** **

** **

 

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

________________

**FORM 10-Q**

________________

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

**            For the quarterly period ended June30, 2010.**

**OR**

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

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

** **

**Commission File Number: 0-6669**

________________

**FORWARD INDUSTRIES, INC.**

(Exact name of registrant as specified in its charter)

________________

** **

**                                      **
| **New York** | **13-1950672**
(State or other jurisdiction of 

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

 

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

(Address of principal executive offices, including zipcode)

**(954) 419-9544**

(Registrant’s telephone number, including area code)

________________

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

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 reporting company.  Seethe definitions of “large accelerated filer”, “accelerated filer”, and “smallerreporting 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 August 6, 2010, was 8,021,775 shares.

1

 

 

 
****
 

 

 

 

**Forward Industries, Inc.**

**INDEX**

**PART  I.**

** **

**FINANCIAL  INFORMATION**

Page No.

 

 

 

 

 

**Item  1.**

**Financial  Statements**

 

 

 

     - Consolidated Balance Sheets as of June 30, 2010 (unaudited)	and September 30, 2009

 4

 

 

     

 

 

 

   	- Consolidated Statements of Operations  (unaudited) for the Three and Nine Months Ended June 30, 2010 and 2009

5

 

 

 

 

 

 

    - Consolidated Statements of Cash  Flows (unaudited) for the Nine Months Ended June 30, 2010 and 2009

6

 

 

 

 

 

 

     - Notes to Consolidated Financial Statements (unaudited)

7

 

 

 

 

 

**Item  2.**

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

16

 

** **

** **

 

 

**Item  3.**

**Quantitative  and Qualitative Disclosures About Market Risk**

26
            
 

**Item  4.**

**Controls  and Procedures**

26

 

** **

 

 

**PART  II.**

** **

**OTHER  INFORMATION**

** **

 

** **

 

 

 

**Item  1.**

**Legal  Proceedings**

28

 

** **

** **

 

 

**Item  1A.**

**Risk  Factors**

28

 

**Item  5.**

**Other  Information**

28

 

** **

** **

 

 

**Item  6.**

**Exhibits**

28

 

** **

** **

 

 

 

**Signatures**

29

 

 

** **

 

 

 

**Certifications**

30

** **

2

 
****
 

 

**Note Regarding Use of Certain Terms**

Inthis Quarterly Report on Form 10-Q, unless the context otherwise requires, the followingterms have the meanings assigned to them as set forth below: "we", "our", and the "Company"  refer to ForwardIndustries, Inc., a New York corporation, together with its consolidatedsubsidiaries; “Forward” or “Forward Industries” refers to Forward Industries, Inc.; “common stock” refers to the common stock, $.01 par value per share, of ForwardIndustries, Inc.; "Koszegi" refers to Forward Industries’ wholly owned subsidiaryKoszegi Industries, Inc., an Indiana corporation; “Forward HK” refers to Forward Industries’ wholly owned subsidiary ForwardIndustries HK, Ltd., a Hong Kong corporation (formerly Koszegi Asia Ltd.);“Forward Innovations” refers to Forward Industries’ wholly owned subsidiaryForward Innovations GmbH, a Swiss corporation; “Forward APAC” refers to ForwardIndustries’ wholly owned subsidiary Forward Asia Pacific Limited, a Hong Kongcorporation; “GAAP” refers to accounting principles generally accepted in theUnited States; “Commission” refers to the United States Securities and Exchange Commission; “Exchange Act” refers to the United States Securities Exchange Act of 1934, asamended;

“2010Quarter” refers to the three months ended June 30, 2010; 

“2009Quarter” refers to the three months ended June 30, 2009;

“2010Period” refers to the nine months ended June 30, 2010;

“2009Period” refers to the nine months ended June 30, 2009; 

“Fiscal2010” refers to our fiscal year ending September 30, 2010; 

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

 

 

 

 

 

3

 

 

 

 

 

 

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

 

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

**June 30,**

** **

**September 30,**

 

**2010**

** **

**2009**

**Assets**

**(Unaudited)**

** **

** **

**Current assets:**

 

 

 

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

$19,877,077

 

$20,103,502

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

4,167,352

 

3,259,462

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

1,047,248

 

666,485

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

318,770

 

228,938

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

25,410,447

 

24,258,387

 

 

 

 

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

119,251

 

162,468

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

46,032

 

59,532

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

$25,575,730

 

$24,480,387

 

 

 

 

**Liabilities and shareholders’ equity**

 

 

 

Current liabilities:

 

 

 

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

$2,689,086

 

$1,824,091

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

413,477

 

133,857

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

3,102,563

 

1,957,948

 

 

 

 

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

 

 

 

** **

 

 

 

**Shareholders’ equity:**

 

 

 

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

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

 

--

 

 

--

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

8,728,185 and 8,643,598 shares issued,  respectively 	(including 706,410 held in treasury at both dates)..............................................

 

 

87,282

 

86,436

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

16,333,630

 

16,101,568

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

(1,260,057)

 

(1,260,057)

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

7,312,312

 

7,594,492

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

22,473,167

 

22,522,439

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

$25,575,730

 

$24,480,387

 

 

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

 

4

 

Forward Industries,Inc.

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 

**(UNAUDITED)**

** **

**(UNAUDITED)**

 

**Three Months Ended June 30,**

** **

**Nine Months Ended June 30,**

 

**2010**

** **

**2009**

** **

**2010**

**     **

**2009**

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

$5,058,392

 

$4,106,814

 

$13,604,845

 

$13,670,407

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

3,787,101

 

3,075,481

 

10,415,616

 

11,031,543

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

1,271,291

 

1,031,333

 

3,189,229

 

2,638,864

 

 

 

 

 

 

 

 

**Operating expenses:**

 

 

 

 

 

 

 

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

556,749

 

645,035

 

1,548,307

 

2,069,699

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

690,163

 

512,474

 

1,901,698

 

1,806,315

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

1,246,912

 

1,157,509

 

3,450,005

 

3,876,014

** **

 

 

 

 

 

 

 

**Income (loss) from  operations**....................................... 

24,379

 

(126,176)

 

(260,776)

 

(1,237,150)

** **

 

 

 

 

 

 

 

**Other (expense) income:**

 

 

 

 

 

 

 

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

6,927

 

49,137

 

35,959

 

248,378

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

(14,306)

 

13,182

 

(57,363)

 

(30,228)

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

(7,379)

 

62,319

 

(21,404)

 

218,150

** **

 

 

 

 

 

 

 

**Income (loss) before provision for income taxes**........ 

17,000

 

(63,857)

 

(282,180)

 

(1,019,000)

**Provision for income  taxes**............................................. 

--

 

--

 

--

 

300,499

**Net income (loss)**............................................................ 

$17,000

 

($63,857)

 

(282,180)

 

($1,319,499)

** **

 

 

 

 

 

 

 

**Net income (loss) per common and common equivalent  share**

 

 

 

 

 

 

 

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

$0.00

 

($0.01)

 

($0.04)

 

($0.17)

** **

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

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

7,987,285

 

7,930,496

 

7,964,070

 

7,922,985

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

8,149,837

 

7,930,496

 

7,964,070

 

7,922,985

 

 

 

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

 

5

 

**Forward Industries, Inc.**

 

**CONSOLIDATED STATEMENTS OFCASH FLOWS**

 

 

**(Unaudited)**

 

 

**Nine Months Ended**

**June 30,**

 

 

**     2010**

** **

**2009**

**Operating activities:**

 

 

 

 

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

 

($282,180)

 

($1,319,499)

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

 

 

 

 

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

 

165,908

 

153,464

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

 

40,990

 

58,867

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

 

16,913

 

(35,912)

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

 

8,875

 

23,401

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

 

2,227

 

11,759

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

 

--

 

409,130

Changes in operating assets and liabilities:

 

 

 

 

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

 

(916,765)

 

339,831

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

 

(397,676)

 

618,744

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

 

(89,832)

 

223,289

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

 

13,500

 

38,727

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

 

864,995

 

(714,601)

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

 

279,620

 

11,172

**Net cash  used in operating activities**

 

**(293,425)**

** **

**(181,628)**

 

 

 

 

 

**Investing activities:**

 

 

 

 

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

 

**--**

 

(124,958)

**Net cash used in  investing activities**

 

**--**

 

**(124,958)**

 

 

 

 

 

**Financing activities:**

 

** **

** **

 

Proceeds  from exercise of stock options ........................................................................ 

