** **

** **

 

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington****, D.C. 20549**

________________

**FORM 10-Q**

________________

 

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

**For the quarterly period ended June 30, 2007.**

**OR**

**[   ]       TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

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

** **

**Commission File Number: 0-6669**

________________

**FORWARD INDUSTRIES, INC.**

(Exact name of registrant as specified in its charter)

________________

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

 

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

(Address of principal executive offices, including zipcode)

**(954) 419-9544**

(Registrant’s telephone number, including area code)

________________

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

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer (see definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act).

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

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

Thenumber of shares outstanding of the registrant’s common stock, par value $0.01per share, at July 31, 2007, was 7,812,439 shares.

** **

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**Forward Industries, Inc.**

|           |                       |                                                                                                  | **INDEX** |
|----------------|----------------------------|-------------------------------------------------------------------------------------------------------|-----------|
|           |                       |                                                                                                  |      |
| **PART  I.**   | **FINANCIAL  INFORMATION** | Page No.                                                                                              |
|           |                       |                                                                                                  |      |
|           | **Item  1.**               | **Financial  Statements**                                                                             |      |
|           |                       |      - Consolidated Balance Sheets as of June 30, 2007 (unaudited)                     |      |
|           |                       |      and September 30, 2006                                                            | 4         |
|           |                       |                                                                                                  |      |
|           |                       |      - Consolidated Statements of Operations (unaudited) for the Three and Nine Months |      |
|           |                       | Ended June 30, 2007 and 2006                                                                          | 5         |
|           |                       |                                                                                                  |      |
|           |                       |      - Consolidated Statements of Cash Flows (unaudited) for the Nine Months           |      |
|           |                       |      Ended June 30, 2007 and 2006                                                      | 6         |
|           |                       |                                                                                                  |      |
|           |                       |      - Notes to Consolidated Financial Statements (unaudited)                          | 7         |
|           |                       |                                                                                                  |      |
|           | **Item  2.**               | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**       | 16        |
|           | ** **                 | ** **                                                                                            |      |
|           | **Item  3.**               | **Quantitative  and Qualitative Disclosures About Market Risk**                                       | 27        |
|           | ** **                 | ** **                                                                                            |      |
|           | **Item  4.**               | **Controls  and Procedures**                                                                          | 28        |
|           | ** **                 |                                                                                                  |      |
| **PART  II.**  | **OTHER  INFORMATION**     | ** **                                                                                            |
|           | ** **                 |                                                                                                  |      |
|           | **Item  1.**               | **Legal  Proceedings**                                                                                | 29        |
|           | ** **                 | ** **                                                                                            |      |
|           | **Item  1A.**              | **Risk  Factors**                                                                                     | 29        |
|           | ** **                 | ** **                                                                                            |      |
|           | **Item  2**                | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                      | 32        |
|           | ** **                 | ** **                                                                                            |      |
|           | **Item  3**                | **Defaults  Upon Senior Securities**                                                                  | 32        |
|           | ** **                 | ** **                                                                                            |      |
|           | **Item  4.**               | **Submission  of Matters to a Vote of Security Holders**                                              | 32        |
|           | ** **                 | ** **                                                                                            |      |
|           | **Item  5.**               | **Other  Information**                                                                                | 33        |
|           | ** **                 | ** **                                                                                            |      |
|           | **Item  6.**               | **Exhibits**                                                                                          | 33        |
|           | ** **                 | ** **                                                                                            |      |
|           |                       | **Signatures**                                                                                        | 34        |
|           |                       | ** **                                                                                            |      |
|           |                       | **Certifications**                                                                                    | 35        |
|  

  |                       | ** **                                                                                            |      |

**Explanatory Note**

The registrant determined, as of September 30, 2006, its most recent fiscal year-end, that it no longer met the definition of a smallbusiness issuer, in accordance with Rule 228.10(a) under the Exchange Act. Accordingly, its Annual Report on Form 10-KSB for the fiscal year endedSeptember 30, 2006, was its last annual report filing as a Small Businessissuer in exiting the Small Business Disclosure System (until such time as itsfiling status may be reassessed).  This Quarterly Report on Form 10-Q for thequarterly period ended June 30, 2007, pursuant to the Exchange Act of ForwardIndustries, Inc. represents the registrant’s  third  quarterly filing as anon-accelerated filer on Form 10-Q and in accordance with Regulation S-K.

2

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**Note Regarding Use ofCertain Terms**

In this QuarterlyReport on Form 10-Q, unless the context otherwise requires, the terms"we", "our", and the "Company" refer to ForwardIndustries, Inc., a New York corporation, together with its consolidatedsubsidiaries; “Forward” or “Forward Industries” refers to Forward Industries,Inc.; “common stock” refers to the common stock, $.01 par value per share, ofForward Industries, Inc.; "Koszegi" refers to Forward Industries’wholly owned subsidiary Koszegi Industries, Inc., an Indiana corporation;“Koszegi Asia” refers to Forward Industries’ wholly owned subsidiary KoszegiAsia Ltd., a Hong Kong corporation; “Forward Innovations” refers to ForwardIndustries’ wholly owned subsidiary Forward Innovations GmbH, a Swisscorporation;  “GAAP” refers to accounting principles generally accepted in theUnited States; “Commission” refers to the United States Securities and ExchangeCommission; “Exchange Act” refers to the United States Securities Exchange Actof 1934; the “2007 Quarter” refers to the three months ended June 30, 2007; the“2006 Quarter” refers to the three months ended June 30, 2006; the “2007Period” refers to the nine months ended June 30, 2007; the “2006 Period” refersto the nine months ended June 30, 2006; “Fiscal 2007” refers to our fiscal yearending September 30, 2007; “Fiscal 2006” refers to our fiscal year endedSeptember 30, 2006; “EMEA Region” means the geographic area encompassingEurope, the Middle East and Africa; APAC Region means the Asia Pacific Region,consisting of Australia, New Zealand, Hong Kong, Taiwan, China, South Korea,Japan, Singapore, Malaysia, Thailand, Indonesia, India, the Philippines andVietnam; and “Americas” refers to the geographic area encompassing North,Central, and South America.

 

 

 

 

 

 

| 3 |
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# PART I.   FINANCIAL INFORMATION

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

Forward Industries,Inc.

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                           |            |       |                    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|------------|-------------------------|
|                                                                                                                                                                                           |            |       |                    |
|                                                                                                                                                                                           | **June 30,**    | ** ** | **September 30,**       |
|                                                                                                                                                                                           | **2007**        | ** ** | **2006**                |
| **Assets**                                                                                                                                                                                     | **(Unaudited)** | ** ** | ** **              |
| **Current assets:**                                                                                                                                                                            |            |       |                    |
| Cash and cash equivalents                                                                                                                                                                      | $20,900,189     |       | $18,609,371             |
| Accounts receivable, net                                                                                                                                                                       | 3,275,789       |       | 6,069,058               |
| Inventories, net                                                                                                                                                                               | 1,675,242       |       | 2,449,065               |
| Prepaid expenses and other current  assets                                                                                                                                                     | 854,176         |       | 329,461                 |
| Deferred tax asset                                                                                                                                                                             | 54,599          |       | 83,000                  |
| **Total current assets**                                                                                                                                                                       | 26,759,995      |       | 27,539,955              |
|                                                                                                                                                                                           |            |       |                    |
| Property, plant, and equipment, net                                                                                                                                                            | 173,708         |       | 190,084                 |
| Other assets                                                                                                                                                                                   | 57,538          |       | 51,932                  |
| **Total Assets**                                                                                                                                                                               | $26,991,241     |       |  $27,781,971  |
|                                                                                                                                                                                           |            |       |                    |
| **Liabilities and shareholders’ equity**                                                                                                                                                  |            |       |                    |
| Current liabilities:                                                                                                                                                                           |            |       |                    |
|    Accounts payable                                                                                                                                                                  | $1,842,564      |       |  $ 2,141,191       |
|    Accrued expenses and other current liabilities                                                                                                                                    | 299,242         |       | 690,413                 |
| **Total current liabilities**                                                                                                                                                                  | 2,141,806       |       | 2,831,604               |
|                                                                                                                                                                                           |            |       |                    |
| **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, 

8,435,932 and 8,424,931 shares issued,  respectively (including 623,493 and 563,493 held in treasury, respectively ) | 84,359          |       | 84,249                  |
| Capital in excess of par value                                                                                                                                                                 | 15,335,829      |       | 15,287,952              |
| Treasury stock, 623,493 and 563,493  shares at cost, respectively                                                                                                                              | (1,057,257)     |       | (853,159)               |
| Retained earnings                                                                                                                                                                              | 10,486,504      |       | 10,431,325              |
| **Total shareholders' equity**                                                                                                                                                                 | 24,849,435      |       | 24,950,367              |
| **Total liabilities and shareholders’ equity**                                                                                                                                            | $26,991,241     |       |  $27,781,971       |

 

 

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

 

4

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Forward Industries,Inc.

**CONSOLIDATED STATEMENTS OF OPERATIONS**

|                                                                            | **(UNAUDITED)**                 | ** ** | **(UNAUDITED)**                |
|---------------------------------------------------------------------------------|---------------------------------|------------|--------------------------------|
|                                                                            | **Three Months Ended June 30,** | ** ** | **Nine Months Ended June 30,** |
|                                                                            | **2007**                        | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** |
| **Net  sales**                                                                  | $4,401,462                      |       | $7,304,648                     |   | $17,711,652 |   | $22,432,325 |
| **Cost of goods sold**                                                          | 3,460,380                       |       | 5,560,026                      |   | 13,513,140 |   | 16,629,311 |
| **Gross profit**                                                                | 941,082                         |       | 1,744,622                      |   | 4,198,512 |   | 5,803,014 |
|                                                                            |                            |       |                           |   |   |   |   |
| **Operating expenses:**                                                         |                            |       |                           |   |   |   |   |
| Selling                                                                         | 920,140                         |       | 933,176                        |   | 2,697,178 |   | 2,565,459 |
| General  and administrative                                                     | 627,705                         |       | 637,478                        |   | 2,186,955 |   | 1,965,012 |
| **Total operating expenses**                                                    | 1,547,845                       |       | 1,570,654                      |   | 4,884,133 |   | 4,530,471 |
| ** **                                                                      |                            |       |                           |   |   |   |   |
| **(Loss) income from  operations**                                              | (606,763)                       |       |  173,968                  |   | (685,621) |   | 1,272,543 |
| ** **                                                                      |                            |       |                           |   |   |   |   |
| **Other income:**                                                               |                            |       |                           |   |   |   |   |
| Interest  income                                                                | 249,736                         |       | 208,470                        |   | 743,146 |   | 554,202 |
| Other  (expense) income, net                                                    | (2,911)                         |       | 14,196                         |   | 3,257 |   | 973 |
| **Total other income**                                                          | 246,825                         |       | 222,666              |   | 746,403 |   | 555,175 |
| ** **                                                                      |                            |       |                           |   |   |   |   |
| **(Loss) income before provision (benefit) for income  taxes**                  |  

(359,938)               |       |  

396,634                |   | 60,782 |   | 1,827,718 |
| **(Benefit) provision for  income taxes**                                       | (77,128)                        |       | 111,690                        |   | 5,601 |   | 704,769 |
| **Net (loss) income**                                                           | ($282,810)                      |       | $284,944                       |   | $55,181 |   | $1,122,949 |
| ** **                                                                      |                            |       |                           |   |   |   |   |
| **Net (loss) income per common and common equivalent  share**                   |                            |       |                           |   |   |   |   |
| Basic                                                                           | ($0.04)                         |       | $0.04                          |   | $0.01 |   | 0.14 |
| Diluted                                                                         | ($0.04)                         |       | $0.04                          |   | $0.01 |   | 0.14 |
| ** **                                                                      |                            |       |                           |   |   |   |   |
| **Weighted average number of common and common  equivalent shares outstanding** |                            |       |                           |   |   |   |   |
| Basic                                                                           | 7,835,454                       |       | 7,861,438                      |   | 7,852,777 |   | 7,853,682 |
| Diluted                                                                         | 7,835,454                       |       | 7,998,285                      |   | 7,964,485 |   | 8,011,966 |

