** **

** **

 

 

 

 

**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 March 31, 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 May 4, 2010, was 7,965,023 shares.

1

 

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**Forward Industries, Inc.**

**INDEX**
| **PART I.**  | ** **   | **FINANCIAL INFORMATION**                                                                                                         | Page No.   |
|--------------|--------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|
|         |         |                                                                                                                              |       |
|         | **Item 1.**  | **Financial Statements**                                                                                                          |       |
|         |         |    	- Consolidated Balance Sheets as of March 31, 2010 (unaudited)                                                 |       |
|         |         |    	and September 30, 2009                                                                                         | 4          |
|         |         |                                                                                                                              |       |
|         |         |     -	Consolidated	Statements of Operations (unaudited) for the Three and Six Months Ended	March 31, 2010 and 2009 | 5          |
|         |         |                                                                                                                              |       |
|         |         |     -	Consolidated	Statements of Cash Flows (unaudited) for the Six Months Ended March 31, 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         |

** **

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**Note Regarding Use of Certain Terms**

Inthis Quarterly Report on Form 10-Q, unless the context otherwise requires, the followingterms have the meanings assigned to them as set forth below: "we", "our", and the "Company"  refer 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 March 31, 2010; 

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

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

“2009Period” refers to the six months ended March 31, 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. 

 

 

 

 

 

 

 

 

 

 

 

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# PART I.   FINANCIAL INFORMATION

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

Forward Industries,Inc.

CONSOLIDATED BALANCE SHEETS
|                                                                                                                                                                                                                                                              |            |       |              |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|------------|-------------------|
|                                                                                                                                                                                                                                                              |            |       |              |
|                                                                                                                                                                                                                                                              | **March 31,**   | ** ** | **September 30,** |
|                                                                                                                                                                                                                                                              | **2010**        | ** ** | **2009**          |
| **Assets**                                                                                                                                                                                                                                                        | **(Unaudited)** | ** ** | ** **        |
| **Current assets:**                                                                                                                                                                                                                                               |            |       |              |
| Cash and cash equivalents...........................................................................................                                                                                                                                              | $19,673,323     |       | $20,103,502       |
| Accounts receivable, net .............................................................................................                                                                                                                                            | 3,630,737       |       | 3,259,462         |
| Inventories, net...............................................................................................................                                                                                                                                   | 821,532         |       | 666,485           |
| Prepaid expenses and other current  assets................................................................                                                                                                                                                        | 240,105         |       | 228,938           |
| **Total current assets**..........................................................................................                                                                                                                                                | 24,365,697      |       | 24,258,387        |
|                                                                                                                                                                                                                                                              |            |       |              |
| Property, plant, and equipment, net.............................................................................                                                                                                                                                  | 134,010         |       | 162,468           |
| Other assets.....................................................................................................................                                                                                                                                 | 46,032          |       | 59,532            |
| **Total Assets**........................................................................................................................                                                                                                                          | $24,545,739     |       | $24,480,387       |
|                                                                                                                                                                                                                                                              |            |       |              |
| **Liabilities and shareholders’ equity**                                                                                                                                                                                                                     |            |       |              |
| Current liabilities:                                                                                                                                                                                                                                              |            |       |              |
|    Accounts payable...........................................................................................................                                                                                                                          | $2,002,490      |       | $1,824,091        |
|    Accrued expenses and other current liabilities...........................................................                                                                                                                                            | 211,758         |       | 133,857           |
| **Total liabilities**...................................................................................................                                                                                                                                          | 2,214,248       |       | 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, 

8,671,433 and 8,643,598 shares issued,  respectively (including 706,410

held in treasury at both dates)............................................................................... |  

86,714  |       | 86,436            |
| Capital in excess of par value........................................................................................                                                                                                                                            | 16,209,522      |       | 16,101,568        |
| Treasury stock, 706,410 shares at cost .......................................................................                                                                                                                                                    | (1,260,057)     |       | (1,260,057)       |
| Retained earnings............................................................................................................                                                                                                                                     | 7,295,312       |       | 7,594,492         |
| **Total shareholders’ equity**...............................................................................................                                                                                                                                | 22,331,491      |       | 22,522,439        |
| **Total liabilities and shareholders’ equity**......................................................................                                                                                                                                         | $24,545,739     |       | $24,480,387       |

 

 

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

 

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Forward Industries,Inc.

