** **

** **

 

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

________________

**FORM 10-Q**

________________

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

**            For the quarterly period ended December31, 2010.**

**OR**

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

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

** **

**Commission File Number: 0-6669**

________________

**FORWARD INDUSTRIES, INC.**

(Exact name of registrant as specified in its charter)

________________

** **

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

 

 

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

(Address of principal executive offices, including zipcode)

**(954) 419-9544**

(Registrant’s telephone number, including area code)

________________

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

Indicate bycheck mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).   Yes [ **X**]                  No[  ]

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “large accelerated filer”, “acceleratedfiler”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| [   ] Large accelerated filer         [**  **] Non-accelerated filer (Do not check if a smallerreporting company)   | [   ]		Accelerated filer  		[**X**] Smaller reporting company 
Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).          [**  **] Yes   [**X**] No

Thenumber of shares outstanding of the registrant’s common stock, par value $0.01per share, at the latest practical date January 28, 2011, was 8,085,886 shares.

1

 
****
 

 

 

 

**Forward Industries, Inc.**

**INDEX**

**PART  I.**

** **

**FINANCIAL  INFORMATION**

Page No.

 

 

 

 

 

**Item  1.**

**Financial  Statements**

 

 

 

     - Consolidated Balance Sheets as of December 31, 2010 (unaudited)

 

 

 

     and September 30, 2010............................................................................................................ 

4

 

 

 

 

 

 

     - Consolidated Statements of Operations (unaudited) for the Three Months

 

 

 

Ended December 31, 2010 and 2009....................................................................................... 

5

 

 

 

 

 

 

     - Consolidated Statements of Cash Flows (unaudited) for the Three Months

 

 

 

     Ended December 31, 2010 and 2009....................................................................................... 

6

 

 

 

 

 

 

     - Notes to Consolidated Financial Statements (unaudited)...............................................	

7

 

 

 

 

 

**Item  2.**

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

  19

 

** **

** **

 

 

**Item  3.**

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

25

 

 

** **

**Item  4.**

** **

**Controls  and Procedures**............................................................................................................ 

 

25

 

** **

 

 

**PART  II.**

** **

**OTHER  INFORMATION**

** **

 

** **

 

 

 

**Item  1.**

**Legal  Proceedings**....................................................................................................................... 

26

 

** **

** **

 

 

**Item  1A.**

**Risk  Factors**................................................................................................................................. 

26

 

** **

** **

 

 

**Item  2**

**Unregistered  Sales of Equity Securities and Use of Proceeds**............................................ 

27

 

** **

** **

 

 

**Item  3**

**Defaults  Upon Senior Securities**.............................................................................................. 

27

 

** **

** **

 

 

**Item  4.**

**Removed  and Reserved**................................................................................................................ 

27

 

** **

** **

 

 

**Item  5.**

**Other  Information**........................................................................................................................ 

27

 

** **

** **

 

 

**Item  6.**

**Exhibits**.......................................................................................................................................... 

27

 

** **

** **

 

 

 

**Signatures**..................................................................................................................................... 

28

 

 

** **

 

 

 

**Certifications**................................................................................................................................ 

29

** **

 

 

2

 
****
 

 

 

 

**Note Regarding Use of Certain Terms**

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

“2011Quarter” refers to the three months ended December 31, 2010; 

“2010Quarter” refers to the three months ended December 31, 2009; 

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

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

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

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

 

 

 

 

3

 

 

 

 

 

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

 

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

**December 31,**

** **

**September 30,**

 

**2010**

** **

**2010**

**Assets**

**(Unaudited)**

** **

**(Note 1)**

**Current assets:**

 

 

 

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

$18,121,051

 

$18,471,520

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

4,650,380

 

4,621,181

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

1,395,914

 

1,036,386

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

294,320

 

240,651

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

24,461,665

 

24,369,738

 

 

 

 

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

116,842

 

115,205

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

46,032

 

46,032

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

$24,624,539

 

$24,530,975

 

 

 

 

**Liabilities and shareholders’ equity**

 

 

 

**Current liabilities:**

 

 

 

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

$2,772,204

 

$2,439,273

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

535,128

 

885,332

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

3,307,332

 

3,324,605

 

 

 

 

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

 

 

 

** **

 

 

 

**Shareholders’ equity:**

 

 

 

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

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

 

--

 

 

--

Common stock, par value  $0.01 per share; 40,000,000 shares authorized, 	8,791,296 and 8,761,629 shares  issued; and

8,084,886 and 8,055,219 shares outstanding,  respectively........................ 

 

87,913

 

 

87,616

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

16,562,207

 

16,469,142

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

5,927,144

 

5,909,669

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

(1,260,057)

 

(1,260,057)

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

21,317,207

 

21,206,370

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

$24,624,539

 

$24,530,975

 

 

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

 

4

 

 

 

 

 

Forward Industries,Inc.

 

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(UNAUDITED)**

 

** **

 

**Three Months Ended December 31,**

 

**2010**

** **

**2009**

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

$5,968,208

 

$4,126,772

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

4,591,675

 

3,202,577

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

1,376,533

 

924,195

 

 

 

 

**Operating expenses:**

 

 

 

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

440,992

 

458,272

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

912,320

 

660,121

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

1,353,312

 

1,118,393

** **

 

 

 

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

23,221

 

(194,198)

** **

 

 

 

**Other (expense) income:**

 

 

 

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

5,654

 

20,332

Other  expense, net.................................................................................................. 

(11,400)

 

(13,120)

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

(5,746)

 

7,212

** **

 

 

 

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

$17,475

 

($186,986)

** **

 

 

 

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

 

 

 

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

$0.00

 

($0.02)

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

$0.00

 

($0.02)

** **

 

 

 

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

 

 

 

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

8,060,672

 

7,940,257

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

8,132,408

 

7,940,257

 

 

 

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

 

	 

5

 

 

 

 

 

**Forward Industries, Inc.**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 

 

** **

 

 

**Three Months Ended**

**December 31,**

 

 

**     2010**

** **

**2009**

**Operating activities:**

 

 

 

 

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

 

$17,475

 

($186,986)

Adjustments to reconcile net income (loss) to net  cash used in operating activities:

 

 

 

 

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

 

93,362

 

49,963

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

 

13,161

 

14,935

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

 

(7,392)

 

17,437

Changes  in operating assets and liabilities:

 

 

 

 

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

 

(29,199)

 

(287,890)

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

 

(352,136)

 

(362,706)

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

 

(53,669)

 

56,429

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

 

--

 

13,500

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

 

332,931

 

1,896

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

 

(350,204)

 

15,982

**Net cash  used in operating activities**

 

**(335,671)**

** **

**(667,440)**

 

 

 

 

 

**Investing activities:**

 

 

 

 

Purchases of property and  equipment................................................................................ 

 

**(14,798)**

 

**--**

**Net cash used in  investing activities**

 

**(14,798)**

 

**--**

 

 

 

 

 

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

 

**(350,469)**

** **

**(667,440)**

** **

 

** **

** **

** **

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

 

**18,471,520**

** **

**20,103,502**

** **

 

** **

** **

** **

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

 

**$18,121,051**

** **

**$19,436,062**

 

 

 

 

 

**Supplemental Disclosures  of Cash Flow Information:**

 

 

 

 

Cash  paid for:

 

 

 

 

Income  Taxes................................................................................................................. 

