these carrying cases included Lifescan,Abbott Labs, and Roche Diagnostics (including its subsidiaries, affiliates andcontract manufacturers) as well as other customers. Our carrying cases arepackaged as an accessory "in-box" with the monitoring kits that aresold by our OEM customers.

Salesof cases for blood glucose monitoring kits increased approximately $1.0million, or 42%, to $3.5 million in the 2008 Quarter from $2.5 million in the2007 Quarter. This increase was primarily due to higher sales to Lifescan andRoche of $0.7 million and $0.5 million, respectively, in the 2008 Quarter,while sales to Abbot Labs remained essentially flat at $0.9 million. These increaseswere offset, in small part, by decreases in sales to other suppliers ofdiabetic devices of $0.2 million. 

Salesof carrying cases for blood glucose monitoring kits represented 71% of ourtotal net sales in the 2008 Quarter compared to 33% of our total net sales inthe 2007 Quarter due primarily to the significant decline in cell phone productsales.

**OtherProduct Sales**

Wedesign and sell a number of other carrying solutions for items such as cameras,portable oxygen tanks, bar code scanners, MP3 players, and other carryingsolutions for an assortment of products on a made-to-order basis that arecustomized to meet the individual needs of our smaller OEM customers.  Bythe nature of our distribution in this market, sales of these customizedproducts to order in their product category vary from period to period withoutnecessarily reflecting a significant trend in overall demand for these items.Sales of other products increased $0.2 million, or 22%, to $0.9 million in the 2008Quarter from $0.7 million in the 2007 Quarter due primarily to a $0.1 millionincrease in sales to one OEM customer.

**Cell Phone Product Sales**

Ourcell phone carry solutions products include carrying cases for handsets andcamera attachments, plastic belt clips, carrying case straps and bags, screencleaners, decorative faceplates, and other attachments used to carry or enhancethe appearance of cellular telephone handsets.  We design to the order ofand sell these products directly to cell phone handset original equipmentmanufacturers.  Our cases are packaged as an accessory "in-box"with the handsets that are sold by our OEM customers. Motorola was our only OEMcell phone customer in Fiscal 2007, as well as the 2008 Quarter.  Inaddition, under our license agreement with Motorola we distribute our productsas separately packaged accessories directly to third party wholesalers andretailers in the EMEA and APAC Regions. Cell phone product sales consisted ofOEM “in-box” sales to Motorola and sales under our license agreement.  See“Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q andin our Annual Report on Form 10-K for the fiscal year ended September 30, 2007,for a discussion of the risks of non-renewal of this agreement, which expiredDecember 31, 2007.

 

 

21

 

 

 

**Forward Industries, Inc.**

 

 

Totalsales of cell phone products decreased $3.7 million, or 87%, to $0.5 millionin the 2008 Quarter from $4.2 million in the 2007 Quarter. “In-box” sales toMotorola decreased $3.0 million to $0.4 million in the 2008 Quarter from $3.4million in the 2007 Quarter. We believe this may be due to a number of factors,including increased competition and the economics accompanying our customer’scell phone launch cycle, in which certain very successful models (for which wehave supplied accessories in-box in the 2007 Quarter), after an extended timeon the market, made a pricing transition to mid- and lower-tier phones.  As aconsequence, we believe our “in-box” accessories have been reduced and/oreliminated with consequent revenue loss for us.  Although we continue to beselected to participate in several new “in-box” programs with Motorola, theseprograms have not been significant, and the revenue from successful programs inrecent fiscal years has not been replaced.

Salesto third party distributors and retailers under our license agreement with Motorolatotaled $0.2 million in the 2008 Quarter compared to $0.8 million in Fiscal2006, a decrease of $0.6 million, or 75%.  We believe that sales under ourlicense agreement with Motorola are being, and will continue to be, adverselyaffected as consumers may be less inclined to purchase relatively high costcases and other accessories for mature, lower-tier phones accessorized by ourproducts.   We believe that the decline may also be attributable to thelicensor’s direct sales in the EMEA Region to one or more distributors, in directcompetition with our sales efforts.