 

67,000

 

--

Proceeds  from disgorgement of short-swing ................................................................ 

 

**--**

 

13,948

**Net cash provided by  financing activities**........................................................................... 

 

**67,000**

 

**13,948**

 

 

 

 

 

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

 

**(226,425)**

** **

**(292,638)**

** **

 

** **

** **

** **

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

 

**20,103,502**

** **

**19,862,426**

** **

 

** **

** **

** **

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

 

**$19,877,077**

** **

**$19,569,788**

 

 

 

    

 

 

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

	 
 
6

**Forward Industries,Inc.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** (UNAUDITED)**

 

**NOTE 1     OVERVIEW **

ForwardIndustries, Inc. was incorporated under the laws of the State of New York andbegan operations in 1961. The Company designs, markets, and distributes carrysolutions, including soft-sided carrying cases, bags, clips, hand straps,protective face plates, and other accessories, primarily for hand heldelectronic devices such as medical monitoring and diagnostic kits, cellulartelephones, bar code scanners, laptop computers, MP3 players, firearms, andsporting, recreational, and aeronautical and other products.  The Company’s principalcustomer market is original equipment manufacturers, or “OEMs”, of theseproducts that package its carry solution products as accessories “in box”together with their product offerings or the contract manufacturing firms ofthese OEM customers. Sales to OEM customers are made in Europe, the APAC Region,and the Americas.

In theopinion of management, the accompanying consolidated financial statementsreflect all normal recurring adjustments necessary to present fairly thefinancial position and results of operations and cash flows for the interimperiods presented herein, but are not necessarily indicative of the results ofoperations for the fiscal year ending September 30, 2010. These financialstatements should be read in conjunction with the Company's audited consolidatedfinancial statements included in its annual report on Form 10-K for the fiscalyear ended September 30, 2009, and with the disclosures and risk factorspresented herein and therein, respectively.

**NOTE 2     ACCOUNTINGPOLICIES**

**Accountingestimates**

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

**Basis ofpresentation**

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 Equivalents**

Cash andcash equivalents consist primarily of cash on deposit, highly liquid moneymarket accounts, and certificates of deposit with original contractualmaturities of three months or less, predominantly in US dollar denominatedinstruments. 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 majorfinancial institutions in the United States, at which cash amounts maysignificantly exceed FDIC insured limits, and in Europe. Historically, theCompany has not experienced any losses due to such cash concentrations.

**AccountsReceivable**

Accountsreceivable consist of unsecured trade accounts with various customers. TheCompany performs ongoing credit evaluations of its customers and believes thatadequate allowances for any uncollectible receivables are maintained. Creditterms to the majority of customers are generally net thirty (30) days to netsixty (60) days; however, the Company extends to certain customers,particularly its largest, payment terms up to 90 days. The Company has not historicallyexperienced significant losses in extending credit to customers.  At June 30,2010 and September 30, 2009, the allowance for doubtful accounts wasapproximately $22,000 and $25,000, respectively.

7

 

**Forward Industries,Inc.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** (UNAUDITED)**

 

**NOTE2     ACCOUNTING POLICIES (CONTINUED)**

**Inventories**

Inventoriesconsist primarily of finished goods and are stated at the lower of cost(determined by the first-in, first-out method) or market.  Based onmanagement’s estimates, an allowance is made to reduce excess, obsolete, orotherwise un-saleable inventories to net realizable value. The allowance isestablished through charges to cost of goods sold on the Company’s consolidatedstatements of operations. As reserved inventory is disposed of, the Companycharges off the associated allowance. In determining the adequacy of theallowance, management’s estimates are based upon several factors, includinganalyses of inventory levels, historical loss trends, sales history, andprojections of future sales demand. The Company’s estimates of the allowance maychange from time to time based on management’s assessments, and such changescould be material. At June 30, 2010 and September 30, 2009, the allowance forobsolete inventory was approximately $15,000 and $33,000, respectively. 

**Property, Plantand Equipment**

Property,plant and equipment 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, plant and equipment areretired or otherwise disposed of, the cost and accumulated depreciation areremoved from the accounts and any resulting gain or loss is included in theresults of operations for the respective period. Depreciation is provided overthe estimated useful lives of the related assets using the straight-line methodfor financial statement purposes. The estimated useful life for furniture,fixtures and equipment ranges from three to ten years. Amortization ofleasehold improvements is computed using the straight-line method over theshorter of the remaining lease term or the estimated useful lives of theimprovements. For the three-month periods ended June 30, 2010 and 2009, theCompany recorded approximately $13,000 and $18,000 of depreciation andamortization expense, respectively. For the nine-month periods ended June 30,2010 and 2009, the Company recorded approximately $41,000 and $59,000 ofdepreciation and amortization expense, respectively. Depreciation andamortization for production related property, plant and equipment is includedas a component of costs of goods sold in the accompanying consolidatedstatements of operations. Depreciation and amortization for selling and generaland administrative related property, plant and equipment, is included as acomponent of operating expenses in the accompanying consolidated statements ofoperations.

**Income Taxes**

TheCompany accounts for its income taxes in accordance with accounting principles generallyaccepted in the United States which requires, among other things, recognitionof future tax benefits and liabilities measured at enacted rates attributableto temporary differences between financial statement and income tax bases ofassets and liabilities and to tax net operating loss carryforwards to theextent that realization of these benefits is more likely than not. The Companyperiodically evaluates the realizability of its net deferred tax assets.   SeeNote 6 to these Notes to Consolidated Financial Statements. The Company’spolicy is to account for interest andpenalties relating to income taxes, if any, in “provisionfor income taxes” in the statement of operations. For the periods presented inthe accompanying statements of operations no income tax related interest orpenalties were assessed or recorded.

**RevenueRecognition**

Inaccordance with accounting principles generally accepted in the U.S., wegenerally recognize revenue from product sales to customers when:(1) title and risk of loss are transferred; (2) persuasive evidenceof an arrangement exists; (3) we have no continuing obligations to thecustomer; and (4) the collection of related accounts receivable isprobable.

8

 

**Forward Industries,Inc.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** (UNAUDITED)**

 

**NOTE2     ACCOUNTING POLICIES (CONTINUED)**

**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’sdistribution network) as a component of cost of goods sold in the accompanyingconsolidated 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$35,000 and $24,000 for the three-month periods ended June 30, 2010 and 2009,respectively, and $84,000 and $79,000 for the nine-month periods ended June 30,2010 and 2009, respectively.  

**Foreign CurrencyTransactions**

Thefunctional currency of the Company and its wholly owned foreign subsidiaries isthe U.S. dollar. Foreign currency transactions may generate receivables orpayables that are fixed in terms of the amount of foreign currency that will bereceived or paid. Fluctuations in exchange rates between such foreign currencyand the functional currency increase or decrease the expected amount offunctional currency cash flows upon settlement of the transaction. Theseincreases or decreases in expected functional currency cash flows are foreigncurrency transaction gains or losses that are included in “other income (expense),net” in the accompanying consolidated statements of operations. The net gains (losses)from foreign currency transactions and translations were approximately ($14,000)and $13,000 for the three-month periods ended June 30, 2010 and 2009,respectively. The net losses from foreign currency transactions andtranslations were approximately ($57,000) and ($25,000) for the nine-monthperiods ended June 30, 2010 and 2009, respectively. 

**ComprehensiveLoss**

For the threeand nine-month periods ended June 30, 2010 and 2009, the Company did not haveany components of comprehensive loss other than net income (loss).

**NOTE 3     DEBT**

In 2003, Forward’s wholly-ownedSwiss subsidiary, Forward Innovations GmbH (Forward Innovations), established acredit facility with a Swiss bank that provided for an uncommitted line ofcredit in the maximum amount of $400,000.  The facility was establishedprimarily to provide for a letter of credit in favor of the Company’s freightforwarder in The Netherlands to satisfy the terms of the parties’representation agreement.  In connection with this facility, ForwardInnovations agreed to certain customary financial covenants, with which ForwardInnovations has been in compliance in all material respects.  Such covenants didnot include any financial ratios or other financial tests. As of December 31,2009, the credit facility expired in accordance with its terms.  See Note 9 tothese Notes to Consolidated Financial Statements.