 

$15,000

 

$--

 

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

	 

6

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

** **

 

**NOTE 1     OVERVIEW                   **

ForwardIndustries, Inc. was incorporated under the laws of the State of New York andbegan operations in 1961. The Company designs, markets, and distributes carryand protective solutions primarily for hand held electronic devices, includingsoft-sided carrying cases, bags, clips, hand straps, protective plates andskins, and other accessories for medical monitoring and diagnostic kits, barcode scanners, GPS and location devices, and cellular telephones. It alsodesigns, markets, and distributes carry and protective solutions for otherconsumer products such as laptop computers, MP3 players, firearms, sporting,recreational, and aeronautical products.  The Company’s principal customermarket is original equipment manufacturers, or “OEMs” (or the contractmanufacturing firms of these OEM customers), of these products that eitherpackage our products as accessories “in box” together with their productofferings or sell them through their retail distribution channels. OEMcustomers are located in Europe, the APAC Region, and the Americas.

In theopinion of management, the accompanying consolidated financial statementsreflect all normal recurring adjustments necessary to present fairly thefinancial position and results of operations and cash flows for the interimperiod presented herein, but are not necessarily indicative of the results ofoperations for the fiscal year ending September 30, 2011. These financialstatements should be read in conjunction with the Company's auditedconsolidated financial statements included in its annual report on Form 10-Kfor the fiscal year ended September 30, 2010, and with the disclosures and riskfactors presented herein and therein, respectively. The September 30, 2010 balancesheet has been derived from these financial statements.

**NOTE 2     ACCOUNTINGPOLICIES**

**Accounting Estimates**

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

**Basis of Presentation**

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

**Cash and CashEquivalents**

Cash andcash equivalents consist primarily of cash on deposit and highly liquid moneymarket accounts. The Company minimizes its credit risk associated with cash andcash equivalents by investing in high quality instruments and by periodicallyevaluating the credit quality of the primary financial institution issuers ofsuch instruments. The Company holds cash and cash equivalents at majorfinancial institutions in the United States, at which cash amounts maysignificantly exceed FDIC insured limits, and in Europe. At December 31, 2010,this amount was approximately $17.6 million. Historically, the Company has notexperienced any losses due to such cash concentrations.

 

 

7

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE2     ACCOUNTING POLICIES (CONTINUED)**

**AccountsReceivable**

Accountsreceivable consist of unsecured trade accounts with various customers. TheCompany performs periodic credit evaluations of its customers including anevaluation of days outstanding, payment history, recent payment trends, andperceived credit worthiness; and believes that adequate allowances for anyuncollectible receivables are maintained. Credit terms to the majority ofcustomers are generally net thirty (30) days to net sixty (60) days; however,the Company typically extends to its largest customers payment terms up to 90days. The Company has not historically experienced significant credit or collectionproblems with its OEM customers or their contract manufacturers.  None ofthese customers or their contract manufacturers is or has been in default tothe Company, and payments are generally received from them on a timely basis.Two customers, including their affiliates and contract manufacturers, accountedfor approximately 71% and 75% of the Company’s accounts receivable at December31, 2010 and September 30, 2010, respectively. At December 31, 2010 and September30, 2010, the allowance for doubtful accounts was approximately $19,000.

**Inventories**

Inventories consist primarily of finished goods andare stated at the lower of cost (determined by the first-in, first-out method)or market.  Based on management’s estimates, an allowance is made toreduce excess, obsolete, or otherwise un-saleable inventories to net realizablevalue. The allowance is established through charges to cost of goods sold onthe Company’s consolidated statements of operations. As reserved inventory isdisposed of, the Company charges off the associated allowance.  Indetermining the adequacy of the allowance, management’s estimates are basedupon several factors, including analyses of inventory levels, historical losstrends, sales history, and projections of future sales demand. The Company’sestimates of the allowance may change from time to time based on management’sassessments, and such changes could be material. At December 31, 2010 and September30, 2010, the allowances for obsolete inventory were approximately $18,000 and $28,000,respectively. 

**Property andEquipment**

Property andequipment consist of furniture, fixtures, and equipment and leaseholdimprovements and are recorded at cost. Expenditures for major additions andimprovements are capitalized, and minor replacements, maintenance, and repairsare charged to expense as incurred. When property and equipment are retired orotherwise disposed of, the cost and accumulated depreciation are removed fromthe accounts and any resulting gain or loss is included in the results ofoperations for the respective period. Depreciation is provided over theestimated useful lives of the related assets using the straight-line method forfinancial statement purposes. The estimated useful life for furniture, fixturesand equipment ranges from three to ten years. Amortization of leaseholdimprovements is computed using the straight-line method over the shorter of theremaining lease term or the estimated useful lives of the improvements. For thethree-month periods ended December 31, 2010 and 2009, the Company recordedapproximately $13,000 and $15,000 of depreciation and amortization expense,respectively. Depreciation and amortization for production related property andequipment is included as a component of costs of goods sold in the accompanyingconsolidated statements of operations. Depreciation and amortization forselling and general and administrative related property and equipment, isincluded as a component of operating expenses in the accompanying consolidatedstatements of operations.

 

 

8

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE2     ACCOUNTING POLICIES (CONTINUED)**

**Income Taxes**

TheCompany accounts for its income taxes in accordance with accounting principlesgenerally accepted in the United States of America which requires, among otherthings, recognition of future tax benefits and liabilities measured at enactedrates attributable to temporary differences between financial statement andincome tax bases of assets and liabilities and to tax net operating losscarryforwards to the extent that realization of these benefits is more likelythan not. The Company periodically evaluates the realizability of its netdeferred tax assets.   See Note 5 to these Notes to ConsolidatedFinancial Statements. The Company’s policy is to account for interest andpenalties relating to income taxes, if any, in “income tax expense” in itsconsolidated statement of operations. For the three-month periods endedDecember 31, 2010 and 2009 presented in the accompanying consolidated statementsof operations no income tax related interest or penalties were assessed orrecorded.

**RevenueRecognition**

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

**Shipping andHandling Costs**

TheCompany expenses shipping and handling costs (including inbound freightcharges, purchasing and receiving costs, inspection costs, warehousing costs,internal transfer costs, and other costs associated with the Company’sdistribution network) as a component of cost of goods sold in the accompanyingconsolidated statements of operations.

**AdvertisingExpenses**

Advertisingcosts, consisting primarily of samples and product brochures, are expensed asincurred. Advertising costs are included in selling expenses in the accompanyingconsolidated statements of operations and amounted to approximately $21,000 and$25,000 for the three-month periods ended December 31, 2010 and 2009,respectively.  

**Foreign CurrencyTransactions**

Thefunctional currency of the Company and each of its wholly owned foreignsubsidiaries is the U.S. dollar. Foreign currency transactions may generatereceivables or payables that are fixed in terms of the amount of foreigncurrency that will be received or paid. Fluctuations in exchange rates between suchforeign currency and the functional currency increase or decrease the expectedamount of functional currency cash flows upon settlement of the transaction.These increases or decreases in expected functional currency cash flows areforeign currency transaction gains or losses that are included in “otherexpense, net” in the accompanying consolidated statements of operations. Thenet losses from foreign currency transactions were approximately $11,000 and$13,000 for the three-month periods ended December 31, 2010 and 2009,respectively. 

**ComprehensiveLoss**

For thethree-month periods ended December 31, 2010 and 2009, the Company did not haveany material components of comprehensive loss other than net loss.

