** **

** **

 

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

________________

**FORM 10-Q**

________________

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

**            For the quarterly period ended March31, 2011.**

**OR**

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

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

** **

**Commission File Number: 0-6669**

________________

**FORWARD INDUSTRIES, INC.**

(Exact name of registrant as specified in its charter)

________________

** **

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

 

 

**3110 Main St., Suite 400, Santa Monica, CA 90405**

(Address of principal executive offices, including zipcode)

**(310) 526-3005**

(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

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

Yes [ **X**]                  No[  ]

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

 

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

Thenumber of shares outstanding of the registrant’s common stock, par value $0.01per share, at the latest practical date May 6, 2011, was 8,085,886 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 March 31, 2011 (unaudited)                                                                                                                                                    |       |
|          |          |      and September 30, 2010............................................................................................................                                                                                | 4          |
|          |          |                                                                                                                                                                                                                                  |       |
|          |          |      - Consolidated Statements of Operations (unaudited) for the Three and Six  Months                                                                                                                                 |       |
|          |          | Ended March 31, 2011 and 2010.............................................................................................                                                                                                            | 5          |
|          |          |                                                                                                                                                                                                                                  |       |
|          |          |      - Consolidated Statements of Cash Flows (unaudited) for the Six Months                                                                                                                                            |       |
|          |          |      Ended March 31, 2011 and 2010.............................................................................................                                                                                        | 6          |
|          |          |                                                                                                                                                                                                                                  |       |
|          |          |      - Notes to Consolidated Financial Statements (unaudited)...............................................                                                                                                           | 7          |
|          |          |                                                                                                                                                                                                                                  |       |
|          | **Item  2.**  | **Management’s  Discussion and Analysis of Financial Condition and Results of 	Operations**..................................................................................................................................... | 19         |
|          | ** **    | ** **                                                                                                                                                                                                                            |       |
|          | **Item  3.**  | **Quantitative  and Qualitative Disclosures About Market Risk**...........................................                                                                                                                            | 29         |
|          |          |                                                                                                                                                                                                                                  |       |
|          | **Item  4.**  | **Controls  and Procedures**............................................................................................................                                                                                              | 29         |
|          | ** **    |                                                                                                                                                                                                                                  |       |
| **PART  II.** | ** **    | **OTHER  INFORMATION**                                                                                                                                                                                                                | ** ** |
|          | ** **    |                                                                                                                                                                                                                                  |       |
|          | **Item  1.**  | **Legal  Proceedings**.......................................................................................................................                                                                                         | 29         |
|          | ** **    | ** **                                                                                                                                                                                                                            |       |
|          | **Item  1A.** | **Risk  Factors**.................................................................................................................................                                                                                    | 29         |
|          | ** **    | ** **                                                                                                                                                                                                                            |       |
|          | **Item  2**   | **Unregistered  Sales of Equity Securities and Use of Proceeds**............................................                                                                                                                          | 31         |
|          | ** **    | ** **                                                                                                                                                                                                                            |       |
|          | **Item  3**   | **Defaults  Upon Senior Securities**..............................................................................................                                                                                                    | 31         |
|          | ** **    | ** **                                                                                                                                                                                                                            |       |
|          | **Item  4.**  | **Removed  and Reserved**................................................................................................................                                                                                             | 31         |
|          | ** **    | ** **                                                                                                                                                                                                                            |       |
|          | **Item  5.**  | **Other  Information**........................................................................................................................                                                                                        | 31         |
|          | ** **    | ** **                                                                                                                                                                                                                            |       |
|          | **Item  6.**  | **Exhibits**..........................................................................................................................................                                                                                | 31         |
|          | ** **    | ** **                                                                                                                                                                                                                            |       |
|          |          | **Signatures**.....................................................................................................................................                                                                                   | 32         |
|          |          | ** **                                                                                                                                                                                                                            |       |
|          |          | **Certifications**................................................................................................................................                                                                                    |       |

** **

2

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**Note Regarding Use of Certain Terms**

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

“ForwardAPAC” refers to Forward Industries’ wholly owned subsidiary Forward AsiaPacific Limited, a Hong Kong corporation; “GAAP” refers to accountingprinciples generally accepted in the United States; “Commission” refers to the United States Securities and Exchange Commission; “Exchange Act” refers to the United States Securities Exchange Act of 1934, as amended;

“2011Quarter” refers to the three months ended March 31, 2011; 

“2010Quarter” refers to the three months ended March 31, 2010;

“2011Period” refers to the six months ended March 31, 2011;

“2010Period” refers to the six months ended March 31, 2010; 

“Fiscal2011” refers to our fiscal year ending September 30, 2011; 

“Fiscal2010” refers to our fiscal year ended September 30, 2010; “Europe” refers to the countries included in the European Union; “APAC Region” refers to the Asia Pacific Region, consisting of Australia, NewZealand, Hong Kong, Taiwan, China, South Korea, Japan, Singapore, Malaysia,Thailand, Indonesia, India, the Philippines and Vietnam;

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

“OEM”refers to Original Equipment Manufacturer of certain consumer electronicproducts. 

 

 

 

 

 

 

 

 

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# PART I.   FINANCIAL INFORMATION

### **Item 1.  Financial Statements**

Forward Industries,Inc.

CONSOLIDATED BALANCE SHEETS
|                                                                                                                                                                                                    |                   |       |                   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------|------------|------------------------|
|                                                                                                                                                                                                    |                   |       |                   |
|                                                                                                                                                                                                    | **March 31,**          | ** ** | **September 30,**      |
|                                                                                                                                                                                                    | **2011**               | ** ** | **2010**               |
| **Assets**                                                                                                                                                                                              | **(Unaudited)**        | ** ** | **(Note 1)**           |
| **Current assets:**                                                                                                                                                                                     |                   |       |                   |
| Cash and cash equivalents...........................................................................................                                                                                    | $16,292,122            |       | $18,471,520            |
| Accounts receivable, net ..............................................................................................                                                                                 | 4,240,424              |       | 4,621,181              |
| Inventories, net...............................................................................................................                                                                         | 1,167,066              |       | 1,036,386              |
| Note receivable...............................................................................................................                                                                          | 1,024,260              |       | --                     |
| Prepaid expenses and other current assets................................................................                                                                                               | 307,620                |       | 240,651                |
| **Total current assets**..........................................................................................                                                                                      | 23,031,492             |       | 24,369,738             |
|                                                                                                                                                                                                    |                   |       |                   |
| Property and equipment, net.........................................................................................                                                                                    | 161,748                |       | 115,205                |
| Other assets.....................................................................................................................                                                                       | 52,276                 |       | 46,032                 |
| **Total Assets**........................................................................................................................                                                                | $23,245,516            |       | $24,530,975            |
|                                                                                                                                                                                                    |                   |       |                   |
| **Liabilities and shareholders’ equity**                                                                                                                                                           |                   |       |                   |
| **Current liabilities:**                                                                                                                                                                                |                   |       |                   |
|    Accounts payable...........................................................................................................                                                                | $1,827,080             |       | $2,439,273             |
|    Accrued expenses and other current liabilities...........................................................                                                                                  | 601,187                |       | 885,332                |
| **Total liabilities**...................................................................................................                                                                                | 2,428,267              |       | 3,324,605              |
|                                                                                                                                                                                                    |                   |       |                   |
| **Commitments and contingencies**....................................................................................                                                                                   |                   |       |                   |
| ** **                                                                                                                                                                                              |                   |       |                   |
| **Shareholders’ equity:**                                                                                                                                                                          |                   |       |                   |
| Preferred stock, par value  $0.01 per share; 4,000,000 shares authorized; 

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

--             |       |  

--             |
| Common stock, par value  $0.01 per share; 40,000,000 shares authorized, 	8,792,296 and 8,761,629 shares  issued; and

8,085,886 and 8,055,219 shares outstanding,  respectively........................ |  

 

87,923 |       |  

 

87,616 |
| Capital in excess of par value........................................................................................                                                                                  | 16,617,027             |       | 16,469,142             |
| Retained earnings............................................................................................................                                                                           | 5,372,356              |       | 5,909,669              |
| Treasury stock, 706,410 shares at cost........................................................................                                                                                          | (1,260,057)            |       | (1,260,057)            |
| **Total shareholders’ equity**..............................................................................................                                                                       | 20,817,249             |       | 21,206,370             |
| **Total liabilities and shareholders’ equity**....................................................................                                                                                 | $23,245,516            |       | $24,530,975            |

 

 

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

 

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Forward Industries,Inc.

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(UNAUDITED)**
|                                                                                       | ** **                       |   | ** **                     |
|--------------------------------------------------------------------------------------------|----------------------------------|--------|--------------------------------|
|                                                                                       | **Three Months Ended March 31,** |   | **Six Months Ended March 31,** |
|                                                                                       | **2011**                         |   | **2010**                       |   | **2011** | ** ** | **2010** |
| **Net  sales**.........................................................                    | $4,996,267                       |   | $4,419,681                     |   | $10,964,474 |   | $8,546,453 |
| **Cost of goods sold**..............................................................       | 3,841,999                        |   | 3,425,938                      |   | 8,433,676 |   | 6,628,515 |
| **Gross profit**........................................................................   | 1,154,268                        |   | 993,743                        |   | 2,530,798 |   | 1,917,938 |
|                                                                                       |                             |   |                           |   |   |   |   |
| **Operating expenses:**                                                                    |                             |   |                           |   |   |   |   |
| Selling...........................................................................         | 662,447                          |   | 533,286                        |   | 1,103,437 |   | 991,558 |
| General  and administrative........................................                        | 1,099,591                        |   | 551,414                        |   | 2,011,911 |   | 1,211,535 |
| **Total operating expenses**..................................                             | 1,762,038                        |   | 1,084,700                      |   | 3,115,348 |   | 2,203,093 |
| ** **                                                                                 |                             |   |                           |   |   |   |   |
| **Loss from operations**........................................................           | (607,770)                        |   | (90,957)                       |   | (584,550) |   | (285,155) |
| ** **                                                                                 |                             |   |                           |   |   |   |   |
| **Other income (expense):**                                                                |                             |   |                           |   |   |   |   |
| Interest  income...........................................................                | 29,748                           |   | 8,700                          |   | 35,403 |   | 29,032 |
| Other  income (expense), net.....................................                          | 23,234                           |   | (29,937)                       |   | 11,834 |   | (43,057) |
| **Total other  income (expense)**..........................                           | 52,982                           |   | (21,237)                       |   | 47,237 |   | (14,025) |
| ** **                                                                                 |                             |   |                           |   |   |   |   |
| **Net loss**.............................................................................. | $(554,788)                       |   | $(112,194)                     |   | $(537,313) |   | $(299,180) |
| ** **                                                                                 |                             |   |                           |   |   |   |   |
| **Net loss per common and common equivalent share**                                        |                             |   |                           |   |   |   |   |
| Basic  and diluted........................................................                 | $(0.07)                          |   | $(0.01)                        |   | $(0.07) |   | $(0.04) |
| ** **                                                                                 |                             |   |                           |   |   |   |   |
| **Weighted average number of common and common  equivalent shares outstanding**            |                             |   |                           |   |   |   |   |
| Basic  and diluted........................................................                 | 8,085,875                        |   | 7,964,938                      |   | 8,125,304 |   | 7,952,462 |