Salesof carry solutions for cell phone products represented 11% of our total netsales in the 2008 Quarter compared to 57% in the 2007 Quarter, due primarily tothe significant decline in cell phone sales and, to a much lesser extent, theincreases in our diabetic and other product sales.

**Gross Profit**

Grossprofit decreased more than $0.8 million, or 43%, to $1.1 million in the 2008Quarter from $2.0 million in the 2007 Quarter predominantly due to the steepdecline in revenue from cell phone products.   With the decline in salesof cell phone products, sales of diabetic products, which typically have narrowermargins, accounted for an overall higher percentage of our total net sales in2008 Quarter.  This adversely affected gross profit percentage. Margins acrossall product lines continue to be affected by a difficult pricing environment. In addition, higher costs of goods sold, including labor and materials costs,due to inflation and currency factors, all contributed to reduced gross profitand gross profit percentage. Further, certain costs of operating our Hong Kong facility, which constitutes part of our cost of goods sold on our statements ofoperations, are relatively fixed and, on a lower revenue base, tend to act as adrag on our gross margin. Finally, we recorded a $0.1 million charge in the2008 Quarter for obsolete inventory which also adversely affected cost of goodssold in the 2008 Quarter compared to the 2007 Quarter.

Grossprofit as a percentage of net sales decreased to 23% in the 2008 Quarter from 26%in the 2007 Quarter due to the factors discussed above.

**Selling, General, and Administrative Expenses**

Selling,general, and administrative expenses remained essentially flat at $1.7 millionbetween the 2008 Quarter and the 2007 Quarter, which masked a number of changes.Selling expenses decreased $0.1 million due to a 35% decline in royalty expense (due to lower sales under theMotorola license) and 55% decline in travel and entertainment.  General andadministrative expense increased $40,000 primarily due to a $0.2 millionincrease in personnel costs related to an executive's severance, which wasoffset in part by lowerprofessional fees.

 

22

 

 

 

**Forward Industries, Inc.**

 

 

**Other Income**

Otherincome, predominately consisting of interest income, declined slightly to $0.3million due to lower average interest rates in the 2008 Quarter compared to the2007 Quarter, while cash balances increased by $1.0 million. The secondcomponent of “other income” consists of gain from foreign currencytransactions, as to which we recorded small gains in the 2008 Quarter and 2007Quarter.

**Pretax (Loss) Income**

Pretaxloss increased $0.8million, to $0.3 million in the 2008 Quarter from pretaxincome of $0.5 million in the 2007 Quarter as a result of the changes asdescribed above.

**Income Taxes**

Werecorded a benefit from income taxes of $57,000 in the 2008 Quarter compared toa provision for income taxes of $90,000 in the 2007 Quarter due to the swing topretax loss in the 2008 Quarter from pretax income in the 2007 Quarter.  Oureffective tax rate does not approximate the United States statutory federalincome tax rate primarily due to tax rate differentials in respect of state andforeign taxes, to which income recorded by Forward Innovations is subject. The (benefit)provision consists primarily of estimated U.S. federal income taxes, and to alesser extent, current state and foreign income taxes.  See Note 6 to theFinancial Statements. 

We considerthe earnings of our foreign subsidiaries indefinitely invested and,accordingly, have not recorded a provision for U.S. income taxes on theirun-repatriated earnings.  At December 31, 2007, those cumulative earnings wereapproximately $4.7 million.  

**LIQUIDITY AND CAPITAL RESOURCES**

Duringthe 2008 Period, we generated $1.0 million of cash from operations compared to$2.5 million in the 2007 Quarter. Our operating cash flows in the 2008 Quarterconsisted of a net loss of $0.3 million, increased by $0.1 million for non-cashitems, and $1.2 million for net changes in working capital items, consistingprimarily of changes in accounts receivable and accounts payable of $0.2 and $1.3million, respectively, offset, in part, by changes in inventories of $0.4million. The change in accounts receivable is attributable to the lower saleslevels in the 2008 Quarter. The change in inventories is in support of salesorders received. The change in accounts payable is attributable to improvementsin our average payables processing period and to increased purchases of inventoryin support of sales orders received.