 

 

 

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

 

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**Forward Industries, Inc.**

**CONSOLIDATED STATEMENTS OFCASH FLOWS**
|                                                                               |   | **(Unaudited)**                        |
|------------------------------------------------------------------------------------|--------|----------------------------------------|
|                                                                               |   | **Nine Months Ended June 30,**         |
|                                                                               |   | **     2007**      | ** ** | **2006** |
| **Operating activities:**                                                          |   |                                   |   |   |
| Net  income                                                                        |   | $      55,181 |   | $  1,122,949 |
| Adjustments to reconcile net income to net cash  provided by operating activities: |   |                                   |   |   |
| Provision  for obsolete inventory                                                  |   | 248,661                                |   | 234,606 |
| Depreciation  and amortization                                                     |   | 68,496                                 |   | 80,253 |
| Share-based  compensation                                                          |   | 47,985                                 |   | -- |
| Deferred  income taxes                                                             |   | 28,401                                 |   | 168,642 |
| Tax  benefit from exercise of stock options                                        |   | --                                     |   | 479,405 |
|      Provision for bad debt expense                                 |   | --                                     |   | 7,700 |
| Changes  in operating assets and liabilities:                                      |   |                                   |   |   |
| Accounts receivable                                                                |   | 2,793,269                              |   |  6,893,242 |
| Inventories                                                                        |   | 525,162                                |   | (2,261,515) |
| Prepaid expenses and other  current assets                                         |   | (524,715)                              |   | (333,536) |
| Other assets                                                                       |   | (5,606)                                |   | (6,165) |
| Accounts payable                                                                   |   | (298,627)                              |   |  (3,002,370) |
| Accrued expenses and other  current liabilities                                    |   | (391,171)                              |   | (1,531,276) |
| **Net cash  provided by operating activities**                                     |   | **2,547,036**                          | ** ** | 1,851,935 |
|                                                                               |   |                                   |   |   |
| **Investing activities:**                                                          |   |                                   |   |   |
| Proceeds from sale of  marketable equity securities                                |   | --                                     |   | 75,034 |
| Purchases of property,  plant, and equipment                                       |   | (52,120)                               |   |  (18,863) |
| **Net cash (used) provided  by investing activities**                              |   | **(52,120)**                           | ** ** | 56,171 |
|                                                                               |   |                                   |   |   |
| **Financing activities:**                                                          |   |                                   |   |   |
| Purchases of treasury stock                                                        |   | (204,098)                              |   | -- |
| Proceeds from exercise of  stock options                                           |   | --                                     |   | 87,653 |
| **Net  cash (used) provided by financing activities**                              |   | **(204,098)**                          | ** ** | 87,653 |
|                                                                               |   |                                   |   |   |
| **Net increase in cash and  cash equivalents**                                     |   | 2,290,818                              |   | 1,995,759  |
| ** **                                                                         |   |                                   |   |   |
| **Cash and  cash equivalents at beginning of period**                              |   | 18,609,371                             |   | 15,291,739 |
| ** **                                                                         |   |                                   |   |   |
| **Cash and  cash equivalents at end of period**                                    |   | $20,900,189                            |   | $17,287,498 |
|                                                                               |   |                                   |   |   |
|                                                                               |   |                                   |   |   |

 

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 is engaged in the design, marketing,and distribution of custom-designed, soft-sided carrying cases and other carrysolutions products made from leather, nylon, vinyl, and other syntheticfabrics.  The cases and other products are used primarily for the protectionand transport of portable electronic devices such as cellular phones andmedical devices. The Company markets products as a direct seller tooriginal-equipment-manufacturers in the EMEA Region (meaning the geographicarea encompassing Europe, the Middle East and Africa), the APAC Region (meaningthe Asia Pacific Region, encompassing Australia, New Zealand, Hong Kong,Taiwan, China, South Korea, Japan, Singapore, Malaysia, Thailand, Indonesia,India, the Philippines and Vietnam) and the Americas (meaning the geographicarea, encompassing North, Central, and South America) and as a seller toretailers and wholesalers in Europe, the Middle East and Africa under non-exclusivelicenses for certain trademarks. 

In theopinion of management, the accompanying consolidated financial statementsreflect all normal recurring adjustments necessary to present fairly thefinancial position and results of operations and cash flows for the interimperiods presented herein, but are not necessarily indicative of the results ofoperations for the full fiscal year ending September 30, 2007. These financial statements should be read in conjunction with the Company's audited consolidatedfinancial statements included in its annual report on Form 10-KSB for thefiscal year ended September 30, 2006, and with the disclosures presentedtherein.

 

NOTE 2      ACCOUNTINGPOLICIES

*Accounting estimates*:Preparing the Company's financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

*Basis ofpresentation:*The accompanying consolidated financial statements includethe accounts of Forward Industries, Inc. ("Forward") and its whollyowned subsidiaries (together, the "Company"). All significantintercompany transactions and balances have been eliminated in consolidation.

*Revenue Recognition:*In accordance with the requirements of Staff Accounting Bulletin (SAB) No.104, *Revenue Recognition in Financial Statements*, the Company recognizesrevenue from product sales to customers when: products that do not requirefurther services by the Company are shipped, there are no uncertainties surroundingcustomer acceptance, and collectibility is reasonably assured.

*Supplier Rebates:*EmergingIssues Task Force (EITF) Issue No. 02-16, *Accounting by a Customer(Including a Reseller) for Certain Consideration Received from a Vendor*,permits recognition of a rebate or refund of a specified amount of cashconsideration that is payable if the customer completes a specified cumulativelevel of purchases. The Company has entered into agreements with several ofits suppliers that grant the Company a rebate based on its level of purchasesmade during each quarter. In lieu of a cash payment from these suppliers theCompany generally receives a credit memo. The Company reduces accounts payableto the supplier and cost of goods sold each quarter as the Company earns therebates. For the three-month periods ended June 30, 2007 and 2006, the cumulative amounts of such quarterly rebates were approximately $94,000 and$150,000 in each period, respectively. For the nine-month periods ended June 30, 2007 and 2006, the cumulative amounts of such quarterly rebates wereapproximately $422,000 and $471,000, respectively. The quarterly rebatesare net of amounts allocated to unsold inventories and are reflected in theaccompanying consolidated statements of operations as a reduction of cost ofgoods sold.

7

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**Forward Industries, Inc.**

 

 

 

 

NOTE2      ACCOUNTING POLICIES (CONTINUED)

*Foreign CurrencyTransactions:*The functional currency of the Company's wholly owned foreignsubsidiaries is the U.S. dollar. Foreign currency transactions may generate receivablesor payables that are fixed in terms of the amount of foreign currency that willbe received or paid. Fluctuations in exchange rates between the functionalcurrency and the currency in which a transaction is denominated increases ordecreases the expected amount of functional currency cash flows upon settlementof the transaction. These increases or decreases in expected functionalcurrency cash flows are foreign currency transaction gains or losses that areincluded in “other income, net” in the accompanying unauditedconsolidated statements of operations. The net (loss) gain  from foreigncurrency transactions was approximately ($3,000) and $14,000 for the three-monthperiods ended June 30, 2007 and 2006, respectively. The net gain from foreign currencytransactions was approximately $3,000 and $10,000 for the nine-month periodsended June 30, 2007 and 2006, respectively.

*Comprehensive (Loss)Income:* For the three and nine-month periods ended June 30, 2007 and 2006, the Company did not have any components of comprehensive (loss) income otherthan net (loss) income.

*Recent Accounting Pronouncements*

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

FIN 48 applies to alltax positions related to income taxes subject to FASB Statement No. 109,Accounting for Income Taxes, (FAS 109). This includes tax positions consideredto be “routine” as well as those with a high degree of uncertainty.

FIN 48 is effective forfiscal years beginning after December 15, 2006. Differences between the amountsrecognized in the statements of financial position prior to the adoption of FIN48 and the amounts recognized after adoption should be accounted for as acumulative-effect adjustment recorded to the beginning balance of retainedearnings. The cumulative effect adjustment would not apply to those items thatwould not have been recognized in earnings, such as the effect of adopting FIN48 on tax positions related to business combinations. The Company will adoptFIN 48 effective October 1, 2007.  The Company has not completed its evaluationof FIN 48. However, it does not expect the adoption will have a material impacton its financial statements.

NOTE 3      INVENTORIES

Inventoriesconsist primarily of finished goods and are stated at the lower of cost(determined by the first-in, first-out method) or market.  Provision has beenmade to reduce excess, obsolete, or otherwise un-saleable inventories to netrealizable value.

NOTE 4      DEBT

In February 2007,Forward and its wholly-owned U.S. subsidiary, Koszegi Industries, Inc. renewedtheir credit facility with a U.S. bank that provides for a committed line ofcredit in the maximum amount of $3 million, including a $1.5 million sub-limitfor letters of credit, expiring February 2008. Forward and Koszegi are requiredto eliminate borrowings for thirty consecutive days during the term of thefacility and are required to comply with certain financial covenants, includingthe maintenance of current and tangible net worth ratios, as defined. Amountsdrawn under the credit facility bear interest at LIBOR plus 2.5% and aresecured by substantially all of Koszegi’s assets and certain assets ofForward.  There were no borrowings or letter of credit obligations outstanding underthis facility during the three or nine-month period ended June 30, 2007. 

 

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**Forward Industries, Inc.**

 

 

 

NOTE 4      DEBT (CONTINUED)

In2003, Forward’s wholly-owned Swiss subsidiary, Forward Innovations GmbH(Forward Innovations), established a credit facility with a Swiss bank thatprovides for an uncommitted line of credit in the maximum amount of $400,000. Amounts borrowed under the facility may be structured as a term loan or loans,with a maximum repayment period of 12 months, as a letter of credit facility,or as a guarantee facility, or any combination of the foregoing.  Either partymay terminate the facility at any time; however, such termination would notaffect the stated maturity of any term loans outstanding.  Amounts borrowedother than as a term loan must be settled quarterly or converted into termloans.  In connection with this facility, Forward Innovations agreed to certaincovenants. Amounts drawn under this credit facility bear interest at variablerates established by the bank (5.5% as June 30, 2007).  At June 30, 2007, Forward Innovations is contingently liable to the bank in respect of aletter of credit issued on its behalf in the amount of €224,000 (approximately $300,000)in favor of Forward Innovations’ freight forwarder and customs agent inconnection with its logistics operations in The Netherlands. The effect of theissuance of the letter of credit is to reduce the availability of the creditline in an amount equal to the face amount of the letter of credit. 