**CONSOLIDATED STATEMENTS OF OPERATIONS**
|                                                                                        | **(UNAUDITED)**                  | ** ** | **(UNAUDITED)**                |
|---------------------------------------------------------------------------------------------|----------------------------------|------------|--------------------------------|
|                                                                                        | **Three Months Ended March 31,** | ** ** | **Six Months Ended March 31,** |
|                                                                                        | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** |
| **Net  sales**............................................................................. | $4,419,681                       |       | $4,256,951                     |   | $8,546,453 |   | $9,563,593 |
| **Cost of goods sold**.............................................................         | 3,425,938                        |       | 3,593,423                      |   | 6,628,515 |   | 7,956,062 |
| **Gross profit**.......................................................................     | 993,743                          |       | 663,528                        |   | 1,917,938 |   | 1,607,531 |
|                                                                                        |                             |       |                           |   |   |   |   |
| **Operating expenses:**                                                                     |                             |       |                           |   |   |   |   |
| Selling..........................................................................           | 533,286                          |       | 748,576                        |   | 991,558 |   | 1,424,664 |
| General  and administrative.......................................                          | 551,414                          |       | 627,807                        |   | 1,211,535 |   | 1,293,841 |
| **Total operating expenses**.................................                               | 1,084,700                        |       | 1,376,383                      |   | 2,203,093, |   | 2,718,505 |
| ** **                                                                                  |                             |       |                           |   |   |   |   |
| **Loss from operations**.......................................................             | (90,957)                         |       | (712,855)                      |   | (285,155) |   | (1,110,974) |
| ** **                                                                                  |                             |       |                           |   |   |   |   |
| **Other (expense) income:**                                                                 |                             |       |                           |   |   |   |   |
| Interest  income...........................................................                 | 8,700                            |       | 80,296                         |   | 29,032 |   | 199,241 |
| Other  expense, net.....................................................                    | (29,937)                         |       | (12,769)                       |   | (43,057) |   | (43,410) |
| **Total other (expense) income**..........................                                  | (21,237)                         |       | 67,527                         |   | (14,025) |   | 155,831 |
| ** **                                                                                  |                             |       |                           |   |   |   |   |
| **Loss before provision for income taxes**........................                          | (112,194)                        |       | (645,328)                      |   | (299,180) |   | (955,143) |
| **Provision for income  taxes**.............................................                | --                               |       | 405,890                        |   | -- |   | 300,499 |
| **Net loss**.............................................................................   | ($112,194)                       |       | ($1,051,218)                   |   | ($299,180) |   | ($1,255,642) |
| ** **                                                                                  |                             |       |                           |   |   |   |   |
| **Net loss per common and common equivalent share**                                         |                             |       |                           |   |   |   |   |
| Basic  and diluted......................................................                    | ($0.01)                          |       | ($0.13)                        |   | ($0.04) |   | ($0.16) |
| ** **                                                                                  |                             |       |                           |   |   |   |   |
| **Weighted average number of common and		common  equivalent shares outstanding**            |                             |       |                           |   |   |   |   |
| Basic  and diluted......................................................                    | 7,964,938                        |       | 7,923,019                      |   | 7,952,462 |   | 7,919,229 |

 

 

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

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

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**Forward Industries, Inc.**

**CONSOLIDATED STATEMENTS OFCASH FLOWS**
|                                                                                                    |   | **(Unaudited)**                     |
|---------------------------------------------------------------------------------------------------------|--------|-------------------------------------|
|                                                                                                    |   | **Six Months Ended**

**March 31,** |
|                                                                                                    |   | **     2010**   | ** ** | **2009** |
| **Operating activities:**                                                                               |   |                                |   |   |
| Net	loss............................................................................................... |   | ($299,180)                          |   | ($1,255,642) |
| Adjustments to reconcile net loss to net cash used  in operating activities:                            |   |                                |   |   |
| Share-based	compensation..............................................................                  |   | 108,232                             |   | 111,007 |
|    	Depreciation and	amortization.....................................................   |   | 28,458                              |   | 40,597 |
|  Provision for bad debt	expense....................................................                |   | 8,875                               |   | 23,401 |
|  Provision for obsolete	inventory.................................................                 |   | 6,883                               |   | (8,302) |
|  Deferred income	taxes....................................................................         |   | --                                  |   | 409,130 |
|  Loss on disposal of property, plant, and equipment................                                |   | --                                  |   | 11,759 |
| Changes  in operating assets and liabilities:                                                           |   |                                |   |   |
| Accounts receivable..........................................................................           |   | (380,150)                           |   | 25,297 |
| Inventories..........................................................................................   |   | (161,930)                           |   | 266,280 |
| Prepaid expenses and other  current assets....................................                          |   | (11,167)                            |   | 113,440 |
| Other assets........................................................................................    |   | 13,500                              |   | 38,727 |
| Accounts payable..............................................................................          |   | 178,399                             |   | (572,240) |
| Accrued expenses and other  current liabilities..............................                           |   | 77,901                              |   | 27,647 |
| **Net cash  used in operating activities**                                                              |   | **(430,179)**                       | ** ** | **(768,899)** |
|                                                                                                    |   |                                |   |   |
| **Investing activities:**                                                                               |   |                                |   |   |
| Purchases of property,  plant, and equipment.................................                           |   | **--**                              |   | (124,958) |
| **Net cash used in  investing activities**                                                              |   | **--**                              |   | **(124,958)** |
|                                                                                                    |   |                                |   |   |
| **Financing activities:**                                                                               |   | ** **                          | ** ** |   |
| **Net cash provided by  financing activities**........................................                  |   | **--**                              |   | **--** |
|                                                                                                    |   |                                |   |   |
| **Net decrease in cash and  cash equivalents**.....................................                     |   | **(430,179)**                       | ** ** | **(893,857)** |
| ** **                                                                                              |   | ** **                          | ** ** | ** ** |
| **Cash and  cash equivalents at beginning of period**.........................                          |   | **20,103,502**                      | ** ** | **19,862,426** |
| ** **                                                                                              |   | ** **                          | ** ** | ** ** |
| **Cash and  cash equivalents at end of period**.....................................                    |   | **$19,673,323**                     | ** ** | **$18,968,569** |
|                                                                                                    |   |                                |   |   |

 

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

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

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**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

** **

 

**NOTE 1     OVERVIEW     **

ForwardIndustries, Inc. was incorporated under the laws of the State of New York and began 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’sprincipal customer market is original equipment manufacturers, or “OEMs”, ofthese products 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 that adequate allowances for any uncollectible receivables are maintained. Credit termsto the majority of customers are generally net thirty (30) days to net sixty(60) days; however, the Company extends to certain customers, particularly itslargest, payment terms up to 90 days. The Company has not historicallyexperienced significant losses in extending credit to customers.  At March 31, 2010 and September 30, 2009, the allowance for doubtful accounts wasapproximately $30,000 and $25,000, respectively.

7

 

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**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (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, ,may change from time to time based on management’s assessments, and suchchanges could be material. At March 31, 2010 and September 30, 2009, the allowance for obsolete inventory was approximately $7,000 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, fixturesand equipment ranges from three to ten years. Amortization of leaseholdimprovements is computed using the straight-line method over the shorter of theremaining lease term or the estimated useful lives of the improvements. For thethree-month periods ended March 31, 2010 and 2009, the Company recordedapproximately $14,000 and $21,000 of depreciation and amortization expense,respectively. For the six-month periods ended March 31, 2010 and 2009, the Company recorded approximately $28,000 and $41,000 of depreciation andamortization expense, respectively. Depreciation and amortization forproduction related property, plant and equipment is included as a component ofcosts of goods sold in the accompanying consolidated statements of operations.Depreciation and amortization for selling and general and administrativerelated property, plant and equipment, is included as a component of operatingexpenses in the accompanying consolidated statements of operations.