 

 

 

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

 

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

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**Forward Industries, Inc.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(UNAUDITED)**
|                                                                                                      |   | ** **                          |
|-----------------------------------------------------------------------------------------------------------|--------|-------------------------------------|
|                                                                                                      |   | **Six Months Ended**

**March 31,** |
|                                                                                                      |   | **     2011**   | ** ** | **2010** |
| **Operating activities:**                                                                                 |   |                                |   |   |
| Net	loss................................................................................................. |   | $(537,313)                          |   | $(299,180) |
| Adjustments to reconcile net loss to net cash used  in operating activities:                              |   |                                |   |   |
| Share-based compensation...........................................................                       |   | 148,192                             |   | 108,232 |
| Depreciation and amortization......................................................                       |   | 28,280                              |   | 28,458 |
| Provision for obsolete inventory.................................................                         |   | 19,124                              |   | 6,883 |
| Provision for bad debts.................................................................                  |   | (4,120)                             |   | 8,875 |
| Changes  in operating assets and liabilities:                                                             |   |                                |   |   |
| Accounts  receivable......................................................................                |   | 384,877                             |   | (380,150) |
| Inventories.......................................................................................        |   | (149,804)                           |   | (161,930) |
| Prepaid  expenses and other current assets.................................                               |   | (91,229)                            |   | (11,167) |
| Other  assets....................................................................................         |   | (6,244)                             |   | 13,500 |
| Accounts  payable..........................................................................               |   | (612,193)                           |   | 178,399 |
| Accrued  expenses and other current liabilities.........................                                  |   | (284,145)                           |   | 77,901 |
| **Net cash  used in operating activities**                                                                |   | **(1,104,575)**                     | ** ** | **(430,179)** |
|                                                                                                      |   |                                |   |   |
| **Investing activities:**                                                                                 |   |                                |   |   |
| Issuance of note receivable..............................................................                 |   | (1,000,000)                         |   | -- |
| Purchases of property and  equipment............................................                          |   | (74,823)                            |   | -- |
| **Net cash used in  investing activities**                                                                |   | **(1,074,823)**                     |   | **--** |
|                                                                                                      |   |                                |   |   |
| **Net decrease in cash and  cash equivalents**...................................                         |   | **(2,179,398)**                     | ** ** | **(430,179)** |
| ** **                                                                                                |   | ** **                          | ** ** | ** ** |
| **Cash and  cash equivalents at beginning of period**.......................                              |   | **18,471,520**                      | ** ** | **20,103,502** |
| ** **                                                                                                |   | ** **                          | ** ** | ** ** |
| **Cash and  cash equivalents at end of period**...................................                        |   | **$16,292,122**                     | ** ** | **$19,673,323** |
|                                                                                                      |   |                                |   |   |
| **Supplemental Disclosures  of Cash Flow Information:**                                                   |   |                                |   |   |
| Cash  paid for:                                                                                           |   |                                |   |   |
| Income  Taxes.............................................................................                |   | $84,757                             |   | $-- |

 

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

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

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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 andbegan operations in 1961 as a manufacturer of specialty promotional items. TheCompany designs, markets, and distributes carry and protective solutions primarilyfor hand held electronic devices, including soft-sided carrying cases, bags,clips, hand straps, protective plates and skins, and other accessories formedical monitoring and diagnostic kits, bar code scanners, GPS and locationdevices, and cellular telephones. It also designs, markets, and distributescarry and protective solutions for other consumer products such as laptopcomputers, MP3 players, firearms, sporting, recreational, and aeronauticalproducts.  The Company’s principal customer market is original equipmentmanufacturers, or “OEMs” (or the contract manufacturing firms of these OEMcustomers), of these products that either package our products as accessories“in box” together with their product offerings or sell them through theirretail distribution channels. OEM customers are located in Europe, the APACRegion, and the Americas.

In theopinion of management, the accompanying consolidated financial statements presentedin this Quarterly Report on Form 10-Q reflect all normal recurring adjustmentsnecessary to present fairly the financial position and results of operationsand cash flows for the interim period presented herein, but are not necessarilyindicative of the results of operations for the fiscal year ending September30, 2011. These financial statements should be read in conjunction with theCompany's audited consolidated financial statements included in its Annual Reporton Form 10-K for the fiscal year ended September 30, 2010, and with thedisclosures and risk factors presented herein and therein, respectively. TheSeptember 30, 2010 balance sheet has been derived from the audited consolidatedfinancial statements.

**NOTE 2     ACCOUNTINGPOLICIES**

**Accounting Estimates**

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

**Basis of Presentation**

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

**Cash and CashEquivalents**

Cash andcash equivalents consist primarily of cash on deposit and highly liquid moneymarket accounts. The Company minimizes its credit risk associated with cash andcash equivalents by investing in high quality instruments and by periodicallyevaluating the credit quality of the primary financial institution issuers ofsuch instruments. The Company holds cash and cash equivalents at major financialinstitutions in the United States, the amounts of which may significantly exceedFDIC insured limits, and in Europe. At March 31, 2011, this amount wasapproximately $16.0 million. Historically, the Company has not experienced anylosses due to such cash concentrations.

 

 

7

 

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**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE2     ACCOUNTING POLICIES (CONTINUED)**

**AccountsReceivable**

Accountsreceivable consist of unsecured trade accounts with customers or their contractmanufacturers. The Company performs periodic credit evaluations of itscustomers including an evaluation of days outstanding, payment history, recentpayment trends, and perceived credit worthiness; and believes that adequateallowances for any uncollectible receivables are maintained. Credit terms tothe majority of customers are generally net thirty (30) days to net sixty (60)days; however, the Company typically extends to its largest customers paymentterms up to 90 days. The Company has not historically experienced significant creditor collection problems with its OEM customers or their contractmanufacturers.  None of these customers or their contract manufacturers isor has been in default to the Company, and payments are generally received fromthem on a timely basis. Two customers, including their affiliates and contractmanufacturers, accounted for approximately 72% and 75% of the Company’saccounts receivable at March 31, 2011, and September 30, 2010, respectively. AtMarch 31, 2011 and September 30, 2010, the allowance for doubtful accounts wasapproximately $15,000 and $19,000, respectively.

**Inventories**

Inventories consist primarily of finished goods andare stated at the lower of cost (determined by the first-in, first-out method)or market.  Based on management’s estimates, an allowance is made toreduce excess, obsolete, or otherwise un-saleable inventories to net realizablevalue. The allowance is established through charges to cost of goods sold onthe Company’s consolidated statements of operations. As reserved inventory isdisposed of, the Company charges off the associated allowance.  Indetermining the adequacy of the allowance, management’s estimates are basedupon several factors, including analyses of inventory levels, historical losstrends, sales history, and projections of future sales demand. The Company’sestimates of the allowance may change from time to time based on management’sassessments, and such changes could be material. At March 31, 2011, and September30, 2010, the allowances for obsolete inventory were approximately $47,000 and $28,000,respectively. 

**Property andEquipment**

Property andequipment consist of furniture, fixtures, and equipment and leaseholdimprovements and are recorded at cost. Expenditures for major additions andimprovements are capitalized, and minor replacements, maintenance, and repairsare charged to expense as incurred. When property and equipment are retired orotherwise disposed of, the cost and accumulated depreciation are removed fromthe accounts and any resulting gain or loss is included in the results ofoperations for the respective period. Depreciation is provided over theestimated useful lives of the related assets using the straight-line method forfinancial statement purposes. The estimated useful life for furniture, fixturesand equipment ranges from three to ten years. Amortization of leaseholdimprovements is computed using the straight-line method over the shorter of theremaining lease term or the estimated useful lives of the improvements. For thethree-month periods ended March 31, 2011 and 2010, the Company recorded approximately$15,000 and $14,000 of depreciation and amortization expense, respectively. Foreach of the six-month periods ended March 31, 2011 and 2010, the Companyrecorded approximately $28,000 of depreciation and amortization expense. Depreciationand amortization for production related property and equipment is included as acomponent of costs of goods sold in the accompanying consolidated statements ofoperations. Depreciation and amortization for selling and general andadministrative related property and equipment, is included as a component ofoperating expenses in the accompanying consolidated statements of operations.

 

 

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**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE2     ACCOUNTING POLICIES (CONTINUED)**

**Income Taxes**

TheCompany accounts for its income taxes in accordance with accounting principlesgenerally accepted in the United States of America, which requires, among otherthings, recognition of future tax benefits and liabilities measured at enactedrates attributable to temporary differences between financial statement andincome tax bases of assets and liabilities and to tax net operating losscarryforwards to the extent that realization of these benefits is more likelythan not. The Company periodically evaluates the realizability of its netdeferred tax assets.   See Note 6 to these Notes to ConsolidatedFinancial Statements. The Company’s policy is to account for interest andpenalties relating to income taxes, if any, in “income tax expense” in itsconsolidated statement of operations. For the three and six-month and periodsended March 31, 2011 and 2010 presented in the accompanying consolidated statementsof operations no income tax related interest or penalties were assessed orrecorded.

**RevenueRecognition**

Wegenerally recognize revenue from product sales to customers when:(1) title and risk of loss are transferred (in general, these conditionsoccur at either point of shipment or point of destination, depending on theterms of sale); (2) persuasive evidence of an arrangement exists;(3) we have no continuing obligations to the customer; and (4) thecollection of related accounts receivable is reasonably assured.

**Shipping andHandling Costs**

TheCompany expenses shipping and handling costs (including inbound freightcharges, purchasing and receiving costs, inspection costs, warehousing costs,internal transfer costs, and other costs associated with the Company’s HongKong distribution facility and network) as a component of cost of goods sold inthe accompanying consolidated statements of operations. 

**AdvertisingExpenses**

Advertisingcosts, consisting primarily of samples and product brochures, are expensed asincurred. Advertising costs are included in selling expenses in theaccompanying consolidated statements of operations and amounted to approximately$53,000 and $24,000 for the three-month periods ended March 31, 2011 and 2010,respectively, and $74,000 and $49,000 for the six-month periods ended March 31,2011 and 2010, respectively.  

**Foreign CurrencyTransactions**

Thefunctional currency of the Company and each of its wholly owned foreignsubsidiaries is the U.S. dollar. Foreign currency transactions may generatereceivables or payables that are fixed in terms of the amount of foreigncurrency that will be received or paid. Fluctuations in exchange rates between suchforeign currency and the functional currency increase or decrease the expectedamount of functional currency cash flows upon settlement of the transaction.These increases or decreases in expected functional currency cash flows areforeign currency transaction gains or losses that are included in “other income(expense), net” in the accompanying consolidated statements of operations. Foreigncurrency transaction results were approximately $23,000 in gains and $30,000 inlosses for the three-month periods ended March 31, 2011 and 2010, respectively,and approximately $12,000 in gains and $43,000 in losses for the six-monthperiods ended March 31, 2011 and 2010, respectively.

**ComprehensiveLoss**

For thethree and six-month periods ended March 31, 2011 and 2010, the Company did nothave any material components of comprehensive loss other than net loss.