                NOTE5      OPERATING SEGMENT INFORMATION

The Company operates in asingle segment that provides carrying solutions for portable electronicdevices. This carrying-solution segment designs, markets, and distributesproducts to its customers that include manufacturers of consumer hand heldwireless telecommunications and medical monitoring devices. The carryingsolution segment operates in geographic regions that include primarily the Americas, EMEA, and APAC regions. Geographic regions are defined based primarily on thelocation of the customer.  The following table presents net sales related tothese geographic segments:

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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | *(allamounts in thousands of dollars)* |
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|  
**Three Months Ended**

**June 30,**

** **

**Nine Months Ended**

**June 30,**

 

**2007**

** **

**2006**

** **

**2007**

** **

**2006**

APAC

$2,463

 

          $3,236

 

$8,578

 

$9,288

Americas

1,230

 

2,305

 

5,508

 

8,121

EMEA

708

 

1,764

 

3,626

 

5,023

**Total net sales**

**$4,401**

** **

**$7,305**

** **

**$17,712**

** **

**$22,432**

 

NOTE 6      INCOME TAXES

TheCompany’s income tax provision (benefit) consists of the following United States and foreign components:

 

 

**Three Months Ended**

**June 30,**

** **

**Nine Months Ended**

**June 30,**

U.S. Federal and State

**2007**

 

**2006**

 

**2007**

 

**2006**

    Current

($106,400)

 

$97,121

 

$(22,800)

 

$536,191

    Deferred

44,272

 

2,769

 

34,272

 

171,078

 

 

 

 

 

 

 

 

Foreign:

 

 

 

 

 

 

 

    Current

(9,129)

 

11,800

 

--

 

  (2,500)

    Deferred

(5,871)

 

--

 

(5,871)

 

--

**Income  tax (benefit) provision**

**($77,128)**

** **

**$111,690**

** **

**$5,601**

** **

**$704,769**

 

Forthe three and nine-month periods ended June 30, 2007, the Company recorded a (benefit) provision for income taxes of approximately $(77,000) and $6,000,respectively. The Company’s effective tax rate does not approximate thestatutory United States federal income tax rate primarily due to tax ratedifferentials in respect of United States state and foreign taxes.  

9

 

 

**Forward Industries, Inc.**

 

 

 

NOTE 6      INCOME TAXES(CONTINUED)

Effective June 2001,undistributed earnings of the Company’s Swiss subsidiary are considered to bepermanently invested; therefore, in accordance with SFAS No. 109, no provisionfor U.S. Federal and state income taxes on those earnings has been provided. At June 30, 2007, the Company’s Swiss subsidiary had approximately $4,964,000of accumulated undistributed earnings.  

NOTE 7      (LOSS) EARNINGSPER SHARE

Basicper share data for each period presented is computed using the weighted-averagenumber of shares of common stock outstanding during each period.  Diluted pershare data is computed using the weighted-average number of common and dilutivecommon-equivalent shares outstanding during the period. Dilutivecommon-equivalent shares consist of shares that would be issued upon theexercise of stock options, computed using the treasury stock method. For thispurpose, the average quoted market prices on the NASDAQ SmallCap Market for theCompany's common stock for the three-month periods ended June 30, 2007 and 2006 were $3.63 and $6.42, respectively. 

Loss per share for thethree-month period ended June 30, 2007 excludes all outstandingoptions as inclusion of such shares would be anti-dilutive. For the nine-monthperiod ended June 30, 2007 and the three and nine-month periods June 30, 2006options to purchase a total of 70,000, 30,000 and 30,000 shares of common stockwere outstanding, respectively, but were not included in the computation ofdiluted earnings per share because the exercise prices were greater than theaverage quoted market price of the Company’s common stock, and therefore, theireffect would be anti-dilutive as calculated under the treasury methodpromulgated by the Statement of Financial Accounting Standard No. 128, *Earningsper Share* (“SFAS 128”). 

In accordance with the contingently issuable sharesprovision of SFAS 128, 13,780 shares of service-based common stock awards (“restrictedstock”) granted in Fiscal 2007 were not included in the calculation of loss pershare for the three-month period ended June 30, 2007, but were included in thecalculation of earnings per share for the nine-month period ended June 30,2007.

NOTE 8      STOCK BASED COMPENSATION

In November 1996, theCompany’s Board of Directors adopted the 1996 Stock Incentive Plan, pursuant towhich up to 4,000,000 shares of common stock can be issued to officers,employees and non-employee directors of the Company upon the exercise ofincentive stock options and nonqualified stock options. This plan was approvedby shareholders in 1997.  The exercise price of the incentive options may notbe less than the fair market value of the common stock at the date the optionis granted. The Company’s Compensation Committee establishes the exercise priceof the nonqualified options. Options expire ten years after the date of grantand generally vest in equal proportions over three years. In November, 2006,the 1996 Stock Incentive Plan expired in accordance with the terms thereof.  

In February 2007, theCompany’s Board of Directors adopted the 2007 Equity Incentive Plan, pursuantto which up to 400,000 shares of common stock can be issued to officers,employees and non-employee directors of the Company upon the grant ofrestricted common stock and the exercise of stock options granted to suchpersons. This plan was approved by shareholders in May 2007.  The price atwhich restricted common stock may be granted and the exercise price of stock optionsgranted may not be less than the fair market value of the common stock at thedate of such grants. The Company’s Compensation Committee administers theplan..  Options generally expire ten years after the date of grant andgenerally vest in equal proportions over three years.   

10

 

**Forward Industries, Inc.**

 

 

 

 

NOTE 8      STOCK BASEDCOMPENSATION (CONTINUED)

*Adoption of new Accounting Guidance*

Effective October 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123R,*Share-BasedPayments*, and related interpretations, or SFAS No. 123R, which is arevision of SFAS No. 123, using the modified-prospective transition method forits share-based compensation plans. The Company previously accounted for itsshare-based compensation plans under the recognition and measurement provisionsof Accounting Principles Board Opinion No. 25,*Accounting for Stock Issuedto Employees*, and related interpretations, or APB No. 25, as permitted byFASB Statement No. 123,*Accounting for Stock-Based Compensation,*or SFASNo. 123. 

Under SFAS No. 123R, all share-based compensation costis measured at the grant date, based on the fair value of the award, and isrecognized as an expense in earnings over the requisite service period.Compensation cost for stock option awards granted under the Company’s 1996Stock Incentive Plan (expired in November 2006) is measured using theBlack-Scholes model. Compensation cost for restricted stock awards grantedunder the Company’s 2007 Equity Incentive Plan is measured at fair value on thedate of grant based on the number of shares expected to vest and the quotedmarket price of the Company’s common stock. Compensation cost for all awards isrecognized in earnings, net of estimated forfeitures, on a straight-line basiswith graded vesting over the requisite service period. 

Under the provisions of SFAS 123R, the Companyrecorded $48,000 of share-based compensation cost in its ConsolidatedStatements of Operations for the three and nine-month periods ended June 30,2007. 

*Stock Option Awards*

As of October 1, 2006, all stock option awards grantedunder the 1996 Plan were fully vested. The Company did not grant any stockoption awards during the nine-month period ended June 30, 2007, and accordingly, did not recognize any compensation cost for stock option awards during the nine-monthperiod ended June 30, 2007.

A summary of the activityunder our Stock Incentive Plans during the nine-month period ended June 30,2007, is presented below: 

 

**Shares**

** **

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

** **

** **

**Aggregate Intrinsic Value**

**Outstanding at September 30, 2006**

**248,750**

** **

**$4.15**
   
** **
   
** **

Granted

--

 

  --
   
 
   
 

Exercised

--

 

--
   
 
   
 

Forfeited

--

 

--
   
 
   
 

Expired

(3,750)

 

2.00
   
 
   
 

**Outstanding at June 30, 2007**

**245,000**

** **

**$4.18**
   
**3.30**
   
**$275,000**

 

 

 

 
   
 
   
 

Options vested  or expected to vest at June 30, 2007

 

245,000

 

$4.18
   
3.30
   
$**275,000**

Options  exercisable at June 30, 2007

245,000

 

$4.18
   
3.30
   
$**275,000**

 

The tablebelow illustrates the effect on net income and income per share during the threeand nine-month periods ended June 30, 2006 as if we had applied the fair valuerecognition provisions of SFAS No. 123R. 

11

 

 

**Forward Industries, Inc.**

 

 

 

 

NOTE 8      STOCK BASEDCOMPENSATION (CONTINUED)

 

** **

**Three-Months Ended**

**June 30, 2006**

** **

**Nine-Months Ended**

**June 30, 2006**

Net  income, as reported

 

$284,944

 

$1,122,949

Total share-based employee  compensation cost determined under SFAS No. 123R for all awards, net of tax

 

119,064

 

119,064

Pro  forma net income

 

165,880

 

1,003,885

 

 

 

 

 

Net  income per share:

 

 

 

 

Basic  – as reported

 

$0.04

 

$0.14

Basic  – pro forma

 

$0.02

 

$0.13

 

 

 

 

 

Diluted  – as reported

 

$0.04

 

$0.14

Diluted  – pro forma

 

$0.02

 

$0.13

 

Following are the weighted average assumptions usedfor each respective period: 

 

** **

** **

** **

**Three Months Ended June 30, 2006**

** **

** **

** **

**Nine Months Ended June 30, 2006**

	Expected term (in years)

 

5.0

 

5.0
               
Risk-free  interest rate

 

4.7%

 

4.7%

Expected  volatility

 

96.2%

 

96.2%

Expected  dividend yield

 

0%

 

0%

 

*Expected Term*: The expected term represents the period over which the stock option awards areexpected to be outstanding.

*Risk-Free Interest Rate*: The Company based the risk-free interest rate usedin its assumptions on the implied yield currently available on U.S. Treasuryzero-coupon issues with a remaining term equivalent to the award’s expectedterm.

*Expected Volatility*: The volatility factor used in the Company’s assumptions is based onthe historical price of its stock over the most recent period commensurate withthe expected term of the award.

*Expected Dividend Yield*: The Company historically has not paid any dividendson its common stock and had no intention to do so on the date the share-basedawards were granted. Accordingly, the Company used a dividend yield of zero inits assumptions.

The Company estimated theexpected term and expected volatility of share-based awards based uponhistorical data. There were no awards granted during the three or nine-monthperiod ended June 30, 2007. Forfeitures were recognized as they occurred. 

12

 

 

 

**Forward Industries, Inc.**

 

 

 

 

NOTE 8      STOCK BASEDCOMPENSATION (CONTINUED) 

*RestrictedStock Awards*

In May 2007 the CompensationCommittee granted awards of 33,000 shares of restricted stock, in theaggregate, to certain key employees, one of whom also serves as a director,pursuant to the 2007 Equity Incentive Plan.  Vesting of the restricted stock issubject to a continued service condition with one-third of the awards vestingimmediately on the date of grant and one-third vesting each year on theanniversary date the awards were granted.  The grant date fair value of theawards was approximately $115,000, or $3.49 per share. The fair value of theawards was equal to the market value of the Company’s common stock on the grantdate.

The following table summarizesrestricted stock activity from October 1, 2006 through June 30, 2007.

 

 

**Shares**

** **

**Weighted Average  Grant Date Fair Value**

Nonvested balance at October 1, 2007

 

--

 

--

Changes during the period

 

 

 

 

Shares granted

 

33,000

 

$3.49

Shares vested

 

(11,001)

 

$3.49

Shares forfeited

 

--

 

--

Nonvested balance at June 30, 2007

 

21,999

 

$3.49

 

As of June 30, 2007, there was $67,000 of total unrecognized compensation cost related to restricted stockawards granted under the 2007 Equity Incentive Plan. That cost is expected tobe recognized over 1.75 years.

NOTE 9      COMMITMENTS ANDCONTINGENCIES

*Royalty Commitments*

TheCompany has licensed the use of certain trademarks of Motorola, Inc. ("Motorola")for the distribution and sale of carry solution products throughout the EMEARegion under a non-exclusive license agreement effective October 1, 2004.  The license agreement expires by its terms on December 31, 2007.  Under the terms of the license agreement, the Company is required to pay Motorola a royaltybased upon a percentage of the Company's net sales to third parties of licensedproducts within the EMEA Region, subject to payment of minimum royalties(irrespective of actual net sales) to Motorola over the following threecontract periods: 

ContractPeriod 1:  October 1, 2004 to December 31, 2005 

ContractPeriod 2:  January 1, 2006 to December 31, 2006 

ContractPeriod 3:  January 1, 2007 to December 31, 2007 

The minimum royaltypayment to Motorola for Contract Period 1 was $375,000, or $300,000annualized.  The minimum royalty payment to Motorola for Contract Period 2was $225,000. At the time of negotiation of the agreement, the Company and Motorolahad agreed that, prior to the commencement of each contract period, they would agreeto establish a new minimum royalty amount, in the absence of which a defaultformula would apply.  The Company was unable to reach an agreement with Motorolaon the minimum royalty payment for Contract Period 3; consequently, the agreementof the parties is that the minimum royalty payment for Contract Period 3 maynot be less than seventy-five per cent (75%) of the annualized royaltiespayable in respect of actual sales for Contract Period 2, provided, however,that in no event shall the minimum royalty in Contract Period 3 be less thanseventy-five percent (75%) nor more than one-hundred-twenty-five percent (125%)of the amount of Contract Period 2’s annualized minimum royalty. 

