** **

 

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

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

________________

**FORM 10-Q**

________________

 

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

**            ****For the quarterly period ended June 30, 2009.**

**OR**

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

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

** **

**Commission File Number: 0-6669**

________________

**FORWARD INDUSTRIES, INC.**

(Exact name of registrant as specified in its charter)

________________

** **

** **

| **New York** | **13-1950672**
(State or other jurisdiction ofincorporation or organization)

(I.R.S.Employer Identification No.)
 

 
 

 

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

(Address of principal executive offices, including zipcode)

**(954) 419-9544**

(Registrant’s telephone number, including area code)

________________

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

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “ large accelerated filer”, “accelerated filer”, 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, August 3, 2009, was 7,930,496 shares.

1

 

 
****
 

 

 

 

**Forward Industries, Inc.**

**INDEX**

**PART  I.**

** **

**FINANCIAL  INFORMATION**

Page No.

 

 

 

 

 

**Item  1.**

**Financial  Statements**

 

 

 

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

 

 

 

     and September 30, 2008............................................................................................................			

4

 

 

 

 

 

 

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

 

 

 

Ended June 30 , 2009 and 2008................................................................................................			

5

 

 

 

 

 

 

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

 

 

 

     Ended June 30, 2009 and 2008.................................................................................................			

6

 

 

 

 

 

 

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

7

 

 

 

 

 

**Item  2.**

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

16

 

** **

** **

 

 

**Item  3.**

**Quantitative  and Qualitative Disclosures About Market Risk...........................................			
26

 

 

** **

**Item  4.**

** **

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

26

 

** **

 

 

**PART  II.**

** **

**OTHER  INFORMATION**

** **

 

** **

 

 

 

**Item  1.**

**Legal  Proceedings.......................................................................................................................			
27

 

** **

** **

 

 

**Item  1A.**

**Risk  Factors.................................................................................................................................			
27

 

** **

** **

 

 

**Item  2**

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

28

 

** **

** **

 

 

**Item  3**

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

28

 

** **

** **

 

 

**Item  4.**

**Submission  of Matters to a Vote of Security Holders...........................................................			
28

 

** **

** **

 

 

**Item  5.**

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

28

 

** **

** **

 

 

**Item  6.**

**Exhibits..........................................................................................................................................			
28

 

** **

** **

 

 

 

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

29

 

 

** **

 

 

 

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

30

** **

2

 

 
****
 

 

 

 

**Note Regarding Use of Certain Terms**

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

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

“2008Quarter” refers to the three months ended June 30, 2008;

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

“2008Period” refers to the nine months ended June 30, 2008 

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

“Fiscal2008” refers to our fiscal year ended September 30, 2008; “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 that are our customers

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 
PART I.   FINANCIAL INFORMATION**ITEM 1.  FINANCIAL STATEMENTS**
Forward Industries,Inc.

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

**June 30,**

** **

**September 30,**

 

**2009**

** **

**2008**

**Assets**

**(Unaudited)**

** **

** **

**Current assets:**

 

 

 

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

$19,569,788

 

$19,862,426

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

3,296,321

 

3,659,553

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

781,030

 

1,363,862

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

363,343

 

586,632

Deferred tax asset...........................................................................................................		

--

 

49,449

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

24,010,482

 

25,521,922

 

 

 

 

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

179,186

 

124,854

Deferred tax asset...............................................................................................................		

--

 

359,681

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

59,532

 

98,259

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

$24,249,200

 

$26,104,716

 

 

 

 

**Liabilities and shareholders’ equity**

 

 

 

Current liabilities:

 

 

 

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

$1,492,029

 

$2,206,630

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

200,999

 

189,827

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

1,693,028

 

2,396,457

 

 

 

 

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

--

 

--

** **

 

 

 

**Shareholders’ equity:**

 

 

 

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

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

--

 

--

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

8,641,098 and 8,621,932 shares issued at  June 30, 2009 and September 30, 2008, respectively (including 706,410 held in  treasury at both dates)................... 

 

86,411

 

 

86,219

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

16,060,703

 

15,893,480

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

(1,260,057)

 

(1,260,057)

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

7,669,115

 

8,988,617

**Total shareholders' equity**...............................................................................................		

22,556,172

 

23,708,259

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

$24,249,200

 

$26,104,716

 

 

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

 

4

 

 

 

 

 

 

Forward Industries,Inc.

**CONSOLIDATED STATEMENTS OF OPERATIONS -- (UNAUDITED)**

 

** **

** **

** **

 

**Three Months Ended June 30,**

** **

**Nine Months Ended June 30,**

 

**2009**

** **

**2008**

** **

**2009**

** **

**2008**

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

$4,106,814

 

$5,568,232

 

$13,670,407

 

$15,249,026

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

3,075,481

 

4,406,016

 

11,031,543

 

12,349,930

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

1,031,333

 

1,162,216

 

2,638,864

 

2,899,096

 

 

 

 

 

 

 

 

**Operating expenses:**

 

 

 

 

 

 

 

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

645,035

 

652,048

 

2,069,699

 

2,127,240

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

512,474

 

673,266

 

1,806,315

 

2,258,812

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

1,157,509

 

1,325,314

 

3,876,014

 

4,386,052

** **

 

 

 

 

 

 

 

**Loss from operations**....................................................			

(126,176)

 

(163,098)

 

(1,237,150)

 

(1,486,956)

** **

 

 

 

 

 

 

 

**Other income:**

 

 

 

 

 

 

 

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

49,137

 

104,590

 

248,378

 

517,713

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

13,182

 

(7,297)

 

(30,228)

 

23,575

**Total other income**.........................................			

62,319

 

97,293

 

218,150

 

541,288

** **

 

 

 

 

 

 

 

**Loss before provision for (benefit from) income  			taxes**............................................................................

(63,857)

 

(65,805)

 

(1,019,000)

 

(945,668)

**Provision for (benefit  from) income taxes**.................			

--

 

45,191

 

300,499

 

(189,485)

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

($63,857)

 

($110,996)

 

($1,319,499)

 

($756,183)

** **

 

 

 

 

 

 

 

**Net loss per common and common equivalent share**

 

 

 

 

 

 

 

Basic  and Diluted............................................ 

($0.01)

 

($0.01)

 

($0.17)

 

($0.10)

** **

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Basic  and Diluted............................................ 