**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 is probable.

 

 

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**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (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$24,000 and $28,000 for the three-month periods ended March 31, 2010 and 2009, respectively, and $49,000 and $54,000 for the six-month periods ended March 31, 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—other expense,net” in the accompanying consolidated statements of operations. The net losses fromforeign currency transactions and translations were approximately ($30,000) and($8,000) for the three-month periods ended March 31, 2010 and 2009, respectively. The net losses from foreign currency transactions and translations wereapproximately ($43,000) and ($38,000) for the six-month periods ended March 31, 2010 and 2009, respectively. 

**ComprehensiveLoss**

For the threeand six-month periods ended March 31, 2010 and 2009, the Company did not haveany components of comprehensive loss other than net 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.

**NOTE 4     SHAREHOLDERS’EQUITY**

**Anti-takeoverProvisions**

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

9

 

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**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

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

**Stock Repurchase**

InSeptember 2002 and January 2004, the Company’s Board of Directors authorizedthe repurchase of up to an aggregate of 486,200 shares of outstanding commonstock. Under those authorizations, as of March 31, 2010, the Company had repurchased an aggregate of 172,603 shares at a cost of approximately $403,000,but none during the three and six-month periods ended March 31, 2010 and 2009. 

**NOTE 5     STOCK BASEDCOMPENSATION**

InMay 2007, at the annual shareholders meeting, shareholders of the Companyapproved the 2007 Equity Incentive Plan (the 2007 Plan), which authorized theissuance of up to 400,000 shares of common stock to officers, employees, andnon-employee directors of the Company in connection with the grants ofrestricted common stock and stock options awarded to such persons. This planwas adopted by the Board of Directors in February 2007.  In February 2010, atthe annual shareholders meeting, shareholders of the Company approved anamendment to the 2007 Plan to increase the number of shares of Common Stockauthorized for grants by 400,000 shares, thereby bringing the total shares ofcommon stock available for grants of awards of restricted stock and options topurchase common stock under the 2007 Plan to 405,500 as of March 31, 2010. Theprice at which restricted common stock may be granted and the exercise price ofstock options granted may not be less than the fair market value of the commonstock at the date of grant. The Company’s Compensation Committee administersthe plan.  Options generally expire ten years after the date of grant andrestricted stock grants generally vest in equal proportions over three years. 

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

**Stock OptionAwards**

Under the2007 Plan, as amended, the Compensation Committee of the Company’s Board ofDirectors has granted stock option awards to purchase 242,500 shares of commonstock, in the aggregate, to the Company’s current and certain former non-employeedirectors and three Company officers. Of these 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 three and six-month period ended March 31, 2010. These awards are subject to a continued service condition andvest on the first anniversary of the date the awards were granted in the caseof the Company’s non-employee directors and one Company officer, and vest inequal amounts over three years commencing on the first anniversary of the grant,in the case of the other two Company officers. The exercise price 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 and unexercised,all at exercise prices higher than the fair market value of the stock at March 31, 2010. 

TheCompany recognized approximately $30,000 and $27,000 of compensation cost forstock option awards in its consolidated statements of operations for the three-monthperiods ended March 31, 2010 and 2009, respectively, and $49,000 and $50,000for the six-month periods ended March 31, 2010 and 2009, respectively.

10

 

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**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 5     STOCK BASEDCOMPENSATION (CONTINUED)**

**Stock OptionAwards (continued)**

Thefollowing table summarizes stock option activity under the 2007 Plan and the1996 Plan from September 30, 2009 through March 31, 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                                  |   | 9.84                                                        |   |                                                               |
| Exercised...........................................                                  | --                      |       | --                                    |   | --                                                          |   |                                                               |
| Forfeited............................................                                 | --                      |       | --                                    |   | --                                                          |   |                                                               |
| Expired...............................................                                | --                      |       | --                                    |   | --                                                          |   |                                                               |
| **Outstanding at March 31, 2010**                                                     | **242,500**             | ** ** | **$3.10**                             |   | **8.50**                                                    |   | **$177,000**                                                       |
|                                                                                  |                    |       |                                  |   |                                                        |   |                                                               |
| **Options  vested and exercisable at 	March 31, 2010...............................** | ** **

**175,000** |       | ** **

**$3.81**                 |   | ** **

**6.87**                                        |   |  

**$115,000**                                               |

The fairvalue of each stock option on the date of grant was estimated using aBlack-Scholes option-pricing formula applying the following assumptions for eachrespective period: 
|                                                                            | ** ** | **For the Six-Month Periods Ended March 31,** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------------|
|                                                                            | ** ** | **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. 

 

 

 

11

 

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**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 5     STOCK BASEDCOMPENSATION (CONTINUED)**

**Restricted Stock Awards**

Under the2007 Plan, as amended, as of March 31, 2010, the Compensation Committee of theCompany’s Board of Directors has approved and granted 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 commonstock on the various grant dates. During the three-month periods ended March 31, 2010 and 2009, the Company recognized approximately $29,000 and $37,000,respectively, of compensation cost in its consolidated statements of operationsrelated to restricted stock awards. During the six-month periods ended March 31, 2010 and 2009, the Company recognized approximately $59,000 and $61,000,respectively, of compensation cost in its consolidated statements of operationsrelated to restricted stock awards.