13

 

 

 

**Forward Industries, Inc.**

 

 

 

 

 

NOTE 9      COMMITMENTS ANDCONTINGENCIES (CONTINUED)

Pursuant to thisformula, the minimum royalty has been fixed at the amount of $281,000 forContract Period 3. 

If the Company electsto terminate the license agreement before its expiration on December 31, 2007, it will be required to pay a penalty of an amount equal to up to oneyear's minimum royalty under certain conditions as specified in the agreement.The minimum royalty commitments are recognized as expense over the contractperiod.  

In July 2005, thelicense agreement with Motorola was amended to expand the licensed territory toinclude the APAC Region as well as the EMEA Region in consideration for paymentof additional royalties on sales in such licensed territory, subject to paymentof minimum royalties, separate and apart from royalties payable in respect ofsales in the EMEA Region.  

Under its currentlicense agreement with Motorola, the Company recorded royalty expense of approximately$62,000 and $315,000 for the three and nine-month periods ended June 30, 2007, respectively, and $154,000 and $394,000 for the three and nine-monthperiods ended June 30, 2006, respectively.  These amounts are included in sellingexpenses in the accompanying consolidated statements of operations.  Theseamounts represent royalties paid in respect of actual sales and in each case(except in case of the 2007 Quarter) represent an amount in excess (and inlieu) of the minimum royalties otherwise payable to Motorola in respect of thoseperiods. The minimum royalty for the three and nine-month periods ended June 30,2007 were $89,000 and $247,000, respectively, and $69,000 and $223,000 for the threeand nine-month periods ended June 30, 2006, respectively.

*Bank Guarantee*

In July 2002, Forward Innovations and its Europeanlogistics provider (freight forwarding and customs agent) entered into aRepresentation Agreement whereby, among other things, the European logisticsprovider agreed to act as such subsidiary's fiscal representative in TheNetherlands for the purpose of providing services in connection with any valueadded tax matters. As part of this agreement, the subsidiary agreed to providean undertaking to the logistics provider with respect to any value added taxliability arising in The Netherlands that the logistics provider paid on thesubsidiary's behalf. In February 2004, such subsidiary entered into a guaranteeagreement with a Swiss bank relating to the repayment of any amount up to €224,000(approximately $300,000 as of June 30, 2007) paid by such bank to the logisticsprovider pursuant to a letter of credit that was issued by the bank in favor ofthe logistics provider in order to satisfy such undertaking.  Thesubsidiary would be required to perform under the guarantee only in the eventthat: (i) a value added tax liability is imposed on the Company's sales in TheNetherlands, (ii) the logistics provider asserts that it has been called uponin its capacity as surety by the Dutch Receiver of Taxes to pay such taxes, (iii) the subsidiary or the Company on its behalf fails or refuses to remit theamount of value added tax due to the logistics provider, and (iv) the logisticsprovider makes a drawing under the letter of credit. Commencing December 31, 2004, and on each anniversary thereafter until December 31, 2009, it is intended that the bank letter of credit will be renewed automatically for one-yearperiods. The subsidiary has agreed to keep a letter of credit guarantee inplace for five years following the date its relationship terminates with thelogistics provider. As of June 30, 2007, the Company has not incurred aliability in connection with this guarantee.

 

NOTE 10    LEGAL PROCEEDINGS 

From time to time, theCompany may become a party to legal actions or proceedings in the ordinarycourse of its business.  As of June 30, 2007, except as described below, therewere no such actions or proceedings, either individually or in the aggregate,that, if decided adversely to the Company’s interests, the Company believeswould be material to its business.

14

 

 

**Forward Industries, Inc.**

 

 

 

 

NOTE 10    LEGAL PROCEEDINGS(CONTINUED) 

On October 3, 2006, theCompany was served with a summons and purported class action complaint that wasfiled July 31, 2006, in a matter captioned Lynn Finkelstein & Company,Inc., on behalf of certain of its clients as attorney-in-fact and all otherssimilarly situated, Plaintiff, vs. Forward Industries, Inc. and certain of itsexecutive officers, in their individual capacities, Defendants, brought in the UnitedStates District Court for the Southern District of Florida.  The complaintalleges that the Company during the purported class period July 25, 2005, to February 2, 2006, made certain misrepresentations of fact, or failed to disclosecertain material facts, and violated certain generally accepted accountingprinciples in the presentation of its financial statements included in itsperiodic reports filed with the Commission pursuant to the Exchange Act.

On November 15, 2006, the Plaintiffs filed a First Amended Complaint and on May 29, 2007, by leave of the Court filed a second amended complaint that purports to state substantiallyidentical claims. The Company filed motions to dismiss these complaints in theirentirety for failure to satisfy the pleading requirements of the PrivateSecurities Litigation Reform Act of 1995. The motion is currently beingbriefed.

The Company, as well as eachof the individual defendants, believes that the complaint, as amended, iswholly without merit and intends to vigorously contest this lawsuit.  TheCompany has directors and officers’ liability insurance, including entitycoverage. The Company has, in the course of defending the complaint, incurredlegal and other expenses up to the retention amount of $250,000, in itsdirectors and officers liability insurance policy. Such expense, and incurring additionalexpenses not covered by this policy may adversely affect its reported resultsof operations in future periods.  While the Company believes that the complaint,as amended, is without merit and the Plaintiff has yet to assert an amount ofdamages claimed, the outcome of this lawsuit cannot be predicted and theCompany's ultimate liability if this lawsuit is adversely determined cannotcurrently be ascertained and could be material.

 

 

 

 15

 

 

 

**Forward Industries, Inc.**

 

 

**Item 2. Management’s Discussion and Analysis of Financial Conditionand Results of Operations**

*Thefollowing discussion and analysis**shouldbe read in conjunction with our unaudited Consolidated Financial Statements andthe notes thereto and other financial information appearing elsewhere in thisQuarterly Report on Form 10-Q and in our Annual Report on Form 10-KSB for thefiscal year ended September 30, 2006. The following discussion and analysis****comparesour consolidated results of operations for the three months ended June 30, 2007(the “2007 Quarter”), with the three months ended June 30, 2006 (the “2006Quarter”), and the nine months ended June 30, 2007 (the “2007 Period”), withthe nine months ended June 30, 2006 (the “2006 Period”), and is based on orderived from the Unaudited Consolidated Financial Statements included elsewherein this Quarterly Report. There have been no material changes in criticalaccounting estimates since September 30, 2006.  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

Thisquarterly report contains forward-looking statements that are not based onhistorical fact and that involve assessments of certain risks, developments,and uncertainties.  Such forward looking statements, within the meaning of thePrivate Securities Litigation Reform Act of 1995, can be identified by the useof forward-looking terminology such as “may”, “will”, “should”, “expect”,“anticipate”, estimate”, “intend”,  “continue”, or “believe”, or the negativesor other variations of these terms or comparable terminology.  Forward lookingstatements may include projections, forecasts, or estimates of futureperformance.  Forward looking statements are based upon assumptions that webelieve to be reasonable at the time such forward looking statements are made. Whether those assumptions will be realized will be determined by futurefactors, developments, and events, which are difficult to predict and may bebeyond our control.  Actual factors, developments, and events may differmaterially from those assumed.  Such risk factors, uncertainties,contingencies, and developments, including those discussed in this Management’sDiscussion and Analysis of Financial Condition and Results of Operations andthose identified in “Risk Factors” in Item 1A of Part II of this QuarterlyReport on Form 10-Q and in our annual report on Form 10-KSB for the fiscal yearended September 30, 2006, could cause our future operating results to differmaterially from those set forth in any forward looking statement.  Such factorsinclude, among other, the following: our success in winning new business fromour customers and against competing vendors; whether replacement programs thatwe win will be as successful as those that are replaced; levels of demand andpricing generally for cellular handsets and blood glucose monitoring devices soldby our customers for which we supply carry solutions; variability in order flowfrom our OEM customers; general economic and business conditions, nationallyand internationally in the countries in which we do business; the expiration ofour license agreement with Motorola by its terms on December 31, 2007, and theuncertainty as to whether such agreement will be renewed or extended on termsacceptable to us; the need to add materially to our inventory allowance,including the impact on inventory levels or saleability of inventory arisingout of hub agreements we have entered into with two of our OEM customers; demographicchanges; changes in technology, including developments affecting cellularhandsets; developments in the treatment or control of diabetes that affect theincidence of use of handheld blood glucose monitors by diabetics; increasedcompetition in the business of distribution of carry solutions for handheldelectronic devices generally or increased competition to include carrysolutions with products manufactured by our EOM customers in particular;changes affecting the business or business prospects of one or more of ourprincipal Original Equipment Manufacturer (“OEM”) customers; governmentalregulations and changes in, or the failure to comply with, governmentalregulations; and other factors included elsewhere in this report and our otherreports filed with the Commission, including without limitation, thosedescribed under the caption Risk Factors contained in our Annual Report on Form10-KSB for the year ended September 30, 2006.  Accordingly, there can be noassurance that any such forward looking statement, projection, forecast orestimate can be realized or that actual returns or results will not differmaterially from those set forth in any forward looking statement.

Giventhese uncertainties, 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.

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**Forward Industries, Inc.**

 

 

CRITICALACCOUNTING POLICIES AND ESTIMATES

This management’s discussion and analysis of financialcondition and results of operations is based upon our unaudited consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent liabilities. We base these estimates on our historicalexperience and on various other assumptions that we believe to be reasonableunder the circumstances, and these estimates form the basis for our judgmentsconcerning the carrying values of assets and liabilities that are not readilyapparent from other sources. We periodically evaluate these estimates andjudgments based on available information and experience. Actual results coulddiffer from our estimates under different assumptions and conditions. If actualresults significantly differ from our estimates, our financial condition and resultsof operations could be materially impacted. Please refer to “Management’sDiscussion and Analysis—Critical Accounting Policies and Estimates” included inour Annual Report on Form 10-KSB for the fiscal year ended September 30, 2006,for further information regarding our critical accounting policies andestimates. 

The notes to our audited consolidated financialstatements and “Management’s Discussion and Analysis” included in our AnnualReport on Form 10-KSB for the year ended September 30, 2006 (including theinformation under “Risk Factors” therein), the notes to our consolidatedfinancial statements included in Part I, Item 1 of this Quarterly Report onForm 10-Q, the factors and events described elsewhere in the “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” thatfollows below, as well as the information contained under the caption “RiskFactors” in Item 1A of Part II of this Quarterly Report on Form 10-Q  containadditional information related to our accounting policies and should be read inconjunction with the following discussion and analysis relating to our overallfinancial performance, operations and financial position. 

*Revenue Recognition*

In accordance with therequirements of Staff Accounting Bulletin (SAB) No. 104, *Revenue Recognitionin Financial Statements*, the Company recognizes revenue from product salesto customers when: products that do not require further services by the Companyare shipped; there are no uncertainties surrounding customer acceptance; andcollectibility is reasonably assured.