Ouroperating cash flows in the 2007 Quarter consisted of net income of $0.4million, increased by $0.1 million for non-cash items. These cash flows were decreasedby net changes in working capital items of $2.1 million, consisting primarilyof a change in accounts receivable and accounts payable of $0.9 million and$1.6 million, respectively, which was offset, in part, by changes in accruedexpenses, inventories, and prepaid expenses of $0.3 million, $71,000, and $54,000,respectively.

Investingactivities used $19,000 in the 2008 Quarter for purchases of property, plantand equipment, primarily computer and telecommunications hardware and software.In the 2007 Quarter, net investing activities used $5,000 for purchases ofproperty, plant and equipment, primarily computer and telecommunicationshardware and software. 

Therewere no financing activities in the 2008 Quarter or the 2007 Quarter.

 

23

 

 

 

**Forward Industries, Inc.**

 

 

At December 31, 2007, our current ratio (current assets divided by current liabilities) was 7.63;our quick ratio (current assets less inventories divided by currentliabilities) was 7.26; and our working capital (current assets less currentliabilities) was $23.9 million.  As of such date, we had no short or long-termdebt outstanding. 

Ourprimary sources of liquidity are cash on hand, our operating cash flow, and ourbank credit facilities. The primary demands on our working capital are: ouraccounts payable arising in the ordinary course of business, the mostsignificant of which arise when our customers place orders and we order fromour suppliers. Historically, our sources of liquidity have been adequate tosatisfy working capital requirements arising in the ordinary course ofbusiness. We anticipate that our liquidity and financial resources for the twelvemonths will be adequate to manage our financial requirements.

In February2007, Forward and Koszegi renewed their credit facility with a U.S. bank thatprovides for a committed line of credit in the maximum amount of $3.0 million,including a $1.5 million sub-limit for letters of credit.  This credit facilityexpires March 30, 2008. Forward and Koszegi are required to eliminateborrowings for thirty consecutive days during the term of the facility and arerequired to maintain certain financial covenants including the  maintenance ofcurrent and tangible net worth ratios, as defined. Amounts drawn under thecredit facility bear interest at LIBOR plus 2.5% and are secured bysubstantially all of Koszegi’s assets and Forward Industries’ stock ownershipin Koszegi.  At December 31, 2007, there were no outstanding borrowings orletter of credit obligations under this facility.   See Note 4 to the unauditedconsolidated Financial Statements set forth in Item 1.

InFebruary 2003, Forward Innovations established a credit facility with a Swissbank that provides for an uncommitted line of credit in the maximum amount of$400,000.  Amounts borrowed under the facility may be structured as a termloan or loans, with a maximum repayment Quarter of 12 months, or as a guaranteefacility, or any combination of the foregoing.  Either party may terminatethe facility at any time; however, such termination would not affect the statedmaturity of any term loan outstanding under the facility.  Amountsborrowed other than as a term loan must be settled quarterly or converted intoterm loans. In connection with this facility, Forward Innovations has agreed tocertain financial covenants.  Amounts drawn under this credit facility bearinterest at variable rates established by the bank (5.5% as December 31, 2007). At December 31, 2007, Forward Innovations is contingently liable tothe bank under a letter of credit issued on its behalf in the amount of €224,000(equal to approximately $327,000 as of December 31, 2007) in favor of Forward Innovations' freight forwarder and customs agent in connection with its logisticsoperations in The Netherlands.  The effect of the issuance of the letter ofcredit is to reduce the availability of the credit line in an amount equal tothe face amount of the letter of credit.  See Note 4 to the unauditedconsolidated Financial Statements set forth in Item 1.