 

 

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**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE2     ACCOUNTING POLICIES (CONTINUED)**

**Fairvalue of financial instruments**

Forcertain of the Company’s financial instruments, including cash and cashequivalents, receivables, accounts payable, and other accrued liabilities, thecarrying amount approximates fair value due to the short-term maturities ofthese instruments. 

**Share-Based PaymentExpense**

TheCompany recognizes share-based equity compensation in its consolidated statementsof operations at the grant-date fair value of our stock options and otherequity-based compensation. The determination of grant-date fair value isestimated using an option-pricing model, which includes variables such as theexpected volatility of the Company’s share price, the exercise behavior of itsgrantees, interest rates, and dividend yields. These variables are projectedbased on the Company’s historical data, experience, and other factors. Changesin any of these variables could result in material increases to the valuationof options granted in future periods and increases in the expense recognizedfor share-based payments. In the case of awards with multiple vesting periods,the Company has elected to use the graded vesting attribution method, which recognizescompensation cost on a straight-line basis over each separately vesting portionof the award as if the award was, in-substance, multiple awards. Refer to Note 5Share-Based Compensation.

**Recentaccounting pronouncements**

InFebruary 2010, the FASB issued ASU No. 2010-09 “Subsequent Events (ASC Topic855) “Amendments to Certain Recognition and Disclosure Requirements” (“ASU No.2010-09”). ASU No. 2010-09 requires an entity that is an SEC filer to evaluatesubsequent events through the date that the financial statements are issued andremoves the requirement for an SEC filer to disclose a date, in both issued andrevised financial statements, through which the filer had evaluated subsequentevents. The adoption did not have an impact on the Company’s financial positionand results of operations.

InJanuary 2010, the FASB issued an amendment to ASC 820, Fair Value Measurementsand Disclosure, to require reporting entities to separately disclose theamounts and business rationale for significant transfers in and out of Level 1and Level 2 fair value measurements and separately present informationregarding purchase, sale, issuance, and settlement of Level 3 fair valuemeasures on a gross basis.  This standard, is effective for interim and annualreporting periods beginning after December 15, 2009 with the exception ofdisclosures regarding the purchase, sale, issuance, and settlement of Level 3fair value measures which are effective for fiscal years beginning afterDecember 15, 2010. The adoption did not have an impact on the Company’sfinancial position and results of operations.

In October 2009, FASB issued anamendment to the accounting standards related to the accounting for revenue inarrangements with multiple deliverables including how the arrangementconsideration is allocated among delivered and undelivered items of thearrangement. Among the amendments, this standard eliminated the use of theresidual method for allocating arrangement considerations and requires anentity to allocate the overall consideration to each deliverable based on anestimated selling price of each individual deliverable in the arrangement inthe absence of having vendor-specific objective evidence or other third partyevidence of fair value of the undelivered items. This standard also providesfurther guidance on how to determine a separate unit of accounting in amultiple-deliverable revenue arrangement and expands the disclosurerequirements about the judgments made in applying the estimated selling pricemethod and how those judgments affect the timing or amount of revenuerecognition. This standard, which became effective on October 1, 2010 has nothad a material impact on the Company’s financial position and results ofoperations.

 

 

 

10

 

 

----

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

 **NOTE2    ACCOUNTING POLICIES (CONCLUDED)**

**Recent accounting pronouncements (Concluded)**

In December 2010, the Financial Accounting Standards Board (FASB) issuedAccounting Standards Update (ASU) 2010-29, “Business Combinations (ASC Topic805): Disclosure of Supplementary Pro Forma Information for BusinessCombinations.” The amendments in this ASU affect any public entity as definedby ASC Topic 805 that enters into business combinations that are material on anindividual or aggregate basis. The amendments in this ASU specify that if apublic entity presents comparative financial statements, the entity shoulddisclose revenue and earnings of the combined entity as though the businesscombination(s) that occurred during the current year had occurred as of thebeginning of the comparable prior annual reporting period only. The amendmentsalso expand the supplemental pro forma disclosures to include a description ofthe nature and amount of material, nonrecurring pro forma adjustments directlyattributable to the business combination included in the reported pro formarevenue and earnings. The amendments are effective prospectively for businesscombinations for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning on or after December 15, 2010. Earlyadoption is permitted. This guidance will be effective for the Company in thefirst quarter of fiscal 2012. Accordingly, the effects of the Company’sadoption of this guidance will depend upon the extent and magnitude of businesscombinations the Company enters into after September 30, 2011.

**NOTE 3     NOTERECEIVABLE**

Pursuant to the Company’sletter of intent to acquire Flash Ventures, Inc. (Flash), on January 5, 2011,the Company entered into a loan agreement with Flash Ventures to provide acredit facility of up to $1,000,000.  Pursuant to the agreement Flashexecuted an unsecured, unsubordinated term note in favor of the Company,bearing interest at 11% per annum on any unpaid principal, payable quarterlycommencing March 31, 2011.  Principal of the note is payable upon maturityon December 1, 2011 (subject to acceleration in case of an event of default, asspecified in the agreement), together with unpaid interest and any fees,expenses, and other amounts owing to the Company.  On January 6, 2011 andJanuary 19, 2011, Flash drew $600,000 and $400,000, respectively, in fundsunder the note, leaving no further funding available. Repayment of the amountsborrowed under the agreement and note are not contingent on reaching adefinitive acquisition agreement pursuant to the letter of intent (which wasterminated on April 14, 2011 - refer to Note 12 Subsequent Events). 

**NOTE 4     SHAREHOLDERS’EQUITY**

**Anti-takeoverProvisions**

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

**Stock Repurchase**

InSeptember 2002 and January 2004, the Company’s Board of Directors authorizedthe repurchase of up to an aggregate of 486,200 shares of outstanding commonstock. Under those authorizations, as of March 31, 2011, the Company hadrepurchased an aggregate of 172,603 shares at a cost of approximately $403,000,but none during the three and six-month periods ended March 31, 2011 and 2010. 

 

 

11

 

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**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 4     SHAREHOLDERS’EQUITY (CONCLUDED)**

**Changes inShareholders’ Equity**

Changes in shareholders’ equity for the six-monthperiod ended March 31, 2011 is summarized below:
|                                                   | **Common 	Stock** | ** ** | **Capital In 	Excess of 	Par Value** | ** ** | **Retained 	Earnings** | ** ** | ** **

**Treasury 	Stock** |
|--------------------------------------------------------|-------------------|------------|--------------------------------------|------------|------------------------|------------|---------------------------------|
| **Balance at September 30, 2010**                      | $87,616           |       | $16,469,142                          |       | $5,909,669             |       | ($1,260,057)                    |
| Share based compensation.............                  | 307               |       | 147,885                              |       | --                     |       | --                              |
| Net loss.............................................. | --                |       | --                                   |       | (537,313)              |       | --                              |
| **Balance at March 31, 2011**                          | **$87,923**       | ** ** | **$16,617,027**                      | ** ** | **$5,372,356**         | ** ** | **($1,260,057)**                |

** **

**NOTE 5     SHAREBASED COMPENSATION**

**2011 Long TermIncentive Plan**

InMarch 2011 shareholders of the Company approved the 2011Long Term Incentive Plan (the “2011 Plan”), which authorized 850,000 shares ofcommon stock for grants of various types of equity awards to officers,directors, and employees. In March 2011, the Compensation Committee ofthe Company’s Board of Directors approved awards of stock options to purchase anaggregate of 305,000 shares of common stock to the Company’s current non-employeedirectors, and to the Company’s current executive officers and certainemployees. As of March 31, 2011, the total shares of common stock available forgrants of equity awards under the 2011 Plan was 545,000. The prices at which equityawards may be granted and the exercise prices of stock options granted may notbe less than the fair market value of the common stock as quoted at the close onthe Nasdaq Stock Market on the grant date. The Compensation Committee of theCompany’s Board of Directors administers the plan.  Options generallyexpire ten years after the date of grant and vest one year from the date ofgrant for non-employee directors, and, in the case of initial grants toofficers and employees, vest over five years with 50%, 25% and 25% vesting onthe third, fourth, and fifth anniversary of the grant date, respectively.

**2007 EquityIncentive Plan**

The2007 Equity Incentive Plan (the “2007 Plan”), which was approved by theshareholders in May 2007, and amended in February 2010, authorizes 800,000shares of common stock for grants of restricted common stock and stock optionsto officers, employees, and non-employee directors of the Company. As of March31, 2011, the total shares of common stock available for grants of equity awardsunder the 2007 Plan was 2,000. The prices at which restricted common stock maybe granted and the exercise price of stock options granted may not be less thanthe fair market value of the common stock as quoted at the close on the NasdaqStock Market on the grant date. The Compensation Committee of the Company’sBoard of Directors administers the 2007 Plan.  Options generally expireten years after the date of grant, and in the case of non-employee directors, veston the first anniversary of the date of grant. In the case of officers andemployees, options either vest in equal amounts over three to five years orvest over five years with 50%, 25% and 25% vesting on the third, fourth, andfifth anniversary of the grant date, respectively. Restricted stock grantsgenerally vest in equal proportions over three years.

Duringthe quarter ended March 31, 2011, the Company modified certain of itspreviously granted options to an executive by adjusting the vesting schedule tomake these options consistent with those granted to other executives andemployees of the Company.  Options to purchase 200,000 shares, whichpreviously contained a vesting provision of 20% per year, has been modified to50% in year 3, 25% in year 4 and 25% in year 5.  This modification has noimpact on total compensation recorded on these grants.

 

12

 

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**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 5     SHAREBASED COMPENSATION (CONTINUED)**

**1996 StockIncentive Plan**

TheCompany’s 1996 Stock Incentive Plan (the “1996 Plan”) expired in accordancewith its terms in November 2006.  The exercise price of incentive optionsgranted under the 1996 Plan to officers, employees, and non-employee directorsof the Company was required by 1996 Plan provisions to be equal at least to thefair market value of the common stock at the date of grant. Options expire tenyears after the date of grant and generally vest in equal proportions overthree years.  Unexercised options granted pursuant to the 1996 Plan priorto expiration remain outstanding until the earlier of exercise or optionexpiration. Under the 1996 Plan 30,000 fully vested common stock options arethe only awards that remain outstanding and unexercised, all at exercise priceshigher than the fair market value of the common stock at March 31, 2011.

**Stock OptionAwards**

Under the 2011 and 2007 Plans, theCompensation Committee of the Company’s Board of Directors has approved awards ofstock options to purchase an aggregate of 957,500 shares of common stock to theCompany’s current and certain former non-employee directors, and to current andcertain former Company officers, of which awards covering 30,000 shares of commonstock expired unexercised, with such shares reverting to the 2007 Plan andeligible for grant. Of these awards grants covering 685,000 shares were madeduring the six-month period ended March 31, 2011. The exercise prices of theawards granted was, in each case equal, to the closing market value of theCompany’s common stock on the Nasdaq Stock Market on the various grant dates. 

TheCompany recognized approximately $43,000 and $30,000 of compensation expensefor stock option awards in its consolidated statements of operations for thethree-month periods ended March 31, 2011 and 2010, respectively, and $135,000and $49,000 for the six-month periods ended March 31, 2011 and 2010,respectively.