*AccountsReceivable*

We recordan allowance for doubtful accounts for all receivables judged by us to beunlikely to be collected. The effect of the allowance is to reduce the accountsreceivable reported on our balance sheet to an amount that we believe willactually be collected.  Significant management judgments and estimates must bemade and used in connection with establishing this valuation account, based ona combination of factors:  Specifically, we analyze the age of receivablebalances, our historical bad debts write-off experience, and our respectivecustomer’s creditworthiness to determine the appropriate allowance for doubtfulaccounts. At June 30, 2007 and September 30, 2006, our allowance for doubtfulaccounts was approximately $47,000.  Changes to this account are reflectedin the general and administrative expense line of our statement 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.

*InventoryValuation*

Weuse certain estimates and judgments to value our inventory. Our inventory isrecorded at the lower of cost or market. The majority of our inventory consistsof finished goods that are custom made by our suppliers based on firm ordersfrom our OEM customers and held for our account.  We also supply custommanufactured inventory to our customers’ distribution hubs in anticipation oftheir draw-downs to fulfill orders; we also periodically stock inventory inanticipation of orders from our OEM customers when it appears to uscommercially advantageous to do so. We also hold inventory in support of ourlicense agreements. At the end of each fiscal quarter, we evaluate our endinginventories, and we establish an allowance for inventory that is consideredobsolete, slow moving or otherwise un-saleable.  This evaluation includes amongother factors analyses of inventory levels, historical loss trends, saleshistory, and projections of future sales demand.  We physically dispose ofinventory once its marketability has been determined to be zero.  Inventory allowanceswere approximately $0.3 million and $0.2 million at June 30, 2007 and September 30, 2006, respectively.  The cost of obsolete inventory is included incost of goods sold on our statement of operations.

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**Forward Industries, Inc.**

 

 

 

The vastmajority of our production is made to customer specifications.  If a customerelects not to accept delivery, or defaults on a purchase order or commitment, orreturns inventory from a hub without payment in accordance with the hubarrangements, additional inventory write-downs or reserves may be required andwould be reflected in cost of goods sold in the period the revision is made.Historically, actual inventory valuation results have not deviatedsignificantly from those previously estimated by us.

*DeferredIncome Taxes*

In thepreparation of our consolidated financial statements, we are required toestimate income taxes in each of the jurisdictions in which we are subject totaxation. This process involves estimating actual current income tax expensetogether with assessing temporary differences resulting from differingtreatment of revenue and expense items for tax and accounting purposes. Thesedifferences result in deferred tax assets and liabilities, which are includedin our consolidated balance sheet. We had approximately $55,000 and $83,000 ofdeferred tax assets at June 30, 2007, and September 30, 2006, respectively. No valuation allowances were recorded in respect of these deferred tax assetsas of such dates.

Management evaluates ourdeferred tax assets on a quarterly basis and assesses the need for valuationallowances. Our deferred tax assets are evaluated by considering historicallevels of income, estimates of future taxable income, and the impact of our taxplanning strategies. We record a valuation allowance to reduce deferred taxassets when it is determined, on a more likely than not basis, that we will notbe able to use all or part of our deferred tax assets. 

In the event that itshould be subsequently determined that we can not, on a more likely than notbasis, realize all or part of our deferred tax assets, if any, in the future,an adjustment to establish (or record an increase in) the deferred tax assetvaluation allowance would be charged to income in the period in which suchdetermination is made. Changes in our deferred tax assets are reflected in thetax expense (benefit) line of our consolidated statements of operations. 

VARIABILITY OF REVENUES AND RESULTS OF OPERATION

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

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

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**Forward Industries, Inc.**

 

 

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

TRENDS IN RESULTS OF OPERATIONS
-  *Revenue from Motorola, historicallyour largest customer, has trended down on a comparable quarter basis since thesecond quarter of Fiscal 2006, and the downtrend accelerated in the 2007Quarter.  We anticipate that this downtrend will continue through the end of Fiscal2007 as well.*  We believe as part of theeconomics accompanying our customer’s cell phone launch cycle, in which certainvery successful models (for which we have supplied accessories in-box), afteran extended time on the market, make a pricing transition to mid- andlower-tier phones,  that Motorola has reduced and/or in some caseseliminated the inclusion of accessories in-box, with consequent revenue lossfor us. Currently, we foresee no imminent new in-box programs or developmentsto reverse this trend before the end of Fiscal 2007.  We believe that salesunder our license agreement with Motorola are being, and will continue to be,similarly affected as consumers may be less inclined to purchase relatively highcost cases and other accessories for mature, lower-tier phones. * *Absenta reversal of this trend, which we do not foresee before the end of Fiscal2007, and absent a material increase in sales revenues from other productmarkets, we will incur an operating loss, and possibly a net loss, in respectof the fourth fiscal quarter of 2007. 
-  *We anticipate that gross profitand gross profit percentage will be impacted by several factors.* First, reduction in volume demand in the second andthird quarters of Fiscal 2007 has become and for the foreseeable future will likelybe the most significant factor in the level of gross profit. Second, we anticipatethat our gross profit will continue to be pressured by a difficult pricingenvironment for both our cell phone carry solution product line (OEM andlicensed sales) and also our blood glucose carry case product line. Third, marginson certain higher volume blood glucose monitoring programs are already narrow andif revenue from these programs account for an overall higher percentage of ourrevenue mix, we believe our gross profit percentage may deteriorate further. 
-  *Our customer base is becoming moreconcentrated.* In the 2007 Period,three customers, including their subsidiaries, affiliates, or their contractmanufacturers, accounted for 74% of our net sales.  In the 2006 Period, foursuch customers accounted for approximately 71% of our net sales.  Sales to thefourth customer, Bayer Healthcare LLC (“Bayer”), declined to an immaterialamount during the 2007 Period as our sole “in-box” program with themconcluded.  In Fiscal 2006, combined sales to Bayer and Nokia representedapproximately $3.3 million or 11% of our net sales, compared to $0.1 millionand less than 1% in the 2007 Period. Although we continue to pursue additionalopportunities with these two customers (as well as other OEM suppliers ofhandheld devices), as of June 30, 2007, we have not been selected toparticipate in any new “in-box” programs or successors to those thatconcluded.  
-  *In the 2007 Quarter we recordeda pre- tax net loss that would have been significantly larger but for thesubstantial level of “other income”, which consists primarily of interestincome on cash balances.*  We anticipate that these conditions will likely persistthrough the remainder of Fiscal 2007 absent any significant reductions in selling,general, and administrative expense or improvements to our gross profit. 
-  *Our inventory remains athistorically high levels primarily as a result of supporting hub agreementsentered into with two of our largest OEM customers.  We expect inventory toremain at this higher level or perhaps trend slightly higher through Fiscal2007, in large part because of the entry into three additional hub agreementswith these customers.*  Under theseagreements, we are required to source and ship our products to our OEM customers’ distribution hubs at multiple locations, but do not invoice the OEM customers until they withdraw our product from the hub for sale through their chain ofdistribution. The implementation of these arrangements negatively affects ourliquidity. In the 2007 Quarter, we entered into three new hub arrangements,bringing the total to six hub agreements.  

 

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**Forward Industries, Inc.**

 

 

RESULTS OF OPERATIONS FOR THE 2007 QUARTER COMPARED TO THE 2006QUARTER

*Net (loss)income*

We incurred a netloss of $0.3 million in the 2007 Quarter compared to net income of $0.3 millionin the 2006 Quarter. The decrease in our results of operations was due to lowergross profit resulting from decreases in sales across all three of our productlines, but predominantly from lower sales of cell phone products, as detailedbelow, while operating expenses were essentially flat.  The deterioration inoperating results was offset in small part by a $0.2 million swing in incometaxes to a $0.1 million tax benefit in the 2007 Quarter from $0.1 million inincome tax expense in the 2006 Quarter, and an increase in other income due to higher interest income resultingfrom higher average cash balances and higher yields on those cash balances. Basicand diluted net loss per share for the 2007 Quarter was $0.04 compared to basicand diluted net income per share of $0.04 in the 2006 Quarter. 

*NetSales*

Net sales decreased $2.9 million or 40% to $4.4 millionin the 2007 Quarter compared to $7.3 million in the 2006 Quarter due to declinesof $2.2 million in sales of cell phone products, $0.5 million in sales of casesfor diabetic products, and $0.2 million in sales of other products.   Net salesof cell phone products declined primarily as a result of lower OEM demand from Motorola,our only OEM cell phone customer during the 2007 Quarter, as well as lowersales volumes of licensed products to retailers and distributors under ourlicense agreement with Motorola.  The tables below set forth sales by productline and geographic location of our customers for the periods indicated.

 

 

**Net Sales for 2007 Quarter**

**3 Months ended June 30, 2007**

**(millions of dollars)**

** **

**Americas**

**EMEA**

**APAC**

**Total**

Cell Phone Products

$0.2

$0.4

$0.5

$1.1

Diabetic Products

0.3

0.2

1.9

2.4

Other Products

0.7

0.1

0.1

0.9

**Total***

**$1.2**

**$0.7**

**$2.5**

**$4.4**

                                

**Net Sales for 2006 Quarter**

**3 Months ended June 30, 2006**

**(millions of dollars)**

** **

**Americas**

**EMEA**

**APAC**

**Total**

Cell Phone Products

$0.6

$1.4

$1.3

$3.3

Diabetic Products

1.0

0.4

1.5

2.9

Other Products

0.7

0.0

0.4

1.1

**Total***

**$2.3**

**$1.8**

**$3.2**

**$7.3**

* Tables maynot total due to rounding.

*Cell Phone Product Sales*

Our cell phone carrysolutions products include carrying cases for handsets and camera attachments,plastic belt clips, carrying case straps and bags, screen cleaners, decorativefaceplates, and other attachments used to carry or enhance the appearance ofcellular telephone handsets.  

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**Forward Industries, Inc.**

 

 

We design to the orderof and sell these products directly to cell phone handset original equipmentmanufacturers.  Our cases are packaged as an accessory "in-box"with the handsets that are sold by our OEM customers.  In addition, under ourlicense agreements with Motorola and SAGEM, we distribute our products as separatelypackaged accessories directly to third party wholesalers and retailers in the EMEARegion and, under the Motorola license, the APAC Region. Cell phone productsales consist of OEM “in-box” sales to Motorola, our only OEM cell phonecustomer for the 2007 Quarter, sales to Motorola in the licensed region, and salesunder our license agreement to third parties. 

Total sales of cellphone products decreased $2.2 million, or 66%, to $1.1 million in the 2007Quarter from $3.3 million in the 2006 Quarter. The reduction in OEM sales to Motorolaaccounted for $1.4 million of this decline due to reduced demand.

Sales to third partiesunder our license agreement with Motorola totaled approximately $0.3 million inthe 2007 Quarter compared to $1.0 million in the 2006 Quarter, a decrease of $0.7million, or 70%.  The significant decline is due to a number of factors,including reduced demand from distributors and retailers for certain cell phonemodels and consequently our carrying cases and other products that are customdesigned to accessorize those models under license.  We believe that salesunder our license agreement with Motorola are being, and will continue to be, adverselyaffected as consumers may be less inclined to purchase relatively high costcases and other accessories for mature, lower-tier phones accessorized by ourproducts. * * We believe that the decline may also be attributable to thelicensor’s direct sales in the EMEA Region to one or more distributors.  

Sales of carrysolutions for cell phone products represented approximately 26% of our totalnet sales in the 2007 Quarter compared to 45% for in 2006 Quarter.

The Motorola licenseagreement expires on December 31, 2007.  See "Part II. Item 1A. RiskFactors” of this Quarterly Report on Form 10-Q: “*Our license agreement withMotorola expires on December 31, 2007, and the failure to extend or renew thisagreement would have a material, adverse effect on our results of operationsand financial condition”*.