9

 

**Forward Industries,Inc.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** (UNAUDITED)**

 

**NOTE 4     SHAREHOLDERS’EQUITY**

**Anti-takeoverProvisions**

On June 9,2010 the Company adopted a temporary Shareholder Protection Rights Plan (the“Rights Plan”) and declared a distribution of one right on each outstandingshare of common stock of the Company to shareholders of record at the close ofbusiness on June 21, 2010. Upon a triggering event, as defined in the RightsPlan, each right entitles its holder to purchase, for the exercise price, thenumber of shares of the Company’s common stock having a market value of twicethe exercise price of each Right. The Rights may be redeemed by the Board for$0.001 per Right, at any time prior to a triggering event. Unless the RightsPlan is amended or supplemented, the Rights Plan and the rights will expire sixmonths from the record date of the issuance of the Rights, or December 21,2010.

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 June 30, 2010, the Company hadrepurchased an aggregate of 172,603 shares at a cost of approximately $403,000,but none during the three and nine-month periods ended June 30, 2010 and 2009. 

**NOTE 5     STOCK BASEDCOMPENSATION**

Atthe May 2007 annual shareholders meeting, shareholders of the Company approvedthe Forward Industries 2007 Equity Incentive Plan (the 2007 Plan), whichauthorized the issuance of up to 400,000 shares of common stock to officers,employees, and non-employee directors of the Company in connection with thegrants of restricted common stock and stock options awarded to such persons.This plan was adopted by the Board of Directors in February 2007.  At the February2010 annual shareholders meeting, shareholders of the Company approved an amendmentto the 2007 Plan to increase the number of shares of common stock authorizedfor grants by an additional 400,000 shares, thereby bringing the total sharesof common stock available for grants of awards of restricted stock and optionsto purchase common stock under the 2007 Plan, as amended, to 405,500 as of June30, 2010. The price at which restricted common stock may be granted and theexercise price of stock options granted may not be less than the fair marketvalue of the common stock at the date of grant. The Company’s CompensationCommittee administers the plan.  Options generally expire ten years after thedate of grant and restricted stock grants generally vest in equal proportionsover three years. 

TheCompany’s 1996 Stock Incentive Plan (the 1996 Plan) expired in accordance withits terms in November 2006.  The exercise price of incentive options grantedunder the 1996 Plan to officers, employees, and non-employee directors of theCompany was required by the 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 prior to itsexpiration remain outstanding until the earlier of exercise or optionexpiration.

 

 

 

10

 

 

**Forward Industries,Inc.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** (UNAUDITED)**

 

**NOTE 5     STOCK BASEDCOMPENSATION (CONTINUED)**

**Stock OptionAwards**

Under the2007 Plan, as amended, the Compensation Committee of the Company’s Board ofDirectors has approved the grants of stock option awards to purchase 242,500 sharesof common stock, in the aggregate, to the Company’s current and certain former non-employeedirectors and to three Company officers. Of the grants to certain formernon-employee directors, awards covering 30,000 shares of common stock expiredunexercised, with such shares reverting to the 2007 Plan and eligible forgrant. Of the grants to current non-employee directors and officers, awardscovering 87,500 shares were granted during the nine-month period ended June 30,2010, none of which were granted during the three-month period ended June 30,2010. These awards are subject to a continued service condition and vest on thefirst anniversary of the date the awards were granted in the case of theCompany’s non-employee directors and one Company officer, and vest in equalamounts over three years commencing on the first anniversary of the grant, inthe case of the other two Company officers. The exercise prices of the awardsgranted was in each case equal to the market value of the Company’s commonstock on the various grant dates.

Under the1996 Plan 30,000 fully vested stock options remain outstanding andunexercised, all at exercise prices higher than the fair market value of the commonstock at June 30, 2010. 

TheCompany recognized approximately $30,000 and $16,000 of compensation cost forstock option awards in its consolidated statements of operations for the three-monthperiods ended June 30, 2010 and 2009, respectively, and $78,000 and $66,000 forthe nine-month periods ended June 30, 2010 and 2009, respectively.

 

 

 

 

 

 

 

11

 

**Forward Industries,Inc.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** (UNAUDITED)**

 

**NOTE 5     STOCK BASEDCOMPENSATION (CONTINUED)**

**Stock OptionAwards (continued)**

Thefollowing table summarizes stock option activity under the 2007 Plan, asamended, and the 1996 Plan from September 30, 2009 through June 30, 2010: 

 

**Shares**

** **

**Weighted Average  Exercise Price**

** **

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

** **

** **

** **

** **

**Aggregate 	Intrinsic Value**

**Outstanding at September 30, 2009**

155,000

 

$3.52

 

8.25

 

 

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

87,500

 

2.35
   
9.59
   
 

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

(75,000)

 

2.10
   
8.12
   
 

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

--

 

--
   
--
   
 

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

--

 

--
   
--
   
 

**Outstanding at June 30, 2010**

**167,500**

** **

**$3.54**
   
**8.36**
   
**$114,000**

 

 

 

 
   
 
   
 

**Options  vested and exercisable at June  30, 2010..................................**

**80,000**

 

**$4.85**
   
**7.01**
   
**$47,000**

The fairvalue of each stock option on the date of grant was estimated using aBlack-Scholes option-pricing formula applying the following assumptions foreach respective period: 

 

** **

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

 

** **

**2010**

** **

**2009**

Expected  term (in years).................................................... 

 

5.0

 

5.0

Risk-free  interest rate........................................................ 

 

2.26% to 2.33%

 

1.65%

Expected  volatility............................................................. 

 

74% to 78%

 

79.8%

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. 

12

 

 

**Forward Industries,Inc.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** (UNAUDITED)**

 

**NOTE 5     STOCK BASEDCOMPENSATION (CONTINUED)**

**Restricted Stock Awards**

Under the2007 Plan, as amended, as of June 30, 2010, the Compensation Committee of theCompany’s Board of Directors has approved the grant of awards of 183,500 shares of restricted stock, in the aggregate, tocertain key employees, one of whom also serves as a director.  Of these awards,1,500 shares of restricted stock have been forfeited and reverted to, and areeligible for re-grant under, the 2007 Plan. Vesting of the restricted stock isgenerally subject to a continued service condition with one-third of the awardsvesting each year on the anniversary date the awards were granted typicallycommencing on the first such anniversary date.  The fair value of the awardsgranted was in each case equal to the market value of the Company’s common stockon the various grant dates. During the three-month periods ended June 30, 2010and 2009, the Company recognized approximately $28,000 and $27,000,respectively, of compensation cost in its consolidated statements of operationsrelated to restricted stock awards. During the nine-month periods ended June 30,2010 and 2009, the Company recognized approximately $87,000 and $88,000,respectively, of compensation cost in its consolidated statements of operationsrelated to restricted stock awards.

The following table summarizes restricted stock activity under the 2007Plan, as amended, from September 30, 2009, through June 30, 2010.

 

 

** **

** **

** **

**Shares**

** **

**Weighted 	Average  	Grant Date 	Fair Value**

Non-vested  balance at September 30, 2009........................................ 

 

84,832

 

$2.16

Changes during the period:

 

 

 

 

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

 

53,500

 

$2.02

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

 

(29,835)

 

$2.17

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

 

--

 

--

Non-vested balance at June 30, 2010................................................... 

 

108,497

 

$2.09

As of June 30, 2010, there wasapproximately $89,000 of total unrecognized compensation cost related to 108,497shares of unvested restricted stock awards (reflected in the table above)granted under the 2007 Plan. That cost is expected to be recognized over theremainder of the requisite service (vesting) periods.

**Warrants**

            As of June 30, 2010, warrants to purchase 75,000shares of the Company’s common stock at an exercise price of $1.75 were outstanding.By their terms, these warrants expire 90 days after a registration statementregistering common stock (other than pursuant to employee benefit plans) isdeclared effective by the Securities and Exchange Commission. As of June 30,2010, no such registration statement has been filed with the Securities andExchange Commission.