 

 

9

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE2     ACCOUNTING POLICIES (CONTINUED)**

**Fairvalue of financial instruments**

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

**Share-Based PaymentExpense**

TheCompany recognizes share-based equity compensation in its consolidatedstatements of operations at the grant-date fair value of our stock options andother equity-based compensation. The determination of grant-date fair value isestimated using an option-pricing model, which includes variables such as theexpected volatility of the Company’s share price, the exercise behavior of itsgrantees, interest rates, and dividend yields. These variables are projected basedon the Company’s historical data, experience, and other factors. Changes in anyof these variables could result in material increases to the valuation ofoptions granted in future periods and increases in the expense recognized forshare-based payments. The Company has elected to recognize compensation costfor its awards on a straight-line basis over the requisite service period foreach separately vesting portion of the award as if the award was, in-substance,multiple awards. Refer to Note 4 Share-Based Compensation.

**Recentaccounting pronouncements**

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

InJanuary 2010, the FASB issued an amendment to ASC 820, Fair Value Measurementsand Disclosure, to require reporting entities to separately disclose theamounts and business rationale for significant transfers in and out of Level 1and Level 2 fair value measurements and separately present informationregarding purchase, sale, issuance, and settlement of Level 3 fair valuemeasures on a gross basis.  This standard, for which the Company iscurrently assessing the impact, is effective for interim and annual reportingperiods beginning after December 15, 2009 with the exception of disclosuresregarding the purchase, sale, issuance, and settlement of Level 3 fair valuemeasures which are effective for fiscal years beginning after December 15,2010.

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

 

 

10

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

 **NOTE2    ACCOUNTING POLICIES (CONCLUDED)**

**Recentaccounting pronouncements (Concluded)**

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

 

**NOTE 3     SHAREHOLDERS’EQUITY**

**Anti-takeoverProvisions**

TheCompany is authorized to issue up to 4,000,000 shares of "blankcheck" preferred stock. The Board of Directors has the authority and discretion,without shareholder approval, to issue preferred stock in one or more seriesfor any consideration it deems appropriate, and to fix the relative rights andpreferences thereof including their redemption, dividend and conversion rights.

**Stock Repurchase**

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

 

 

 

11

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**Changes inShareholders’ Equity**

Changes in shareholders’ equity for the three monthperiod ended December 31, 2010 is summarized below:

 

**Common 	Stock**

 

**Capital In 	Excess of Par 	Value**

** **

**Retained 	Earnings**

** **

** **

** **

** **

**Treasury 	Stock**

**Balance at September 30, 2010**

$87,616

 

$16,469,142

 

$5,909,669

 

($1,260,057)

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

297

 

93,065

 

--

 

--

   Net income........................................ 

--

 

--

 

17,475

 

--

**Balance at December 31, 2010**

**$87,913**

 

**$16,562,207**

** **

**$5,927,144**

** **

**($1,260,057)**

** **

**NOTE 4     SHAREBASED COMPENSATION**

InMay 2007 shareholders of the Company approved the 2007 Equity Incentive Plan(as amended, as described in the next sentence, the “2007 Plan”), whichauthorized the issuance of up to 400,000 shares of common stock to officers,employees, and non-employee directors of the Company in connection with awardsof restricted common stock and stock options to such persons.   In February 2010 shareholders of the Company approved an amendment to the 2007Plan to increase the number of shares of common stock authorized for grants byan additional 400,000 shares.  As of December 31, 2010, the total sharesof common stock available for grants of awards of restricted stock and optionsto purchase common stock under the 2007 Plan was 168,000. The price at whichrestricted 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 grant. The Compensation Committee of the Company’s Board of Directorsadministers the plan.  Options generally expire ten years after the dateof grant and restricted stock grants generally vest in equal proportions overthree years. 

TheCompany’s 1996 Stock Incentive Plan (the 1996 Plan) expired in accordance withits terms in November 2006.  The exercise price of incentive optionsgranted under the 1996 Plan to officers, employees, and non-employee directorsof the Company was required by 1996 Plan provisions to be equal at least to thefair market value of the common stock at the date of grant. Options expire tenyears after the date of grant and generally vest in equal proportions overthree years.  Unexercised options granted pursuant to the 1996 Plan priorto expiration remain outstanding until the earlier of exercise or optionexpiration.

Underthe 1996 Plan 30,000 fully vested common stock options remain outstanding andunexercised, all at exercise prices higher than the fair market value of the commonstock at December 31, 2010.

**Stock OptionAwards**

Under the 2007 Plan, the CompensationCommittee of the Company’s Board of Directors has approved awards of stockoptions to purchase an aggregate of 480,000 shares of common stock to the Company’scurrent and certain former non-employee directors, and to current and certain formerCompany officers, of which awards covering 30,000 shares of common stockexpired unexercised, with such shares reverting to the 2007 Plan and eligiblefor grant. Of these awards grants covering 207,500 shares were made during the three-monthperiod ended December 31, 2010. Awards to current non-employee directors and(in respect of awards prior to the 2011 Quarter) current officers are subjectto a continued service condition and vest on the first anniversary of the datethe awards were granted, and awards to two current officers made during the2011 Quarter vest in equal amounts over three to five years commencing on thefirst anniversary of the grant. The exercise prices of the awards granted was,in each case equal, to the market value of the Company’s common stock on thevarious grant dates. 

TheCompany recognized approximately $84,000 and $19,000 of compensation expensefor stock option awards in its consolidated statements of operations for thethree-month periods ended December 31, 2010 and 2009, respectively.

 

 

12

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 4     SHAREBASED COMPENSATION (CONTINUED)**

**Stock OptionAwards (continued)**

Thefollowing table summarizes stock option activity under the 2007 Plan and the1996 Plan from September 30, 2010 through December 31, 2010: 

 

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

** **

** **

**Aggregate 	Intrinsic 	Value**

**Outstanding at September 30, 2010**

187,500
   
$3.66
   
8.3
   
 

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

207,500
   
3.54
   
9.9
   
 

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

--
   
--
   
--
   
 

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

--
   
--
   
--
   
 

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

--
   
--
   
--
   
 

**Outstanding at December 31, 2010**

**395,000**
   
**$3.60**
   
**9.0**
   
**$117,000**

 

 
   
 
            
**Options expected  to vest.......................**

**395,000**
   
**$3.60**
   
**9.0**
   
**$117,000**

** **

** **
   
** **
   
** **
   
 

**Options  vested and exercisable at 	December  31, 2010.........................**

** **

**112,500**
   
** **

**$4.14**
   
** **

**7.3**
   
 

**$79,000**

** **

During the three month periods ended December 31, 2010 and 2009, the Company granted207,500 and 22,400 stock options at a weighted average grant date fair value of$2.16 and $1.28, respectively.

**Stock OptionAwards**

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

 
   
**For the Three-Month Periods Ended 	December  31,**

 
   
**2010**

** **

**2009**

	Expected term (in years)...................................................
   
5.0

 

5.0

Risk-free  interest rate........................................................
   
1.2% to 2.0%

 

2.3%

Expected  volatility.............................................................
   
68% to 69%

 

77.7%

	Expected dividend yield...................................................
   