7,930,496

 

7,911,412

 

7,922,985

 

7,879,730

 

 

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

 

5

 

 

 

 

 

 

**Forward Industries, Inc.**

**CONSOLIDATED STATEMENTS OFCASH FLOWS -- (Unaudited)**

 

** **

 

**Nine Months Ended**

**June 30,**

 

**     2009**

** **

**2008**

**Operating activities:**

 

 

 

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

($1,319,499)

 

($756,183)

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

 

 

 

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

409,130

 

(151,926) 

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

153,464

 

94,735

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

58,867

 

48,936

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

23,401

 

(20,033) 

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

11,759

 

 

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

(35,912)

 

465,442

Changes in operating assets  and liabilities:

 

 

 

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

339,831

 

(273,633)

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

618,744

 

(783,617)

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

223,289

 

287,575

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

38,727

 

357

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

(714,601)

 

1,088,734

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

11,172

 

36,377

**Net cash (used in) provided  by operating activities..........................................................**

**(181,628)**

** **

**36,764**

 

 

 

 

**Investing activities:**

 

 

 

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

(124,958)

 

(24,196)

**Net cash used in  investing activities..................................................................................**

**(124,958)**

 

**(24,196)**

 

 

 

 

**Financing activities:**

 

** **

 

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

13,948

 

--

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

--

 

38,500

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

**--**

 

**38,500**

 

** **

 

 

**Net (decrease) increase  in cash and cash equivalents....................................................**

**(292,638)**

** **

**51,068**

** **

** **

** **

** **

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

**19,862,426**

** **

**20,267,791**

** **

** **

** **

** **

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

**$19,569,788**

** **

**$20,318,859**

 

 

 

 

 

The accompanying notes are an integral part of theconsolidated financial 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 and began operations in 1961.  The Company is engaged in the design, marketing,and distribution of custom-designed, soft-sided carrying cases and other carrysolutions products made from leather, nylon, vinyl, and other syntheticfabrics.  The cases and other products are used primarily by consumers for theprotection and transport of portable electronic devices such as medical devicesand cellular phones. The Company markets its products directly tooriginal-equipment-manufacturers (“OEMs”).  Sales to OEM customers are made inEurope, the APAC Region, and the Americas. 

In theopinion of management, the accompanying consolidated financial statementsreflect all normal recurring adjustments necessary to present fairly thefinancial position and results of operations and cash flows for the interimperiods presented herein, but are not necessarily indicative of the results ofoperations for the fiscal year ending September 30, 2009. These financial statements should be read in conjunction with the Company's audited consolidatedfinancial statements included in its annual report on Form 10-K for the fiscalyear ended September 30, 2008, and with the disclosures and risk factorspresented herein and therein, respectively.

**NOTE 2     ACCOUNTINGPOLICIES**

**Accountingestimates**

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

**Basis ofpresentation**

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

**RevenueRecognition**

In accordancewith the requirements of Staff Accounting Bulletin (SAB) No. 104, RevenueRecognition in Financial Statements, the Company generally recognizes revenuefrom product sales to customers when: products that do not require furtherservices by the Company are shipped, there are no uncertainties surroundingcustomer acceptance, and collectability is reasonably assured. 

**Supplier Rebates**

EmergingIssues Task Force (EITF) Issue No. 02-16, Accounting by a Customer (Including aReseller) for Certain Consideration Received from a Vendor, permits recognitionof a rebate or refund of a specified amount of cash consideration that ispayable if the customer completes a specified cumulative level of purchases. The Company entered into agreements with several of its suppliers that grantedthe Company a rebate based on its level of purchases made during fiscal quartersprior to October 1, 2008. In lieu of a cash payment from these suppliers theCompany received a credit memo. The Company reduced accounts payable to thesupplier, inventory, and cost of goods sold each quarter as the Company earnedthe rebates.  For the three-and nine-month periods ended June 30, 2008, the cumulative amount of such quarterly rebates were approximately $130,000 and$329,000, respectively. The quarterly rebate is net of amounts allocated tounsold inventories and is reflected in the accompanying consolidated statementsof operations as a reduction of cost of goods sold for the three-and nine-monthperiods ended June 30, 2008. No such rebates were agreed to or recorded for thethree- and nine-month periods ended June 30, 2009.

7

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE2     ACCOUNTING POLICIES (CONTINUED)**

**Foreign CurrencyTransactions**

Thefunctional currency of the Company's wholly owned foreign subsidiaries is theU.S. dollar. Foreign currency transactions may generate receivables or payablesthat are fixed in terms of the amount of foreign currency that will be receivedor paid. Fluctuations in exchange rates between the functional currency and thecurrency in which such transaction is denominated increases or decreases theexpected amount of functional currency cash flows upon settlement of thetransaction. These increases or decreases in expected functional currency cashflows are foreign currency transaction gains or losses that are included in“other income (expense), net” in the accompanying consolidated statements ofoperations. The net gains (losses) from foreign currency transactions wereapproximately $13,000 and ($7,000) for the three-month periods ended June 30, 2009 and 2008, respectively. The net (losses) gains from foreign currencytransactions were approximately $(25,000) and $20,000 for the nine-monthperiods ended June 30, 2009 and 2008, respectively. 

**ComprehensiveLoss**

 For thethree and nine-month periods ended June 30, 2009 and 2008, the Company did not have any components of comprehensive loss other than net loss.

**RecentAccounting Pronouncements**

InJune 2009, the Financial Accounting Standards Board (“FASB”) issued SFASNo. 168, *The “FASB Accounting Standards Codification” and the Hierarchyof Generally Accepted Accounting Principles (“GAAP”)*. This standardreplaces SFAS No. 162, *The Hierarchy of Generally Accepted AccountingPrinciples*, and will become the source of authoritative, nongovernmentalGAAP, except for rules and interpretive releases of the Securities andExchange Commission (“SEC”), which are sources of authoritative GAAP for SECregistrants. All other nongrandfathered, non-SEC accounting literature notincluded in the Codification will become nonauthoritative.This standard is effective for financial statements for interim or annualreporting periods ending after September 15, 2009.  The Company willbegin to use the new guidelines and numbering system prescribed by theCodification when referring to GAAP in its fiscal 2009annual report.  As the Codification was notintended to change or alter existing GAAP, it will not have any impact on theCompany’s consolidated financial results or financial position.

On June 30, 2009, the Company adopted FASB StatementNo. 165, “*Subsequent Events”*. The Statement establishes generalstandards of accounting for and disclosure of events that occur after thebalance sheet date but before financial statements are issued or are availableto be issued. Specifically, the Statement defines: (1) the period afterthe balance sheet date during which management of a reporting entity shouldevaluate events or transactions that may occur for potential recognition ordisclosure in the financial statements, (2) the circumstances under whichan entity should recognize events or transactions occurring after the balancesheet date in its financial statements, and (3) the disclosures that anentity should make about events or transactions that occurred after the balancesheet date. Management has reviewed events occurring through August 5, 2009,the date the financial statements were issued and no subsequent events occurredrequiring accrual or disclosure.