 

 

 

13

 

**Forward Industries,Inc.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 6     INCOME TAXES**

The Company’s provision for income taxes consists of the followingUnited States and foreign components:

 

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

** **

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

 

**2010**

 

**2009**

** **

**2010**

 

**2009**

U.S.  Federal and State

 

 

 

 

 

 

 

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

$        --

 

     $      --

 

$           --

 

$           --

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

35,378

 

1,752

 

(35,034)

 

(187,780)

 

 

 

 

 

 

 

 

Foreign:

 

 

 

 

 

 

 

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

--

 

--

 

 

 

--

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

(1,527)

 

(6,910)

 

(9,768)

 

(27,711)

** **

** **

** **

** **

** **

** **

** **

** **

Change  in valuation allowance 

(33,851)

 

5,158

 

44,802

 

515,990

**Provision  for  income taxes**

**$          --**

** **

**$      --**

** **

**$        --**

** **

**$300,499**

The Company’s effective tax ratedoes not approximate the statutory United States federal income tax rate due totax rate differentials in respect of United States state and foreign taxes aswell as due to the establishment during the 2009 Period of a full valuationallowance in respect of deferred tax assets, as described below. As ofSeptember 30, 2009, the Company has no unrecognized tax benefits relatedto federal and state income tax matters. As of September 30, 2009, theCompany has not accrued for interest and penalties related to uncertain taxpositions. It is the Company’s policy to recognize interest and/or penalties,if any, related to income tax matters in income tax expense in the statement ofoperations. For the periods presented in the accompanying statements ofoperations no income tax related interest or penalties were assessed orrecorded.

At June 30,2010, the Company had available net operating loss carryforwards for UnitedStates federal and state income tax purposes of approximately $2,289,000expiring through 2029 and resulting in a combined deferred tax asset ofapproximately $410,000. In addition, at June 30, 2010, the Company hadavailable net operating loss carryforwards for foreign income tax purposes ofapproximately $1,288,000 resulting in a deferred tax asset of approximately $113,000. At June 30, 2010 and September 30, 2009, the Company had total deferred taxassets of approximately $641,000 and $598,000, respectively, before reserve forvaluation allowances.

During Fiscal2009, as part of its periodic evaluation of the need for a valuation allowanceagainst its deferred tax assets, and after consideration of all factors, bothpositive and negative (including, among others, projections of future taxableincome, current year net operating loss carryforward utilization and the extentof the Company’s cumulative losses in recent years), the Company determinedthat, on a more likely than not basis, it would not be able to use its deferredtax assets, except in respect of United States income taxes in the event and tothe extent that the Company elects to effect the repatriation of certainforeign source income of its Swiss subsidiary, Forward Innovations, which incomeis currently considered to be permanently invested and for which no UnitedStates tax liability has been accrued. Accordingly, except to the extent setforth in the preceding sentence, the Company has established a full valuationallowance against its deferred tax assets, and as of June 30, 2010 andSeptember 30, 2009, the valuation allowance was approximately $641,000 and $598,000,respectively.  If the Company determines in a future reporting period that itwill be able to use some or all of its deferred tax assets, the adjustment toreduce or eliminate the valuation allowance would reduce its tax expense andincrease after-tax income. Changes in deferred tax assets and valuationallowance are reflected in the “Provision for income taxes” line item of theCompany’s consolidated statements of operations. 

14

 

**Forward Industries,Inc.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** (UNAUDITED)**

 

**NOTE 6     INCOME TAXES(CONTINUED)**

Effective June2001, undistributed earnings of the Company’s Swiss subsidiary are consideredto be permanently invested; therefore, in accordance with generally acceptedaccounting principles in the United States, no provision for U.S. Federal andstate income taxes on those earnings has been provided.  At June 30, 2010, theCompany’s Swiss subsidiary had approximately $3,694,000 of accumulatedundistributed earnings. 

**NOTE 7     INCOME (LOSS)PER SHARE**

Basic pershare data for each period presented is computed using the weighted-averagenumber of shares of common stock outstanding during each such period.  Dilutedper share data is computed using the weighted-average number of common anddilutive common-equivalent shares outstanding during each period. Dilutivecommon-equivalent shares consist of shares that would be issued upon theexercise of stock options, stock rights and warrants, computed using thetreasury stock method. A total of 30,000 common stock equivalents have beenexcluded from the calculation of earnings per share for the three-month periodended June 30, 2010, because their inclusion would be anti-dilutive. Loss pershare data for the three-month period ended June 30, 2009, and the nine-monthperiods ended June 30, 2010 and 2009, excludes all outstanding commonequivalent shares as inclusion of such shares would be anti-dilutive.

Inaccordance with generally accepted accounting principles in the United States, 87,333shares of service-based common stock awards (“restricted stock”) were excludedfrom the calculation of diluted loss per share for the three period ended June30, 2009 and 108,798 and 87,333 shares were excluded from the calculation ofdiluted loss per share for the nine-month periods ended June 30, 2010 and 2009,respectively.

**NOTE 8     OPERATINGSEGMENT INFORMATION**

The Company operates in a singlesegment: the supply of carrying solutions. This carrying-solution segment includesthe design, marketing, and distribution of products to its customers thatinclude manufacturers of consumer hand held wireless telecommunications andmedical monitoring devices. The Company’s carrying solution segment operates ingeographic regions that include primarily the APAC, Americas, and Europe. Geographicregions are defined based primarily on the location of the customer.  Thefollowing table presents net sales related to these geographic segments:

*                                                                            *
 
*(all amounts in thousands of dollars)*
 
**Three Months Ended**

**June 30,**

** **

**Nine Months Ended**

**June 30,**

 

**2010**

** **

**2009**

** **

**2010**

** **

**2009**

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

$1,804

 

$1,480

 

$5,755

 

$4,900

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

1,876

 

1,774

 

4,832

 

5,457

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

1,378

 

853

 

3,018

 

3,313

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

**$5,058**

** **

**$4,107**

** **

**$13,605**

** **

**$13,670**

 

15

**Forward Industries,Inc.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** (UNAUDITED)**

 

**NOTE 9     COMMITMENTSAND CONTINGENCIES**

**GuaranteeObligation**

In February2010, Forward Innovations and its European logistics provider (freightforwarding and customs agent) entered into a Representation Agreement whereby,among other things, the European logistics provider agreed to act as suchsubsidiary's fiscal representative in The Netherlands for the purpose ofproviding services in connection with any value added tax matters. As part ofthis agreement, which succeeds a substantially similar agreement (except as tothe amount and term of the undertaking) between the parties that expiredDecember 31, 2009, the subsidiary agreed to provide an undertaking (in the formof a bank letter of guarantee) to the logistics provider with respect to anyvalue added tax liability arising in The Netherlands that the logisticsprovider is required to pay to Dutch tax authorities on the subsidiary'sbehalf. As of February 1, 2010, such subsidiary entered into a guaranteeagreement with a Swiss bank relating to the repayment of any amount up to €75,000(equal to approximately $92,000 as of June 30, 2010) paid by such bank to thelogistics provider in order to satisfy such undertaking pursuant to the bankletter of guarantee.  The subsidiary would be required to perform underthe guarantee agreement only in the event that: (i) a value added tax liabilityis imposed on the Company's sales in The Netherlands, (ii) the logisticsprovider asserts that it has been called upon in its capacity as surety by theDutch Receiver of Taxes to pay such taxes, (iii) the subsidiary or the Companyon its behalf fails or refuses to remit the amount of value added tax due tothe logistics provider upon its demand, and (iv) the logistics provider makes adrawing under the bank letter of guarantee. Under the Representation Agreementthe subsidiary agreed that the letter of guarantee would remain available fordrawing for three years following the date that its relationship terminateswith the logistics provider to satisfy any value added tax liability arisingprior to expiration of the Representation Agreement but asserted by TheNetherlands after expiration. The term of the bank letter of guarantee expiresFebruary 28, 2011, but will be renewed automatically for one-year periods untilFebruary 28, 2014, unless the subsidiary provides the Swiss bank with writtennotice of termination at least 60 days prior the renewal date. It is the intentof the subsidiary and the logistics provider that the bank letter of guaranteeamount be adjusted annually. In consideration of the issuance of the letter of guarantee,the subsidiary has granted the Swiss bank a security interest on all of thesubsidiary’s assets on deposit with, held by, or credited to the subsidiary’saccounts with, the Swiss bank (approximately $3,196,000 at June 30, 2010). Asof June 30, 2010, the Company had not incurred a liability in connection withthis guarantee. 