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, 2007, we had repurchased an aggregate of 172,603 shares at a cost ofapproximately $0.4 million, but none during the 2008 Quarter.

**CONTRACTUAL OBLIGATIONS ANDCOMMERCIAL COMMITMENTS**

TheCompany has entered into various contractual obligations and commercialcommitments that, under accounting principles generally accepted in the United States, are not recorded as a liability.   The following is a summary of suchcontractual cash obligations as of December 31, 2007:

**Contractual  Obligation or Commitment**

**Jan 08 – Dec 08**

**Jan 09- Dec 10**

**Jan 11 – Dec 12**

**Thereafter**

Employment & Consulting Agreements

$370,000

$120,000 

$           --

$         --

Operating Leases

318,000

419,000

216,000

--

**Totals**

**$688,000**

**$ 539,000**

**$216,000**

**    $        --**

 

 

24

 

 

 

**Forward Industries, Inc.**

 

 

The Company has notguaranteed the debt of any unconsolidated entity and does not engage inderivative transactions or maintain any off-balance sheet special purposeentities. 

 

**ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Weare exposed to certain market risks arising from transactions in the normalcourse of business, principally risks associated with interest rate and foreigncurrency fluctuations.  We have not engaged in interest rate swaps, foreigncurrency hedges or other derivative transactions designed to mitigate theserisks.

**Interest Rate Risk**

The predominantportion of our cash is invested in money market funds and overnight interestrate sensitive securities.  The values of these investments do not fluctuate materiallydue to their short term nature and are not subject to interest rate risks;however, the income we earn on our invested cash will fluctuate with changes ininterest rates.  Our credit facilities in the United States and Switzerland are also based on variable interest rates.  Although we have not had anyborrowings under these facilities in several years, and did not have anyborrowings outstanding as of December 31, 2007, any such borrowings would besubject to interest rate risk if we decide to borrow against these creditlines.  Given the lack of borrowings, our current cash position and the dollaramount of these credit lines we do not believe a change in interest rates wouldbe material to our financial results.

**Foreign Currency Risk**

Ourfinancial statements are presented in US dollars.  As a result of our globaloperating activities, we are exposed to changes in foreign currency exchangerates that may adversely affect our results of operations and financialcondition. We actively manage this foreign currency exchange exposure throughour regular operating activities. Our exposure is concentrated in the Euro,Swiss Franc, and Hong Kong dollar. In Fiscal 2008, approximately 14% of oursales were denominated in Euros.  In addition, certain operating expenses ofour Swiss subsidiary are paid in Euros or Swiss Francs, whereas, certainoperating expenses of our Hong Kong subsidiary are paid in the Hong Kong dollar. Because we have determined that the US dollar is the functional currencyof our foreign subsidiaries, the gains and losses resulting from convertingthese transactions to the U.S. dollar for financial statement presentationpurposes are included in our results of operations as a component of our netincome (loss). See “Notes to Consolidated Financial Statements, Note 2–Accounting Policies – Foreign Currency Transactions” for a description of ourforeign currency accounting policies.

Weestimate that an adverse movement of 20% in these foreign currencies exchangerates would have decreased our results of operations in the aggregate by approximately$0.2 million, before taxes, for the three-month period ended December 31, 2007.

Wepurchase substantially our entire inventory from China and although thesetransactions are denominated in U.S. dollars, our suppliers may pay theirexpenses in Chinese Yuan. If the rate of the Yuan to the U.S. dollar fluctuatesour suppliers are likely to change the prices they charge to us furthersubjecting our operating results to foreign currency risk.

Ouranalysis methods used to assess and mitigate risk discussed above should not beconsidered projections of future risks.

 

**Item4. Controls and Procedures **

Notapplicable.

25

 

 

 

**Forward Industries, Inc.**

 

 

 

**ITEM 4T. CONTROLS AND PROCEDURES**

**Evaluationof Disclosure Controls and Procedures**

Our management 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 fiscal quartercovered by this Quarterly Report, to provide reasonable assurance thatinformation 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 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 2008 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 2008 Quarter that has materially affected,or is reasonably likely to materially affect, the Company's internal controlsover financial reporting.