The following table summarizes restricted stock activity under the 2007Plan from September 30, 2009, through March 31, 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.................................................................................. |   | (27,834)                                       |       | $2.07                                          |
| Shares forfeited............................................................................... |   | --                                             |       | --                                             |
| Non-vested balance at March 31, 2010...............................................             |   | 110,498                                        |       | $2.10                                          |

As of March 31, 2010, there was approximately $88,000 of total unrecognized compensation cost related to 110,498shares of unvested restricted stock awards (reflected in the table above)granted under the 2007 Equity Incentive Plan. That cost is expected to berecognized over the remainder of the requisite service (vesting) periods.

**Warrants**

            As of March 31, 2010, warrants to purchase 75,000 shares 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 March 31, 2010, no such registration statement has been filed with the Securities andExchange Commission.

 

 

12

 

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**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 6     INCOME TAXES**

The Company’s provision for income taxes consists of the following United States and foreign components:
|                                       | **For the Three-Month Periods 	Ended March 31,**     | ** ** | **For the Six-Month Periods 	Ended March 31,** |
|--------------------------------------------|------------------------------------------------------|------------|------------------------------------------------|
|                                            | **2010**                                             |            | **2009**                                       | ** ** | **2010** |   | **2009** |
| U.S. Federal and State                     |                                                 |       |                                           |   |   |   |   |
| Current................................... |          $-- |       | --                                             |   | $-- |   |           -- |
| Deferred.................................  | (20,952)                                             |       | ($92,176)                                      |   | (70,412) |   | ($189,532) |
|                                       |                                                 |       |                                           |   |   |   |   |
| Foreign:                                   |                                                 |       |                                           |   |   |   |   |
| Current................................... | --                                                   |       | --                                             |   | -- |   | -- |
| Deferred.................................  | (4,097)                                              |       | (12,766)                                       |   | (8,241) |   | (20,801) |
| ** **                                 | ** **                                           | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** |
| Change  in valuation allowance             | 25,049                                               |       | 510,832                                        |   | 78,653 |   | 510,832 |
| **Provision  for  income taxes**      | **$--**                                              | ** ** | **$405,890**                                   | ** ** | **$--** | ** ** | **$300,499** |

The Company’s effective tax ratedoes not approximate the statutory United States federal income tax rateprimarily due to the establishment of the valuation allowance and tax ratedifferentials in respect of United States state and foreign taxes. As of September 30, 2009, the Company has no unrecognized tax benefits related to federaland state income tax matters. If ultimately recognized, the Company does notanticipate any material increase in the effective tax rate during Fiscal 2009relative to any tax positions taken prior to Fiscal 2009. As of September 30, 2009, the Company has not accrued for interest and penalties related touncertain tax positions. It is the Company’s policy to recognize interestand/or penalties, if any, related to income tax matters in income tax expensein the statement of operations. For the periods presented in the accompanyingstatements of operations no income tax related interest or penalties wereassessed or recorded.

At March 31, 2010, the Company had available net operating loss carryforwards for United States federal and state income tax purposes of approximately $2,378,000 expiringthrough 2029 and resulting in a combined deferred tax asset of approximately $443,000.In addition, at March 31, 2010, the Company had available net operating losscarryforwards for foreign income tax purposes of approximately $1,292,000 resultingin a deferred tax asset of approximately $114,000.  At March 31, 2010 andSeptember 30, 2009, the Company had total deferred tax assets of approximately$677,000 and $598,000, respectively, before reserve for valuation 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 theCompany elects to effect the repatriation of certain foreign source income ofits Swiss subsidiary, which income is currently considered to be permanentlyinvested and for which no United States tax liability has been accrued).Accordingly, except to the extent set forth in the preceding sentence, theCompany has established a full valuation allowance against its deferred taxassets, and as of March 31, 2010 and September 30, 2009, the valuationallowance was approximately $677,000 and $598,000, respectively.  If theCompany determines in a future reporting period that it will be able to use someor all of its deferred tax assets, the adjustment to reduce or eliminate thevaluation allowance would reduce its tax expense and increase after-tax income.Changes in deferred tax assets and valuation allowance are reflected in the “Provisionfor income taxes” line item of the Company’s consolidated statements ofoperations. 

13

 

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**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 6     INCOME TAXES(CONTINUED)**

EffectiveJune 2001, undistributed earnings of the Company’s Swiss subsidiary areconsidered to be permanently invested; therefore, in accordance with generallyaccepted accounting principles in the United States, no provision for U.S.Federal and state income taxes on those earnings has been provided.  At March 31, 2010, the Company’s Swiss subsidiary had approximately $3,711,000 of accumulatedundistributed earnings. 

**NOTE 7     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 and warrants, computed using the treasury stockmethod. Loss per share data for the six-month periods ended March 31, 2010 and 2009,excludes all outstanding common equivalent shares as inclusion of such shareswould be anti-dilutive.

Inaccordance with generally accepted accounting principles in the United States, 110,498and 98,832 shares of service-based common stock awards (“restricted stock”)were excluded from the calculation of diluted loss per share for the three-monthperiods ended March 31, 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. Geographic regions are defined based primarily on the location of the customer. The following table presents net sales related to these geographic segments:

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

**March 31,**

** **

**Six Months Ended**

**March 31,**

 

**2010**

** **

**2009**

** **

**2010**

** **

**2009**

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

$2,081

 

$1,725

 

$3,951

 

$3,420

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

1,354

 

1,621

 

2,955

 

3,685

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

985

 

911

 

1,640

 

2,460

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

**$4,420**

** **

**$4,257**

** **

**$8,546**

** **

**$9,565**

 

14

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (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 guarantee agreementwith a Swiss bank relating to the repayment of any amount up to €75,000 (equalto approximately $101,000 as of March 31, 2010) paid by such bank to thelogistics provider in order to satisfy such undertaking.  The subsidiarywould be required to perform under the guarantee only in the event that: (i) avalue added tax liability is imposed on the Company's sales in The Netherlands,(ii) the logistics provider asserts that it has been called upon in itscapacity as surety by the Dutch Receiver of Taxes to pay such taxes, (iii) thesubsidiary or the Company on its behalf fails or refuses to remit the amount ofvalue added tax due to the logistics provider upon its demand, and (iv) thelogistics provider makes a drawing under the bank letter of guarantee. Underthe Representation Agreement the subsidiary agreed to the letter of guaranteein place for three years following the date its relationship terminates withthe logistics provider to satisfy any value added tax liability arising priorto expiration of the Representation Agreement but asserted by The Netherlandsafter expiration. The term of the bank letter of guarantee expires February 28, 2011, but will be renewed automatically for one-year periods until February 28, 2014, unless the subsidiary provides the Swiss bank with written notice oftermination at least 60 days prior the renewal date. It is the intent of thesubsidiary and the logistics provider that the bank letter of guarantee amountbe 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 $3.4 million at March 31, 2010). Asof March 31, 2010, the Company had not incurred a liability in connection withthis guarantee. 