0%

 

0%

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

 

13

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 4     SHAREBASED COMPENSATION (CONTINUED)**

**Restricted Stock Awards**

Under the2007 Plan as of December 31, 2010, the Compensation Committee of the Company’sBoard of Directors had approved and granted awards of 183,500 shares of restricted stock, in the aggregate, tocertain key employees. Of these awards, 132,335 have vested and 1,500 shares ofrestricted stock were forfeited and reverted to, and are eligible for re-grantunder, the 2007 Plan. No awards of restricted stock were made during the threemonths ended December 31, 2010.  Vesting of restricted stock awards isgenerally subject to a continued service condition with one-third of the awardsvesting each year on the three successive anniversary dates the awards weregranted typically commencing on the first such anniversary date.  The fairvalue of the awards granted was equal to the market value of the Company’scommon stock on the grant date. During the three-month periods ended December31, 2010 and 2009, the Company recognized approximately $10,000 and $31,000,respectively, of compensation cost in its consolidated statements of operationsrelated to restricted stock awards.

The following table summarizes restricted stock activity under the 2007Plan from September 30, 2010, through December 31, 2010.

 

 

** **

** **

** **

**Shares**
   
**Weighted 	Average  	Grant Date 	Fair Value**

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

 

79,332
   
$2.07

Changes during the period:

 

 
   
 

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

 

--
   
--

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

 

(29,667)
   
$2.05

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

 

--
   
--

Non-vested balance at December 31, 2010........................................

 

49,665
   
$2.08

                Asof December 31, 2010, there was approximately $38,000 of total unrecognizedcompensation cost related to 49,665 shares of unvested restricted stock awards(reflected in the table above) granted under the 2007 Plan. That cost isexpected to be recognized over the remainder of the requisite service (vesting)periods.

**Warrants**

    Asof December 31, 2010, warrants to purchase 75,000 shares of the Company’scommon stock at an exercise price of $1.75 were outstanding. By their termsthese warrants expire 90 days after a registration statement registering commonstock (other than pursuant to employee benefit plans) is declared effective bythe Securities and Exchange Commission. As of December 31, 2010, no suchregistration statement has been filed with the Securities and ExchangeCommission.

 

 

14

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 5  INCOME TAXES**

The Company’s provision (benefit) from income taxes consists of thefollowing United States Federal and State, and foreign components:

 

**For the Three-Month Periods 	Ended December  31,**

 

**2010**

 

**2009**

U.S.  Federal and State

 
   
 

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

$           --
   
$          --     

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

(30,336)
   
(49,460)

 

 
   
 

Foreign:

 
   
 

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

--
   
--

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

10,018
   
(4,144)

** **

** **
   
** **

	Change in valuation	allowance...................................................................

**20,318**
   
**53,604**

**Benefit from income taxes**

**$           --**
   
**$           --**

As of December 31, 2010, and September 30, 2010, theCompany has no unrecognized tax benefits related to U.S. federal and stateincome tax matters. As of December 31, 2010 and September 30, 2010, theCompany has not accrued any interest and penalties related to uncertain taxpositions. It is the Company’s policy to recognize interest and/or penalties,if any, related to income tax matters in income tax expense in the statement ofoperations. For the periods presented in the accompanying statements ofoperations no income tax related interest or penalties were assessed or recorded.All fiscal years prior to the fiscal year ended September 30, 2007 are closedto Federal and State examination, except with respect ot net operating lossesgenerated in prior fiscal years.

At December31, 2010, the Company had available net operating loss carryforwards primarily forstate income tax purposes of approximately $1,423,000 expiring through 2030 andresulting in a deferred tax asset of approximately $115,000. In addition, atDecember 31, 2010, the Company had available net operating loss carryforwardsfor foreign income tax purposes of approximately $1,239,000 resulting in adeferred tax asset of approximately $109,000, expiring through 2017.  Total deferred tax assets,before reserve for valuation allowances, was $421,000 and $401,000 at December31, 2010 and September 30, 2009, respectively. As of September 30, 2010, theundistributed earnings of the Company’s Swiss subsidiary of $928,000 areconsidered to be permanently invested; therefore, in accordance with generallyaccepted accounting principles in the U.S., no provision for U.S. Federal andstate income taxes on those earnings has been provided.

As of December 31, 2010, as partof its periodic evaluation of the need to maintain a valuation allowanceagainst its deferred tax assets, and after consideration of all factors, bothpositive and negative (including, among others, projections of future taxableincome, current year net operating loss carryforward utilization and the extentof the Company’s cumulative losses in recent years), the Company determined that,on a more likely than not basis, it would not be able to use its remainingdeferred tax assets (except in respect of United States income taxes in theevent the Company elects to effect the repatriation of certain foreign sourceincome of its Swiss subsidiary, which income is currently considered to bepermanently invested and for which no United States tax liability has beenaccrued). Accordingly, the Company has determined to maintain a full valuationallowance against its deferred tax assets; accordingly, as of December 31, 2010and September 30, 2010, the valuation allowances were approximately $421,000and $401,000, respectively.  If the Company determines in a futurereporting period that it will be able to use some or all of its deferred tax assets,the adjustment to reduce or eliminate the valuation allowance would reduce itstax expense and increase after-tax income. Changes in deferred tax assets andvaluation allowance are reflected in the “Income tax benefit” line item of theCompany’s consolidated statements of operations. 

 

 

15

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 6     EARNINGSPER SHARE**

Basic per share data foreach period presented is computed using the weighted-average number of sharesof common stock outstanding during each such period.  Diluted per sharedata is computed using the weighted-average number of common and dilutivecommon-equivalent shares outstanding during each period. Dilutivecommon-equivalent shares consist of shares that would be issued upon theexercise of stock options and warrants, computed using the treasury stockmethod. A total of 60,000 common stock equivalents have been excluded from thecalculation of earnings per share for the three-month period ended December 31,2010, because their inclusion would be anti-dilutive. Loss per share data forthe three-month period ended December 31, 2009, excludes all outstanding commonequivalent shares as inclusion of such shares would be anti-dilutive.Calculation of basic and diluted earnings per share is as follows:

 

Three Months Ended December 31,

 

2010

 

2009

Numerator:

 

 

 

Net income (loss)

$17,475 

 

($186,986) 

 

Denominator:

 

 

 

   Denominator for basic earnings per share - weighted average shares

8,060,672

 

7,940,257

   Dilutive stock options and warrants -  treasury stock method

32,599

 

--
    Dilutive unvested restricted stock
39,137   
--
   Denominator for diluted earnings per share -  weighted average shares

8,132,408

 

7,940,257

  

Net  income per common share:

 

 

 

     Basic

$0.00 

 

($0.02) 

     Diluted

$0.00

 

($0.02) 

Shares excluded due to antidilution

60,000

 

290,665

 

**NOTE 7     OPERATINGSEGMENT INFORMATION**

The Companyoperates in a single segment: the supply of carrying solutions for portableelectronic devices and other consumer products. This carrying-solution segment includesthe design, marketing, and distribution of products to its customers that includemanufacturers of consumer hand held medical monitoring and diagnostic kits, barcode scanners, GPS and location devices, and cellular telephones as well as laptopcomputers, MP3 players, firearms, sporting, recreational, and aeronauticalproducts. The Company’s carrying solution segment operates in geographicregions that include primarily the APAC, the Americas, and Europe. Geographicregions are defined by reference primarily to the location of the customer orits contract manufacturer.  The following table presents net sales relatedto these geographic segments:

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

**December 31,**

 

**2010**

** **

**2009**

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

$2,734

 

$1,871

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

1,936

 

1,601

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

1,298

 

655

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

**$5,968**

** **

**$4,127**

 

16

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 8     COMMITMENTSAND CONTINGENCIES**

**Employment and Retention Agreements**

Pursuantto an Employment Agreement, dated as of August 10, 2010, between the Company andJames O. McKenna, the Company agreed to employ Mr. McKenna’s as its ChiefFinancial Officer and Treasurer at a salary of $175,000 per annum untilexpiration of the term on December 31, 2011.  In connection with this agreement,the Employment Agreement, dated August 12, 2008 between Mr. McKenna and theCompany was terminated.  Under the new agreement, Mr. McKenna will beeligible to earn bonus compensation based on achievement of targets set by theBoard’s Compensation Committee in respect of each fiscal year during the term. The term of the agreement is renewable for successive one year periods unlesseither party gives notice of non-renewal not less than 90 days prior to expiration. If the Company gives such notice, which is considered a termination withoutcause, Mr. McKenna would be entitled to receive a payment from the Companyequal to one year of his salary.  Mr. McKenna is also entitled to apayment equal to one year of his salary as severance in the event of histermination “without cause” in circumstances other than non-renewal andtermination for “good reason” (as such terms are defined in the EmploymentAgreement).