InDecember 2007, the FASB issued FASB Statement No. 141 (revised 2007),*“Business Combinations”*(SFAS 141(R)). SFAS 141(R) requires thatthe fair value of the purchase price of an acquisition including the issuanceof equity securities be determined on the acquisition date; requires that allassets, liabilities, non-controlling interests, contingent consideration,contingencies, and in-process research and development costs of an acquiredbusiness be recorded at fair value at the acquisition date; requires thatacquisition costs generally be expensed as incurred; requires that restructuringcosts generally be expensed in periods subsequent to the acquisition date; andrequires that changes in deferred tax asset valuation allowances and acquiredincome tax uncertainties after the measurement period be reflected in incometax expense. SFAS 141(R) also expandsdisclosures related to business combinations. SFAS 141(R) must be appliedprospectively to business combinations occurring after the beginning of theCompany's fiscal year 2010, except that business combinations consummated priorto the effective date must apply SFAS 141(R) income tax requirementsimmediately upon adoption. 

8

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 3     INVENTORIES**

Inventories consist primarily offinished goods and are stated at the lower of cost (determined by the first-in,first-out method) or market.  Based on management’s estimates, an allowance ismade to reduce excess, obsolete, slow-moving, or otherwise un-saleableinventories to net realizable value. The allowance is established throughcharges to cost of goods sold on the Company’s consolidated statements ofoperations. Reserved inventory that is disposed of is charged against theallowance. Management’s estimates in determining the adequacy of the allowanceare based upon several factors, including analyses of inventory levels,historical loss trends, sales history, and projections of future sales demand.The Company’s estimates of the allowance, as well as recoveries of reservedinventory, may change from time to time based on management’s assessments, andsuch changes could be material. At June 30, 2009 and September 30, 2008, the allowances for obsolete inventory were approximately $64,000 and$168,000, respectively. 

**NOTE 4     DEBT**

In March 2008, Forward and itswholly-owned U.S. subsidiary, Koszegi Industries, Inc., elected not to renew theircredit facility with a U.S. bank that provided for a committed line of creditin the maximum amount of $3.0 million, including a $1.5 million sub-limit forletters of credit.  Accordingly, this credit facility expired March 30, 2008. There were no borrowings or letter of credit obligations outstanding underthis facility during the nine-month period ended June 30, 2008. 

In 2003, Forward’s wholly-ownedSwiss subsidiary, Forward Innovations GmbH (Forward Innovations), established acredit facility with a Swiss bank that provides for an uncommitted line ofcredit in the maximum amount of $400,000.  Amounts borrowed under the facilitymay be structured as a term loan or loans, with a maximum repayment period of12 months, as a letter of credit facility, or as a guarantee facility, or anycombination of the foregoing.  Either party may terminate the facility at anytime; however, such termination would not affect the stated maturity of anyterm loans outstanding.  Amounts borrowed other than as a term loan must be settledquarterly or converted into term loans.  In connection with this facility,Forward Innovations agreed to certain covenants. Amounts drawn under thiscredit facility bear interest at variable rates established by the Swiss bank (5.50%as June 30, 2009).  At June 30, 2009, Forward Innovations is contingentlyliable to the Swiss bank in respect of a letter of credit issued on its behalfin the amount of €224,000 (equal to approximately $315,000 as at June 30, 2009) in favor of Forward Innovations’ freight forwarder and customs agent inconnection with its logistics operations in The Netherlands.  The effect of theissuance of the letter of credit is to reduce the availability of the creditline in an amount equal to the face amount of the letter of credit.  See Note10.

**NOTE 5     SHAREHOLDERS’EQUITY**

**Anti-takeoverProvisions**

The Company is authorized to issueup to 4,000,000 shares of "blank check" preferred stock. The Board ofDirectors has the authority and discretion, without shareholder approval, toissue preferred stock in one or more series for any consideration it deemsappropriate, and to fix the relative rights and preferences thereof includingtheir redemption, dividend and conversion rights.

 

 

9

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 5     SHAREHOLDERS’EQUITY (CONTINUED)**

**Stock Repurchase**

On September 27, 2002, the Company’s Board of Directors authorized the repurchase of up to 400,000 shares of theCompany’s outstanding common stock (approximately 7% of the number of sharesthen outstanding). On January 21, 2004, the Company’s Board increased theamount of shares authorized for repurchase to 486,200.  Under theseauthorizations, as of June 30, 2009, the Company had repurchased an aggregateof 172,603 shares at a cost of approximately $0.4 million, but none during the2009 Period, leaving a balance of 313,597 shares (approximately 4% of theshares outstanding at June 30, 2009) under those authorizations.  Separately, on March 5, 2008, the Company accepted 72,917 outstanding shares of common stockfrom a former officer as consideration for his exercise of options to purchase100,000 shares of common stock as part of a cashless exercise.   See Note 9. 

**NOTE 6     OPERATINGSEGMENT INFORMATION**

The Company operates in a singlesegment: the supply of carrying solutions for portable electronic devices. Thiscarrying-solution segment includes the design, marketing, and distribution ofproducts to its customers that include manufacturers of consumer hand heldmedical monitoring devices and cell phones. The Company’s carrying solutionsegment operates in geographic regions that include primarily the APAC, Americas, and Europe. Geographic regions are defined based primarily on the location of the customer(or their contract manufacturers).  The following table presents net salesrelated to these geographic segments:

*(all amounts in thousands ofdollars)*

**Three Months Ended**

**June 30,**

** **

**Nine Months Ended**

**June 30,**

 

**2009**

** **

**2008**

** **

**2009**

** **

**2008**

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

$1,774

 

$1,823

 

$5,457

 

$4,394

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

1,480

 

2,859

 

4,900

 

7,913

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

853

 

886

 

3,313

 

2,942

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

**$4,107**

** **

**$5,568**

** **

**$13,670**

** **

**$15,249**

 

10

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 7     INCOME TAXES**

The Company’s provision for (benefit from) income taxes consists of thefollowing United States and foreign components.

 
**Three Months Ended**

**June 30,**

** **

**Nine Months Ended**

**June 30,**

 

**2009**

** **

**2008**

** **

**2009**

** **

**2008**

U.S. Federal and State:

 

 

 

 

 

 

 

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

$         --

 

-- 

 

--

 

--

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

1,752

 

$56,578

 

($187,780)

 

($152,938)

 

** **

** **

 

** **

** **

** **

** **

Foreign:

** **

** **

 

** **

** **

** **

** **

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

**--**

** **

--

** **

**--**

** **

--

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

(6,910)

 

(11,387)

 

(27,711)

** **

(36,547)

** **

** **

** **

** **

** **

** **

** **

** **

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

**5,158**

** **

**--**

** **

**515,990**

** **

** **

**Provision for (benefit from) income taxes....................................................**

**$         --**

** **

**$45,191**

** **

**$300,499**

** **

**($189,485)**

The Company’s effective tax ratedoes not approximate the statutory United States federal income tax rateprimarily due to the establishment of the valuation allowance and tax ratedifferentials in respect of United States state and foreign taxes.  