**NOTE 10   LEGALPROCEEDINGS**

            From time to time,the Company may become a party to legal actions or proceedings in the ordinarycourse of its business.  As of March 31, 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.

 

 

 

 

 15

 

 

 

 

**Forward Industries, Inc.**

 

 

 

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

*Thefollowing discussion and analysis should be read in conjunction with ourunaudited consolidated financial statements, and the notes thereto, and otherfinancial information appearing elsewhere in this Quarterly Report on Form 10-Qand 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 March 31, 2010 (the “2010 Quarter”), withthose for the three months ended March 31, 2009 (the “2009 Quarter”) and the sixmonths ended March 31, 2010 (the “2010 Period”), with those for the six monthsended March 31, 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 “SAFE HARBOR” 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, wherematerial 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; the impactson our financial condition, results of operations, and business prospectsarising from making an acquisition or failing to make an acquisition; generaleconomic and business conditions, nationally and internationally in thecountries in which we do business; the continuation or resumption of globaleconomic recession; the failure of one or more of our suppliers; failures inour ability to maintain adequate quality control in our products; demographicchanges; changes in technology, including developments in the treatment orcontrol of diabetes that adversely affect the incidence of use and replacementrates of handheld blood glucose monitors by diabetics; increased competition inthe business of distribution of carry solutions for handheld electronic devicesgenerally or increased competition to include carry solutions with productsmanufactured by our OEM customers in particular; 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.

 

16

 

 

**Forward Industries, Inc.**

 

 

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

**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 weak economy, high unemployment, tight credit markets, and heighteneduncertainty in financial markets during calendar 2008 and most of 2009, certainmajor diabetic case customers reduced their sales forecasts provided to us forblood glucose diagnostic kits, with which our products are packaged in box. Ourresponses to these economic conditions and OEM customer reaction were to cutoperating expenses, reduce headcount, and limit increases in operating expensesexcept where we thought increases were critical to potential future growth. These actions had the desired effect, as reductions in operating expensethroughout Fiscal 2009 and in the 2010 Period helped to mitigate the impact onnet operating results from a generally lower level of net sales and grossprofit.  However, with operating expenses at their lowest levels in nearly eightyears, absent severe weakening from this point in the economy and/or in ourrevenues, we do not anticipate further meaningful benefit to our results ofoperations from additional expense reduction efforts.

Since thebeginning of the 2010 Quarter, we have begun to see an increase in sales ordersfrom some of our larger diabetic customers, which may imply that their cautionand/or the negative economic conditions are abating.  While the recent pickup inorders from some of our major diabetic case customers is encouraging, themagnitude is modest, and we believe that the sustainability of any improvementin revenues from these customers for Fiscal 2010 is uncertain.  Nor is itapparent to us whether this recent pickup in orders is due to improvingbusiness conditions generally, i.e., one that would lead to a more significantlyimproved tone in OEM customer demand for our products, or if it is no more thana reflection of the normal variability in order flow from our major customersthat our business has experienced over the years.  In any event, we continue tooperate in a very challenging business environment near term, where materialchanges in revenue contribution from our diabetic case customers is somewhatvolatile and likely to stem more from customer-specific issues, such as ourprogram wins and product pricing, than broad-based conditions.  

As we havepreviously reported, in response to the increasing customer and salesconcentration in our diabetic products business, we have focused marketingefforts on expanding our customer and product base. We believe that theseefforts are meeting with some preliminary success, and 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, but significantprogress in reducing customer concentration in significant measure is uncertainat this time.    

As previously disclosed, inconnection with the decline in our cell phone accessory business and scalingback in demand from certain OEM customers in the diabetic case line during thecurrent economic downturn, we are pursuing a strategy to diversify our businessby means of acquisition.  We are currently assessing potential acquisitionand or investment targets.

17

 

 

 

 

**Forward Industries, Inc.**

 

 

**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. 

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 September 30, 2009, under the caption “Management’s Discussion and Analysis—CriticalAccounting Policies and Estimates”.  There have been no material changes incritical accounting policies and estimates since September 30, 2009.

The notesto our audited consolidated financial statements in our Annual Report on Form10-K for the year ended September 30, 2009, and the notes to our consolidatedfinancial statements included in Part I, Item 1 of this Quarterly Report onForm 10-Q contain additional information related to our accounting policies andshould be read in conjunction with the following discussion and analysisrelating to our overall financial performance, operations and financialposition. 
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 March 31, 2010 and September 30, 2009, our allowance for doubtful accounts was approximately $30,000 and$25,000, respectively.  Changes to this account are reflected in the generaland administrative 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.

18

 

 

 

 

**Forward Industries, Inc.**

 
 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. 

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 $7,000and $33,000 at March 31, 2010 and September 30, 2009, respectively.  Increases to 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 IncomeTaxes
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 $0.7 million and $0.6million of deferred tax assets at March 31, 2010 and September 30, 2009, respectively. The increase in deferred tax assets results primarilyfrom net loss incurred in respect of the 2010 Period and accumulated temporarydifferences between book and tax income.  