Thefollowing table summarizes stock option activity under the 2011 Plan, 2007 Plan,and the 1996 Plan from September 30, 2010 through March 31, 2011: 

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

** **

** **

**Aggregate 	Intrinsic 	Value** |
|---------------------------------------------------------------------------------------|-------------------------|--------|-----------------------------------------------------------------------------|--------|-------------------------------------------------------------|--------|---------------------------------------------------------------------|
| **Outstanding at September 30, 2010**                                                 | 187,500                 |   | $3.66                                                                       |   | 8.3                                                         |   |                                                                |
| Granted..............................................                                 | 685,000                 |   | 3.67                                                                        |   | 9.8                                                         |   |                                                                |
| Exercised............................................                                 | --                      |   | --                                                                          |   | --                                                          |   |                                                                |
| Forfeited............................................                                 | --                      |   |              -- |   | --                                                          |   |                                                                |
| Expired...............................................                                | --                      |   | --                                                                          |   | --                                                          |   |                                                                |
| **Outstanding at March 31, 2011**                                                     | **872,500**             |   | **$3.67**                                                                   |   | **9.4**                                                     |   | **$370,000**                                                        |
|                                                                                  |                    |   |                                                                        |   |                                                        |   |                                                                |
| **Options  expected to vest.......................**                                  | **872,500**             |   | **$3.67**                                                                   |   | **9.4**                                                     |   | **$370,000**                                                        |
| ** **                                                                            | ** **              |   | ** **                                                                  |   | ** **                                                  |   |                                                                |
| **Options vested and exercisable at  	March 31, 2011...............................** | ** **

**152,500** |   | ** **

**$3.69**                                                       |   | ** **

**7.5**                                         |   |  

**$195,000**                                                |

 

 

 

13

 

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**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

 

**NOTE 5     SHAREBASED COMPENSATION (CONTINUED)**

**Stock OptionAwards (Continued)**

During the six-month periods ended March 31, 2011 and 2010, the Company granted685,000 and 87,500 stock options at a weighted average grant date fair value of$2.09 and $2.35, respectively.

The fairvalue of each stock option on the date of grant was estimated using aBlack-Scholes option-pricing formula applying the following assumptions for eachrespective period: 
|                                                                              | ** ** | **For the Six-Month Periods Ended March 31,** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------|
|                                                                              | ** ** | **2011**                                      | ** ** | **2010** |
| Expected  term (in years)....................................................     |       | 5.0                                           |   | 5.0 |
| Risk-free  interest rate........................................................  |       | 0.3% to 2.2%                                  |   | 2.26% to 2.33% |
| Expected  volatility............................................................. |       | 66% to 69%                                    |   | 74% to 78% |
| Expected  dividend yield....................................................      |       | 0%                                            |   | 0% |

The expected term represents theperiod over which the stock option awards are expected to be outstanding. TheCompany based the risk-free interest rate used in its assumptions on theimplied yield currently available on U.S. Treasury zero-coupon issues with aremaining term equivalent to the award’s expected term. The volatility factorused in the Company’s assumptions is based on the historical price of its stockover the most recent period commensurate with the expected term of the award.The Company historically has not paid any dividends on its common stock and hadno intention to do so on the date the share-based awards were granted.Accordingly, the Company used a dividend yield of zero in its assumptions. TheCompany estimates the expected term, volatility and forfeitures of share-basedawards based upon historical data. 

**Restricted Stock Awards**

Under the2007 Plan as of March 31, 2011, the Compensation Committee of the Company’sBoard of Directors has approved and granted awards of 183,500 shares of restricted stock, in the aggregate, tocertain key employees. Of these awards, 133,335 have vested and 8,000 shares ofrestricted stock were forfeited and reverted to, and are eligible for re-grantunder, the 2007 Plan. No awards of restricted stock were made during the six monthsended March 31, 2011.  Vesting of restricted stock awards is generallysubject to a continued service condition with one-third of the awards vestingeach year on the three successive anniversary dates the awards were grantedtypically commencing on the first such anniversary date.  The fair valueof the awards granted was equal to the closing market value of the Company’scommon stock as quoted on the Nasdaq Stock Market on the grant date. During thethree-month periods ended March 31, 2011 and 2010, the Company recognizedapproximately $3,000 and $29,000, respectively, of compensation cost in itsconsolidated statements of operations related to restricted stock awards.During the six-month periods ended March 31, 2011 and 2010, the Companyrecognized approximately $13,000 and $59,000, respectively, of compensationcost in its consolidated statements of operations related to restricted stockawards.

 

 

 

14

 

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**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 5     SHAREBASED COMPENSATION (CONCLUDED)**

**Restricted Stock Awards (Concluded)**

The following table summarizes restricted stock activity under the 2007Plan from September 30, 2010, through March 31, 2011.
|                                                                                            |   | ** **

** **

** **

**Shares** | ** ** | **Weighted 	Average  	Grant Date 	Fair Value** |
|-------------------------------------------------------------------------------------------------|--------|------------------------------------------------|------------|------------------------------------------------|
| Non-vested balance at September 30,  2010........................................               |   | 79,332                                         |       | $2.07                                          |
| Changes during the period:                                                                      |   |                                           |       |                                           |
| Shares granted................................................................................  |   | --                                             |       | --                                             |
| Shares vested.................................................................................. |   | (30,667)                                       |       | $2.06                                          |
| Shares forfeited............................................................................... |   | (6,500)                                        |       | $2.22                                          |
| Non-vested balance at March 31, 2011...............................................             |   | 42,165                                         |       | $2.05                                          |

                Asof March 31, 2011, there was approximately $25,000 of total unrecognizedcompensation cost related to 42,165 shares of unvested restricted stock awards(reflected in the table above) granted under the 2007 Plan. That cost isexpected to be recognized over the remainder of the requisite service (vesting)periods.

**Warrants**

    Asof March 31, 2011, warrants to purchase 75,000 shares of the Company’s commonstock at an exercise price of $1.75 issued in fiscal 1999 were outstanding. Bytheir terms these warrants expire 90 days after a registration statementregistering common stock (other than pursuant to employee benefit plans) isdeclared effective by the Securities and Exchange Commission. As of March 31, 2011,no such registration statement has been filed with the Securities and ExchangeCommission.

**NOTE 6  INCOME TAXES**

The Company’s provision (benefit) for income taxes consists of thefollowing United States Federal and State, and foreign components:
|                                       | **For the Three-Month Periods 	Ended March 31,**                             | ** ** | **For the Six-Month Periods 	Ended March 31,**                                |
|--------------------------------------------|------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|
|                                       | **2011**                                                                     |       | **2010**                                                                      | ** ** | **2011** |   | **2010** |
| U.S.  Federal and State                    |                                                                         |       |                                                                          |   |   |   |   |
| Current................................... |          $--     |       |           $--     |   | $-- |   | $-- |
| Deferred.................................  | (209,987)                                                                    |       | (20,952)                                                                      |   | (240,323) |   | (70,412) |
|                                       |                                                                         |       |                                                                          |   |   |   |   |
| Foreign:                                   |                                                                         |       |                                                                          |   |   |   |   |
| Current................................... | --                                                                           |       | --                                                                            |   | -- |   | -- |
| Deferred.................................  | 9,953                                                                        |       | (4,097)                                                                       |   | 19,971 |   | (8,241) |
| ** **                                 | ** **                                                                   | ** ** | ** **                                                                    | ** ** | ** ** | ** ** | ** ** |
| Change  in valuation allowance             | 200,034                                                                      |       | 25,049                                                                        |   | 220,352 |   | 78,653 |
| **Provision  for income taxes**            | **$--        **                      | ** ** | **$--        **                       | ** ** | **$--** | ** ** | **$--** |

 

As of March31, 2011, and September 30, 2010, the Company has no unrecognized tax benefitsrelated to U.S. Federal and state income tax matters. 

15

 

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**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 6  INCOME TAXES(CONCLUDED)**

At March31, 2011, the Company had available net operating loss carryforwards forU.S. federal and state income tax purposes of approximately $979,000 and$1,306,000, respectively, expiringthrough 2030 and resulting in a deferred tax asset of approximately $425,000.In addition, at March 31, 2011, the Company had available net operating loss carryforwards for foreign income tax purposes of approximately $1,126,000resulting in a deferred tax asset of approximately $99,000, expiring through2017.  Total deferred tax assets, before the valuation allowances, was$621,000 and $401,000 at March 31, 2011 and September 30, 2010, respectively.As of September 30, 2010, the undistributed earnings of the Company’s Swisssubsidiary of $856,000 are considered to be permanently invested; therefore, inaccordance with generally accepted accounting principles in the U.S., noprovision for U.S. Federal and state income taxes on those earnings has beenprovided.

As of March 31, 2011, as part ofits periodic evaluation of the need to maintain a valuation allowance againstits deferred tax assets, and after consideration of all factors, both positiveand negative (including, among others, projections of future taxable income,current year net operating loss carryforward utilization and the extent of theCompany’s cumulative losses in recent years), the Company determined that, on amore likely than not basis, it would not be able to use its remaining deferredtax assets (except in respect of United States income taxes in the event theCompany elects to effect the repatriation of certain foreign source income ofits Swiss subsidiary, which income is currently considered to be permanentlyinvested and for which no United States tax liability has been accrued).Accordingly, the Company has determined to maintain a full valuation allowanceagainst its deferred tax assets; accordingly, as of March 31, 2011 andSeptember 30, 2010, the valuation allowances were approximately $621,000 and$401,000, respectively.  If the Company determines in a future reportingperiod that it will be able to use some or all of its deferred tax assets, theadjustment to reduce or eliminate the valuation allowance would reduce its taxexpense and increase after-tax income. Changes in deferred tax assets andvaluation allowance are reflected in the “Provision (benefit) for Income Taxes”line item of the Company’s consolidated statements of operations. 

            Asof March 31, 2011 and September 30, 2010, the Company has not accrued any interestand penalties related to uncertain tax positions. It is the Company’s policy torecognize interest and/or penalties, if any, related to income tax matters inincome tax expense in the statement of operations. For the periods presented inthe accompanying statements of operations no income tax related interest orpenalties were assessed or recorded. All fiscal years prior to the fiscal yearended September 30, 2007 are closed to Federal and State examination, exceptwith respect to net operating losses generated in prior fiscal years.

**NOTE 7     EARNINGSPER SHARE**

Basic per share data for each period presentedis computed using the weighted-average number of shares of common stockoutstanding during each such period.  Diluted per share data is computedusing the weighted-average number of common and dilutive common-equivalentshares outstanding during each period. Dilutive common-equivalent sharesconsist of shares that would be issued upon the exercise of stock options andwarrants, computed using the treasury stock method. Loss per share data for thethree and six-month periods ended March 31, 2011, excludes 32,599 and 39,429,respectively, of outstanding common equivalent shares as inclusion of such shares would beanti-dilutive. Loss per share data for the three and six-month periods endedMarch 31, 2010, excludes 11,573 and 10,264, respectively, of outstanding commonequivalent shares as inclusion of such shares would be anti-dilutive.