Pursuant to a Retention Agreement, dated as of August 10, 2010, betweenthe Company and Mr. McKenna, the Company agreed to make a retention payment of$175,000 to Mr. McKenna if he continues to perform his duties under his EmploymentAgreement (referred to above) in the capacities set forth therein until atleast March 1, 2011. This expense in the amount of $75,000 is reflected in thestatement of operations for the three month period ended December 31, 2010.

**NOTE 8     COMMITMENTSAND CONTINGENCIES (CONTINUED)**

**Guarantee Obligation**

InFebruary 2010, Forward Innovations and its European logistics provider (freightforwarding and customs agent) entered into a Representation Agreement whereby,among other things, the European logistics provider agreed to act as suchsubsidiary's fiscal representative in The Netherlands for the purpose ofproviding services in connection with any value added tax matters. As part ofthis agreement, which succeeds a substantially similar agreement (except as tothe amount and term of the undertaking) between the parties that expiredDecember 31, 2009, the subsidiary agreed to provide an undertaking in the formof a bank letter of guarantee to the logistics provider with respect to anyvalue added tax liability arising in The Netherlands that the logisticsprovider is required to pay to Dutch tax authorities on the subsidiary'sbehalf. As of February 1, 2010, such subsidiary entered into a guaranteeagreement with a Swiss bank relating to the repayment of any amount up to€75,000 (equal to approximately $100,000 as of December 31, 2010) paid by suchbank to the logistics provider in order to satisfy such undertaking pursuant tothe bank letter of guarantee.  The subsidiary would be required to performunder the guarantee agreement only in the event that: (i) a value added taxliability is imposed on the Company's sales in The Netherlands, (ii) thelogistics provider asserts that it has been called upon in its capacity assurety by the Dutch Receiver of Taxes to pay such taxes, (iii) the subsidiaryor the Company on its behalf fails or refuses to remit the amount of valueadded tax due to the logistics provider upon its demand, and (iv) the logisticsprovider makes a drawing under the bank letter of guarantee. Under theRepresentation Agreement the subsidiary agreed that the letter of guaranteewould remain available for drawing for three years following the date that itsrelationship terminates with the logistics provider to satisfy any value addedtax liability arising prior to expiration of the Representation Agreement butasserted by The Netherlands after expiration. The term of the bank letter ofguarantee expires February 28, 2011, but will be renewed automatically forone-year periods until February 28, 2014, unless the subsidiary provides theSwiss bank with written notice of termination at least 60 days prior to therenewal date. It is the intent of the subsidiary and the logistics providerthat the bank letter of guarantee amount be adjusted annually. In considerationof the issuance of the letter of guarantee, the subsidiary has granted theSwiss bank a security interest on all of the subsidiary’s assets on depositwith, held by, or credited to the subsidiary’s accounts with, the Swiss bank(approximately $928,000 at December 31, 2010). As of December 31, 2010, theCompany had not incurred a liability in connection with this guarantee.

 

17

 

 

 

**Forward Industries, Inc.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**Letter of Intent**

 Duringthe first fiscal quarter of 2011 the Company entered into a Letter of Intent toacquire Flash Ventures, Inc., (“Flash Ventures”) a Delaware corporation and adistributor of consumer electronics peripherals and accessories specializing inaccessory products bearing professional team and college team sports logosacquired under license.  The Company intends to use commerciallyreasonable efforts to reach a definitive merger agreement, subject tosatisfaction of due diligence review, regulatory approvals, financing, employeeretention, and other closing conditions, as well as subject to approval of theparties’ respective boards of directors of any such definitive agreement.  If any such agreement is consummated, as to which there can be noassurance, it is anticipated that consideration paid by the Company may involveone or more of the issuance of shares of its capital stock, cash payments atclosing, post-closing contingent payments, and/or the incurrence ofindebtedness.

Inconnection with a closing of any acquisition pursuant to the letter of intentthe Company’s investment banker, Morgan Joseph & Co., Inc. will be entitledto payment by the Company of a fee of $225,000 pursuant to the Company’sengagement letter with Morgan Joseph entered into in October 2009, assubsequently amended, inaddition to reimbursement of Morgan Joseph's out of pocket expenses.  Depending on the valuation of Flash Ventures pursuant to anydefinitive agreement, the fee payable to Morgan Joseph may be greater than theabove amount.  Under the engagement letter, the Company may under certaincircumstances be required to indemnify Morgan Joseph in respect of certainliabilities arising under the Federal Securities Act of 1933.  

InNovember 2010, prior to entering into the letter of intent, the Companyrecorded approximately $377,000 in sales to Flash Ventures under its customaryterms of sale.

**NOTE 9     LEGALPROCEEDINGS**

            Fromtime to time, the Company may become a party to legal actions or proceedings inthe ordinary course of its business.  As of December 31, 2010, there wereno such actions or proceedings, either individually or in the aggregate, that,if decided adversely to the Company’s interests, the Company believes would bematerial to its business.

**NOTE 10   SUBSEQUENTEVENTS**

            Inconnection with the Company’s letter of intent to acquire Flash Ventures (referto Note 8 Commitments and Contingencies above) on January 5, 2011, the Companyentered into a loan agreement with Flash Ventures to loan it up to $1,000,000. Pursuant to the agreement Flash Ventures executed an unsecured, unsubordinatedterm note in favor of the Company, bearing interest at 11% per annum on anyunpaid principal, payable quarterly commencing March 31, 2011.  Principalof the note is payable upon maturity on December 1, 2011 (subject toacceleration in case of an event of default, as specified in the agreement),together with unpaid interest and any fees, expenses, and other amounts owingto the Company.  On January 6, 2011, and January 19, 2011, Flash Venturesdrew $600,000 and $400,000, respectively, in funds under the note, leaving nofurther funding available. Repayment of the amounts borrowed under theagreement and note are not contingent on reaching a definitive acquisitionagreement pursuant to the letter of intent.