DuringFiscal 2009, as part of our periodic evaluation of the need for a valuationallowance against our deferred tax assets, and after consideration of allfactors, both positive and negative (including, among others, projections offuture taxable income, current year net operating loss carryforward utilizationand the extent of our cumulative losses in recent years), we determined that,on a more likely than not basis, we would not be able to use any of ourdeferred tax assets, except in the event and to the extent we elect to effectthe repatriation of certain foreign source income earned by our Swisssubsidiary, Forward Innovations, in which case our deferred tax assets can beapplied in respect of United States income taxes arising from such repatriation. Such foreign source income is currently considered to be permanently investedand for which no United States income tax liability has been accrued.Accordingly, except to the extent as aforesaid, we established a full valuationallowance against our deferred tax assets. As of March 31, 2010 and September 30, 2009, the valuation allowance was approximately $0.7 million and $0.6 million,respectively. If we determine that we will be able to realize some or all ofour deferred tax assets, the adjustment to reduce or eliminate the valuationallowance would reduce our tax expense and increase after-tax income. Changesin deferred tax assets and valuation allowance are reflected in the “Provision forincome taxes” line item of our consolidated statements of operations. See Notes2 and 6 to our consolidated financial statements included in Part I of thisQuarterly Report on Form 10-Q. 

 

 

19

 

 

 

 

**Forward Industries, Inc.**

 

 

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

**Net loss**

Weincurred a net loss of $112 thousand in the 2010 Quarter compared to a net lossof $1.1 million in the 2009 Quarter. The improvement in 2010 Quarter net lossresulted from higher gross profit, lower operating expenses, and lower incometax expense, offset in part by a decline in “other (expense) income”, as shownin the table below:    

**Main Components of Net Loss**
      
(thousands of dollars)

 

2010 	Quarter

2009 	Quarter

Increase 	(Decrease)

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

$4,420

$4,257

163

 

 

 

 

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

994

664

330

Selling, general and administrative Expenses......................................... 

(1,085)

(1,376)

(291)

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

(21)

68

(89)

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

--

406

406

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

**($112)**

**($1,051)**

(939)

* Table may nottotal due to rounding.

Basic and diluted loss per share data was ($0.01) forthe 2010 Quarter, compared to ($0.13) for the 2009 Quarter. The reduction in lossper share in the 2010 Quarter was due to the decrease in net loss and increasein weighted average shares outstanding.   

**Net Sales**

Netsales increased $163 thousand, or 4%, to $4.4 million in the 2010 Quarter from$4.3 million in the 2009 Quarter, due primarily to an increase in sales ofdiabetic products of $0.4 million, or 13%, which was offset, in part, by a declinein sales of “Other Products” (which includes cell phone product sales), of $0.2million, due to the continuing decline in cell phone accessory product sales.  Thetables below set forth sales by product line and geographic location of ourcustomers for the periods indicated.

 

 

 

20

 

 

 

 

**Forward Industries, Inc.**

 

 

**Net Sales for 2010 Quarter**

**3 Months ended March 31, 2010**

**(millions of dollars)**

** **

**APAC**

**Americas**

**Europe**

**Total***

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

$1.9

$0.8

$0.8

$3.6

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

0.2

0.5

0.2

0.9

**Total***

**$2.1**

**$1.4**

**$1.0**

**$4.4**

                                

**Net Sales for 2009 Quarter**

**3 Months ended March  31, 2009**

**(millions of dollars)**

** **

**APAC**

**Americas**

**Europe**

**Total***

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

$1.4

$0.8

$0.9

$3.2

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

0.3

0.8

--

1.1

**Total***

**$1.7**

**$1.6**

**$0.9**

**$4.3**

* 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 theOEM’s blood glucose testing and monitoring kits.

Salesof cases and related accessories for blood glucose monitoring kits increased $0.4million, or 13%, to $3.6 million in the 2010 Quarter, from $3.2 million in the 2009Quarter. This increase was due primarily to a $0.4 million increase in ordersfrom one major diabetic customer, as presented in the table below, which setsforth our sales by diabetic customer for the periods indicated.

(millions of dollars)

 

**2010 	Quarter**

**2009 	Quarter**

**Increase 	(Decrease)**

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

$1.9

$1.5

$0.4

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

0.9

0.8

0.1

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

0.7

0.7

--

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

0.1

0.2

(0.1)

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

**$3.6**

**$3.2**

**$0.4**

* Table may not totaldue to rounding.

Salesof carrying cases for blood glucose monitoring kits represented 80% of ourtotal net sales in the 2010 Quarter compared to 74% of our total net sales inthe 2009 Quarter, denoting greater customer and product line salesconcentration. 

*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 declined $0.2 million, or 21%, to $871 thousand in the 2010Quarter from $1.1 million in the 2009 Quarter. This decline was due primarilyto a $0.3 million decrease in sales to a cell phone customer in the 2010Quarter, which was partially offset by increased sales to other customers, noneof which increases being material.

21

 

 

 

 

**Forward Industries, Inc.**

 

 

Salesof other products represented 20% of our net sales in the 2010 Quarter comparedto 26% of net sales in the 2009 Quarter. 

**Gross Profit**

Grossprofit of $1.0 million in the 2010 Quarter was $0.3 million, or 50%, higher comparedwith gross profit of $0.7 million in the 2009 Quarter. This improvementresulted from the 4% increase in sales revenues (refer to “Net Sales” sectionabove) and a 5% decrease in cost of goods sold. 2010 Quarter cost of goods soldwere lower than those for the 2009 Quarter as a result of: a decrease in HongKong costs primarily due to reduced personnel costs in the 2010 Quarter comparedto the 2009 Quarter, when staffing changes in connection with the relocation ofthe facility included severance and recruitment expenses; a decrease in ourmaterials costs due to the introduction of certain higher margin products with existingand new customers into our product mix, as well unit cost improvements oncertain of our existing programs with our larger customers.; and a decrease in freight,duties, and customs resulting primarily from the decline in sales to one diabeticcustomer in the 2010 Quarter compared to the 2009 Quarter when higher shippingcosts were incurred in accordance with the customer’s requirements. These improvementswere offset, in part, by the change in the amount of our reserve for obsoleteinventory compared to the 2009 Quarter, in which we eliminated a smallerportion of the allowance in the 2010 Quarter compared to the 2009 Quarter.