  

16

 

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**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 8     OPERATINGSEGMENT INFORMATION**

The Companyoperates in a single segment: the supply of carrying solutions for portableelectronic devices and other consumer products. This carrying-solution segment includesthe design, marketing, and distribution of products to its customers thatinclude manufacturers of consumer hand held medical monitoring and diagnostickits, bar code scanners, GPS and location devices, and cellular telephones aswell as laptop computers, MP3 players, firearms, sporting, recreational, andaeronautical products. The Company’s carrying solution segment operates ingeographic regions that include primarily APAC, the Americas, and Europe.Geographic regions are defined by reference primarily to the location of thecustomer or its contract manufacturer.  The following table presents netsales related to these geographic segments:
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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | *(all amounts in thousands ofdollars)* |
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|  
**Three Months Ended**

**March 31,**

** **

**Six Months Ended**

**March 31,**

 

**2011**

** **

**2010**

** **

**2011**

** **

**2010**

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

$2,466

 

$2,081

 

$5,200

 

$3,951

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

1,350

 

1,354

 

3,286

 

2,955

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

1,180

 

985

 

2,478

 

1,640

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

**$4,996**

** **

**$4,420**

** **

**$10,964**

** **

**$8,546**

 

**NOTE 9     COMMITMENTSAND CONTINGENCIES**

**Employment and Retention Agreements**

Mr.Brett M. Johnson, the Company’s Chief Executive Officer, is receiving salary atthe rate of $250,000 per annum and is currently serving in such capacity withouta written employment agreement. Until such time as the Company and Mr. Johnsonenter into a definitive written agreement, it is the parties’ understandingthat the terms of Mr. Johnson’s compensation upon termination will be theequivalent of those of his predecessor, which provided for severance paymentequal to one year’s salary in the event of termination without cause.

Pursuantto an Employment Agreement, dated as of August 10, 2010, between the Companyand James O. McKenna, Mr. McKenna serves as the Company’s Chief FinancialOfficer and Treasurer.

Pursuant to a Retention Agreement, dated as of August10, 2010, between the Company and Mr. McKenna, the Company paid $175,000 to Mr.McKenna on March 1, 2011 upon the satisfactory completion of the performanceperiod. $125,000 of this amount is reflected in the “General and administrativeexpenses” in the statement of operations for the six month period ended March31, 2011.

OnMarch 7, 2011, the Compensation Committee of the Company’s Board of Directorsapproved changes in the terms of compensatory arrangements with Mr. McKennaunder his employment agreement with the Company, subject to and effective uponhis relocation to California in connection with moving the Company’s executiveoffices to Los Angeles, which condition was subsequently satisfied (refer to PartII, Item 5. Other Information of this Form 10-Q).  The changes relate tosalary, housing allowance/relocation, and termination, as describedbelow, as well as an extension of the initial term of employment to December 31,2012.  Other terms of the executive’s employment agreement remainunchanged.

*Salary:*increase of base salary to $225,000 per annum from $175,000 per annum.

*HousingAllowance/Relocation:* (i) Payment of a housing allowance of $7,500 permonth, or $90,000 per annum.  The allowance will be phased out over timeaccording to a schedule approved by the Compensation Committee.  (ii) Reimbursementof the executive’s reasonable out-of-pocket costs incurred in the relocation,including current monthly expense in respect of his existing lease of his house inFlorida until the earlier of lease termination or expiration in August 2011.

17

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

*Terminationof Employment.*  In case of termination for good reason or withoutcause, in either case within the first 36 months after relocation, reimbursement for out-of-pocket costs incurred in connection with a return toFlorida, including reimbursement of rent paid on executive's Californiaresidence, not exceed 12 months of such expense. 

Theforegoing summary is qualified in its entirety by the terms of executive’s newemployment agreement, which is attached as an exhibit to this Quarterly Reporton Form 10-Q; see Part II, Item 5. Other Information.

**Guarantee Obligation**

InFebruary 2010, Forward Switzerland, a wholly owned subsidiary, and its Europeanlogistics provider (freight forwarding and customs agent) entered into aRepresentation Agreement whereby, among other things, the European logisticsprovider agreed to act as such subsidiary's fiscal representative in TheNetherlands for the purpose of providing services in connection with any valueadded tax matters. As part of this agreement, which succeeds a substantiallysimilar agreement (except as to the amount and term of the undertaking) betweenthe parties that expired on December 31, 2009, the subsidiary agreed to providean undertaking in the form of a bank letter of guarantee to the logisticsprovider with respect to any value added tax liability arising in TheNetherlands that the logistics provider is required to pay to Dutch taxauthorities on the subsidiary's behalf. As of February 1, 2010, such subsidiaryentered into a guarantee agreement with a Swiss bank relating to the repaymentof any amount up to Û75,000 (equal to approximately $107,000 as of March 31,2011) paid by such bank to the logistics provider in order to satisfy suchundertaking pursuant to the bank letter of guarantee.  The subsidiarywould be required to perform under the guarantee agreement only in the eventthat: (i) a value added tax liability is imposed on the Company's sales in TheNetherlands, (ii) the logistics provider asserts that it has been called uponin its capacity 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 upon its demand, and(iv) the logistics provider makes a drawing under the bank letter of guarantee.Under the Representation Agreement the subsidiary agreed that the letter ofguarantee would remain available for drawing for three years following the datethat its relationship terminates with the logistics provider to satisfy anyvalue added tax liability arising prior to expiration of the RepresentationAgreement but asserted by The Netherlands after expiration. The term of thebank letter of guarantee will be renewed automatically for one-year periodsuntil February 28, 2014, unless the subsidiary provides the Swiss bank withwritten notice of termination at least 60 days prior to the renewal date. It isthe intent of the subsidiary and the logistics provider that the bank letter ofguarantee amount be adjusted annually. In consideration of the issuance of theletter of guarantee, the subsidiary has granted the Swiss bank a securityinterest on all of the subsidiary’s assets on deposit with, held by, orcredited to the subsidiary’s accounts with, the Swiss bank (approximately $731,000at March 31, 2011). As of March 31, 2011, the Company had not incurred aliability in connection with this guarantee.

**NOTE 10   LEGALPROCEEDINGS**

            Fromtime to time, the Company may become a party to legal actions or proceedings inthe ordinary course of its business.  As of March 31, 2011, there were nosuch 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.

**NOTE 11   LETTER OFINTENT**

            OnNovember 16, 2010 the Company entered into a Letter of Intent to acquire FlashVentures, Inc. (“Flash”) a Delaware corporation and a distributor of consumerelectronics peripherals and accessories (refer to Note 12 – Subsequent Events).Prior to entering into the letter of intent, in November 2010, the Company hadrecorded approximately $377,000 in sales to Flash under its customary terms ofsale. 

**NOTE 12   SUBSEQUENTEVENTS**

            OnApril 14, 2011, the Company terminated its Letter of Intent to acquire Flash.

In April 2011, the Company relocated its executiveoffices from Pompano Beach, Florida to offices in Santa Monica, California, which consistsof approximately 3,400 square feet for which the Company rents at $13,500 permonth under lease agreements, which expire in October 2016.

On May 10,2011, the Company has been granted a license to establish a branch office inthe Jebel Ali Free Zone of the United Arab Emirates to facilitate product salesin the EMEA Region. Under the license, the Company rents approximately 638square feet of office space at annual rate of AED118,580 (approximately $32,000at March 31, 2011) through May 2012. 

 

18

 

 

 

 

**Forward Industries, Inc.**

 

 

 

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

*Thefollowing discussion and analysis should be read in conjunction with ourunaudited consolidated financial statements, and the notes thereto, and otherfinancial information appearing elsewhere in this Quarterly Report on Form 10-Qand the audited consolidated financial statements and notes thereto included inour Annual Report on Form 10-K for the fiscal year ended September 30, 2010. The following discussion and analysis compares our consolidated results ofoperations for the three months ended March 31, 2011 (the “2011 Quarter”), withthose for the three months ended March 31, 2010 (the “2010 Quarter”) and ourconsolidated results of operations for the six months ended March 31, 2011 (the“2011 Period”) with those for the six months ended March 31, 2010 (the “(2010Period”).  All figures in the following discussion are presented on aconsolidated basis. All dollar amounts and percentages presented herein havebeen rounded to approximate values.*

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

Thefollowing management’s discussion and analysis includes “forward-lookingstatements” (as such term is used within the meaning of the Private SecuritiesLitigation Reform Act of 1995).  These “forward-looking statements” are notbased on historical fact and involve assessments of certain risks,developments, and uncertainties in our business looking to the future.  Suchforward looking statements can be identified by the use of forward-lookingterminology such as “may”, “will”, “should”, “expect”, “anticipate”, estimate”,“intend”,  “continue”, or “believe”, or the negatives or other variationsof these terms or comparable terminology.  Forward-looking statements mayinclude projections, forecasts, or estimates of future performance anddevelopments.  Forward-looking statements contained in this QuarterlyReport are based upon assumptions and assessments that we believe to bereasonable as of the date of this Quarterly Report.  Whether thoseassumptions and assessments will be realized will be determined by futurefactors, developments, and events, which are difficult to predict and may bebeyond our control.  Actual results, factors, developments, and events maydiffer materially from those we assumed and assessed.  Such risk factors,uncertainties, contingencies, and developments, including those discussed inthis Management’s Discussion and Analysis of Financial Condition and Results ofOperations of this Quarterly Report on Form 10-Q and those identified in “RiskFactors” in Item 1A of Forward’s Annual Report on Form 10-K for the fiscal yearended September 30, 2010, could cause our future operating results to differmaterially from those set forth in any forward looking statement. Such factorsinclude, among others, the following: our ability to maintain constructivecommercial relationships with our key customers, including during periods ofeconomic downturns generally or downturns/volatility in their specificbusinesses; the impacts on our financial condition, results of operations, andbusiness prospects arising from making an acquisition or failing to make anacquisition; management’s ability to successfully execute its business plan andstrategy and whether gains in net sales arising from this strategy, if any,will be adequate to offset increased operating expense incurred in executingthe strategy; our success in winning new business from our customers andagainst competing vendors; whether replacement programs that we win will bemore or less successful or profitable than those that are replaced; levels ofdemand and pricing generally for blood glucose monitoring devices sold by ourcustomers for which we supply carry solutions; variability in order flow fromour OEM customers; OEM customers’ decisions to reduce or eliminate theirpractice of including our carry case accessories in-box; the loss of key salesemployees upon whom relationships with key OEM customers depend; generaleconomic and business conditions, nationally and internationally in thecountries in which we do business; the continuation or resumption of globaleconomic recession; the failure of one or more of our suppliers; failures inour ability to maintain adequate quality control in our products; demographicchanges; changes in technology, including developments in the treatment orcontrol of diabetes that adversely affect the incidence of use and replacementrates of handheld blood glucose monitors by diabetics; increased competition inthe business of distribution of carry solutions for handheld electronic devicesgenerally or increased competition to include carry solutions with productsmanufactured by our OEM customers in particular; the failure of borrower FlashVentures to repay amounts borrowed under the note receivable owed us as andwhen due; changes affecting the business or business prospects of one or moreof our principal OEM customers; governmental regulations and changes in, or thefailure to comply with, governmental regulations; and other factors includedelsewhere in this Annual Report and our other reports filed with theCommission.  Accordingly, there can be no assurance that any such forwardlooking statement, projection, forecast or estimate contained herein or in ourAnnual Report on Form 10-K for the fiscal year ended September 30, 2010, can berealized or that actual returns, results, or business prospects will not differmaterially from those set forth in any forward looking statement.