**NOTE 7     INCOME TAXES(CONTINUED)**

At June 30, 2009, the Company had available net operating loss carryforwards for United States federal and stateincome tax purposes of approximately $952,000 and $1,673,000, respectively,expiring through 2028 and resulting in a combined deferred tax asset ofapproximately $420,000. In addition, at June 30, 2009, the Company had available net operating loss carryforwards for foreign income tax purposes ofapproximately $1,083,000 resulting in a deferred tax asset of approximately$95,000.  At June 30, 2009, the Company had total deferred tax assets ofapproximately $515,000.

During the three-month periodended March 31, 2009, as part of its periodic evaluation of the need for avaluation allowance against its deferred tax assets, and after consideration ofall the evidence, both positive and negative (including, among others,projections of future taxable income, current year net operating losscarrforward utilization and the extent of the Company’s cumulative losses inrecent years), the Company determined that, on a more likely than not basis, itwould not be able to use any of its deferred tax assets except in respect of UnitedStates income taxes arising from the repatriation of certain foreign sourceincome of its Swiss subsidiary, which is currently considered to be permanentlyinvested and for which no United States tax liability has been accrued.Accordingly, except as set forth in the preceding sentence, the Company hasestablished a full valuation allowance against its deferred tax assets, and,, asof June 30, 2009, the valuation allowance was approximately $515,000. If theCompany determines in a future reporting period that it will be able to realizesome or all of its deferred tax assets, the adjustment to reduce or eliminatethe valuation allowance would reduce its tax expense and increase after-taxincome. Changes in deferred tax assets and valuation allowance are reflected inthe “Provision for (benefit from) income taxes” line item of the Company’sconsolidated statements of operations. No such valuation allowance was recordedas of September 30, 2008.

EffectiveJune 2001, undistributed earnings of the Company’s Swiss subsidiary areconsidered to be permanently invested; therefore, in accordance with SFAS No.109, no provision for U.S. Federal and state income taxes on those earnings hasbeen provided.  At June 30, 2009, the Company’s Swiss subsidiary had approximately$3,920,000 of accumulated undistributed earnings.  

11

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 8     LOSS PER SHARE**

Basic pershare data for each period presented is computed using the weighted-averagenumber of shares of common stock outstanding during each period.  Diluted pershare data is computed using the weighted-average number of common shares plusdilutive common-equivalent shares outstanding during each period. Dilutivecommon-equivalent shares consist of shares that would be issued upon theexercise of stock options and warrants, computed using the treasury stockmethod. For this purpose, the average quoted market prices on the NASDAQSmallCap Market for the Company's common stock for the three-month periodsended June 30, 2009 and 2008, were $1.65 and $2.46, respectively. The averagequoted market prices on the NASDAQ SmallCap Market for the Company’s commonstock for the nine-month periods ended June 30, 2009 and 2008, were $1.97 and $2.47, respectively. Loss per share data for the three and nine-month periodsended June 30, 2009 and 2008, excludes all outstanding dilutive commonequivalent shares as inclusion of such shares would be anti-dilutive. 

Inaccordance with the contingently issuable shares provision of SFAS 128, 80,233 and39,998 shares of service-based common stock awards (“restricted stock”) wereexcluded from the calculation of diluted loss per share for the three monthperiods ended June 30, 2009 and 2008, respectively.

**NOTE 9     STOCK BASEDCOMPENSATION**

In May 2007, shareholders of theCompany approved the 2007 Equity Incentive Plan (the 2007 Plan), whichauthorized the issuance of up to 400,000 shares of common stock to officers,employees, and non-employee directors of the Company in connection with thegrants of restricted common stock and stock options awarded to such persons.This plan was adopted by the Board of Directors in February 2007.  The price atwhich restricted common stock may be granted and stock options granted may beexercised may not be less than the fair market value of the common stock at thedate of grant. The Company’s Compensation Committee administers the plan. Options generally expire ten years after the date of grant and restricted stockgrants generally vest in equal proportions over three years.   As of June 30, 2009, 146,500 shares of common stock remain available for grants of awards ofrestricted stock and options to purchase common stock under the 2007 Plan.

TheCompany’s 1996 Stock Incentive Plan (the 1996 Plan) expired in accordance withits terms in November 2006.  The exercise price of incentive options grantedunder the 1996 Plan to officers, employees, and non-employee directors of theCompany were required by its provisions to be equal at least to the fair marketvalue of the common stock at the date of grant. Options expire ten years afterthe date of grant and generally vest in equal proportions over three years. Unexercised options granted pursuant to the 1996 Plan prior to expirationremain outstanding until the earlier of exercise or option expiration.

**Stock OptionAwards**

Under the1996 Plan 30,000 fully vested stock options remain outstanding and unexercised,all at exercise prices higher than the fair market value of the common stock at June 30, 2009.  

Under the2007 Plan, the Compensation Committee of the Company’s Board of Directors has grantedstock option awards to purchase 155,000 shares of common stock, in theaggregate, to the Company’s non-employee directors and a Company officer, ofwhich awards covering 30,000 shares of common stock expired unexercised, withsuch shares reverting to the 2007 Plan.  Of these awards, 55,000 were grantedduring the nine-month period ended June 30, 2009. These awards are subject to a continued service condition and vest on the anniversary date the awards weregranted. The Company recognized approximately $16,000 and $66,000 ofcompensation costs for stock option awards in its consolidated statements ofoperations in the three- and nine month-periods ended June 30, 2009, respectively.  The Company recorded approximately $29,000 and $43,000 of such costsin its consolidated statements of operations in the three- and nine-monthperiods ended June 30, 2008, respectively.

12

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 9     STOCK BASEDCOMPENSATION (CONTINUED)**

**Stock OptionAwards (continued)**

Thefollowing table summarizes stock option activity under the 2007 Plan and the1996 Plan from September 30, 2008 through June 30, 2009: 

 

**Shares**
 
**Weighted AverageExercise Price**
 
**Weighted AverageRemaining		Contractual Term (Years)**
 
** **

**AggregateIntrinsic Value**

**Outstanding at September 30, 2008**

110,000
 
$4.26
 
7.40
 
--

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

55,000
 
1.80
 
9.62
 
 

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

--
 
--
 
--
 
 

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

--
 
--
 
--
 
 

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

(10,000)
 
2.20
 
--
 
 

**Outstanding at June 30, 2009**

**155,000**
 
**$3.52**
 
**8.50**
 
**--**

 

 
 
 
 
 
 
 

**Options  vested and exercisable at June 30, 2009...........................................**

** **

**100,000**
 
** **

**$4.47**
 
** **

**7.88**
 
 

--

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 and Nine-Month Periods Ended  June 30,**

 

** **

**2009**

** **

**2008**

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

 

5.0

 

5.0

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

 

1.65%

 

3.78%

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

 

79.8%

 

80.2%

Expected  dividend yield....................................................