Gross profit as apercentage of net sales was 23% in the 2010 Quarter compared to 16% in the 2009Quarter.  

**Selling, General, and Administrative Expenses**

Operatingexpenses decreased $0.3 million, or 21%, to $1.1million in the 2010 Quarterfrom $1.4 million in the 2009 Quarter due primarily to a $0.2 million reductionin selling personnel costs and related travel and entertainment and automobileallowance expense in the 2010 Quarter resulting from changes to our staffingand employee benefit plans made in Fiscal 2009 and to a lesser extent to decreasesin other general and administrative expenses (primarily bad debt expense), rentand related occupancy costs, and professional fees. 

**Other (expense) income**

Other(expense) income, consisting primarily of foreign currency transaction gainsand losses and interest income on cash balances, declined $89 thousand to $21thousand of expense in the 2010 Quarter from $68 thousand of income in the 2009Quarter. This resulted primarily from a $72 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 $30 thousand in the2010 Quarter compared to $8 thousand in the 2009 Quarter resulting primarilyfrom the impact of rate changes on our Euro denominated accounts receivableoccurring between the date of sale and the date of collection. Exchange ratechanges on foreign currency cash balances were not material. 

**Pretax Loss**

Pretaxloss narrowed to $0.1 million in the 2010 Quarter compared to $0.6 million in the2009 Quarter as a result of the changes as described above.

**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 operating expenses, and lower incometax expense, offset in part by a decline in “other (expense) income”, as shownin the table below:    

22

 

 

 

 

**Forward Industries, Inc.**

 

 

**Main Components of Net Loss**

 
**(thousands of dollars)**

 

**2010 	Period**

**2009 	Period**

**Increase 	(Decrease)**

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

$8,546

$9,564

($1,017)

 

 

 

 

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

1,918

1,608

310

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

(2,204)

(2,719)

(515)

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

(14)

156

(170)

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

--

(300)

(300)

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

**($299)**

**($1,256)**

(956)

* Table may nottotal due to rounding.

Basic and diluted loss per share data was ($0.04) forthe 2010 Period, compared to ($0.16) for the 2009 Period. The reduction in lossper share in the 2010 Period was due to the decrease in net loss and increasein weighted average shares outstanding.   

**Net Sales**

Netsales decreased $1.0 million, or 11%, to $8.5 million in the 2010 Period from$9.6 million in the 2009 Period, due to declines in sales of diabetic products and“Other Products” (which includes cell phone product sales) of $0.6 million and $0.4million, respectively.  The tables below set forth sales by product line andgeographic location of our customers for the periods indicated.

 

**Net Sales for 2010 Period**

**6 Months ended March 31, 2010**

**(millions of dollars)**

** **

**APAC**

**Americas**

**Europe**

**Total***

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

$3.5

$1.7

$1.5

$6.6

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

0.4

1.3

0.2

1.9

**Total***

**$4.0**

**$3.0**

**$1.6**

**$8.6**

                                

**Net Sales for 2009 Period**

**6 Months ended March  31, 2009**

**(millions of dollars)**

** **

**APAC**

**Americas**

**Europe**

**Total***

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

$2.9

$1.9

$2.4

$7.2

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

0.5

1.8

0.1

2.3

**Total***

**$3.4**

**$3.7**

**$2.5**

**$9.6**

* Tables maynot total due to rounding.

*Diabetic Product Sales*

Salesof cases and related accessories for blood glucose monitoring kits declined $0.6million, or 8%, to $6.6 million in the 2010 Period, from $7.2 million in the2009 Period. This decrease was due primarily to a $1.2 million drop in sales toone major diabetic customer (from which we receive periodically significantstand-alone orders rather than steady orders over time), which was offset, inpart, by a $0.5 million increase in sales to another major diabetic customers,as presented in the table below, which sets forth our sales by diabeticcustomer for the periods indicated.

23

 

 

 

 

**Forward Industries, Inc.**

 

 

 
(millions of dollars)

 

**2010 	Period**

**2009 	Period**

**Increase 	(Decrease)**

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

$3.5

$3.0

$0.5

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

1.8

1.9

(0.1)

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

1.2

1.0

0.2

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

--

1.2

(1.2)

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

0.1

0.1

--

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

**$6.6**

**$7.2**

**($0.6)**

* Table may not totaldue to rounding.

Salesof carrying cases for blood glucose monitoring kits represented 78% of ourtotal net sales in the 2010 Period compared to 75% of our total net sales inthe 2009 Period. 

*OtherProduct Sales*

Salesof other products declined $0.4 million, or 18%, to $1.9 million in the 2010Period from $2.3 million in the 2009 Period. This decline was due primarily toa $0.6 million decrease in sales to a cell phone customer in the 2010 Period,partially offset by increased sales to a number of customers, none of whichincreases alone being material.

Salesof other products represented 22% of our net sales in the 2010 Period comparedto 25% of net sales in the 2009 Period. 

**Gross Profit**

Grossprofit of $1.9 million in the 2010 Period was $0.3 million, or 19%, higher comparedto $1.6 million in the 2009 Period. In the 2010 Period decreases in everycomponent of our costs of goods sold more than offset the 11% decline in salesrevenues, compared to the 2009 Period. The decrease in our cost of goods soldresulted from favorable comparisons with the 2009 Period: lower materials costsdue primarily to the introduction of certain higher margin products with newand existing customers into our product mix, as well unit cost improvements oncertain of our existing programs with our larger customers; lower Hong Kong expensedue primarily to reduced personnel costs in the 2010 Period compared to the2009 Period, when staffing changes in connection with the relocation of thefacility included severance and recruitment expenses; 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 $0.5 million, or 19%, to $2.2 million in the 2010 Periodfrom $2.7 million in the 2009 Period due primarily to a $0.4 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 and to a lesser extent decreases inprofessional fees, other general and administrative expenses (primarily baddebt expense and director compensation) office expenses, and several other componentsof operating expenses.