**NOTE 10   LEGALPROCEDINGS**

            From time to time,the Company may become a party to legal actions or proceedings in the ordinarycourse of its business.  As of June 30, 2010, there were no such actions orproceedings, either individually or in the aggregate, that, if decidedadversely to the Company’s interests, the Company believes would be material toits business.

 

 

 

 

 

 

 

 16

 

 

**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, 2009. The following discussion and analysis compares our consolidated results ofoperations for the three months ended June 30, 2010 (the “2010 Quarter”), withthose for the three months ended June 30, 2009 (the “2009 Quarter”) and the ninemonths ended June 30, 2010 (the “2010 Period”), with those for the nine monthsended June 30, 2009 (the “2009 Period”).  All figures in the followingdiscussion are presented on a consolidated basis. All dollar amounts andpercentages presented herein have been 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.  Such forward lookingstatements can be identified by the use of forward-looking terminology such as“may”, “will”, “should”, “expect”, “anticipate”, estimate”, “intend”,“continue”, or “believe”, or the negatives or other variations of these termsor comparable terminology.  Forward looking statements may include projections,forecasts, or estimates of future performance and developments.  Forwardlooking statements contained in this Quarterly Report are based uponassumptions and assessments that we believe to be reasonable as of the date ofthis Quarterly Report.  Whether those assumptions and assessments will berealized will be determined by future factors, developments, and events, whichare difficult to predict and may be beyond our control.  Actual results,factors, developments, and events may differ materially from those we assumedand assessed.  Such risk factors, uncertainties, contingencies, anddevelopments, including those discussed in this Management’s Discussion andAnalysis of Financial Condition and Results of Operations of this QuarterlyReport on Form 10-Q and those identified in “Risk Factors” in Item 1A ofForward’s Annual Report on Form 10-K for the fiscal year ended September 30,2009, could cause our future operating results to differ materially from thoseset forth in any forward looking statement.  Such factors include, among others,the following: customer concentration in a small number of key customers;material variation in order flow from any one or more of such customers maycause significant swings in results of operations; product line concentrationin carry cases for diabetic monitoring devices; our ability to maintainconstructive commercial relationships with our key customers, including duringperiods of economic downturns generally or downturns/volatility in theirspecific businesses; the loss of key sales employees upon whom relationshipswith key OEM customers depend; our success in winning new business from existingand new customers and against competing vendors; whether replacement programsthat we win will be more or less successful or profitable than those that arereplaced; levels of demand and pricing generally for blood glucose monitoringdevices sold by our customers for which we supply carry solutions; variabilityin order flow from our OEM customers; OEM customers’ decisions to reduce oreliminate their practice of including carry case accessories in-box; theimpacts on our financial condition, results of operations, and businessprospects arising from making an acquisition or failing to make an acquisition;general economic 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; changes affecting the businessor business prospects of one or more of our principal OEM customers;governmental regulations and changes in, or the failure to comply with,governmental regulations; and other factors included elsewhere in this QuarterlyReport on Form 10-Q and in our Annual Report on Form 10-K for the year endedSeptember 30, 2009. Accordingly, there can be no assurance that any suchforward looking statement, projection, forecast or estimate can be realized orthat actual returns, results, or business prospects will not differ materiallyfrom those set forth in any forward looking statement.

 

17

 

**Forward Industries,Inc.**

 

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

**BUSINESS OVERVIEW**

We design,market, and distribute carry solutions primarily for hand held electronicdevices, including soft-sided carrying cases, bags, clips, hand straps,protective face plates, and other accessories for medical monitoring anddiagnostic kits, cellular telephones, and bar code scanners. We also design,market and distribute carry cases for other consumer products such as laptopcomputers, MP3 players, firearms and sporting, recreational, and aeronauticaland other products.  Our principal customer market is original equipmentmanufacturers, or “OEMs”, of these products that package our carry solutionproducts as accessories “in box” together with their product offerings or thecontract manufacturing firms of these OEM customers.  

**Trends and Economic Environment**

In responseto the economic downturn 2007-2009 and OEM customer caution during that period,we implemented several cost-cutting measures, which achieved the desired goals. However, with operating expenses at their lowest levels in eight years, absentsevere weakening from this point in the economy and/or in our revenues, we do notanticipate engaging in additional expense reduction efforts that would beconsidered meaningful to our results of operations.  Rather, as a result ofseveral factors relating to strategic initiatives and other matters, generaland administrative expense increased in the 2010 Quarter and may continue toincrease in the near-term.  Moreover, we believe that significant improvementto our results of operations must be driven by the growth of our revenues.  

We havenoted a recent pickup in sales orders from our longstanding major diabeticproduct customers. While this is encouraging, the magnitude is modest, and webelieve that the sustainability of any improvement in revenues from thesecustomers is uncertain.  Furthermore, we continue to operate in a verychallenging business environment in the near term, where material changes inrevenue contribution from our major diabetic case customers, with whom we arehighly concentrated, are somewhat volatile. As such, we continue to focus ourefforts on expanding our customer and product base. We believe that these effortscontinue to meet with some preliminary success, as we have received small,initial orders from first time customers.   We believe that discussions withthese first time customers regarding larger orders, as well as prospectivecustomers regarding initial orders, have been constructive and positive, butsignificant progress in reducing customer concentration in significant measure remainsuncertain at this time.

Also, aspreviously reported, we continue to consider all strategic alternatives, in theform of an acquisition or business combination that will enable us to diversifyour customer base, reduce our customer and product line concentration, and growour business.

**Variability of Revenuesand Results of Operations**

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

**CRITICALACCOUNTING 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. The preparation of these financial statements requires us tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues, and expenses, and related disclosure of contingentliabilities. We base these judgments and estimates on our historical experienceand on various other assumptions that we believe to be reasonable under thecircumstances, 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. 

 

18

 

**Forward Industries,Inc.**

 

We discussthe material accounting policies that are critical in making these estimatesand judgments in our Annual Report on Form 10-K for the fiscal year ended September30, 2009, under the caption “Management’s Discussion and Analysis—CriticalAccounting Policies and Estimates”.  There has been no material change incritical accounting policies or estimates since September 30, 2009.  

The notesto our audited consolidated financial statements contained in our Annual Reporton Form 10-K for the year ended September 30, 2009, and the notes to ourconsolidated financial statements included in Part I, Item 1 of this Quarterly Reporton Form 10-Q contain additional information related to our accounting policiesand should be read in conjunction with the following discussion and analysisrelating to our overall financial performance, operations and financialposition. 

Revenue Recognition 

Inaccordance with generally accepted accounting principles in the U.S., we generallyrecognize revenue from product sales to customers when: (1) title and riskof loss are transferred; (2) persuasive evidence of an arrangement exists;(3) we have no continuing obligations to the customer; and (4) thecollection of related accounts receivable is probable.
Accounts Receivable
We recordan allowance for doubtful accounts for all receivables judged by us to beunlikely to be collected. The effect of the allowance is to reduce the accountsreceivable reported on our balance sheet to an amount that we believe willactually be collected.  Significant management judgments, analyses, andestimates must be made and used in connection with establishing this valuationaccount, based on a combination of factors:  the age of receivable balances,our historical bad debts write-off experience, and our respective customer’screditworthiness, among other factors. At June 30, 2010 and September 30, 2009,our allowance for doubtful accounts was approximately $22,000 and $25,000,respectively.  Changes to this account are reflected in the general andadministrative expense line of our consolidated statements of operations. Although we consider our allowance for doubtful accounts to be adequate andproper, changes in economic conditions, the assessments of new customers’creditworthiness, changes in customer circumstances, or other factors couldhave a material effect on the recorded allowance.
Inventory Valuation
We makeestimates and judgments to value our inventory. Our inventory is recorded atthe lower of cost or market. The majority of our inventory consists of finishedgoods that are made by our suppliers to our specifications based on firm ordersfrom our OEM customers and held for our account or supplied to our OEMcustomers’ distribution hubs in anticipation of their draw-downs to fulfill orders. We also periodically stock inventory in anticipation of orders from our OEMcustomers when it appears to us commercially advantageous to do so. 