 

0%

 

0%

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

13

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 9     STOCK BASED COMPENSATION(CONTINUED)**

**Restricted Stock Awards**

Under the2007 Plan as of June 30, 2009, the Compensation Committee had approved andgranted awards of 130,000 shares ofrestricted stock, in the aggregate, to certain key employees, one of whom alsoserves as a director, pursuant to the 2007 Plan.  Of these awards 1,500 sharesof restricted stock have been forfeited and reverted to the 2007 Plan.  Vestingof the restricted stock is generally subject to a continued service conditionwith one-third of the awards vesting each year on the anniversary date theawards were granted typically commencing on the first such anniversary date. The fair value of the awards granted was equal to the market value of theCompany’s common stock on the grant date. During the three- and nine-monthperiods ended June 30, 2009, the Company recognized approximately $27,000 and$88,000, respectively, of compensation costs in its consolidated statements ofoperations related to restricted stock awards granted under the 2007 Plan. Duringthe three- and nine-month periods ended June 30, 2008, the Company recognized approximately $15,000 and $52,000, respectively, in its consolidated statements ofoperations****of such costs.

The following table summarizes restricted stock activity under the 2007Plan from September 30, 2008, through June 30, 2009.

 

 

** **

** **

** **

**Shares**

** **

**Weighted Average  		Grant Date Fair Value**

Non-vested balance at September 30, 2008.............

 

47,498

 

$2.65

Changes during the period:

 

 

 

 

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

 

60,500

 

2.07

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

 

(19,166)

 

2.93

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

 

(1,500)

 

3.49

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

 

87,332

 

$2.17

As of June 30, 2009, there was approximately $120,000 of total unrecognized compensation cost related to shares ofunvested restricted stock awards (reflected in the table above) granted underthe 2007 Plan. That cost is expected to be recognized over the remainder of therequisite service (vesting) periods.

**Warrants**

As of June 30, 2009, warrants to purchase 75,000 shares of the Company’s common stock at anexercise price of $1.75 were outstanding. These warrants are scheduled toexpire 90 days after a registration statement is declared effective by theSecurities and Exchange Commission. As of June 30, 2009, no such registration statement has been filed with the Securities and Exchange Commission.

**NOTE 10   COMMITMENTS ANDCONTINGENCIES**

**Royalty Commitments**

On May 22,2008, the Company entered into a non-exclusive license agreement with Motorola,Inc. (“Motorola”) that granted the Company the right to distribute certainMotorola trademarked carry solution accessory products to wholesale and retailcustomers in the United States, Canada, and Europe through June 30, 2009,subject to renewal by mutual agreement.  The license agreement was madeeffective retroactive to January 1, 2008, the date subsequent to expiration ofa prior license agreement on December 31, 2007.  In consideration of the grant,the Company agreed to pay to Motorola a royalty based upon a percentage ofactual net sales of branded accessory products, subject to payment of minimumroyalties (irrespective of actual net sales) in the amount of $650,000 over the15-month term of the agreement. 

14

 

 

 

 

**Forward Industries, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** (UNAUDITED)**

 

 

**NOTE 10   COMMITMENTS ANDCONTINGENCIES (CONTINUED)**

**Royalty Commitments (continued)**

On December 22, 2008, the Company and Motorola amended the license agreement to (i) reducethe royalty rate from 15% of Net Sales to 7% of Net Sales and (ii) eliminateall minimum royalties under the agreement with retroactive effect.  On December 31, 2008, the Company provided Motorola written notice of its intention not torenew the License Agreement upon expiration of its term on June 30, 2009.

For thenine-month period ended June 30, 2009, the Company recorded $4,000 of royaltyexpense, but none for the three-month period ended June 30, 2009. For the three- and nine-month periods ended June 30, 2008, the Company recorded $83,000 and$185,000 of royalty expense under the prior license. These amounts are includedin selling expenses in the accompanying consolidated statements of operations.

**Bank Guarantee**

In July2002, 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 such subsidiary'sfiscal representative in The Netherlands for the purpose of providing servicesin connection with any value added tax matters. As part of this agreement, thesubsidiary agreed to provide an undertaking to the logistics provider withrespect to any value added tax liability arising in The Netherlands that thelogistics provider paid on the subsidiary's behalf. In February 2004, suchsubsidiary entered into a guarantee agreement with a Swiss bank relating to therepayment of any amount up to €224,000 (equal to approximately $315,000 as ofJune 30, 2009) paid by such bank to the logistics provider pursuant to a letterof credit that was issued by the Swiss bank in favor of the logistics providerin order to satisfy such undertaking.  The subsidiary would be required toperform under the guarantee 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 as suretyby the Dutch Receiver of Taxes to pay such taxes, (iii) the subsidiary or theCompany on its behalf fails or refuses to remit the amount of value added taxdue to the logistics provider, and (iv) the logistics provider makes a drawingunder the letter of credit. Commencing December 31, 2004, and on each anniversary thereafter until December 31, 2009, it is intended that the bank letter ofcredit will be renewed automatically for one-year periods. The subsidiary hasagreed to keep a letter of credit guarantee in place for five years followingthe date its relationship terminates with the logistics provider to satisfy anyvalue added tax liability arising prior to expiration of the RepresentationAgreement but asserted by The Netherlands after expiration. As of June 30, 2009, the Company has not incurred a liability in connection with this guarantee.

**NOTE 11   LEGALPROCEDINGS**

            From time to time,the Company may become a party to legal actions or proceedings in the ordinarycourse of its business.  As of June 30, 2009, there were no such actions orproceedings, either individually or in the aggregate, that, if decidedadversely to the Company’s interests, the Company believes would be material toits business. 

 

 

 

15

 

 
****
 

 

**Forward Industries, Inc.**

 

 

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

*Thefollowing discussion and analysis should be read in conjunction with ourunaudited consolidated financial statements, and the notes thereto, and otherfinancial information appearing elsewhere in this Quarterly Report on Form 10-Qand the audited consolidated financial statements and notes included in ourAnnual Report on Form 10-K for the fiscal year ended September 30, 2008.  Thefollowing discussion and analysis compares our consolidated results of operationsfor the three months ended June 30, 2009 (the “2009 Quarter”), with those forthe three months ended June 30, 2008 (the “2008 Quarter”), and for the ninemonths ended June 30, 2009 (the “2009 Period”), with the nine months ended June30, 2008 (the “2008 Period”).  All figures in the following discussion arepresented on a consolidated basis. All dollar amounts and percentages presentedherein have been rounded to approximate values.*