             

 18

 

 

 

**Forward Industries, Inc.**

 

 

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

*Thefollowing discussion and analysis should be read in conjunction with ourunaudited consolidated financial statements, and the notes thereto, and otherfinancial information appearing elsewhere in this Quarterly Report on Form 10-Qand the audited consolidated financial statements and notes thereto included inour Annual Report on Form 10-K for the fiscal year ended September 30, 2010. The following discussion and analysis compares our consolidated results ofoperations for the three months ended December 31, 2010 (the “2011 Quarter”),with those for the three months ended December 31, 2009 (the “2010 Quarter”).  Allfigures in the following discussion are presented on a consolidated basis. Alldollar amounts and percentages presented herein have been rounded toapproximate values.*

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

 

Thefollowing management’s discussion and analysis includes “forward-looking statements”(as such term is used within the meaning of the Private Securities LitigationReform Act of 1995).  These “forward-looking statements” are not based onhistorical fact and involve assessments of certain risks, developments, anduncertainties in our business looking to the future.  Such forward lookingstatements can be identified by the use of forward-looking terminology such as“may”, “will”, “should”, “expect”, “anticipate”, estimate”, “intend”, “continue”, or “believe”, or the negatives or other variations of these termsor comparable terminology.  Forward looking statements may includeprojections, forecasts, or estimates of future performance and developments. Forward looking statements contained in this Quarterly Report are based uponassumptions and assessments that we believe to be reasonable as of the date ofthis Quarterly Report.  Whether those assumptions and assessments will berealized will be determined by future factors, developments, and events, whichare difficult to predict and may be beyond our control.  Actual results,factors, developments, and events may differ materially from those we assumedand assessed.  Such risk factors, uncertainties, contingencies, anddevelopments, including those discussed in this Management’s Discussion andAnalysis of Financial Condition and Results of Operations of this QuarterlyReport on Form 10-Q and those identified in “Risk Factors” in Item 1A ofForward’s Annual Report on Form 10-K for the fiscal year ended September 30,2010, could cause our future operating results to differ materially from thoseset forth in any forward looking statement. Such factors include, among others,the following: our ability to maintain constructive commercial relationshipswith our key customers, including during periods of economic downturnsgenerally or downturns/volatility in their specific businesses; the impacts onour financial condition, results of operations, and business prospects arisingfrom making an acquisition or failing to make an acquisition; our success inwinning new business from our customers and against competing vendors; whetherreplacement programs that we win will be more or less successful or profitablethan those that are replaced; levels of demand and pricing generally for bloodglucose monitoring devices sold by our customers for which we supply carrysolutions; management’s ability to successfully execute its business plan andstrategy and whether gains in net sales arising from this strategy, if any,will be adequate to offset increased operating expense incurred in executingthe strategy; variability in order flow from our OEM customers; OEM customers’decisions to reduce or eliminate their practice of including our carry caseaccessories in-box; the loss of key sales employees upon whom relationshipswith key OEM customers depend; general economic and business conditions,nationally and internationally in the countries in which we do business; thecontinuation of a global economic recession; the failure of one or more of oursuppliers; failures in our ability to maintain adequate quality control in ourproducts; demographic changes; changes in technology, including developments inthe treatment or control of diabetes that adversely affect the incidence of useand replacement rates of handheld blood glucose monitors by diabetics;increased competition in the business of distribution of carry solutions forhandheld electronic devices generally or increased competition to include carrysolutions with products manufactured by our OEM customers in particular;changes affecting the business or business prospects of one or more of ourprincipal OEM customers; governmental regulations and changes in, or thefailure to comply with, governmental regulations; and other factors includedelsewhere in this Annual Report and our other reports filed with theCommission.  Accordingly, there can be no assurance that any such forwardlooking statement, projection, forecast or estimate contained herein or in ourAnnual Report on Form 10-K for the fiscal year ended September 30, 2010, can berealized or that actual returns, results, or business prospects will not differmaterially from those set forth in any forward looking statement.

 

 19

 

 

**Forward Industries, Inc.**

 

 

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

**BUSINESS OVERVIEW**

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

In August 2010, we appointed a new chairman of the board and a newchief executive officer who, respectively, succeeded the outgoing actingchairman of the board and chief executive officer under the terms of a SettlementAgreement, as more fully described in our recently filed proxy statement underthe caption “Security Ownership of Certain Beneficial Owners and Management andRelated Shareholder Matters–Settlement Agreement” and in our Current Report onForm 8-K filed with the Commission on August 16, 2010.

**Trends and Economic Environment****

Ournew management team has stated its commitment to growing our OEM business andto its pursuit of a more marketing- and product development-driven businessmodel.  The second part of this strategy involves initiatives to expandour product offerings and to develop a retail distribution channel, in additionto our OEM channel.  In executing the second part of this strategy, we arelikely to incur significantly increased selling, general, and administrativeexpenses as we devote resources to develop and/or acquire new product offeringsand a retail sales capability and to the related recruitment of experiencedsales and marketing professionals. The realization of the benefits of these initiativeswill be determined by the speed in which we can bring new products to marketand by the success and acceptance of these products in the marketplace. 

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

Previously,we disclosed our intention to expand and/or diversify our business by means ofacquisition.  In December we announced the entry into a letter of intentto acquire a private distributor and developer of consumer electronicsperipherals and accessories. If an acquisition under this letter of intent wereto be consummated, as to which there can be no assurance, the Company wouldlikely become obliged to commit some combination of cash, stock, and otherresources to acquire and/or integrate such business and/or its personnel. See Note 8 of Notes to Financial Statements set forth elsewhere in thisQuarterly Report and our Current Report on Form 8-K as filed with theCommission on December 9, 2010.

 

 

20

 

 

 

**Forward Industries, Inc.**

 

 

**Variability of Revenuesand Results of Operations**

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

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

Thismanagement’s discussion and analysis of financial condition and results ofoperations is based upon or derived from the unaudited consolidated financialstatements included in this Quarterly Report on Form 10-Q, which have beenprepared in accordance with accounting principles generally accepted in theUnited States of America. The preparation of these financial statements requiresus to make estimates and judgments that affect the reported amounts of assets,liabilities, revenues, and expenses, and related disclosure of contingentliabilities. We base these judgments and estimates on our historical experienceand on various other assumptions that we believe to be reasonable under thecircumstances, and these judgments form the basis for our estimates concerningthe carrying values of assets and liabilities that are not readily apparentfrom other sources. We periodically re-evaluate these estimates and judgmentsbased on available information and experience. Actual results could differ fromour estimates under different assumptions and conditions. If actual resultssignificantly differ from our estimates, our financial condition and results ofoperations could be materially impacted. 

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

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

**Share-Based PaymentExpense**

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

**RESULTS OFOPERATIONS FOR THE 2011 QUARTER COMPARED TO THE 2010 QUARTER**

**Net income**

Werecorded net income of $17 thousand in the 2011 Quarter, compared to a net lossof $0.2 million in the 2010 Quarter. The improvement in the 2011 Quarterresulted from higher gross profit on higher sales, offset in part by higheroperating expenses, as shown in the table below:    

 

21

 

 

 

**Forward Industries, Inc.**

 

 

 

**Main Components of Net Loss**

 
(thousands of dollars)

 

2011

Quarter

2010 	Quarter

Increase 	(Decrease)

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

$5,968

$4,127

1,841

 

 

 

 

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

1,377

924

452

Selling, General and Administrative	Expenses....................................

(1,353)

(1,118)

235

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

(6)

7

(13)

Benefit from Income	Taxes.....................................................................

--

--

 

**Net Income (Loss)*.................................................................................**

**$17**

**($187)**

204

* Table may nottotal due to rounding.

Basic and diluted per share data was income of $0.00for the 2011 Quarter, compared to a loss of ($0.02) for the 2010 Quarter. The improvementin the 2011 Quarter compared to the 2010 Quarter was due to the increase in operatingincome.   