*Diabetic Product Sales*

We design to the orderof and sell directly to OEMs carrying cases used by diabetics to carry theirpersonal electronic, blood glucose monitoring kits. In the 2007 Quarter, OEMcustomers for these carrying cases included Lifescan (including itssubsidiaries, affiliates and contract manufacturers), Abbott Labs, Bayer, andRoche Diagnostics. Our carrying cases are packaged as an accessory "in-box"with the monitoring kits that are sold by our OEM customers.

Sales of cases for bloodglucose monitoring kits decreased approximately $0.5 million, or 16%, to $2.4million in the 2007 Quarter from $2.9 million in the 2006 Quarter. Thisdecrease was due to a decline in sales to Bayer from $0.6 million in the 2006Quarter to an immaterial amount in the 2007 Quarter and a decline of $0.4million in sales to Abbot Labs from $0.8 million in the 2006 Quarter to $0.4million in the 2007 Quarter. The decreases in sales to these two customers wereoffset, in part, by sales to Lifescan, our largest OEM customer for these cases,which increased $0.5 million, or 38%, to $1.8 million in the 2007 Quarter comparedto $1.3 million in the 2006. 

Sales of carrying casesfor blood glucose monitoring kits represented 55% of our total net sales in the2007 Quarter compared to 39% of our total net sales in the 2006 Quarter.

*OtherProduct Sales*

We design and sell anumber of other carrying solutions for items such as cameras, portable oxygentanks, bar code scanners, MP3 players, and other carrying solutions for anassortment of products on a made-to-order basis that are customized to meet theindividual needs of our smaller OEM customers.  By the nature of ourdistribution in this market, sales of these customized products to order intheir product category vary from period to period without necessarilyreflecting a significant trend in overall demand for these items. Sales ofother products decreased $0.2 million, or 23%, to $0.9 million in the 2007Quarter from $1.1 million in the 2006 Quarter due primarily to the winding downof a program with one customer.

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**Forward Industries, Inc.**

 

 

 

*GrossProfit*

Grossprofit decreased $0.8 million, or 46%, to $0.9 million in the 2007 Quarter from$1.7 million in the 2006 Quarter as a result of lower sales revenues dueprimarily to lower volume demand.  To a lesser extent, gross profit wasadversely affected by a difficult pricing environment in which pressure onproduct sales margins, particularly in the case of certain higher volume bloodglucose monitoring diabetic in-box programs that have narrow margins, accountedfor an overall higher percentage of our product mix given the decline in cellphone product revenues. Our gross profit percentage was approximately 21% forthe 2007 Quarter compared to 24% for the 2006 Quarter.

*Selling,General, and Administrative Expenses*

Selling, general, andadministrative expenses decreased 2% to $1.5 million in the 2007 Quarter comparedto $1.6 million in the 2006 Quarter. The decrease was primarily due to lowerroyalty and commission expense of $0.1 million (due to lower sales of licensedproducts), and to a lesser extent, several other smaller components of selling,general, and administrative expenses. These decreases were offset, in part, by anincrease in both selling and administrative personnel costs aggregating $0.1million due to changes in personnel and remuneration increases. 

*Other Income(Expense)*

Other income increased$30,000 to $250,000 in the 2007 Quarter from $220,000 in the 2006 Quarter dueto higher interest income resulting from higher average rates on higher averagecash balances.   The second component of “other income (expense)” consists ofgain (loss) from foreign currency transactions, as to which we incurred a smallloss in each of the 2007 Quarter and 2006 Quarter.

*Pretax (Loss)Income*

Pretax loss increased$0.8 million, to $0.4 million in the 2007 Quarter from pretax income of $0.4million in the 2006 Quarter as a result of the changes as described above.

*IncomeTaxes*

We recorded a benefitfrom income taxes of $77,000 in the 2007 Quarter compared to a provision forincome taxes of $0.1 million in the 2006 Quarter due to the change in pretax(loss) income.  Our effective tax rate does not approximate the United States statutory federal income tax rate primarily due to tax rate differentials inrespect of state and foreign taxes, to which income recorded by ForwardInnovations is subject. The (benefit) provision consists primarily of estimated  U.S. federal income taxes, and to a lesser extent, current state and foreignincome taxes.  See Note 6 to the Financial Statements. 

We considerthe earnings of our foreign subsidiaries indefinitely invested and,accordingly, have not recorded a provision for U.S. income taxes on theirun-repatriated earnings.  At June 30, 2007, those cumulative earnings wereapproximately $5.0 million.  

RESULTS OF OPERATIONS FOR THE 2007 PERIOD COMPARED TO THE 2006 PERIOD

*Net income*

Net income in the2007 Period was $55,000 compared to net income of $1.1 million in the 2006Period, a decrease of $1.1 million, or 95%.  The decrease was primarily due to a$1.6 million, or 28%, reduction in gross profit, due primarily to a $4.4million decline in sales of cell phone carry solution products. In addition tothe decline in gross profit, net income was adversely affected by an increasein selling, general and administrative expenses of $0.4 million, or 8%,primarily due to higher professional fees and personnel costs.  These negativefactors were offset in small part by a decrease in our provision for incometaxes of $0.7 million and by an increase in other income of $0.2 million. Basicand diluted earnings per share were $0.01 for the 2007 Period, compared to $0.14for the 2006 Period. The decrease in earnings per share in the 2007 Period wasdue to the decrease in net income.

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**Forward Industries, Inc.**

 

 

 

*NetSales*

Net sales decreased $4.7 million, or 21%, to $17.7million in the 2007 Period compared to $22.4 million in the 2006 Period due todeclines of $4.4 million in sales of cell phone products, and $0.5 million insales of other products. These declines were offset in small part by a $0.2 millionincrease in sales of cases for diabetic products. Net sales of cell phone carrysolution products were lower due to a $2.9 million decline in demand from oursole OEM cell phone customer, Motorola, during the 2007 Period combined withthe absence of any meaningful contribution by Nokia in the 2007 Period,compared to a contribution to revenues by Nokia of $1.0 million in the 2006Period.  The tables below set forth approximate sales by product line andgeographic location of our customers for the periods indicated.

 

 

**Net Sales for 2007 Period**

**9 Months ended June 30, 2007**

**(millions of dollars)**

** **

**Americas**

**EMEA**

**APAC**

**Total**

Cell Phone Products

$1.7

$2.5

$3.0

$7.2

Diabetic Products

1.8

1.0

5.3

8.1

Other Products

2.0

0.1

0.3

2.4

**Total***

**$5.5**

**$3.6**

**$8.6**

**$17.7**

                                

**Net Sales for 2006 Period**

**9 Months ended June 30, 2006**

**(millions of dollars)**

** **

**Americas**

**EMEA**

**APAC**

**Total**

Cell Phone Products

$2.8

$3.9

$4.9

$11.7

Diabetic Products

3.3

1.1

3.5

7.9

Other Products

2.0

0.0

0.9

2.9

**Total***

**$8.1**

**$5.0**

**$9.3**

**$22.4**

* Tables maynot total due to rounding.

*Cell Phone Product Sales*

Total sales of cellphone products decreased $4.5 million, or 38%, to $7.2 million in the 2007Period from $11.7 million in the 2006 Period. Sales to Motorola, our only OEMcell phone customer for the 2007 Period, decreased $2.9 million from the 2006Period due to an overall reduction in demand for our products. 

Sales to third partydistributors and retailers under our license agreement with Motorola totaled $1.7million in the 2007 Period compared to $2.3 million in the 2006 Period, a decreaseof $0.6 million, or 25%.  As noted above in the discussion of the 2007 Quarter,licensed sales weakened during the 2007 Period as demand for the handsets forwhich we distribute cases and other carry solutions under license declined,with a corresponding effect on revenues from sales of licensed products.  Webelieve that sales under our license agreement with Motorola are being, andwill continue to be, adversely affected as consumers may be less inclined topurchase relatively high cost cases and other accessories for mature,lower-tier phones accessorized by our products. * * We believe that thedecline may also be attributable to the licensor’s direct sales in the EMEARegion to one or more distributors

Sales of carrysolutions for cell phone products represented approximately 41% of our totalnet sales in the 2007 Period compared to 52% in 2006 Period.

23

 

 

 

**Forward Industries, Inc.**

 

 

See the discussion ofthe 2007 Quarter Compared to the 2006 Quarter for information relating to thescheduled expiration of the license agreement with Motorola. 

*Diabetic Product Sales*

Sales of cases for bloodglucose monitoring kits increased $0.2 million, or 2%, to $8.1 million in the2007 Period from $7.9 million in the 2006 Period. Sales to Lifescan, ourlargest OEM customer for these cases, were $1.9 million, or 56%, higher in the2007 Period compared to the 2006 Period resulting from the contribution torevenues of a new in-box program and increased sales from an in-box program thathas continued from Fiscal 2006. The higher sales to Lifescan were offset, in largepart, by a decline in sales to Bayer of approximately $1.7 million due to thewinding down of a significant program with this customer by the beginning ofthe 2007 Period. Fluctuations in diabetic product sales to other customers wereimmaterial.

Sales of carrying casesfor blood glucose monitoring kits represented 46% of our total net sales in the2007 Period compared to 35% of our total net sales in the 2006 Period.

*Other Product Sales*

Sales of other productsdecreased approximately $0.5 million, or 18%, to $2.4 million in the 2007Period from $2.9 million in the 2006 Period due primarily to the winding downof a program with one customer in this product line by the beginning of the2007 Period.

*GrossProfit*

Grossprofit decreased $1.6 million, or 28%, to $4.2 million in the 2007 Period from$5.8 million in the 2006 Period dueprimarily to lower volume demand.  To a lesser extent, gross profit wasadversely affected by a difficult pricing environment in which pressure onproduct sales margins, particularly in the case of certain higher volume bloodglucose monitoring diabetic in-box programs that have narrow margins, accountedfor an overall higher percentage of our product mix given the decline in cellphone product revenues.

Grossprofit as a percentage of net sales decreased to 24% in the 2007 Period from 26%in the 2006 Period due to the factors discussed above, which were offset inpart by declines in the 2007 Period of freight, duties, and customs and HongKong costs as percentages of sales.

*Selling,General, and Administrative Expenses*

Selling, general, andadministrative expenses increased $0.4 million to $4.9 million in the 2007Period from $4.5 million in the 2006 Period. This increase was due to $0.2million in increased personnel expenses, due to changes in personnel andremuneration, $0.2 million of increased legal and other professional feesincurred in the course of defending the purported class action litigationagainst the Company, offset in small part by a decline in royalty expense dueto lower sales of licensed products.

*Other Income(Expense)*

Other income increased 34%to $0.7 million in the 2007 Period compared to $0.6 million in the 2006 Perioddue to higher interest income due to higher average rates on higher averagecash balances. Other income accounted for all of our pre-tax income in the 2007Period compared to 30% of pre-tax income in the 2006 Period.  

*Pre-taxIncome*

Pre-tax income decreased$1.8 million or 97% to $61,000 in the 2007 Period from $1.8 million in the 2006Period as a result of the changes as described above.

 

24

 

 

 

**Forward Industries, Inc.**

 

 

*IncomeTaxes*

Our effective incometax rate was 9% in the 2007 Period compared to 39% in 2006 Period as a resultof the relative contribution of taxable income from the EMEA Region, which istaxed at a lower rate than United States taxable income, which was significantlylower in the 2007 Period compared to the 2006 Period.  This had adisproportionate impact on an overall smaller taxable income base.  Oureffective tax rate does not approximate the United States statutory federalincome tax rate primarily due to tax rate differentials in respect of state andforeign taxes, to which income recorded by Forward Innovations is subject. Provision for income taxes decreased $0.7 million in the 2007 Period toapproximately $6,000 compared to $0.7 million in the 2006 Period due to lowertaxable income.  The provision consists primarily of estimated U.S. federal income taxes, and to a lesser extent, current state and foreign income taxes. See Note 6 to the Financial Statements.