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

Thisquarterly report contains forward-looking statements (as such term is used withinthe meaning of the Private Securities Litigation Reform Act of 1995) that arenot based on historical fact. Such forward looking statements can be identifiedby the use of forward-looking terminology such as “may”, “might”, “will”,“should”, “likely”, “possible”, “seek”, “expect”, “anticipate”, estimate”,“plan”, “intend”, “continue”, or “believe”, or the negatives or othervariations of these terms or comparable terminology.  Forward lookingstatements may include projections, forecasts, or estimates of futureperformance.  Forward looking statements are based upon assumptions that webelieve to be reasonable at the time such forward looking statements are made. Whether those assumptions will be borne out will be determined by futurefactors, developments, and events, which are difficult to predict and may bebeyond our control.  These forward-looking statements involve assessments of knownand potential risks, uncertainties and other factors that may cause our actualresults, levels of activity, performance or achievements to be materiallydifferent from any future results, levels of activity, performance orachievements expressed or implied by such forward-looking statements.  Suchfactors include, among others: the duration and severity of current domesticand global economic conditions and their impact on consumer demand and spending,demand for our products, and uncertainties in the financial and credit markets;a significant change of the Company’s relationship with its customers(including changes affecting their businesses), including changes in our OEM distributionchannel where our sales are highly concentrated to a small number of customers;our ability to control operating expenses during periods of declining sales andor gross margins; the loss of a key salesman who has significant influence onour relationships with certain OEM customer makers of diabetic test kits; theimpact on our business of an acquisition or the failure to make an acquisition;whether our important OEM customers continue to include carry solutions “inbox” with their electronic products; whether our important OEM customers electto offer much lower cost, simplified carry case accessories in box; our successin winning new business from existing and new customers and against competingvendors; levels of demand and pricing generally for electronic devices sold byour customers for which we supply carry solutions; variability in order flowfrom our OEM customers; the adverse impact on gross margins of reduced pricesfor our products offered by our OEM customers; obsolescence of inventory,including the impact on inventory allowance arising out of hub agreements wehave entered into; developments in the treatment or control of diabetes that mayreduce the usage of handheld blood glucose monitors; increased competition inour business; changes in, governmental regulations; and other factors set forthunder the caption “risk factors” included elsewhere in this quarterly report onForm 10-Q and in our Annual Report on Form 10-K for the year ended September30, 2008.  

Given theseuncertainties, as well as risks that are at present not ascertainable, readersare cautioned not to place undue reliance on such forward-looking statements.  Forwardlooking statements speak only as of the date made.  We undertake no obligationto publicly update or revise any forward-looking statements, whether as aresult of new information, future events or otherwise, after the date of thisForm 10-Q.

 

 

16

 

 

 

 

**Forward Industries, Inc.**

 

 

**BUSINESSOVERVIEW**

                We design,market, and distribute custom-designed, soft-sided carrying cases and othercarry solutions for consumer electronic products primarily to originalequipment manufacturers (OEMs) of blood glucose monitoring kits for diabeticpatients.  A very few OEM customers account for a very high percentage of ournet sales, and in general approximately 75% or more of net sales areconcentrated in the diabetic sales product line.  During the past three years,cell phone revenue in the OEM and aftermarket channel (sales to distributorsand retailers), which historically was our largest revenue source by productline and was dependent on one or two major OEM customers, has declined sosignificantly that we no longer present such revenues separately but includethem as part of “other products”.  In conjunction with the decline in cell phoneproduct revenues, that part of our business that was engaged in distribution toretailers and distributors has become immaterial.  Because of these factorsconcentration risks in our business—as to customer concentration, product lineconcentration, and distribution channel concentration—have increased.

                *Trends andEconomic Environment:*  We believe that the deteriorating economicconditions, rising unemployment, tight credit markets, and heighteneduncertainty in financial markets during the past 18 months have adverselyimpacted discretionary consumer spending, including spending on the types ofelectronic devices that are accessorized by our products. We expect thischallenging business environment to continue in the foreseeable future.  

*               *Thedeterioration in general economic conditions worldwide has increased thechallenges in the carry solution market.  Certain of our OEM customers havesignificantly reduced their sales forecasts of electronic devices with whichour products are packaged in box, therefore implying reduced sales revenuesfrom these customers in future periods.  Certain such customers have alsoadvised us of proposed changes in their “in box” business model whereby thecarry solution is a lower cost, universal, carry case solution.  We believethis approach is intended to reduce expense to the OEM, and this sensitivity toexpense has contributed to an environment in which it is difficult for us tomaintain or increase prices, even as our vendors’ prices may be increasing.  Weexpect that these changes and developments, if implemented, will result indecreased revenues from the sales of these lower cost, universal,  carrysolutions and may adversely affect our gross profit. 

As this environment haspersisted we have engaged in our own cost cutting measures, includingreductions in staff.  We have attempted to limit increases in operatingexpenses except where we think increases are critical to potential futuregrowth. 

                See “RiskFactors” in Item 1A of Part II of this Quarterly Report on Form 10-Q and “*Ifany one or more of our OEM customers elect to reduce their “in-box” accessorymodel, our results of operations and financial condition would be materiallyand adversely affected”* in the caption “Risk Factors” in our Annual Reporton Form 10-K for the year ended September 30, 2008.

                *Variabilityof Revenues and Results of Operations*.  Because a high percentage of oursales revenues is highly concentrated in a few large customers, and because thevolumes of these customers’ order flows to us are highly variable, with shortlead times, our quarterly revenues, and consequently our results of operations,are susceptible to significant variability over a relatively short period oftime.  

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

                Thismanagement’s discussion and analysis of financial condition and results ofoperations is based upon or derived from the unaudited consolidated financialstatements included in this Quarterly Report on Form 10-Q, which have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requires us tomake judgments and estimates that affect the reported amounts of assets,liabilities, revenues, and expenses, and related disclosures of contingentliabilities. We base these judgments and estimates on our historical experienceand on various other assumptions that we believe to be reasonable under thecircumstances, and these judgments form the basis for our estimates concerningthe carrying values of assets and liabilities that are not readily apparentfrom other sources. We periodically re-evaluate these estimates and judgmentsbased on available information and experience. Actual results could differ fromour estimates under different assumptions and conditions. If actual resultssignificantly differ from our estimates, our financial condition and results ofoperations could be materially impacted. We discuss the material policies thatare critical in making these estimates and judgments in our Annual Report onForm 10-K for the fiscal year ended September 30, 2008, under the caption “Management’s Discussion and Analysis—Critical Accounting Policies and Estimates”. There have been no material changes in critical accounting policies andestimates since September 30, 2008, except for our estimates with regard to“Deferred Income Taxes”, which have been updated below.* *

 

17

 

 

 

 

**Forward Industries, Inc.**

 

 

The notesto our audited consolidated financial statements in our Annual Report on Form10-K for the year ended September 30, 2008, and the notes to our consolidatedfinancial statements included in Part I, Item 1 of this Quarterly Report onForm 10-Q contain additional information related to our accounting policies andshould be read in conjunction with the following discussion and analysisrelating to our overall financial performance, operations and financial position.
Accounts Receivable
At June 30, 2009, and September 30, 2008, our allowance for doubtful accounts wasapproximately $25 thousand and $10 thousand, respectively.  
Inventory Valuation
Inventory allowanceswere approximately $64 thousand and $168 thousand at June 30, 2009, and September 30, 2008, respectively. See Note 3 to the Financial Statements. Changesto this account are reflected in the cost of goods sold line of ourconsolidated statements of operations.  