**Net Sales**

Netsales increased $1.8 million, or 45%, to $6.0 million in the 2011 Quarter from$4.1 million in the 2010 Quarter, due to higher sales of Diabetic Products and“Other Products”, which increased $1.1 million and $0.7 million, respectively,in the 2011 Quarter. The tables below set forth sales by product line andgeographic location of our customers for the periods indicated.

 

**Net Sales for 2011 Quarter**

**3 Months****ended****December 31, 2010**

**(millions of dollars)**

** **

**APAC**

**Americas**

**Europe**

Total*

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

$2.5

$0.7

$1.0

$4.2

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

0.2

1.2

0.3

1.7

**Total***

**$2.7**

**$1.9**

**$1.3**

**$6.0**

 

                                

**Net Sales for 2010 Quarter**

**3 Months ended December  31, 2009**

**(millions of dollars)**

** **

**APAC**

**Americas**

**Europe**

Total*

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

$1.6

$0.8

$0.7

$3.1

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

0.3

0.8

--

1.0

**Total***

**$1.9**

**$1.6**

**$0.7**

**$4.1**

* Tables maynot total due to rounding.

*Diabetic Product Sales*

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

Salesof cases and related accessories for blood glucose monitoring kits increased$1.1 million, or 38%, to $4.2 million in the 2011 Quarter, from $3.1 million inthe 2010 Quarter. This increase was due primarily to higher sales to one majordiabetic product customer as well as smaller increases to our two otherprincipal OEM diabetic customers, as presented in the table below, which setsforth our sales by diabetic product customer for the periods indicated.

 

22

 

 

 

**Forward Industries, Inc.**

 

 

 
(millions of dollars)

 

2011 Quarter

2010 Quarter

Increase 	(Decrease)

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

$2.5

$1.7

0.8

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

1.0

0.8

0.2

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

0.7

0.5

0.2

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

0.1

0.1

--

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

**$4.2**

**$3.1**

**$1.1**

* Table may not totaldue to rounding.

Salesof carrying cases for blood glucose monitoring kits represented 71% of ourtotal net sales in the 2011 Quarter compared to 75% of our total net sales inthe 2010 Quarter.  

*OtherProduct Sales*

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

Salesof other products increased $0.7 million, or 64%, to $1.7 million in the 2011Quarter from $1.0 million in the 2010 Quarter. This increase was due primarily toseveral new customers, for which we recorded first time sales in the 2011Quarter of $0.9 million, in the aggregate. Included in this amount, and thelargest single sale for the 2010 Quarter, is $0.4 million of non-recurringsales to Flash Ventures, Inc., the company that we are proposing to acquirepursuant to a letter of intent (refer to Note 8 Commitments and Contingenciesin the footnotes to the Unaudited Consolidated Financial Statements herein).These new customer sales were partially offset by lower sales to a number of existingcustomers. None of these declines are individually material.

Salesof other products represented 29% of our net sales in the 2011 Quarter comparedto 25% of net sales in the 2010 Quarter. 

**Gross Profit**

Grossprofit of $1.4 million in the 2011 Quarter increased $0.5 million, or 49%, from$0.9 million in the 2010 Quarter. This improvement resulted primarily from the45% increase in sales revenues (refer to “Net Sales” section above), offset inpart by relatively higher materials costs and higher freight costs.  Costof goods sold as a percentage of sales was 77% in the 2011 Quarter, compared to78% the 2010 Quarter, which is primarily a net result of a 3.6% decrease in thecosts of our Hong Kong based operations as a percentage of sales (due primarilyto lower local freight costs incurred) nearly offset by a 3.5% increase in ourmaterials costs as a percentage of sales due to the introduction of certainproducts for new “other product” customers into our product mix. 

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

**Selling Expenses**

Sellingexpenses of $0.4 million in the 2011 Quarter decreased $17 thousand, or 4%,from the 2010 Quarter due primarily to a $32 thousand decrease in personnelcosts and related travel and entertainment expenses and auto expense, and to alesser extent, a decrease in sampling costs. These decreases were offset, inpart, by small increases in utilities, office, and other selling expenses.

 

23

 

 

 

**Forward Industries, Inc.**

 

 

**Generaland Administrative Expenses**

Generaland Administrative expenses increased $0.3 million, or 38%, to $0.9 million inthe 2011 Quarter from $0.7 million in the 2010 Quarter due primarily to a $0.2million increase in personnel costs, including $75 thousand of bonus to retaina current Company officer (refer to Note 8 Commitments and Contingencies –Employment and Retention Agreements) and a $40 thousand increase in share-basedcompensation, primarily due to the 200,000 stock option award to a currentCompany officer in the 2011 Quarter (refer to Note 4 Share BasedCompensation).  Increases in other general and administrative,professional fees, travel and entertainment, and office expenses of $66thousand, $27 thousand, $26 thousand, and $14 thousand, respectively, alsocontributed to the increase. These increases were offset, in part, by adecrease in rent expense of $47 thousand. 

**Other (Expense) Income**

Other(expense) income, consisting primarily of interest income on cash and cashequivalent balances and foreign currency transaction gains and losses, declined$13 thousand to $6 thousand of expense in the 2011 Quarter, from $7 thousand ofincome in the 2010 Quarter. This resulted from a $15 thousand decline ininterest income in the 2011 Quarter, due primarily to lower average interestrates in the 2011 Quarter on slightly lower cash balances compared to the 2010Quarter. Exchange rate changes on foreign currency cash balances were notmaterial in either the 2011 Quarter or the 2010 Quarter.

**Net Income (Loss)**

Netincome improved to $17 thousand in the 2011 Quarter compared to a net loss of $0.2million in the 2010 Quarter as a result of the changes as described above.

**LIQUIDITY AND CAPITALRESOURCES**

                Duringthe 2011 Quarter, we used $0.3 million of cash in operations compared to a useof $0.7 million in the 2010 Quarter. Net cash used in operating activities inthe 2011 Quarter consisted of net income of $17 thousand, adjusted by $0.1million for non-cash items, reduced by changes in working capital items of $0.5million. As to working capital items, uses of cash in operating activities inrespect of increases in accounts receivable, inventories, and prepaid and othercurrent assets were $29 thousand, $0.4 million, and $54 thousand, respectively.A decrease in accrued expenses and other current liabilities of $0.4 millionalso contributed to uses of cash. These changes were offset, in part, by anincrease of $0.3 million in accounts payable, which generated cash in operatingactivities. The increases in inventories and accounts payable are a result ofpurchases made in support of sales orders received and also reflect the rampingup of production in anticipation of the Chinese New Year. The decrease inaccrued expenses and other current liabilities is primarily due to paymentsmade during the 2011 Quarter in respect of items accrued as of September 30,2010: (i) $83 thousand in severance payments to a former officer of the Companyunder the August 2010 Settlement Agreement; (ii) $140 thousand in shareholdersettlement costs under the August 2010 Settlement Agreement; and (iii) $175thousand in sales commissions. 

 

                Inthe 2010 Quarter, operating activities used $0.7 million of cash, consisting ofa net loss of $0.2 million (reduced by $82,000 for non-cash items), and $0.6million for net changes in working capital items. Changes in inventories andaccounts receivable of $0.3 million and $0.4 million, respectively, contributedto the net cash used by operating activities. These uses of working capitalwere partially offset by changes in prepaid expenses and other current assets,accrued expenses and other current liabilities, other assets, and accountspayable. 