19

 

**Forward Industries,Inc.**

 

At the endof each fiscal quarter, we evaluate our ending inventories, and we establish anallowance for inventory that is considered obsolete, slow moving, or otherwiseun-saleable.  This evaluation includes, among other factors, analyses ofinventory levels, historical loss trends, sales history, and projections offuture sales demand.  We physically dispose of inventory once its marketabilityhas been determined to be zero.  Inventory allowances were approximately $15,000and $33,000 at June 30, 2010 and September 30, 2009, respectively.  Changes ofestimate in this account are reflected in the cost of goods sold line of ourconsolidated statements of operations.  

Our productionis made to customer specifications.  If a customer elects not to acceptdelivery, or defaults on a purchase order or commitment, or returns inventoryfrom its hub without payment in violation of the hub arrangements, additionalinventory write-downs or reserves may be required and would be reflected incost of goods sold in the period the revision is made. 
Deferred Income Taxes
In ourconsolidated financial statements, we are required to estimate income taxes ineach of the jurisdictions in which we are subject to taxation. This processinvolves estimating actual current income tax expense as well as assessingtemporary differences resulting from differing treatment of revenue and expenseitems for tax and accounting purposes. These differences result in deferred taxassets and liabilities, which are reflected in our consolidated balance sheets.The Company’s policy is to account for interest and penalties, if any, relatingto income tax expense in the statement of operations. For the periods presentedin the accompanying statements of operations no income tax related interest orpenalties were assessed or recorded. We had approximately $0.6 million ofdeferred tax assets at June 30, 2010 and September 30, 2009, respectively. 

See Note 6to the Notes to Financial Statements included elsewhere in this Form 10-Q forthe three-months ended June 30, 2010, for a discussion of the full valuationallowance in respect of deferred tax assets established during the Fiscal 2009Period.

**RESULTS OF OPERATIONS FOR THE 2010 QUARTER COMPARED TO THE 2009QUARTER**

**Net Income (Loss)**

We recordednet income of $17 thousand in the 2010 Quarter compared to a net loss of $64 thousandin the 2009 Quarter. The improvement in 2010 Quarter results was due to highergross profit, offset in large part by higher operating expenses, as well as “otherincome (expense), as shown in the table below:    

**Main Components of Net Income (Loss)**

(thousands of dollars)

 

2010 	Quarter

2009 	Quarter

Increase 	(Decrease)

Net sales....................................................................................................... 

$5,058

$4,107

951

 

 

 

 

Gross profit................................................................................................... 

1,271

1,031

240

Selling, general and administrative expenses.......................................... 

(1,247)

(1,158)

89

Other income (expense).............................................................................. 

(7)

62

(69)

Provision for income taxes......................................................................... 

--

--

 

**Net Income (loss)*......................................................................................**

**$17**

**($64)**

81

* Table may nottotal due to rounding.

Basic and diluted per share data was ($0.00) for the 2010Quarter, compared to ($0.01) for the 2009 Quarter. The improvement in per shareresults in the 2010 Quarter was due to the swing to a slight net profit from anet loss.   

**Net Sales**

Netsales increased $1.0 million, or 23%, to $5.1 million in the 2010 Quarter from$4.1 million in the 2009 Quarter, due to an increase in sales “Other Products” of$0.6 million, or 59%, and an increase in sales of diabetic products of $0.4million, or 12%.  The tables below set forth sales by product line andgeographic location of our customers for the periods indicated.

20

 

 

 

 

**Forward Industries,Inc.**

 

 

 

**Net Sales for 2010 Quarter**

**3 Months ended June 30, 2010**

**(millions of dollars)**

** **

**APAC**

**Americas**

**Europe**

**Total***

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

$1.6

$0.8

$1.1

$3.5

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

0.2

1.1

0.3

1.6

**Total***

**$1.8**

**$1.9**

**$1.4**

**$5.1**

                                

**Net Sales for 2009 Quarter**

**3 Months ended June  30, 2009**

**(millions of dollars)**

** **

**APAC**

**Americas**

**Europe**

**Total***

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

$1.4

$0.9

$0.8

$3.1

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

0.1

0.9

--

1.0

**Total***

**$1.5**

**$1.8**

**$0.9**

**$4.1**

* Tables maynot total due to rounding.

*Diabetic Product Sales*

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

Salesof cases and related accessories for blood glucose monitoring kits increased $0.4million, or 12%, to $3.5 million in the 2010 Quarter, from $3.1 million in the 2009Quarter. This increase was due primarily to increased orders from two of our majordiabetic customers, as presented in the table below, which sets forth our salesby diabetic customer for the periods indicated.

(millions of dollars)

 

**2010 	Quarter**

**2009 	Quarter**

**Increase 	(Decrease)**

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

$1.6

$1.4

$0.2

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

1.2

1.0

0.2

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

0.6

0.6

--

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

0.1

0.1

--

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

**$3.5**

**$3.1**

**$0.4**

* Table may not totaldue to rounding.

Salesof carrying cases for blood glucose monitoring kits represented 69% of ourtotal net sales in the 2010 Quarter compared to 76% of our total net sales inthe 2009 Quarter, denoting somewhat lessened customer and product line salesconcentration due to the increase in sales of other products. 

*OtherProduct Sales*

Wedesign and sell carrying solutions to OEMs for a diverse array of otherportable electronic and other products, including cell phones, laptopcomputers, bar code scanners, cameras, binoculars, firearms, portable oxygentanks, MP3 players, and a variety of other products on a made-to-order basisthat are customized to fit the products sold by our OEM customers.  

Salesof other products increased $0.6 million, or 59%, to $1.6 million in the 2010Quarter from $1.0 million in the 2009 Quarter. This increase was due primarily toincreased sales to several existing customers of “other products” (of whichnone were material individually), as well as sales to several new customers (ofwhich one such customer contributed $0.2 million of sales in the 2010 Quarter).

 

21

 

**Forward Industries,Inc.**

 

Salesof other products represented 31% of our net sales in the 2010 Quarter comparedto 24% of net sales in the 2009 Quarter. 

**Gross Profit**

Grossprofit of $1.3 million in the 2010 Quarter was $0.2 million, or 23%, higher comparedwith gross profit of $1.0 million in the 2009 Quarter. This improvementresulted from the 23% increase in sales revenues (refer to “Net Sales” sectionabove). Cost of goods sold as a percentage of sales was 75% in both the 2010Quarter and the 2009 Quarter, which is primarily a net result of: 1) a decreasein Hong Kong costs (which on an absolute basis increased 9%) relative toproduct sales as the fixed component thereof was spread over a larger revenuebase; and 2) an increase in our materials costs due to the introduction ofcertain products for new “other product” customers into our product mix. 

Gross profit as apercentage of net sales was 25% in the 2010 Quarter and in the 2009 Quarter.  

**Selling, General, and Administrative Expenses**

Operatingexpenses increased $89 thousand, or 8%, to $1.2 million in the 2010 due primarilyto an increase in professional fees of $175 thousand, due to legal expensesincurred in connection with the adoption of a shareholders rights plan in June2010 and related issues. This increase was offset, in part, by decreases in sellingpersonnel costs and related travel and entertainment and automobile allowance expensein the 2010 Quarter resulting from changes to our staffing and employee benefitplans made in Fiscal 2009 and to a lesser extent to decreases in most othercomponents of selling and general and administrative expenses (of which thelargest of such decreases was $16 thousand of rent expense). 

**Other (Expense) Income**

Other(expense) income, consisting primarily of foreign currency transaction gainsand losses and interest income on cash balances, declined $70 thousand to $7thousand of expense in the 2010 Quarter from $62 thousand of income in the 2009Quarter. This resulted primarily from a $42 thousand reduction in interestincome in the 2010 Quarter, due primarily to lower average interest rates on slightlylower cash balances compared to the 2009 Quarter. Net losses from foreigncurrency transactions and translations were approximately $14 thousand in the2010 Quarter compared to net gains of $13 thousand in the 2009 Quarter resultingprimarily from the impact of rate changes on our Euro denominated accountsreceivable occurring between the date of sale and the date of collection. Exchangerate changes on foreign currency cash balances were not material. 