The vastmajority of our production is made to customer specifications.  If a customerelects not to accept delivery, or defaults on a purchase order or commitment,or returns inventory from its hub without payment in violation of the hubarrangements, additional inventory write-downs or reserves may be required andwould be reflected in cost of goods sold in the period the revision is made.Historically, actual inventory valuation results have not deviatedsignificantly from those previously estimated by us. 
Deferred Income Taxes 
We had approximately$0.5 million and $0.4 million of deferred tax assets at June 30, 2009, and September 30, 2008, respectively. The increase in deferred tax assets resultsprimarily from net loss incurred in respect of the 2009 Period and accumulatedtemporary differences between book and tax income.  During the 2009 Period, aspart of our periodic evaluation of the need for a valuation allowance againstour deferred tax assets, and after consideration of all the evidence, bothpositive and negative (including, among others, projections of future taxableincome, current year net operating loss carryforward utilization and the extentof our cumulative losses in recent years), we determined that, on a more likelythan not basis, we would not be able to use any of our deferred tax assets,except in respect of United States income taxes arising from the repatriationof certain foreign source income earned by our Swiss subsidiary, ForwardInnovations, which is currently considered to be permanently invested and forwhich no Unites States tax liability has been accrued. As such, we establisheda full valuation allowance against our deferred tax assets. As of June 30, 2009, the valuation allowance was approximately $0.5 million. If we determinethat we will be able to realize some or all of our deferred tax assets, theadjustment to reduce or eliminate the valuation allowance would reduce our taxexpense and increase after-tax income. Changes in deferred tax assets andvaluation allowance are reflected in the “Provision for (benefit from) incometaxes” line item of our consolidated statements of operations. No suchvaluation allowance was recorded as of September 30, 2008.  See Note 7 to the Financial Statements included in this Quarterly Report on Form 10-Q.

18

 

 

 

 

**Forward Industries, Inc.**

 

 

**RESULTS OF OPERATIONS FOR THE 2009 QUARTER COMPARED TO THE 2008QUARTER**

**Net loss**

Weincurred a net loss of $64 thousand in the 2009 Quarter compared to a loss of$111 thousand in the 2008 Quarter. The small improvement in the 2009 Quarter wasdue primarily to lower general and administrative expenses and to a lesserextent the absence of a provision for income tax expense (attributable to theeffect of maintaining a full valuation allowance), compared to an income taxexpense in the 2008 Quarter.  These factors were offset in small part by lowergross profit and lower other income (primarily interest income), as reflectedin the table below:  

(thousands of dollars)

 

2009 	Quarter

2008 	Quarter

Increase 	(Decrease)

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

$4,107

$5,568

($1,461)

 

 

 

 

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

1,031

1,162

(131)

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

(1,158)

(1,325)

(168)

Other Income................................................................................................ 

62

97

(35)

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

**--**

**(45)**

**45**

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

**($64)**

**($111)**

**$47**

* Table may nottotal due to rounding.

Basic and diluted loss per share data was ($0.01) forthe 2009 Quarter, compared to ($0.01) for the 2008 Quarter.

**Net Sales**

Netsales decreased $1.5 million, or 26%, to $4.1 million in the 2009 Quarter from$5.6 million in the 2008 Quarter, due to  lower sales of diabetic products,which declined $1.4 million, or 30%. Sales of other products declined $0.1million, or 10%. Cell phone product revenues, which are now included in salesof “other products”, declined slightly and were $0.3 million in the 2009Quarter and the 2008 Quarter. The tables below set forth sales by product lineand geographic location of our customers for the periods indicated.

 

 

 

19

 

 

 

 

 

**Forward Industries, Inc.**

 

 

**Net Sales for 2009 Quarter**

**Three Months ended June 30, 2009**

**(millions of dollars)**

** **

**Americas**

**APAC**

**Europe**

**Total***

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

$0.9

$1.4

$0.8

$3.1

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

0.9

0.1

--

1.0

**Total***

**$1.8**

**$1.5**

**$0.9**

**$4.1**

                                

**Net Sales for 2008 Quarter**

**Three Months ended June 30, 2008**

**(millions of dollars)**

** **

**Americas**

**APAC**

**Europe**

**Total***

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

$1.0

$2.7

$0.8

$4.5

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

0.9

0.1

0.1

1.1

**Total***

**$1.9**

**$2.8**

**$0.9**

**$5.6**

* Tables maynot total due to rounding.

*Diabetic Product Sales*

Wedesign to the order of and sell directly to our OEM customers carrying casesused by diabetics to carry their personal electronic, blood glucose monitoringkits. In the 2009 Quarter, OEM customers for these carrying cases included Lifescan,Abbott Labs, Roche Diagnostics, and Bayer (including their subsidiaries,affiliates and contract manufacturers) as well as other customers. Our carryingcases are typically packaged as an accessory "in-box" with themonitoring kits that are sold by our OEM customers.

Salesof cases and related accessories for blood glucose monitoring kits decreased$1.4 million, or 30%, to $3.1 million in the 2009 Quarter, from $4.5 million inthe 2008 Quarter.  This decline was primarily driven by lower sales to ourlargest customer, which decreased by $1.4 million in the 2009 Quarter comparedto the 2008 Quarter due to lower unit volumes and a lower average sellingprice.  In addition, sales to another major diabetic product customer declined$0.2 million in the 2009 Quarter from the 2008 Quarter. These declines wereoffset, in part, by higher sales to our two other major diabetic productcustomers, which, in the aggregate, increased $0.4 million in the 2009 Quartercompared to the 2008 Quarter. 

Salesof carrying cases for blood glucose monitoring kits represented 76% of ourtotal net sales in the 2009 Quarter compared to 80% of our total net sales inthe 2008 Quarter,  the decline being attributable to the decline in diabeticsales revenues for the 2009 Quarter.

*OtherProduct Sales*

Wedesign and sell carrying solutions for items such as cell phones, cameras,portable oxygen tanks, bar code scanners, MP3 players, and other carrying solutionsfor an assortment of products on a made-to-order basis that are customized tomeet the needs of our smaller OEM customers.   In general, sales of “otherproducts” to order are made to numerous customers and typically vary fromperiod to period without necessarily reflecting a significant trend in ourbusiness in this product line.  Beginning with the first fiscal quarter of2009, we changed our presentation of sales by product line by combining cellphone product sales with “other product sales” as the amounts of cell phoneproduct revenues ceased to warrant separate presentation.  For purposes of the discussionbelow, the 2008 Quarter results have, for consistency of presentation with the 2009Quarter, been calculated retroactively to combine “other products” with cellphone products.