 

                Inthe 2011 Quarter, net investing activities used $15 thousand for purchases ofproperty and equipment, primarily computer and telecommunications hardware andsoftware. There were no investing activities in the 2010 Quarter. There were nofinancing activities in the 2010 Quarter or the 2009 Quarter.

 

 

24

 

 

 

**Forward Industries, Inc.**

 

                

InJanuary 2011, and not reflected in the above analysis of the 2011 Quarter, weloaned $1,000,000 to Flash Ventures pursuant to a note and loan agreement,maturing in December 2011.  The Company and Flash Ventures have enteredinto a letter of intent pursuant to which it is proposed that the Company willacquire Flash.  See Notes 8 and 10 to Notes to Unaudited ConsolidatedFinancial Statements.  We believe these funds were borrowed by Flash torefinance indebtedness that was used for working capitalrequirements.    

 

AtDecember 31, 2010, our current ratio (current assets divided by currentliabilities) was 7.4; our quick ratio (current assets less inventories dividedby current liabilities) was 7.0; and our working capital (current assets lesscurrent liabilities) was $21.2 million.  As of such date, we had no shortor long-term debt outstanding. 

Ourprimary source of liquidity is our cash and cash equivalents on hand. Theprimary demands on our working capital are: operating losses to the extent theyoccur and accounts payable arising in the ordinary course of business, the mostsignificant of which arise when our customers place orders with us and we orderfrom our suppliers. Historically, our sources of liquidity have been adequateto satisfy working capital requirements arising in the ordinary course ofbusiness. Management’s recently announced business strategy includes (i)increasingthe Company’s existing OEM business and (ii) expanding its product offeringsand diversifying its distribution by moving into the retail channel. An acquisitionof Flash Ventures pursuant to the letter of intent referred to above, ifconsummated, would form an integral part of such strategy.  If any suchtransaction were to be consummated, we anticipate that it would involve thepayment of cash and/or the issuance of securities, either or both of whichmight be significant in amount, as well as the assumption (or modification) ofcommitments to certain employees of Flash.  See Note 8 to Notes toFinancial Statements, Commitments and Contingencies–Letter of Intent.  Weanticipate that our liquidity and financial resources for the next twelvemonths will be adequate to manage our operating and financial requirements.  However,in contrast to prior periods when the maintenance of cash balances and costcontainment were primary objectives, we anticipate significant use of ourcapital resources as a result of one or more of the following developments infuture periods: (i) cash payments as consideration arising out of a definitiveagreement to acquire Flash Ventures or another transaction; (ii) increases inoperating expenses in our implementation of management’s strategy (see “Trendsand Economic Environment” above); and (iii) varying scenarios in repayment ofthe loan referred to above depending on the outcome of such acquisition.

In September 2002 andJanuary 2004, our Board of Directors authorized the repurchase of up to anaggregate of 486,200 shares of our outstanding common stock. Under thoseauthorizations, as of December 31, 2009, we had repurchased an aggregate of172,603 shares at a cost of approximately $0.4 million but none during Fiscal2010 or the 2011 Quarter. 

 

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

Notapplicable.

**ITEM4. CONTROLS AND PROCEDURES **

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

 

25

 

 

 

**Forward Industries, Inc.**

 

 

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

**Changesin internal control**

Ourmanagement, with the participation of our Principal Executive Officer and PrincipalFinancial Officer, performed an evaluation required by Rule 13a-15(d) of theExchange Act as to whether any change in our internal control over financialreporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred duringthe 2011 Quarter.  Based on that evaluation, our Principal ExecutiveOfficer and our Principal Financial Officer concluded that no change occurredin the Company's internal control over financial reporting during the 2011Quarter that has materially affected, or is reasonably likely to materiallyaffect, the Company's internal control over financial reporting.
PART II.   OTHER INFORMATION
**ITEM1. LEGAL PROCEEDINGS**

Fromtime to time, the Company may become a party to legal actions or proceedings inthe ordinary course of its business.  As of December 31, 2010, there wereno such actions or proceedings, either individually or in the aggregate, that,if decided adversely to the Company’s interests, the Company believes would bematerial to its business.

**ITEM1A. RISK FACTORS**

Pleasereview our Annual Report on Form 10-K for the fiscal year ended September 30,2010, for a complete statement of “Risk Factors” that pertain to our business.Please refer to ITEM 2. “CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATESECURITIES LITIGATION REFORM ACT OF 1995 on page 19 of this QuarterlyReport on Form 10-Q as well as Management’s Discussion and Analysis ofFinancial Condition and Results of Operations for further discussion of certainof such risk factors.

Thefollowing paragraphs set forth two risk factors from our Annual Report on Form10-K for the year ended September 30, 2010, that are updated for purposes ofthis Quarterly Report.

                *Wehave previously announced our intention to diversify our business by means ofacquisition or other business combination*.

                Ournew management team has announced a business strategy to grow our OEM business,expand product offerings and technology solutions, and develop or acquire retaildistribution capability.   Management stated that an acquisitionwithin the technology accessories business might, in the right circumstances,be complementary with the strategy it has identified.  In December 2010,we announced entry into a letter of intent to acquire Flash Ventures Inc., a distributorof consumer electronics peripherals and accessories specializing in accessoryproducts bearing professional team and college team sports logos acquired underlicense with a significant retail presence. If such acquisition is undertaken,there can be no assurance as to the cost in cash or securities of such anacquisition or other combination, the potential dilution to existingshareholders if our securities are issued as part of transaction consideration,or the business risks that accompany any such transaction. There can be noassurance that we will be successful in our efforts to make such acquisition,or a different one, or that any business that we do acquire or invest in willbe profitable.  There can be no assurance as to the timing of atransaction, or that the market price of our common stock will not decline inresponse to any such transaction as may be effected.

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

 

 

26

 

 

 

**Forward Industries, Inc.**

 

                

Ournew management team intends to pursue a more marketing- and product development-drivenbusiness model to grow our existing business and expand product offerings,compared to the prior management team that was focused on maintaining theliquidity of the balance sheet as it assessed potential acquisitions.  Inexecuting this strategy, we are likely to incur increased selling, general, andadministrative expense as we devote increased resources to product sales anddevelopment and a retail presence, including resources to recruit andcompensate experienced sales and marketing professionals.  Such increasedexpenses are likely to impact our income statement and reduce cash andequivalents before such efforts result in higher revenues, if at all, which maymaterially and adversely affect our results of operations.    Realizationof this strategy and improvement in our results of operations will depend onmanagement’s ability to execute successfully on its strategy and business plan.

 

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

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

**ITEM3. DEFAULTS UPON SENIOR SECURITIES**

None.

**ITEM4. REMOVED AND RESERVED**

**ITEM5. OTHER INFORMATION**

None

**ITEM 6. EXHIBITS     **

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

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

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

 

 

 

27

 

 

 

**Forward Industries, Inc.**

 

 

 

**SIGNATURES**

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

 

Dated:  February 9, 2011
 

 
FORWARDINDUSTRIES, INC.

 
                (Registrant)

 
           

 
 

 
By:/s/ Brett M.Johnson                    
  
 
BrettM. Johnson                 

 
ChiefExecutive Officer

 
(PrincipalExecutive Officer)

 
 

 
 

 
By:/s/James O. McKenna                  
  
 
JamesO. McKenna          

 
ChiefFinancial Officer

 
(PrincipalFinancial and Accounting Officer)

                                                                                

 

 

 

 

 

28

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