**Pretax Income (Loss)**

Pretaxincome improved to $17 thousand in the 2010 Quarter compared to a pretax netloss $64 thousand in the 2009 Quarter as a result of the changes as describedabove.

**RESULTS OFOPERATIONS FOR THE 2010 PERIOD COMPARED TO THE 2009 PERIOD**

**Net Loss**

Weincurred a net loss of $0.3 million in the 2010 Period compared to a net lossof $1.3 million in the 2009 Period. The improvement in 2010 Period net lossresulted from higher gross profit, lower selling expenses, and lower income taxexpense, offset in part by a decline in “other (expense) income” and anincrease in general and administrative expense, as shown in the table below:   

 

22

 

 

 

 

**Forward Industries,Inc.**

 

 

**Main Components of Net Loss**

 
**(thousands of dollars)**

 

**2010 	Period**

**2009 	Period**

**Increase 	(Decrease)**

Net	sales..............................................................................................

$13,605

$13,670

(65)

 

 

 

 

Gross	profit.........................................................................................

3,189

2,639

550

Selling, general and administrative	expenses................................

(3,450)

(3,876)

(426)

Other (expense)	income....................................................................

(21)

218

(239)

Provision for income	taxes...............................................................

--

(300)

(300)

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

**($282)**

**($1,319)**

(1,037)

* Table may nottotal due to rounding.

Basic and diluted loss per share data was ($0.04) forthe 2010 Period, compared to ($0.17) for the 2009 Period. The reduction in lossper share in the 2010 Period was due to the decrease in net loss.   

**Net Sales**

Netsales decreased $66 thousand (less than 1%) to $13.6 million in the 2010 Periodfrom $13.7 million in the 2009 Period, due to a decline in sales of diabeticproducts of $207 thousand (less than 1%), which was offset, in part, by anincrease in sales of “Other Products” (which includes cell phone product sales)of $148 thousand, or 4%.  The tables below set forth sales by product line andgeographic location of our customers for the periods indicated.

 

**Net Sales for 2010 Period**

**9 Months ended June 30, 2010**

**(millions of dollars)**

** **

**APAC**

**Americas**

**Europe**

**Total***

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

$5.1

$2.4

$2.6

$10.1

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

0.7

2.4

0.4

3.5

**Total***

**$5.8**

**$4.8**

**$3.0**

**$13.6**

                                

**Net Sales for 2009 Period**

**9 Months ended June  30, 2009**

**(millions of dollars)**

** **

**APAC**

**Americas**

**Europe**

**Total***

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

$4.3

$2.9

$3.2

$10.3

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

0.6

2.6

0.1

3.3

**Total***

**$4.9**

**$5.5**

**$3.3**

**$13.7**

* Tables maynot total due to rounding.

*Diabetic Product Sales*

Salesof cases and related accessories for blood glucose monitoring kits declined $0.2million, or less than 1%, to $10.1 million in the 2010 Period, from $10.3million in the 2009 Period. This decrease was due primarily to a $1.3 million declinein sales to one major diabetic customer (from which we receive periodicallysignificant stand-alone orders rather than steady orders over time), which wasoffset, in large part, by a $1.1 million increase in sales to other majordiabetic customers, as presented in the table below, which sets forth our salesby diabetic customer for the periods indicated.

23

 

 

 

 

**Forward Industries,Inc.**

 

 

(millions of dollars)

 

**2010 	Period**

**2009 	Period**

**Increase 	(Decrease)**

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

$5.2

$4.4

0.8

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

3.0

2.9

0.1

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

1.8

1.6

0.2

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

--

1.3

(1.3)

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

0.1

0.1

--

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

**$10.1**

**$10.3**

**(0.2)**

* Table may not totaldue to rounding.

Salesof carrying cases for blood glucose monitoring kits represented 75% of ourtotal net sales in the 2010 Period compared to 76% of our total net sales inthe 2009 Period. 

*OtherProduct Sales*

Salesof other products increased $148 thousand, or 4%, to $3.5 million in the 2010Period from $3.3 million in the 2009 Period. The improvement was due to a $0.9million increase in sales in the aggregate to a number of customers, of which$0.3 million and $0.2 million were to two new larger customers offset in large partby a $0.7 million decrease in sales to a cell phone customer in the 2010 Periodcompared to the 2009 Period.

Salesof other products represented 25% of our net sales in the 2010 Period comparedto 24% of net sales in the 2009 Period. 

**Gross Profit**

Grossprofit of $3.2 million in the 2010 Period was $0.6 million, or 21%, higher comparedto $2.6 million in the 2009 Period. In the 2010 Period decreases in everycomponent of our costs of goods sold more than offset the small decline insales revenues of less than 1%, compared to the 2009 Period. The decrease inour cost of goods sold resulted from the following favorable comparisons withthe 2009 Period: lower materials costs due primarily to the introduction ofcertain higher margin products with new and existing customers into our productmix, as well unit cost improvements on certain of our existing programs withour larger customers; lower Hong Kong expense (primarily to reduced personnelcosts) compared to the 2009 Period, in the second quarter of which staffingchanges were effected in connection with the relocation of the facility resultingin severance and recruitment expenses in such period; and lower freight,duties, and customs expense resulting  primarily from the decline in sales toone diabetic customer in the 2010 Period compared to the 2009 Period whenhigher shipping costs were incurred in accordance with the customer’srequirements. 

**Selling, General, and Administrative Expenses**

Operatingexpenses decreased $0.4 million, or 11%, to $3.5 million in the 2010 Periodfrom $3.9 million in the 2009 Period due primarily to a $0.5 million reductionin selling personnel costs and related travel and entertainment and automobileallowance expense in the 2010 Period resulting from changes to our staffing andemployee benefit plans made in Fiscal 2009. To a lesser extent decreases inoccupancy costs, office expenses, other general and administrative expenses alsocontributed to the decline. These decreases were offset, in part, by anincrease in professional fees in excess of $0.1 million due to legal expensesincurred in connection with the adoption of a shareholders’ rights plan in June2010 and related issues.

**Other (Expense) Income**

Other(expense) income, consisting primarily of interest income on cash balances andforeign currency transaction gains and losses, declined $0.2 million to $21thousand of expense in the 2010 Period from $0.2 million of income in the 2009Period. This resulted from a $0.2 million decline in interest income in the2010 Period, due primarily to lower average interest rates on slightly lowercash balances compared to the 2009 Period. Exchange rate changes on foreigncurrency cash balances were not material.

24

 

 

**Forward Industries,Inc.**

 

**Pretax Loss**

Pretaxloss narrowed to $0.3 million in the 2010 Period compared to $1.0 million in the2009 Period as a result of the changes as described above.

**LIQUIDITY AND CAPITALRESOURCES**

During the 2010 Period, cash and cash equivalentsdeclined $0.2 million, which consist of $0.3 million used in operatingactivities, offset by $0.1 million generated from financing activities.  Ouroperating activities in the 2010 Period used $0.3 million in cash, consistingof a net loss of $0.3 million (reduced by $0.2 million for non-cash items), plususes of $0.2 million for net changes in working capital items. Net cash used inoperating activities consisted of changes in accounts receivable, inventories,and prepaid and other current assets of $0.9 million, $0.4 million, and $0.1million, respectively. These uses of working capital were partially offset bychanges in accounts payable, accrued expenses and other current liabilities, andother assets, which generated $0.9 million, $0.3 million, and $14 thousand, respectively.The increase in accounts receivable is attributable to the higher sales levelsin the 2010 Quarter compared to the three-month period ended September 30, 2009and the timing in which these accounts receivable were originated. The increasein inventories is in support of either firm purchase orders or forecasteddemand data received from our customers. The increase in our accounts payable isa result of the higher purchase volume in support of the higher sales levelsand the timing in which these purchases were originated..  The increase inaccrued expenses and other current liabilities is due to a one time overpaymentby a customer, as well as professional fees incurred but not paid as of ourthird fiscal quarter end.