 

19

 

 

**Forward Industries, Inc.**

 

 

 

 

Given theseuncertainties, readers are cautioned not to place undue reliance on suchforward-looking statements.  The Company disclaims any obligation toupdate any such factors or to publicly announce the results of any revisions toany of the forward-looking statements contained herein to reflect futureresults, events or developments.

**BUSINESS OVERVIEW**

We design, market, and distribute carry and protective solutions primarilyfor hand held electronic devices, including medical monitoring and diagnostickits, bar code scanners, GPS and location devices, cellular telephones, laptopcomputers, and MP3 players. Our technology solutions include soft-sidedcarrying cases, bags, clips, hand straps, protective plates and skins, andother accessories.  We also design, market and distribute carry andprotective solutions for other consumer products such as firearms, sporting andrecreational products, and aeronautical products.  Our customers are originalequipment manufacturers, or “OEMs”, of these electronic and other consumerproducts (or the contract manufacturing firms of these OEM customers) thateither package our carry solution products as accessories “in box” together withtheir product offerings, or to a much lesser extent, sell them through theirretail distribution channels. We do not manufacture any of the products that wedesign, market, and distribute.  We source substantially all products wemarket and distribute from independent suppliers in China.  Our supplierscustom manufacture our carrying solutions and related products to our order,based on our designs and know-how, and to our customers’ specifications.

In August 2010, we appointed a new chairman of the board and a newchief executive officer who, respectively, succeeded the outgoing actingchairman of the board and chief executive officer under the terms of aSettlement Agreement, as more fully described in our most recent proxystatement under the caption “Security Ownership of Certain Beneficial Ownersand Management and Related Shareholder MattersÑSettlement Agreement” and in ourCurrent Report on Form 8-K filed with the Commission on August 16, 2010.

**Trends and Economic Environment****

Ournew management team has made a commitment to (i) growing our OEM business and (ii)pursuing a marketing- and product development-driven business model.  Thesecond part of this strategy involves initiatives to expand our productofferings and to develop a retail distribution channel, in addition to our OEMchannel.  In executing the second part of this strategy, we have begun toincur, and we are likely to continue to incur, significantly increased selling,general, and administrative expenses as we devote resources to recruit andcompensate experienced sales and operations professionals and to develop and/oracquire new product offerings and a retail sales capability. We believe that therealization of the benefits of these initiatives will depend on our ability toexecute our strategy, succeed in product development, and develop retaildistribution.  We anticipate that a successful impact on our results ofoperations will be determined by the speed in which we can bring new productsto market and by the success and acceptance of these products in themarketplace.  Insofar as most of our new sales and marketing professionalswere not hired until well into the 2011 Quarter, succeeding reporting periodswill begin to reflect more fully the expense side of investments in ourstrategy, while the anticipated benefits of increased sales from those hireswill take longer to be realized.

Webelieve that this may be particularly the case in view of our decision toterminate the letter of intent with respect to the acquisition of FlashVentures, a distributor and developer of consumer electronics accessories,announced in December 2010.  We had anticipated that such acquisitionwould provide us with a retail distribution channel and an initial product lineto sell through that channel.  The termination of the letter of intent has,in the near term, led our management to pursue such channel and productdiversification goals by internal growth and development and selective technologyjoint ventures, while maintaining an openness to pursue an acquisition in thebest interests of shareholders.  

20

 

 

 

 

**Forward Industries, Inc.**

 

 

Withregard to our OEM business, we believe that the recent level of net salesappears to be sustainable, subject always to material changes in order flowfrom our major OEM diabetic product customers, where our business remainshighly concentrated. We continue to operate in a very challenging pricing andgross margin environment with these customers.  We continue to makeprogress in building sales and diversifying our OEM customer base in our otherproducts sales line.  We believe that we can build on the 10% growth inrevenue that was contributed by “other products” in Fiscal 2010. 

**Variability of Revenuesand Results of Operations**

Becausea high percentage of our sales revenues is highly concentrated in a few largecustomers, and because the volumes of these customers’ order flows to us arehighly variable, with short lead times, our quarterly revenues, andconsequently our results of operations, are susceptible to significant variabilityover a relatively short period of time.    

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

Thismanagement’s discussion and analysis of financial condition and results ofoperations is based upon or derived from the unaudited consolidated financialstatements included in this Quarterly Report on Form 10-Q, which have beenprepared in accordance with accounting principles generally accepted in theUnited States of America. The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues, and expenses, and related disclosure ofcontingent liabilities. We base these judgments and estimates on our historicalexperience and on various other assumptions that we believe to be reasonableunder the circumstances, and these judgments form the basis for our estimates concerningthe carrying values of assets and liabilities that are not readily apparentfrom other sources. We periodically re-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. 

Wediscuss the material accounting policies that are critical in making theseestimates and judgments in our Annual Report on Form 10-K for the fiscal yearended September 30, 2010, under the caption “Management’s Discussion andAnalysisÑCritical Accounting Policies and Estimates”.  There has been nomaterial change in critical accounting policies or estimates since September30, 2010, except those described below  

Thenotes to our audited consolidated financial statements contained in our AnnualReport on Form 10-K for the year ended September 30, 2010, and the notes to ourunaudited consolidated financial statements included in Part I, Item 1 of this QuarterlyReport on Form 10-Q contain additional information related to our accountingpolicies and should be read in conjunction with the following discussion andanalysis relating to our overall financial performance, operations andfinancial position.

**Share-Based PaymentExpense**

Werecognize share-based equity compensation in our consolidated statements ofoperations at the grant-date fair value of our stock options and otherequity-based compensation. The determination of grant-date fair value isestimated using an option-pricing model, which includes variables such as theexpected volatility of our share price, the exercise behavior of our employees,interest rates, and dividend yields. These variables are projected based on ourhistorical data, experience, and other factors. Changes in any of thesevariables could result in material increases to the valuation of optionsgranted in future periods and increases in the expense recognized forshare-based payments. Refer to Note 4 Share-Based Compensation to ourconsolidated financial statements included in Part I, Item 1 of this Quarterly Reporton Form 10-Q.

 

21

 

 

 

 

**Forward Industries, Inc.**

 

 

**RESULTS OF OPERATIONS FOR THE 2011 QUARTER COMPARED TO THE 2010QUARTER**

**Net income**

Werecorded a net loss of $0.6 million in the 2011 Quarter, compared to a net lossof $0.1 million in the 2010 Quarter. The widening of net loss in the 2011Quarter resulted from higher operating expenses, offset, in part, by higher grossprofit on higher sales and higher other income, as shown in the table below:   

**Main Components of Net Loss For Three Months  Ended March 31**

 
(thousands of dollars)

 

2011

Quarter

2010 	Quarter

Increase (Decrease)

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

$4,996

$4,420

$576

 

 

 

 

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

1,154

994

161

Selling Expenses........................................................................................ 

(662)

(533)

129

General and Administrative Expenses

(1,100)

(552)

548

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

53

(21)

74

Provision (benefit) from Income Taxes................................................... 

--

--

--

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

**($555)**

**($112)**

$443

* Table may nottotal due to rounding.

Basic and diluted per share data was a loss of ($0.07)for the 2011 Quarter, compared to a loss of ($0.01) for the 2010 Quarter. The greaterloss in the 2011 Quarter compared to the 2010 Quarter was due to the increasein net loss.   

**Net Sales**

Netsales increased $0.6 million, or 13%, to $5.0 million in the 2011 Quarter from$4.4 million in the 2010 Quarter, due to higher sales of Diabetic Products andOther Products, which increased $0.4 million and $0.2 million, respectively, inthe 2011 Quarter. The tables below set forth sales by product line andgeographic location of our customers for the periods indicated.

 

 

 

 

22

 

 

 

 

**Forward Industries, Inc.**

 

 

**Net Sales for 2011 Quarter**

**3 Months ended March 31, 2011**

**(millions of dollars)**

** **

**APAC**

**Americas**

**Europe**

**Total***

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

$2.3

$0.6

$1.0

$3.9

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

0.2

0.7

0.1

1.1

**Total***

**$2.5**

**$1.3**

**$1.2**

**$5.0**

 

                                

**Net Sales for 2010 Quarter**

**3 Months ended March  31, 2010**

**(millions of dollars)**

** **

**APAC**

**Americas**

**Europe**

**Total***

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

$1.9

$0.8

$0.8

$3.6

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

0.2

0.5

0.2

0.9

**Total***

**$2.1**

**$1.4**

**$1.0**

**$4.4**

* Tables maynot total due to rounding.

*Diabetic Product Sales*

Wedesign to the order of and sell carrying cases for blood glucose diagnostickits directly to OEMs (or their contract manufacturers) of these electronic, diagnostickits made for use by diabetics.  The OEM customer or its contractmanufacturer packages our carry cases “in box” as a custom accessory for theOEM’s blood glucose testing and monitoring kits or in certain programsfurnishes them as promotional items.

Salesof cases and related accessories for blood glucose monitoring kits increased $0.4million, or 11%, to $3.9 million in the 2011 Quarter, from $3.6 million in the2010 Quarter. This increase was due primarily to higher sales to one majordiabetic product customer. Fluctuations in sales to our two other principal OEMdiabetic customers offset each other, as reflected in the table below, whichsets forth our sales by diabetic product customer for the periods indicated.

 
(millions of dollars)

 

2011 Quarter

2010 Quarter

Increase 	(Decrease)

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

$2.2

$1.9

$0.3

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

0.8

0.9

(0.1)

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

0.7

0.7

0.1

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

0.1

0.1

--

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

**$3.9**

**$3.6**

**$0.3**

* Table may not totaldue to rounding.

Salesof carrying cases for blood glucose monitoring kits represented 79% of ourtotal net sales in the 2011 Quarter compared to 80% of our total net sales inthe 2010 Quarter.  

*OtherProduct Sales*

Wedesign and sell carrying and protective solutions to OEMs for a diverse arrayof other portable electronic and other products, including bar code scanners,GPS and location devices, cellular telephones, laptop computers, MP3 players, firearms,sporting and recreational products, and aeronautical products on amade-to-order basis that are customized to fit the products sold by our OEMcustomers. 

 

 

23

 

 

 

 

**Forward Industries, Inc.**

 

 

Salesof other products increased $0.2 million, or 23%, to $1.1 million in the 2011Quarter from $0.9 million in the 2010 Quarter. This increase was due primarily tofirst time sales to several new customers in Fiscal 2011 of $ 0.2 million inthe 2011 Quarter, in the aggregate. Smaller increases and decreases in a numberof existing customers offset each other, none of which changes individually is material.

Salesof other products represented 21% of our net sales in the 2011 Quarter comparedto 20% of net sales in the 2010 Quarter. 