 

 

 

 

26

 

 

 

**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, 2007, there were no such 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.

**ITEM1A. RISK FACTORS**

This“Risk Factors” section provides new or updated information in certain areasfrom the “Risk Factors” set forth in our Annual Report on Form 10-K for thefiscal year ended September 30, 2007. These risk factors are new or have beenexpanded or updated from our Annual Report on Form 10-K, but the factors belowdo not constitute all the risk factors that pertain to our business.  Pleasereview our Annual Report on Form 10-K for a complete listing of “Risk Factors”that pertain to our business. Please refer to ITEM 2. “Cautionary statement for purposes of the “Safe Harbor” provisions ofthe Private Securities Litigation Reform Act of 1995 on page 16 of thisQuarterly Report on Form 10-Q.

**New RiskFactors**

*With thesteep decline in cell phone revenue in the three months ended December 31,2008, our business has become more highly concentrated in one product line,thus increasing the risks to our financial condition and results of operationscompared to periods when revenue from two principal product lines was morebalanced.*

Withthe steep decline in revenues from sales of accessories for cellular handsets,revenues from sales of carry solutions for diabetic monitoring cases accountedfor 71% of net revenues.  Thus, revenue from Lifescan, Abbott Labs, and RocheDiagnostics has accounted for a higher percentage of our customer base.  Inrecent years, revenue from the two product lines fluctuated without one beingpredominant.  If cellular handset revenues do not improve over the near- andmedium term, our financial condition and results of operations will be subjectto higher risk from the loss of one or more of these diabetic OEM customers dueto product line concentration.

*Motoroladisclosed in late January 2008 that it is exploring the structural andstrategic realignment of its businesses in order to better equip its Mobile Devices unit to recapture market share and enhance shareholder value.  The resultsof this realignment can not be foreseen at this time, but this developmentincreases the risk to our ongoing relationship with Motorola.*

In lateJanuary 2008 Motorola disclosed that it was evaluating strategic alternativesfor its Mobile Devices unit, which has been our OEM customer for over 10years.  It is believed that a sale or other disposition of the Mobile Devicesunit is among the strategic alternatives being considered by Motorola.  Wecannot predict the outcome of the strategic evaluation undertaken by Motorolanor the effects upon our business if the Mobile Devices unit were to bedisposed of.  We do believe that this development increases the risks anduncertainties attendant to continuation of our long-standing relationship tothe Mobile Devices unit as a reliable, valuable supplier of carry solutionaccessories.  If this relationship were adversely affected by the result of thestrategic evaluation undertaken by Motorola, our business, financial conditionand results of operations would likely be adversely affected, including a morepronounced concentration in our product lines, as described in the precedingrisk factor.

 

 

27

 

 

 

**Forward Industries, Inc.**

 

 

 

**Updated Risk Factors**

*Our license agreement with Motorola expired onDecember 31, 2007, and the failure to extend or renew this agreement could havea material, adverse effect on our results of operations and financial condition.*

Ourlicense agreement with Motorola, Inc. expired on December 31, 2007.  Accordingly, our rights to sell certain cell phone carry solution cases and accessoriesbearing the Motorola trademark has expired, except for limited sell-throughrights with respect to existing inventory on hand. We are presently innegotiations with Motorola relating to an extension or renewal of theagreement, but there can be no assurance that we will be able to successfullyachieve an extension or renewal on terms acceptable to us.  Motorola’sdisclosure in January 2008 that it is evaluating strategic alternatives for itsMobile Devices unit is likely to increase the uncertainty, complexity, anddifficulty in these negotiations.    Any failure to extend or renew the licenseagreement on a long-term basis on terms acceptable to us would have a materialand adverse effect on our results of operations and financial condition. Inaddition to the reduction of revenues as a consequence of losing aftermarketsales to cell phone retailers and distributors, we would expect that our profitmargins would suffer materially, as currently margins on certain sales oflicensed products exceed those in respect of sales of many OEM cell phonesales.  Further, we are unable to predict the influence, if any, that a failureto extend or renew the license agreement would have on our OEM customerrelationship with Motorola, but it could be adverse and material.Notwithstanding the foregoing developments, we believe that our cell phoneaccessory supply relationship with Motorola remains strong and we believe thatwe continue to work closely with Motorola to ensure we are considered forfuture in-box opportunities.