**Other (expense) income**

Other(expense) income, consisting primarily of interest income on cash balances andforeign currency transaction gains and losses, declined $170 thousand to $14thousand of expense in the 2010 Period from $156 thousand of income in the 2009Period. This resulted from a $170 thousand drop in interest income in the 2010Period, due primarily to lower average interest rates on slightly lower cashbalances compared to the 2009 Period. Exchange rate changes on foreign currencycash 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 equivalents declined$0.4 million resulting entirely from uses in operating activities. Cash andcash equivalents declined $0.9 million in the 2009 Period, of which $0.8million was from uses in operating activities.  Our operating cash flows in the2010 Period consisted of a net loss of $0.3 million (reduced by $152 thousandfor non-cash items), and use of $0.3 million for net changes in working capitalitems. Net cash used in operating activities consisted of changes in inventoriesand accounts receivable of $0.2 million and $042 million, respectively. These usesof working capital were partially offset by changes in accounts payable, accruedexpenses and other current liabilities, other assets, and prepaid and other currentassets, which generated $178,000, $78,000, $14,000 and $11,000, respectively. Theincrease in accounts receivable is attributable to the higher sales levels inthe 2010 Quarter compared to the three-month period ended September 30, 2009 and the timing in which these accounts receivable were originated. The increase ininventories is in support of either firm purchase orders or forecasted demanddata received from our customers. The increase in our accounts payablecorrelates with the increase in our inventory.  The increase in accruedexpenses and other current liabilities is due to a one time overpayment by acustomer, as well as investment banking fees incurred but not paid as of oursecond fiscal quarter end.

 

Duringthe 2009 Period, operating activities used $0.8 million of cash consisting of anet loss of $1.3 million (reduced by $0.6 million for non-cash items), and $0.1million in net changes in working capital items, consisting of a change inaccounts payable of $0.6 million, offset, in part, by changes in inventories,prepaid expenses and other current assets, other assets, accrued expenses andother current liabilities, and accounts receivable of $267 thousand, $113thousand, $39 thousand, $28 thousand, and $25 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. 

Therewere no financing activities in the 2010 Period or the 2009 Period.

At March 31, 2010, our current ratio (current assets divided by current liabilities) was 11.0;our quick ratio (current assets less inventories divided by currentliabilities) was 10.6; and our working capital (current assets less currentliabilities) was $22.1 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 March31, 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 $101,000 as of March 31, 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 extends unto February 28, 2011, but will be renewed automatically for one-year periods until February 28, 2014, unless the subsidiary provides the Swiss bank with written notice of termination at least 60 daysprior the renewal date. It is the intent of the Forward Innovations and thelogistics provider that the bank letter of guarantee amount be adjustedannually. 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 deporit with, held by, or credited to the subsidiary’s account with,the Swiss bank (approximately $3.4 million at March 31, 2010). As of March 31, 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 March 31, 2010, we had repurchased an aggregate of 172,603 shares at a cost of approximately $0.4 million butnone during Fiscal 2010 or Fiscal 2009. 

**CONTRACTUAL OBLIGATIONS ANDCOMMERCIAL COMMITMENTS**

TheCompany has entered into various contractual obligations and commercialcommitments that, under accounting principles generally accepted in the United States, are not recorded as a liability.   The following is a summary of suchcontractual cash obligations as of March 31, 2010:

**Contractual  Obligation or Commitment**

**Apr 10 – Mar 11**

**Apr 11 – Mar 13**

**Apr 13 – Mar 15**

**Thereafter**

Employment Agreements

$319,000

$          -- 

**$--**

**$        --**

Operating Leases

159,000

75,000

**--**

**--**

**Totals**

**$478,000**

**$75,000**

$-- 

    $        --

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

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

Notapplicable.

**ITEM4. CONTROLS AND PROCEDURES **

**Evaluationof Disclosure Controls and Procedures**

Ourmanagement is responsible for establishing and maintaining a system of disclosurecontrols and procedures (as defined in Rule 13a-15(e)) under the Exchange Act)that is designed to ensure that information required to be disclosed by theCompany in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported, within the time specified in theCommission's rules and forms. Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by an issuer in the reports that it files or submitsunder the Exchange Act is accumulated and communicated to the issuer'smanagement, including its principal executive officer or officers and principalfinancial officer or officers, or persons performing similar functions, as appropriateto allow timely decisions regarding required disclosure.

Inaccordance with Exchange Act Rule 13a-15(b), our management, under thesupervision and with the participation of our Chief Executive Officer and ChiefFinancial Officer, performed an evaluation of the effectiveness of theCompany's disclosure controls and procedures as of the end of the fiscal quartercovered by this Quarterly Report. Based on that evaluation, the Company's ChiefExecutive Officer and Chief Financial Officer concluded that the Company'sdisclosure controls and procedures were effective, as of the end of thequarterly period ended March 31, 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.

26

 

 

 

 

**Forward Industries, Inc.**

 

 

**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 March 31, 2010.  Based on thatevaluation, our Chief Executive Officer and our Chief Financial Officerconcluded that no change occurred in the Company's internal controls overfinancial reporting during the three month period ended March 31, 2010 that has materially 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 March 31, 2010, there were no such actions or proceedings, either individually or in the aggregate, that, ifdecided adversely to the Company’s interests, the Company believes would bematerial to its business.

**ITEM1A. RISK FACTORS**

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**

None

**ITEM 6. EXHIBITS     **

              
 31.1 
Certification of the Chief Executive Officerunder 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:  May 5, 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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