We considerthe earnings of our foreign subsidiaries indefinitely invested and,accordingly, have not recorded a provision for U.S. income taxes on theirun-repatriated earnings.  At June 30, 2007, those cumulative earnings wereapproximately $5.0 million.

LIQUIDITY AND CAPITAL RESOURCES

During the 2007 Period,we generated $2.3 million of cash from operations compared to $1.9 million inthe 2006 Period. Our operating cash flows in the 2007 Period consisted of netincome of $55,000, increased by $0.4 million for non-cash items, and $2.1million for net changes in working capital items, consisting primarily of changesin accounts receivable and inventories of $2.8 million and $0.5 million,respectively, offset, in part, by changes in accounts payable, accrued expensesand other current liabilities and prepaid expenses of $0.3 million, $0.4million and $0.5 million, respectively. The changes in accounts receivable, inventory,and accounts payable in the 2007 Period are attributable to the lower levels ofsales and related purchases in the 2007 Period. The change in accrued expensesis primarily a result of remuneration and taxes that were accrued in Fiscal2006 that were subsequently paid in the 2007 Period. No such accruals wererequired as of June 30, 2007. The change in prepaid expenses and other currentassets is primarily due to an increase in estimated tax payments made for the2007 Fiscal year and customs and duties payments made in the course of shippingour products for which we expect to be reimbursed.

Our operating cash flowsin the 2006 Period consisted of net income of $1.1 million, increased by $1.0million for non-cash items. These cash flows were decreased by net changes inworking capital items of $0.2 million, consisting primarily of a change inaccounts receivable of $6.9 million, which was offset, in part, by changes ininventories and accounts payable, and accrued expenses of $2.3 million, $3.0million, and $1.5 million, respectively.

Investing activities used$52,000 in the 2007 Period for purchases of property, plant and equipment,primarily computer and telecommunications hardware and software. In the 2006 Period,net investing activities generated $75,000 from the sale of marketable securitiesand used $19,000 for purchases of property, plant and equipment, primarilycomputer and telecommunications hardware and software. 

Financing activities used$0.2 million to purchase 60,000 of the Company’s stock during the 2007 Period.In the 2006 Period, net financing activities generated $0.1 million in cash fromthe issuance of common stock upon the exercise of stock options to purchase approximately27,900 shares of common stock under our 1996 Stock Incentive Plan.

At June 30, 2007, our current ratio (current assets divided by current liabilities) was 12.5; our quickratio (current assets less inventories divided by current liabilities) was 11.7;and our working capital (current assets less current liabilities) was $24.6million.  As of such date, we had no short or long-term debt outstanding. 

Our primary sources ofliquidity are cash on hand, our operating cash flow, and our bank creditfacilities. The primary demands on our working capital are: our accountspayable arising in the ordinary course of business, the most significant ofwhich arise when our customers place orders and we order from our suppliers;and our commitments under our license agreement with Motorola. Historically,our sources of liquidity have been adequate to satisfy working capitalrequirements arising in the ordinary course of business. We anticipate that ourliquidity and financial resources for the ensuing fiscal year will be adequateto manage our financial requirements.

25

 

 

 

**Forward Industries, Inc.**

 

 

In February 2007,Forward and Koszegi renewed their credit facility with a U.S. bank thatprovides for a committed line of credit in the maximum amount of $3.0 million,including a $1.5 million sub-limit for letters of credit, expiring February2008. Forward and Koszegi are required to eliminate borrowings for thirtyconsecutive days during the term of the facility and are required to maintaincertain financial covenants including the  maintenance of current and tangiblenet worth ratios, as defined. Amounts drawn under the credit facility bearinterest at LIBOR plus 2.5% and are secured by substantially all of Koszegi’sassets and certain assets of Forward Industries.  At June 30, 2007, there were no outstanding borrowings or letter of credit obligations under thisfacility.   See Note 4 to the unaudited consolidated Financial Statements setforth in Item 1.

In February 2003,Forward Innovations established a credit facility with a Swiss bank thatprovides for an uncommitted line of credit in the maximum amount of $400,000. Amounts borrowed under the facility may be structured as a term loan or loans,with a maximum repayment period of 12 months, or as a guarantee facility, orany combination of the foregoing.  Either party may terminate the facilityat any time; however, such termination would not affect the stated maturity ofany term loan outstanding under the facility.  Amounts borrowed other thanas a term loan must be settled quarterly or converted into term loans. Inconnection with this facility, Forward Innovations has agreed to certain financialcovenants.  Amounts drawn under this credit facility bear interest at variablerates established by the bank (5.5% as June 30, 2007). At June 30, 2007 Forward Innovations is contingently liable to the bank under a letter ofcredit issued on its behalf in the amount of €224,000 (approximately $300,000)in favor of Forward Innovations' freight forwarder and customs agent in connection with its logistics operations in The Netherlands.  The effect of theissuance of the letter of credit is to reduce the availability of the creditline in an amount equal to the face amount of the letter of credit.  See Note 4to the unaudited consolidated Financial Statements set forth in Item 1.

On September 27, 2002, our Board of Directors authorized the repurchase of up to 400,000 shares of ouroutstanding common stock, or approximately 7% of the number of shares thenoutstanding. On January 21, 2004, our Board increased the amount of sharesauthorized for repurchase to 486,200. Under that authorization, as of June 30, 2007, we had repurchased an aggregate of 623,493 shares at a cost ofapproximately $1.1 million, including 60,000 shares at a cost of approximately$0.2 million during the 2007 Period, but none during the 2006 Period.

CONTRACTUAL OBLIGATIONS ANDCOMMERCIAL COMMITMENTS 

The Company has entered into various contractual obligationsand commercial commitments that, under accounting principles generally acceptedin the United States, are not recorded as a liability.   The following is asummary of such contractual cash obligations as of June 30, 2007:

 

**Contractual  Obligation or Commitment**

**Jul 07 – Jun 08**

**Jul 08- Jun 10**

**Jul 10 – Jun 12**

**Thereafter**

Employment & Consulting Agreements

$550,000

$112,500

$            --

$        --

Operating Leases

203,900

298,400

312,600

--

License Agreements**

$178,100

--

--

--

**Totals**

**$932,000**

**$410,900**

**$312,600**

**    $        --**

 

**The amounts shown as licensee agreement obligations represent the minimumamounts the Company would incur as a royalty expense under the present terms ofits Motorola license agreement. 

 

TheCompany has not guaranteed the debt of any unconsolidated entity and does notengage in derivative transactions or maintain any off-balance sheet specialpurpose entities.  

 

26

 
****
 

 

**Forward Industries, Inc.**

 

 

**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

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

*Interest Rate Risk*

Apredominant portion of our cash is invested in money market funds and overnightinterest rate sensitive securities.  The values of these investments do notfluctuate materially due to their short term nature and are not subject tointerest rate risks; however, the income we earn on our invested cash willfluctuate with changes in interest rates.  Our credit facilities in the United States and Switzerland are also based on variable interest rates.  Although we have not hadany borrowings under these facilities in several years, and did not have anyborrowings outstanding as of June 30, 2007, any such borrowings would besubject to interest rate risk if we decide to borrow against these creditlines.  Given the lack of borrowings, our current cash position and the dollaramount of these credit lines we do not believe a change in interest rates wouldbe material to our financial results.

*Foreign Currency Risk*

Asa result of our global operating activities, we are exposed to changes inforeign currency exchange rates that may adversely affect our results ofoperations and financial condition. We actively manage this foreign currencyexchange exposure through our regular operating activities. Our exposure isconcentrated in the Euro, Swiss Franc, and Hong Kong dollar. In Fiscal 2007, approximately9% of our sales were denominated in Euros.  In addition, certain operatingexpenses of our Swiss subsidiary are paid in Euros or Swiss Francs, whereas, certainoperating expenses of our Hong Kong subsidiary are paid in the Hong Kong dollar. Because we have determined that the US dollar is the functional currencyof our foreign subsidiaries, the gains and losses resulting from convertingthese transactions to the U.S. dollar for financial statement presentationpurposes are included in our results of operations as a component of our netincome (loss). See “Notes to Consolidated Financial Statements, Note 2– Accounting Policies – Foreign Currency Transactions” for a description of ourforeign currency accounting policies.

Weestimate that an adverse movement of 20% in these foreign currencies exchangerates would have decreased our results of operations by approximately $0.7 million,before taxes, for the nine-month periods ended June 30, 2007.

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

Our analysis methodsused to assess and mitigate risk discussed above should not be consideredprojections of future risks.

 

 

 

27

 

 

 

**Forward Industries, Inc.**

 

 

 

**Item 4. Controls and Procedures**

EVALUATION OF DISCLOSURECONTROLS AND PROCEDURES

Our management is responsible for establishing andmaintaining a system of disclosure controls and procedures (as defined in Rule13a-15(e)) under the Exchange Act) that is designed to ensure that informationrequired to be disclosed by the Company in the reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported, withinthe time periods specified in the Commission's rules and forms. Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed by an issuer inthe reports that it files or submits under the Exchange Act is accumulated andcommunicated to the issuer's management, including its principal executiveofficer or officers and principal financial officer or officers, or personsperforming similar functions, as appropriate to allow timely decisions regardingrequired 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 the Company'sdisclosure controls and procedures as of the end of the period covered by thisQuarterly Report. Based on that evaluation, the Company's Chief ExecutiveOfficer and Chief Financial Officer concluded that the Company's disclosurecontrols and procedures were effective, as of the end of the period covered bythis Quarterly Report, to provide reasonable assurance that informationrequired to be disclosed in the Company's reports filed or submitted under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Commission's rules and forms. 

CHANGES IN INTERNAL CONTROLS

Our management, with the participation our Chief Executive Officer and Chief Financial Officer, performed an evaluation as to whether any change in our internal controls over financial reporting  occurred during the 2007 Quarter.  Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that no change occurred in the Company's internal controls over financial reporting during the 2007 Quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.

 

 

 

 

 

28

 

 

 

**Forward Industries, Inc.**

 

 
PART II.   OTHER INFORMATION
**Item 1. Legal Proceedings**

From time to time, theCompany may become a party to legal actions or proceedings in the ordinarycourse of its business.  As of June 30, 2007, except as described below, therewere no such actions or proceedings, either individually or in the aggregate,that, if decided adversely to the Company’s interests, the Company believeswould be material to its business.

On October 3, 2006, theCompany was served with a summons and purported class action complaint that wasfiled July 31, 2006, in a matter captioned Lynn Finkelstein & Company,Inc., on behalf of certain of its clients as attorney-in-fact and all otherssimilarly situated, Plaintiff, vs. Forward Industries, Inc. and certain of itsexecutive officers, in their individual capacities, Defendants, brought in theUnited States District Court for the Southern District of Florida.  Thecomplaint alleges that the Company during the purported class period July 25, 2005, to February 2, 2006, made certain misrepresentations of fact, or failed todisclose certain material facts, and violated certain generally acceptedaccounting principles in the presentation of its financial statements includedin its periodic reports filed with the Commission pursuant to the Exchange Act.

On November 15, 2006, the Plaintiffs filed a First Amended Complaint and on May 29, 2007, by leave of the Court filed a second amended complaint that purports to state substantiallyidentical claims. The Company filed  motions to dismiss these complaints in theirentirety for failure to satisfy the pleading requirements of the PrivateSecurities Litigation Reform Act of 1995. The motion is currently beingbriefed.

The Company, as well as eachof the individual defendants, believes that the complaint, as amended, iswholly without merit and intends to vigorously contest this lawsuit.  TheCompany has directors and officers’ liability insurance, including entitycoverage. The Company has, in the course of defending the complaint, incurredlegal and other expenses up to the retention amount of $250,000, in itsdirectors and officers liability insurance policy. Such expense, and incurring additionalexpenses not covered by this policy may adversely affect its reported resultsof operations in future periods.  While the Company believes that thecomplaint, as amended, is without merit and the Plaintiff has yet to assert anamount of damages claimed, the outcome of this lawsuit cannot be predicted andthe Company's ultimate liability if this lawsuit is adversely determined cannotcurrently be ascertained and could be material.