*Ourdependence on foreign manufacturers creates product cost, pricing,availability, quality control, and delivery risks.*

Allof our products are manufactured by Chinese manufacturers in China. Our reliance on foreign suppliers, manufacturers, and other contractors involves significantrisks, including reduced control over delivery schedules, quality assurance,manufacturing yields, and costs, the potential lack of adequate capacity, andpotential misappropriation of our designs. 

InFiscal 2006, we transitioned the responsibility for quality assuranceinspection of products from our Koszegi Asia facility to a third-party qualityassurance provider. Since making this transition we have experienced a highlevel of personnel turnover at Koszegi Asia, particularly in our sourcingdepartment, as well as in employees who oversee the quality control activitiesof our quality assurance provider. As a result, certain quality control anddelivery problems have continued to surface in Fiscal 2007 and Fiscal 2008. Weare working diligently to improve our quality assurance operations to meet the exactingquality and delivery standards our customers require from us on a consistentbasis. However, there can be no assurance that we will be successful in doingso and our failure to do so may adversely affect customer relationships andcould result in the loss of a key customer, which could have an adverse effecton our results of operations and our business reputation.

*Ourbusiness is and has been characterized by a high degree of customerconcentration.  Our three largest customers accounted for approximately 70%, 72%and 65% of net sales in the 2008 Quarter, Fiscal 2007 and Fiscal 2006,respectively; the loss of, or material reduction in orders from, any of thesecustomers could materially and adversely affect our results of operations andfinancial condition.*  

Thepredominant percentage of our sales revenues is concentrated in three large OEMcustomers (including their international affiliates and/or their contractmanufacturers).  The loss of any of these three key customers (whether as aresult of such customers purchasing their carry solution requirements fromanother vendor, deciding to manufacture their own carrying cases, oreliminating the inclusion of our carrying cases with their products orotherwise) could have a material adverse effect on our financial condition,liquidity and results of operations.

28

 

 

 

**Forward Industries, Inc.**

 

 

** **

*Dollars in millions*

** **

**2008 Quarter**

** **

**Fiscal 2007**

** **

**Fiscal 2006**

** **

**Customer:**

**Net Sales**

**Percentage of Net Sales**

** **

**Net Sales**

**Percentage of Net Sales**

** **

**Net Sales**

**Percentage of Net Sales**

Lifescan

$  2.0

40%

 

$  7.1

32%

 

$  5.3

17%

Motorola *

**

**

 

6.0

27%

 

11.3

37%

Abbott

0.9

19%

 

2.9

13%

 

3.3

11%

Roche

0.5

11%

 

**

**

 

**

**

**Totals**

**$3.4**

**70%**

** **

**$16.0**

**72%**

** **

**$19.9**

**65%**

* Amounts exclude approximately 9%and 11% of our net sales, or $2.0 million and $3.2 million of products underour license agreement with Motorola for Fiscal 2007 and Fiscal 2006,respectively.