**Gross Profit**

Grossprofit of $1.2 million in the 2011 Quarter increased $0.2 million, or 16%, from$1.0 million in the 2010 Quarter. This improvement resulted primarily from the $0.6million, or 13%, increase in sales revenues (refer to “Net Sales” section above),and to a lesser extent, from declines in Hong Kong costs, as well as freight,duties, and customs, which components are included as components of our costsof goods sold. These improvements were offset, in part, by a 3% increase in ourmaterials costs as a percentage of sales due to the introduction of certain newproducts for first time customers into our product mix as described above under“Other Product Sales”.

Grossprofit as a percentage of net sales was 23% in the 2011 Quarter and 22% in the2010 Quarter. 

**Selling Expenses**

Selling expenses of $0.7million in the 2011 Quarter increased $0.1 million, or 24%, from the 2010Quarter primarily due to an increase in personnel costs and related travel andentertainment expenses of $82 thousand, and to a lesser extent, an increase in promotionand sampling costs of $38 thousand. 

**Generaland Administrative Expenses**

Generaland Administrative expenses increased $0.5 million, or 99%, to $ 1.1 million inthe 2011 Quarter from $0.5 million in the 2010 Quarter due primarily to thefollowing: 
-  a $0.4 million increase in personnel costs including: recruitmentand signing fees; travel and entertainment expense; accrued retention bonuspayable to an executive; increased payroll taxes and benefits attributable topersonnel hires, bonus, and salary increases; hire of additional informationtechnology, operations, and accounting personnel; relocation reimbursementpayable to an executive; and accrual of share based compensation;
-  a $0.1 million increase in professional fees (primarilylegal, and to a lesser extent, financial and accounting) primarily inconnection with acquisition efforts. 
-  and a $33 thousand increase in office and telecommunicationscosts.

**Other Income (Expense)**

Otherincome (expense), consisting of interest income on cash and cash equivalentbalances and on the Flash note receivable (refer to Note 3 — Note Receivable),as well as foreign currency transaction gains and losses, improved $74 thousandfrom $21 thousand of expense in the 2010 Quarter to $53 thousand of income inthe 2011 Quarter. This was primarily due to a $53 thousand change from a foreigncurrency transaction loss to a gain in the 2011 Quarter, and to a lesser extent,to an increase in interest income of $21 thousand during the 2011 Quarter(resulting from interest income accrued in respect of the Flash notereceivable). Exchange rate changes on foreign currency cash balances were notmaterial in either the 2011 Quarter or the 2010 Quarter.

**Net Loss**

Netloss of $0.6 million in the 2011 Quarter increased $0.4 million from a net lossof $0.1 million in the 2010 Quarter as a result of the changes as describedabove.

 

 

24

 

 

 

 

**Forward Industries, Inc.**

 

 

**RESULTS OF OPERATIONS FOR THE 2011 PERIOD COMPARED TO THE 2010 PERIOD**

**Net loss**

Werecorded a net loss of $0.5 million in the 2011 Period, compared to a net lossof $0.3 million in the 2010 Period. The widening of net loss in the 2011 Periodresulted from higher operating expenses, offset, in part, by higher grossprofit on higher sales and to a lesser extent higher other income, as shown inthe table below:    

**Main Components of Net Loss for the Six  Months Ended March 31**

 
(thousands of dollars)

 

2011

Period

2010 	Period

Increase 	(Decrease)

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

$10,964

$8,546

$2,418

 

 

 

 

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

2,531

1,918

613

Selling Expenses........................................................................................ 

(1,103)

(992)

112

General and Administrative Expenses.................................................... 

(2,012)

(1,211)

801

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

47

(14)

61

Provision (benefit) from Income Taxes................................................... 

--

--

--

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

**($537)**

**($299)**

$238

* Table may nottotal due to rounding.

Basic and diluted per share data was a loss of ($0.07)for the 2011 Period, compared to a loss of ($0.04) for the 2010 Period. The declinein the 2011 Period compared to the 2010 Period was due to the increase in netloss.   

**Net Sales**

Netsales increased $2.4 million, or 28%, to $11.0 million in the 2011 Period from$8.5 million in the 2010 Period, due to higher sales of Diabetic Products andOther Products, which increased $1.5 million and $0.9 million, respectively, inthe 2011 Period. The tables below set forth sales by product line andgeographic location of our customers for the periods indicated.

 

 

 

 

 

 

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**Forward Industries, Inc.**

 

 

**Net Sales for 2011 Period**

**6 Months ended March 31, 2011**

**(millions of dollars)**

** **

**APAC**

**Americas**

**Europe**

Total*

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

$4.8

$1.3

$2.0

$8.2

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

0.4

1.9

0.5

2.8

**Total***

**$5.2**

**$3.3**

**$2.5**

**$11.0**

 

                                

**Net Sales for 2010 Period**

**6 Months ended March  31, 2010**

**(millions of dollars)**

** **

**APAC**

**Americas**

**Europe**

Total*

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

$3.5

$1.7

$1.5

$6.6

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

0.4

1.3

0.2

1.9

**Total***

**$4.0**

**$3.0**

**$1.6**

**$8.6**

* Tables may nottotal due to rounding.

*Diabetic Product Sales*

Salesof cases and related accessories for blood glucose monitoring kits increased $1.5million, or 23%, to $8.2 million in the 2011 Period, from $6.6 million in the2010 Period. This increase was due primarily to higher sales to one majordiabetic product customer as well as smaller increases to our two otherprincipal OEM diabetic customers, as reflected in the table below, which setsforth our sales by diabetic product customer for the periods indicated.

 
(millions of dollars)

 

2011 Period

2010 Period

Increase (Decrease)

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

$4.7

$3.5

$1.2

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

1.8

1.8

0.1

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

1.5

1.2

0.3

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

0.2

0.1

--

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

**$8.2**

**$6.6**

**$1.5**

* Table may not totaldue to rounding.

Salesof carrying cases for blood glucose monitoring kits represented 75% of ourtotal net sales in the 2011 Period compared to 78% of our total net sales inthe 2010 Period.  

*OtherProduct Sales*

Salesof other products increased $0.9 million, or 45%, to $2.8 million in the 2011 Periodfrom $1.9 million in the 2010 Period. Included in this amount, and the largestsingle sale of Other Products for the 2011 Period, is $0.4 million of sales toFlash Ventures, Inc. (refer to Note 11 — Letter of Intent). The balance of thisincrease was due primarily to first time sales to several new customers in the2011 Period of $0.5 million, in the aggregate. In addition to new customersales, fluctuations in existing customer sales between the 2011 Period and 2010Period offset each other. Existing customer sales included increases of $0.3million and $0.1 million to two major customers, respectively. All othercustomer sales fluctuations between the 2011 Period and 2010 Period wereimmaterial.

Salesof other products represented 25% of our net sales in the 2011 Period comparedto 22% of net sales in the 2010 Period. 

 

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**Forward Industries, Inc.**

 

 

**Gross Profit**

Grossprofit of $2.5 million in the 2011 Period increased $0.6 million, or 32%, from$1.9 million in the 2010 Period. This improvement resulted primarily from the$2.4 million, or 28%, increase in sales revenues (refer to “Net Sales” sectionabove), and to a much lesser extent, from a decrease in Hong Kong costs andwarehousing and handling costs (both of which are included as components of ourcosts of goods sold). These improvements were offset, in part, by a 3% increasein our materials costs as a percentage of sales due to the introduction ofcertain new products for first time  customers into our product mix asdescribed above under “Other Product Sales”.

Grossprofit as a percentage of net sales was 23% in the 2011 Period compared to 22%in the 2010 Period.  

**Selling Expenses**

Sellingexpenses of $1.1 million in the 2011 Period increased $0.1 million, or 11%,from the 2010 Period due primarily to additional costs incurred inrestructuring our sales force, increased sampling activity, and lesserincreases in other components of selling expenses.  

**Generaland Administrative Expenses**

Generaland Administrative expenses increased $0.8 million, or 66%, to $2.0 million inthe 2011 Period from $1.2 million in the 2010 Period due primarily to thefollowing:
-  a $0.6 million increase in personnel costs, including thefollowing: hire of additional information technology, operations, andaccounting personnel; accrued retention bonus payable to an executive; recruitmentand signing fees; travel and entertainment expense; increased payroll taxes andbenefits attributable to personnel hires, bonus, and salary increases; accrualof share based compensation; and relocation expense payable to an executive.; 
-  a $0.1 million increase in professional fees (primarilylegal, and to a lesser extent, financial and accounting) primarily inconnection with the Flash acquisition effort; 
-  a $67 thousand increase in public costs (including $27 thousandof consulting services for executive compensation analysis, $29 thousand ofdirector fees, share-based compensation, and expense reimbursements, and $6thousand of director and officer insurance expense); 
-  and $45 thousand increase in computer expense andtelecommunications costs incurred in connection with upgrading our IT equipmentand restructuring our information technology platform.

**Other Income (Expense)**

Otherincome (expense), consisting of interest income on cash and cash equivalentbalances and on the Flash note receivable (refer to Note 3 — Note Receivable),as well as foreign currency transaction gains and losses, improved $61 thousandfrom $14 thousand of expense in the 2010 Period to $47 thousand of income inthe 2011 Period. This was primarily due to a $55 thousand change from a foreigncurrency transaction loss to a gain in the 2011 Period, and to a lesser extent,to an increase in interest income of $6 thousand during the 2011 Period(resulting from interest income accrued in respect of the Flash notereceivable). Exchange rate changes on foreign currency cash balances were notmaterial in either the 2011 Period or the 2010 Period.

**Net Loss**

Netloss increased to $0.5 million in the 2011 Period compared to $0.3 million inthe 2010 Period as a result of the changes as described above.

 

 

27

 

 

 

 

**Forward Industries, Inc.**

 

 

**LIQUIDITY AND CAPITALRESOURCES**

                Duringthe 2011 Period, we used $1.1 million of cash in operations compared to a useof $0.4 million in the 2010 Period. Net cash used in operating activities inthe 2011 Period consisted of net loss of $0.5 million, adjusted by $0.2 millionfor non-cash items, and reduced by changes in working capital items of $0.8 million.As to working capital items, uses of cash in operating activities in respect ofdecreases in accounts payable, and accrued expenses and other currentliabilities were $0.6 million and $0.3 million, respectively. Increases ininventories and prepaid and other assets (current and long-term) of $0.2million and $0.1 million, respectively, also contributed to uses of cash. Thesechanges were offset, in part, by a decrease in accounts receivable of $0.4million, which generated cash in operating activities. The decreases inaccounts payable is due to lower materials purchases made in the 2011 Quartercompared to the three months ended September 30, 2011, which are driven bysales orders activity. The decrease in accounts receivable is due to lowersales recorded in the 2011 Quarter compared to the three months ended September30, 2011. The decrease in accrued expenses and other current liabilities isprimarily due to payments made during the 2011 Period in respect of itemsaccrued as of September 30, 2010: (i) $125 thousand in severance payments to aformer officer of the Company under the August 2010 Settlement Agreement; (ii)$142 thousand in shareholder settlement costs under the August 2010 SettlementAgreement; (iii) $123 thousand in sales commissions; and (iv) $150 thousand inwages. The increase in inventories is a result of purchases made in support ofsales orders received. The increase in prepaid and other assets (current andlong term) is due to prepaid tooling and mold costs in support of firm purchaseorders.