**Item 1A.Risk Factors**

This “Risk Factors” section providesupdated information in certain areas from the “Risk Factors” set forth in ourAnnual Report on Form 10-KSB for the fiscal year ended September 30, 2006. Setforth below are certain risk factors that have been expanded or updated fromour Annual Report on Form 10-KSB, but the factors below do not constitute allthe risk factors that pertain to our business.  Please review our Annual Reporton Form 10-KSB for a complete listing of “Risk Factors” that pertain to our business.Please read the note regarding "Additional Forward Looking Information"that appears on page 15 of this Quarterly Report on Form 10-Q.

 

*Ourlicense agreement with Motorola expires on December 31, 2007, and the failure to extend or renew this agreement would have a material, adverse effect onour results of operations and financial condition.* 

29

 

 

 

**Forward Industries, Inc.**

 

 

Ourlicense agreement with Motorola, Inc. expires on December 31, 2007.  Motorola is our single largest customer, as detailed in the next risk factor.  Weanticipate that Motorola and we will initiate discussions relating to anextension or new agreement in the near future, but there is no guarantee thatwe will be able to successfully hold such discussions or achieve an extensionor new agreement on terms that we find acceptable. As of July 31, 2007, formal discussions have not commenced and none have yet been scheduled.  If we cannotconclude an extension or a new license agreement beyond December 31, 2007, our rights to sell certain cell phone carry solution cases and accessories bearingthe Motorola trademark will expire at that time, except for limitedsell-through rights with respect to existing inventory then on hand.  Theexpiration of the license agreement with Motorola without an extension orrenewal would have a material and adverse effect on our results of operationsand financial condition.  There can be no assurance that we will be successfulin reaching agreement with respect to a renewal or different agreement uponmutually acceptable terms, if at all.  Any failure to renew the licenseagreement or enter into a different agreement upon terms acceptable to us wouldhave a material adverse effect on our results of operations and financialcondition.  In addition to the reduction of revenues as a consequence of losingaftermarket sales to cell phone retailers and distributors, we would expectthat our profit margins could suffer materially, as currently margins oncertain sales of licensed products exceed those in respect of sales of many OEMcell phone sales.  Further, we are unable to predict the influence, if any,that a failure to extend or renew the license agreement would have on our OEMcustomer relationship with Motorola, but it could be adverse and material. Notwithstanding this development, we believe that ourcell phone accessory supply relationship with Motorola remains strong andcontinue to work closely with Motorola to ensure we are considered for futurein-box opportunities.  However, if the trend in declining OEM revenues fromthis customer and declining licensed sales under license with this customercontinues or further accelerates, it did in the 2007 Quarter, the effect on ourresults of operations and financial condition would be material

*Our business is characterized by a highdegree of customer concentration.  Two significant customers accounted for 57%of net sales in Fiscal 2006. The same two customers and a third customeraccounted for 74% of net sales in the 2007 Period; the loss of, or materialreduction in orders from, any of these customers would materially and adverselyaffect our results of operations and financial condition.*

 

The predominant percentage of our salesrevenues is concentrated in three large OEM customers.  In the 2007 Period,direct sales to Motorola, together with its international affiliates, accountedfor approximately 31% of our net sales, or approximately $5.5 million (whichamount excludes approximately 10% of our net sales, or $1.7 million, ofproducts under our license agreement with Motorola).  Lifescan accounted forapproximately 29% of our net sales, or approximately $5.2 million. Abbott Labsaccounted for approximately 14% of our net sales or $2.4 million. The loss ofany of these three key customers (whether as a result of such customerspurchasing their carry solution requirements from another vendor, deciding tomanufacture their own carrying cases or eliminating the inclusion of ourcarrying cases with their products) would have a material adverse effect on ourfinancial condition, liquidity and results of operations. In addition, sales to a fourth customer, who represented 9% of oursales in Fiscal 2006 declined to an immaterial amount during the 2007 Period asour sole “in-box” program with them concluded.

 

By contrast, in Fiscal 2006, direct salesto Motorola, together with its international affiliates, accounted forapproximately 37% of our net sales, or approximately $11.5 million (whichamount excludes approximately 11% of our net sales, or $3.2 million, ofproducts under our license agreement with Motorola).  Lifescan accounted forapproximately 19% of our net sales, or approximately $5.8 million. In addition,two other OEM customers accounted for 9%, and 7% of net sales in Fiscal 2006.

 

*At any time, a significant percentage of our accounts receivablerisk may be concentrated in a small number of customers.*

Two customers accounted for approximately 75% of our accounts receivable at June30, 2007 and September 30, 2006, respectively. The failure to receive orcollect such amounts when, and as, due could have amaterial adverse effect on our financial condition, liquidity, and results ofoperations.

 

*We have incurred substantial expenses for legal fees in defending thepurported class action litigation that has been filed against us. *

On October 3, 2006, the Company was served with a summons and purported classaction complaint, as described in Item 1. of Part II of this Quarterly Report,"Legal Proceedings."  We maintain directors and officers' liabilityinsurance, including entity coverage. We have incurred legal and other expensesup to the retention amount of $250,000,above which it is our expectation that it is theinsurance carrier's responsibility to assume under such policy.  We may incuradditional legal or other expenses that are not covered by this policy, andthis may adversely affect our reported results of operations in future periods.

30

 

 

 

**Forward Industries, Inc.**

 

 

*While the purported class action that has been filed against us isin its early stages, the ultimate liability of the action is not predictablebut may be material.*

Whilewe believe that the complaint is without merit and will vigorously contest thisaction, and the plaintiff has yet to assert a specific amount in its claim fordamages, the outcome of this lawsuit cannot be predicted and the Company'sultimate liability if this lawsuit is adversely determined cannot currently beascertained and could be material.

*Our inventory levels increased during Fiscal 2006 and may remainat historically high levels in future periods, primarily as a result of thesupport of hub agreements recently entered into with several large OEMcustomers.*

InFiscal 2006 we entered into hub agreements with two of our principal OEMcustomers, and during Fiscal 2007 we have entered into three additional hubagreements with these customers. These arrangements require us to supplyproduct to their distribution hubs based on our OEM customer's forecasts.  Wehave no means of determining the accuracy of such forecasts. Additionally, dueto visibility constraints associated with such forecasts, combined with thelong lead-times for some of our products covered under these hub agreements, wemay, from time to time, be required to stock inventory at levels exceedingthose forecast by our customers.  Whether this will result in a one-time lagbetween inventory stocking of the hubs and a re-adjustment of timing of productprocurement from our suppliers remains to be seen, and inventory levels,liquidity, and results of operations may be adversely affected. In addition, certainof these arrangements include terms of payment to us in the event inventorystocks are not drawn down from a hub by the customer.  The terms of payment varyand  there can be no assurance that these arrangements will not result in amaterial increase in our inventory allowance, which could have a materialadverse effect on our results of operations and financial condition.

*Productmanufacture, in many cases, has been outsourced by our OEM customers to contract manufacturing firms in China and in Southeast Asia*.

Such firmsare performing manufacturing, assembly and product packaging functions,including the bundling of product accessories such as ours with the OEM customer’s product. As a consequence, we are selling our carry solution products to the contract manufacturingfirm. In these cases, we invoice the contract manufacturing firm and not theOEM customer.  Therefore, it is the contract manufacturing firm’s credit towhich we must look for payment in such cases and not that of our OEM “customer”.  In addition, in recent periods the APAC region has accounted for a significantpercentage of our sales revenues.  We believe that the reliance on contractmanufacturers by our OEM customers is an effort to reduce their costs of supplythat may also be increasing pressure generally to compress margins in respectof accessory products packaged “in-box” with various consumer electronics.

31

 
****
 

 

**Forward Industries, Inc.**

 

 

**Item 2. Unregistered Sales of Equity Securities andUse of Proceeds**

**IssuerPurchases of Equity Securities**

On September 27, 2002, our Board of Directorsauthorized the repurchase of up to 400,000 shares of our outstanding commonstock, or approximately 7% of the number of shares then outstanding. On January 21, 2004, our Board increased the amount of shares authorized for repurchase to486,200.  Under these authorizations, as of June 30, 2007, we had repurchased an aggregate of 162,600 shares at a cost of approximately $0.4 million,including 60,000 shares at a cost of approximately $0.2 million during the 2007Period, but none during the 2006 Period.

 

 

 

 

 

 

 

(Amounts in thousands, except per  share amounts)

 

** **

** **

** **

** **

** **

**Total Number of Shares Purchased**

** **

** **

** **

** **

** **

** **

**Average Price Paid per Share**

** **

**Total Number of Shares Purchased as part of Publicly  Announced Plans or Programs**

** **

**Maximum Number****of Shares that May Yet Be  Purchased Under the Plans or Programs**

April 1, 2007  – April 30, 2007

 

--

 

$     --

 

--

 

--

May 1, 2007 –  May 31, 2007

 

60,000

 

3.37

 

162,600

 

323,600

June 1, 2007  – June 30, 2007

 

--

 

--

 

--

 

--

Total

 

60,000

 

$3.37

 

162,600

 

323,600

 

**Item 3.Defaults Upon Senior Securities**

None.

**Item 4.Submission of Matters to a Vote of Security Holders**

TheCompany held its Annual Meeting of Stockholders on May 2, 2007.  The following matters were voted upon at the Annual Meeting of Shareholders:

 

1.       Election of a Board of Directors

 

 

 

Number of Shares Voted

Name

 

For

 

Withheld

Jerome E. Ball

 

6,723,384

 

197,715

Bruce Galloway

 

6,736,409

 

184,690

Edwin Levy

 

6,712,722

 

208,377

Louis Lipschitz

 

6,731,862

 

189,237

Norman Ricken

 

6,736,194

 

184,905

Douglas Sabra

 

6,700,039

 

221,060

Michael Schiffman

 

6,721,714

 

199,385

 

2.       Proposal to approve the ForwardIndustries, Inc. 2007 Equity Incentive Plan.

 

Number of Shares Voted

For

 

Against

 

Abstain

1,995,914

 

204,242

 

23,207

 

 

32

 
 
**Forward Industries, Inc.**

 

 

3.   Ratification of the appointment ofKaufman, Rossin & Co., P.A. as the independent registered public accountingfirm for the Company for the Fiscal Year ending September 30, 2007.

 

 

Number of Shares Voted

 

 

For

 

Against

 

Abstain

Ratify  Kaufman  Rossin & Co., P.A. as the independent registered public  accounting firm for the Company the Fiscal Year ending September 30, 2007

 

6,757,722

 

142,201

 

21,174

 

 

**Item 5.Other Information**

None.

**Item 6. Exhibits**

                31.1 Certification of the ChiefExecutive Officer under Section 302 of the Sarbanes-Oxley Act of 2002

                31.2 Certification of the Chief Financial Officer under Section302 of the Sarbanes-Oxley Act of 2002

 

                32.1Certifications of the Chief Executive Officer and Chief Financial Officer underSection 906 of the Sarbanes-Oxley Act of 2002

 

 

 

33

 

 

 

**Forward Industries, Inc.**

 

 

 

**SIGNATURES**

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

 

Dated:  August 1, 2007
 
 
 FORWARDINDUSTRIES, INC.              (Registrant)
 
 
 
 
 
By:/s/ Jerome E. Ball                                
 
JeromeE. Ball
 
Chairmanand Chief Executive Officer
 
(PrincipalExecutive Officer)
 
 
 
 
 
By:/s/Douglas W. Sabra                          
 
DouglasW. Sabra                                
 
VicePresident, Chief Financial Officer and
 
(PrincipalFinancial and Accounting Officer)

 

34

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