** Amount not disclosed becausethe percentage of net sales was less than 10%

*We experienced severe erosion in our OEMproduct sales margins during Fiscal 2007 and this has continued into Fiscal 2008,and it is not clear when these margins will begin to improve.  We continue toencounter pressures from certain OEM customers to constrain or even roll backprices. This price constraint factor is being exacerbated by inflationarypressures that affect our costs of supply.*

 

DuringFiscal 2007 and into the 2008 Quarter, we have experienced significant pricingpressure from our OEM customers in both cell phone product sales and bloodglucose monitor carrying case sales.  We have been unable to extract comparablepricing concessions from our product suppliers across all product lines, whichhas resulted in the erosion of product sales margins.  We anticipate thatpressures on our pricing power and shifts in our product mix will continue toexert downward pressure on our gross profit percentage in the fiscal yearending September 30, 2008.  We are also facing more persistent increases incosts of goods sold, due to inflationary pressures on materials and labor costsincurred by our Chinese vendors.  In addition, prices these vendors charge tous are reflecting the appreciation of Chinese currency against the US dollar,which are passed through to us in the form of higher US dollar prices. Othercomponents of cost of goods sold, such as our Hong Kong/China inspection costs,which traditionally have been relatively fixed, are showing signs of wage-priceinflation.  We also face higher energy costs passed through to us in freightcharges.  When calculated on the basis of reduced sales volumes, thesepressures are also contributing to reduced gross profit percentage.  We cannotpredict when, if at all, our overall product sales margins will begin toimprove. If we are unable to renew the license agreement with Motorola on termsacceptable to us, as detailed in the risk factor above, our product salesmargins could be subject to further compression, as margins on licensedaftermarket sales are frequently more advantageous to us than on OEM sales.

 

*Our business could suffer if the servicesof any of the key personnel we rely on were lost to us.*

 

Weare highly dependent on the efforts and services of certain key salesrepresentatives, including one individual, who is not under any contractualobligation to us, upon whom relationships with several of our largest OEMdiabetic customers are highly dependent.  Our business could be materially andadversely affected if we lost the services of such individual.  If we lost theservices of this key sales representative, we might experience a reduction inor significant loss of orders from such customers, resulting in a loss ofrevenues, which could materially and adversely affect our results of operationsand financial condition   The degree of this risk has increased to the extentthat our OEM customer relationships in our cell phone product line face greateruncertainty in light of the Motorola disclosures described above.

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

None/NotApplicable.

 

 

29

 

 

 

**Forward Industries, Inc.**

 

 

 

**ITEM3. DEFAULTS UPON SENIOR SECURITIES**

None.

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

None.

**ITEM5. OTHER INFORMATION**

OnJanuary 28, 2008, the Company entered into severance arrangements with Mr.Michael M. Schiffman, whose employment as President and Chief Operating Officerexpired December 31, 2007.  Under these arrangements, in addition to othercustomary terms and conditions, Mr. Schiffman was granted a severance packageconsisting of $162,500, or six months salary at the annual rate under hisemployment agreement at expiration, vested benefits under the Company’s healthand retirement plans in accordance with plan terms, and a release by theCompany of potential claims,  Mr. Schiffman released the Company from potentialclaims and agreed to certain modifications of the non-competition andnon-solicitation covenants contained in the employment agreement. 

**ITEM 6. EXHIBITS**

3.2
Amendedand Restated By-Laws (incorporated by reference to Exhibit 99.1 to theCompany’s Current Report on Form 8-K, filed on December 5, 2007).

 
 

10.9
Amendmentto Employment Agreement effective as of January 1, 2008 between the Company andDouglas W. Sabra

 
 

10.10
Severanceand Release Agreement effective as of February 5, 2008 between the Company andMichael M. Schiffman

 
 

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
Certifications of the Chief Executive Officer and Chief FinancialOfficer under Section 906 of the Sarbanes-Oxley Act of 2002

 

 

30

 

 

 

**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 12, 2008

                                                                                                                                

 
FORWARD INDUSTRIES, INC. 
 
 (Registrant) 
 
  
 
  
 
By: /s/ Douglas W. Sabra  
 
Douglas W. Sabra  
 
Chief Executive Officer 
 
(Principal Executive Officer) 
 
  
 
  
 
By: /s/James O. McKenna 
 
James O. McKenna 
 
Chief Financial Officer 
 
(Principal Financial and Accounting Officer) 
 

 

 

 

 

 

 

 

31

 
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