 

Duringthe 2009 Period, operating activities used $0.2 million of cash consisting of anet loss of $1.3 million (reduced by $0.6 million for non-cash items), and $0.5million in net changes in working capital items, consisting of a change inaccounts payable of $0.7 million, offset, in part, by changes in inventories, accountsreceivable, prepaid expenses and other current assets, other assets, andaccrued expenses and other current liabilities of $0.6 million, $0.3 million, $0.2million, $39 thousand, and $11 thousand, respectively.

Therewere no investing activities in the 2010 Period. In the 2009 Period, netinvesting activities used $0.1 million for purchases of property, plant andequipment, primarily computer and telecommunications hardware and software. 

Duringthe 2010 Period financing activities generated $67,000 in proceeds from theexercise of stock options. There were no financing activities in the 2009 Period.

At June30, 2010, our current ratio (current assets divided by current liabilities) was8.2; our quick ratio (current assets less inventories divided by currentliabilities) was 7.9; and our working capital (current assets less currentliabilities) was $22.3 million.  As of such date, we had no short or long-termdebt outstanding. 

Ourprimary source of liquidity is our cash on hand, a significant portion of whichis considered permanently invested earnings from our Swiss subsidiary ForwardInnovations subsidiary. The primary demands on our working capital are: operatinglosses and accounts payable arising in the ordinary course of business, themost significant of which arise when our customers place orders with us and weorder from our suppliers. Historically, our sources of liquidity have beenadequate to satisfy working capital requirements arising in the ordinary courseof business.  We have announced that one strategy we are pursuing to diversifyour business is by means of acquisition or other business combination.  If anysuch transaction were to be consummated, we anticipate that it would involvethe payment of cash and/or the issuance of securities, either or both of whichmight be significant in amount.  We anticipate that our liquidity and financialresources for the ensuing fiscal year will be adequate to manage our financialrequirements. 

25

 

 

**Forward Industries,Inc.**

 

At June30, 2010, Forward Innovations is contingently liable to a Swiss bank under a letterof guarantee with a Swiss bank relating to the repayment of any amount up to €75,000(equal to approximately $92,000 as of June 30, 2010) paid by such bank to ForwardInnovations' freight forwarder and customs agent with respect to any valueadded tax liability arising that the logistics provider is required to pay toDutch tax authorities on Forward Innovations’ behalf.  The term of the bankletter of guarantee expires February 28, 2011, but will be renewedautomatically for one-year periods until February 28, 2014, unless thesubsidiary provides the Swiss bank with written notice of termination at least60 days prior the renewal date. It is the intent of Forward Innovations and thelogistics provider that the bank letter of guarantee amount be adjustedannually, dependent upon the level of sales, if any, of Forward Innovations inThe Netherlands. In consideration of the issuance of the bank letter of guarantee,Forward Innovations has granted the Swiss bank a security interest in all of itsassets on deposit with, held by, or credited to the subsidiary’s account with,the Swiss bank (approximately $3.2 million at June 30, 2010). As of June 30,2010, Forward Innovations had not incurred a liability in connection with thisguarantee See Note 9 to the Notes to unaudited consolidated FinancialStatements set forth in Item 1.

InSeptember 2002 and January 2004, our Board of Directors authorized therepurchase of up to an aggregate of 486,200 shares of our outstanding commonstock. Under those authorizations, as of June 30, 2010, we had repurchased anaggregate of 172,603 shares at a cost of approximately $0.4 million but noneduring Fiscal 2010 or Fiscal 2009. 

**CONTRACTUAL OBLIGATIONS ANDCOMMERCIAL COMMITMENTS**

The Company has entered into various contractualobligations and commercial commitments that, under accounting principlesgenerally accepted in the United States are not recorded as a liability.   Thefollowing is a summary of such contractual cash obligations as of June 30, 2010:

**Contractual  Obligation or Commitment**

**Jul 10  – Jun 11**

**Jul  11 – Jun 13**

**Jul  13 – Jun 15**

**Thereafter**

Employment Agreements

$213,000

$        --

**$--**

**$         --**

Operating Leases

159,000

38,000

**--**

**--**

**Totals**

**$372,000**

**$38,000**

$-- 

    $        --

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

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

Notapplicable.

**ITEM4. CONTROLS AND PROCEDURES **

**Evaluationof Disclosure Controls and Procedures**

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

 

 

26

 

 

 

**Forward Industries,Inc.**

 

Inaccordance with Exchange Act Rule 13a-15(b), our management, under thesupervision and with the participation of our Principal Executive Officer andPrincipalFinancial Officer, performed an evaluation of the effectiveness of theCompany's disclosure controls and procedures as of the end of the fiscal quartercovered by this Quarterly Report. Based on that evaluation, the Company'sPrincipalExecutive Officer and Principal Financial Officer concluded that the Company'sdisclosure controls and procedures were effective, as of the end of thequarterly period ended June 30, 2010, to provide reasonable assurance thatinformation required to be disclosed in the Company's reports filed orsubmitted under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Commission's rules and forms.

**Changesin internal controls**

Ourmanagement, with the participation our Principal Executive Officer andPrincipal Financial Officer, performed an evaluation required by Rule 13a-15(d)of the Exchange Act as to whether any change in our internal control overfinancial reporting (as defined in Rule 13a-15(f) under the Exchange Act)occurred during the three month period ended June 30, 2010.  Based on thatevaluation, our Principal Executive Officer and our Principal Financial Officerconcluded that no change occurred in the Company's internal controls overfinancial reporting during the three month period ended June 30, 2010 that hasmaterially affected, or is reasonably likely to materially affect, theCompany's internal controls over financial reporting.

 

 

 

 

 

 

 

 

 

 

 

27

 

 

**Forward Industries,Inc.**

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

Fromtime to time, the Company may become a party to legal actions or proceedings inthe ordinary course of its business.  As of June 30, 2010, there were no suchactions or proceedings, either individually or in the aggregate, that, ifdecided adversely to the Company’s interests, the Company believes would bematerial to its business.

**ITEM1A. RISK FACTORS**

Pleasereview our Annual Report on Form 10-K for the fiscal year ended September 30,2009, for a complete statement of “Risk Factors” that pertain to our business.Please refer to ITEM 2. “Cautionarystatement for purposes of the “Safe Harbor” provisions of the PrivateSecurities Litigation Reform Act of 1995 on page 16 of this QuarterlyReport on Form 10-Q as well as Management’s Discussion and Analysis ofFinancial Condition and Results of.  There have been no material changes in theCompany’s risk factors from those disclosed in Part I, Item 1A of our AnnualReport.

**ITEM5. OTHER INFORMATION**

On June 9,2010, our Board of Directors, in response to statements contained in a Schedule13D, as amended, filed by LaGrange Capital Partners, L.P. and certainaffiliates thereof (collectively, “LaGrange”), adopted a temporary ShareholderProtection Rights Plan (the “Rights Plan”) and declared a distribution of oneRight on each outstanding share of Common Stock of the Company to shareholdersof record at the close of business on June 21, 2010.  Based on the unanimousrecommendation of the Special Committee of the Board of Directors, the RightsPlan was adopted to afford the Company a reasonable period to respond to suchstatements, as well as, to continue to explore other strategic alternatives,consistent with the Company’s previously announced intention to effect astrategic transaction. The Company expects to make an announcement in the nearterm with respect to the Board’s response. Please refer to our Current Reporton Form 8-K filed June 15, 2010 with respect to adoption of the Rights Plan.

**ITEM 6. EXHIBITS     **

        		
31.1 
Certification of theChief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
    
31.2
Certification of the Chief Financial Officer underSection 302 of the Sarbanes-Oxley Act of 2002
    
32.1
Certification of the Chief Executive Officer andChief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

28

 

 

 

 

**Forward Industries,Inc.**

 

 

**SIGNATURES**

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

 

Dated:  August 9, 2010

 

FORWARDINDUSTRIES, INC.

     (Registrant)

 

 

By:/s/ Douglas W. Sabra                              

DouglasW. Sabra                               

ChiefExecutive Officer

(PrincipalExecutive Officer)

 

 

By:/s/James O. McKenna                             

JamesO. McKenna                              

ChiefFinancial Officer

(PrincipalFinancial and Accounting Officer)

 

** **

 

                                                                                

 

29

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