 

                Inthe 2010 Period, operating activities used $0.4 million of cash, consisting ofa net loss of $0.3 million (reduced by $0.2 million for non-cash items), and$0.3 million for net changes in working capital items. Changes in inventoriesand accounts receivable of $0.2 million and $0.4 million, respectively, primarilycontributed to the net cash used by operating activities. These uses of workingcapital were partially offset primarily by changes in accounts payable and accruedexpenses and other current liabilities. 

 

                Inthe 2011 Period, net investing activities used $1.1 million, consisting of $1.0million loaned to Flash Ventures, Inc. evidenced by a note receivable (refer toNote 3 — Note Receivable) and $75 thousand in purchases of property andequipment, primarily computer and telecommunications hardware and software.There were no investing activities in the 2010 Period. 

 

There were no financing activities in the 2011 Periodor the 2010 Period.

 

At March31, 2011, our current ratio (current assets divided by current liabilities) was9.48; our quick ratio (current assets less inventories divided by currentliabilities) was 9.0; and our working capital (current assets less currentliabilities) was $20.7 million.  As of such date, we had no short orlong-term debt outstanding. 

Ourprimary source of liquidity is our cash and cash equivalents on hand. Theprimary demands on our working capital are: operating losses to the extent theyoccur and accounts payable arising in the ordinary course of business, the mostsignificant of which arise when our customers place orders with us and we orderfrom our suppliers. Historically, our sources of liquidity have been adequateto satisfy working capital requirements arising in the ordinary course ofbusiness. Management’s recently announced business strategy includes (i) increasingthe Company’s existing OEM business and (ii) expanding its product offeringsand diversifying its distribution by moving into the retail channel. Weanticipate that the termination of the proposed acquisition of Flash Venturesshould signify a reduction if not elimination in what we anticipated would besubstantial capital outlays (acquisition consideration) in investmentactivities in the near term.  However, the building out of our productofferings and establishing a retail distribution channel through internalgrowth and development may lengthen the period required to increase net salesrevenues.  Accordingly, we anticipate significant uses of cash and capitalresources as a result of one or more of the following developments in futureperiods: (i) increases in operating expenses in our implementation ofmanagement’s strategy (see “Trends and Economic Environment” above), inparticular in increased selling and other personnel expenses, and, accordingly,the funding of likely operating losses; and (ii) use of capital in financingtechnology joint ventures in investing activities.   We anticipatethat our liquidity and financial resources for the next twelve months will beadequate to manage our operating and financial requirements.  

28

 

 

 

 

**Forward Industries, Inc.**

 

 

In September 2002 andJanuary 2004, our Board of Directors authorized the repurchase of up to anaggregate of 486,200 shares of our outstanding common stock. Under thoseauthorizations, as of March 31, 2011, we had repurchased an aggregate of172,603 shares at a cost of approximately $0.4 million but none during Fiscal2010 or the 2011 Period. 

 

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

Notapplicable.

**ITEM4. CONTROLS AND PROCEDURES **

Ourmanagement is responsible for establishing and maintaining a system ofdisclosure controls and procedures (as defined in Rule 13a-15(e)) under theExchange Act) that is designed to ensure that information required to bedisclosed by the Company in the reports that we file or submit under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified 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.

In accordancewith Exchange Act Rule 13a-15(b), our management, under the supervisionand with the participation of our Principal Executive Officer and PrincipalFinancial Officer, performed an evaluation of the effectiveness of theCompany's disclosure controls and procedures as of the end of the fiscalquarter covered by this Quarterly Report. Based on that evaluation, theCompany's Principal Executive Officer and Principal Financial Officer concludedthat the Company's disclosure controls and procedures were effective, as of theend of the 2011 Quarter, to provide reasonable assurance that informationrequired to be disclosed in the Company's reports filed or submitted under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Commission's rules and forms.

**Changesin internal control**

Ourmanagement, with the participation of our Principal Executive Officer and PrincipalFinancial Officer, performed an evaluation required by Rule 13a-15(d) of theExchange Act as to whether any change in our internal control over financialreporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred duringthe 2011 Quarter.  Based on that evaluation, our Principal ExecutiveOfficer and our Principal Financial Officer concluded that no change occurredin the Company's internal control over financial reporting during the 2011Quarter that has materially affected, or is reasonably likely to materiallyaffect, the Company's internal control over financial reporting.
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 March 31, 2011, there were nosuch 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**

Pleasereview our Annual Report on Form 10-K for the fiscal year ended September 30,2010, for a complete statement of “Risk Factors” that pertain to our business.Please refer to ITEM 2. CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THEPRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 on page 20 of this QuarterlyReport on Form 10-Q as well as Management’s Discussion and Analysis ofFinancial Condition and Results of Operations for further discussion of certainof such risk factors.

29

 

 

 

 

**Forward Industries, Inc.**

 

 

 

Thefollowing paragraphs set forth two risk factors from our Annual Report on Form10-K for the year ended September 30, 2010, that are updated for purposes ofthis Quarterly Report and a third risk factor that was not included in saidAnnual Report.

*We havepreviously announced our intention to diversify our business by means ofacquisition or other business combination*.

Ournew management team’s business strategy is to grow our OEM business, expandproduct offerings and technology solutions, and develop or acquire retaildistribution capability.   Consistent with this approach, in December2010, we announced entry into a letter of intent to acquire Flash VenturesInc., a distributor of consumer electronics peripherals and accessories(“Flash”). In April 2011 we elected to terminate such letter of intent and notmake such acquisition.  The immediate consequence of this decision is thatthe anticipated payments of some combination of cash and issuance of our equityand/or debt securities will not be made, and the risks of the potentialdilution to existing shareholders and the business risks that accompany any acquisitionshould not arise. 

However,the risks of not making such an acquisition to acquire a retail channel and productdevelopment capability may be the increased time required to accomplish suchgoals through internal growth and development.  There can be no assurancethat we will be successful in our efforts to achieve such goals throughinternal growth and development.

Inany event, management continues to believe that, given the right acquisitiontarget under satisfactory terms and conditions, it will continue to evaluate potentialacquisitions.   There can be no assurance that we will be successfulin our efforts to make any acquisition, or that any business that we do acquireor invest in will be profitable.  There can be no assurance as to thetiming of a transaction, or that the market price of our common stock will notdecline in response to any such transaction as may be effected or not effected.

*Ourbusiness strategy is to develop and grow our existing business and to expandinto retail; to the extent that operating expenses trend significantly higherbefore we realize higher revenues, our operating results may be adversely andmaterially affected*.

                Ourmanagement team is pursuing a more marketing- and product development-drivenbusiness model to grow our existing business and expand product offerings,compared to the prior management team that was focused on maintaining theliquidity of the balance sheet as it assessed potential acquisitions.  Inexecuting this strategy, we are likely to incur increased selling, general, andadministrative expense as we devote increased resources to product sales anddevelopment and a retail presence, including resources to recruit andcompensate experienced sales and marketing professionals.  Such increasedexpenses are likely to impact our income statement and reduce cash andequivalents before such efforts result in higher revenues, if at all, which maymaterially and adversely affect our results of operations.    Itis possible that the achievement of higher revenues may well have been realizedmore quickly if the acquisition contemplated by the letter of intent were tohave been consummated.  With the termination of the Flash letter ofintent, the period of time of during which we incur higher operating expensesbefore we realize a higher level of sales commensurate with such expenses maybe longer than we had forecast.  Realization of higher revenues that willresult in improvement in our results of operations will depend on management’sability to execute successfully on its strategy and business plan, as to whichthere can be no assurance.

*                Thereis a risk that the funds we loaned to a third party will not be repaid.*

 

 

30

 

 

 

 

**Forward Industries, Inc.**

 

                

InJanuary 2011, pursuant to the terms of the letter of intent to acquire Flashreferred to above, we agreed to make available a loan facility to Flash forworking capital purposes in a maximum amount of $1,000,000.  The loanbears interest at 11%per annum on any unpaid principal, payable quarterly commencing March 31,2011.  Principal of the note is payable upon maturity on December 1, 2011(subject to acceleration in case of an event of default, as specified in the agreement),together with unpaid interest and any fees, expenses, and other amounts owingto the Company.   Flash was latein making the interest payment due March 31, 2011, but did make payment infull.  As with any debt obligation, there is a risk that the borrower willdefault and we as lender may not receive repayment in full of the fundsloaned.  If this were to occur, it could have a material, adverse effecton our financial condition and reduce the amount of funds available to supportour growth initiatives and other capital requirements.  

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

During the 2011 Quarter we did not issue or sell anysecurities that were not registered under the Securities Act of 1933. During the 2011 Quarter we did not purchase any common stock or other equitysecurities pursuant to publicly announced plans or programs orotherwise.   

**ITEM3. DEFAULTS UPON SENIOR SECURITIES**

None.

**ITEM4. REMOVED AND RESERVED**

**ITEM5. OTHER INFORMATION**

EffectiveApril 1, 2011, the Company relocated its executive offices from 1801 GreenRoad, Pompano Beach, Florida to 3110 Main St., Suite 400, Santa Monica,California 90406.  For the near term, the Company is maintaining itsPompano Beach, FL facility as a product design location under the same leaseterms as before.  The Santa Monica Facility is leased at an annual rent of$162 thousand per annum pursuant to customary lease terms.

Asdisclosed in our Current Report on Form 8-K, filed with the Commission on March11, 2011, the Compensation Committee of the Board of Directors approved changesto the terms of the employment agreement between James O. McKenna, our ChiefFinancial Officer, and the Company.  See Note 9 of the Notes toConsolidated FinancialStatements.  Such changes have subsequently been memorialized in a new employmentagreement, dated as of April 1, 2011, which agreement is attached hereto asExhibit 10.7.

On May 10,2011, the Company has been granted a license to establish a branch office inthe Jebel Ali Free Zone of the United Arab Emirates to facilitate product salesin the EMEA Region.

**ITEM 6. EXHIBITS**

10.7       EmploymentAgreement between the Company and James O. McKenna, dated as of April 1, 2011.

31.1      Certification of the Chief ExecutiveOfficer under Section 302 of the Sarbanes-Oxley Act of 2002

31.2      Certification of the Chief FinancialOfficer under Section 302 of the Sarbanes-Oxley Act of 2002

32.1       Certificationof the Chief Executive Officer and Chief Financial Officer under Section 906 ofthe Sarbanes-Oxley Act of 2002

 

 

 

31

 

 

 

 

**Forward Industries, Inc.**

 

 

 

 

**SIGNATURES**

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

 
Dated:  May 11, 2011
 
 
FORWARDINDUSTRIES, INC.
 
(Registrant)
 
 
 
 
 
By:/s/ Brett M.Johnson                        
 
BrettM. Johnson   
 
President/ChiefExecutive Officer
 
(PrincipalExecutive Officer)
 
 
 
 
 
By:/s/James O. McKenna                        
 
JamesO. McKenna     
 
Treasurer/ChiefFinancial Officer
 
(PrincipalFinancial and Accounting Officer)

 

 

 

 

 

 

 

 

 

 

 

                                                                                

 

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