20

 

 

 

**Forward Industries, Inc.**

 

 

Salesof other products declined $0.1 million to $1.0 million in the 2009 Quarterfrom $1.1 million in the 2008 Quarter. This decline was primarily the result oflower sales to our largest customer of these products, which decreased $0.2million in the 2009 Quarter from the 2008 Quarter. Also contributing to thisdecline were smaller decreases in sales to several other customers of theseproducts, of which no decline exceeded $0.1 million in the 2009 Quarter. Thesedeclines were partially offset by higher sales to other smaller customers ofthese products, which increased $0.1 million in the aggregate 2009 Quartercompared to the 2008 Quarter.

Salesof other products represented 24% of our net sales in the 2009 Quarter comparedto 20% of net sales in the 2008 Quarter.

**Gross Profit**

Grossprofit decreased by $0.1 million, or 11%, to $1.0 million in the 2009 Quarterfrom $1.2 million in the 2008 Quarter which was primarily due to the $1.5million decline in net sales. However, as a percentage of sales, gross profitincreased to 25% in the 2009 Quarter compared to 21% in the 2008 Quarter. This improvementreflected better average gross profit percentage across all product lines inthe 2009 Quarter, but especially in our diabetic products line, driven by theintroduction of new products. Gross profit percentage also improved as a resultof decreases in tooling and testing costs and a non-recurring reduction in ourreserve for obsolete inventory, which, both of which had the effect of reducing“cost of goods sold”. These improvements were partially offset by the cost ofoperating our Hong Kong facility (which also is reflected in our “cost of goodssold”), a significant component of which represents fixed costs, which on alower sales base, acts to reduce gross profit percentage. 

**Selling, General, and Administrative Expenses**

Operatingexpenses decreased $0.2 million, or 13%, to $1.2 million in the 2009 Quarterfrom $1.3 million in the 2008 Quarter. Lower royalty expense, professionalfees, and “other general and administrative expenses” (primarily insuranceexpense) were the primary drivers for the decrease. Thesereductions were partially offset by increases in selling personnel, andadvertising and promotion expenses.  Changes in other categories of operatingexpenses were not significant.

**Other Income**

Otherincome, primarily interest income on cash balances, declined 36% to $62thousand in the 2009 Quarter, compared to $97 thousand in the 2008 Quarter dueprimarily to lower average interest rates in the 2009 Quarter on slightly lowercash balances compared to the 2008 Quarter. The decline in interest income inthe 2009 Quarter was offset in part by foreign currency transactions (whichrepresents the other component of “other income”), as a result of net gains inthe 2009 Quarter compared to net losses in the 2008 Quarter.

**Pretax Loss**

Pretaxloss decreased 3% to $64 thousand in the 2009 Quarter compared to $66 thousandin the 2008 Quarter as a result of the changes as described above.

**Income Taxes**

Werecorded no income tax expense (benefit) in the 2009 Quarter compared to aprovision for income taxes of less than $0.1 million in the 2008 Quarterprimarily due to our maintenance of a full valuation allowance against ourdeferred tax assets in the 2009 Quarter. See “Critical Accounting Policies andEstimates—Deferred Income Taxes”, above, and “Note 7 – Income Taxes” in Notesto Consolidated Financial Statements set forth elsewhere in this QuarterlyReport on Form 10-Q.

AtJune 30, 2009, we had approximately $3.9 million of earnings attributable toour Swiss subsidiary for which no provision for U.S. Federal income has beenrecorded. Such earnings are currently considered to be permanently invested insuch subsidiary.  The Company may, from time to time, re-evaluate whether suchearnings shall continue to be permanently invested and whether and under whatcircumstances consideration will be given to their repatriation in atax-efficient manner.  

21

 

 

 

 

**Forward Industries, Inc.**

 

 

**RESULTS OF OPERATIONS FOR THE 2009 PERIOD COMPARED TO THE 2008PERIOD**

**Net loss**

Weincurred a net loss of $1.3 million in the 2009 Period compared to $0.8 millionin the 2008 Period. The $0.6 million increase is a result of higher income taxexpense (attributable to the effect of establishment of the valuation allowancein respect of deferred tax assets, discussed above at Note 7 in Notes to the ConsolidatedFinancial Statements and “Critical Accounting Policies and Estimates—DeferredIncome Taxes”), which led to a net income tax provision in the 2009 Periodcompared to a tax benefit in the 2008 Period, lower other income (primarilyinterest income), and lower gross profit, offset in part by lower selling,general and administrative expenses, as reflected in the table below:  

(thousands of dollars)

 

2009 	Period

2008 	Period

Increase 	(Decrease)

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

$13,670

$15,249

($1,579)

 

 

 

 

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

2,639

2,899

(260)

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

(3,876)

(4,386)

(510)

Other Income................................................................................................ 

218

541

(323)

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

**(300)**

189

**(490)**

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

**($1,319)**

**($756)**

**($563)**

* Table may nottotal due to rounding.

Basic and diluted loss per share data was ($0.17) forthe 2009 Period, compared to ($0.10) for the 2008 Period. The increase in loss pershare in the 2009 Period was due to the increase in net loss.

**Net Sales**

Netsales decreased $1.6 million, or 10%, to $13.7 million in the 2009 Period from$15.2 million in the 2008 Period, due primarily to lower diabetic productsales, which were $1.2 million lower in the 2009 Period compared to the 2008period.  Sales of “other products” (which also includes cell phone sales), were$0.4 million, or 10%, lower in the 2009 Period compared to the 2008 Period. Thetables below set forth sales by product line and geographic location of ourcustomers for the periods indicated.

22

 

 

 

 

**Forward Industries, Inc.**

 

 

**Net Sales for 2009 Period**

**Nine Months ended June 30, 2009**

**(millions of dollars)**

** **

**Americas**

**APAC**

**Europe**

**Total***

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

$2.9

$4.3

$3.2

$10.3

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

2.6

0.6

0.1

3.3

**Total***

**$5.5**

**$4.9**

**$3.3**

**$13.7**

                                

**Net Sales for 2008 Period**

**Nine Months**ended **June 30, 2008**

**(millions of dollars)**

** **

**Americas**

**APAC**

**Europe**

**Total***

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

$2.1

$7.0

$2.4

$11.6

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

2.4

0.8

0.5

3.6

**Total***

**$4.5**

**$7.8**

**$2.9**

**$15.2**

* Tables maynot total due to rounding.

*Diabetic Product Sales*

Salesof cases and related accessories for blood glucose monitoring kits decreased$1.2 million, or 11%, to $10.3 million in the 2009 Period, from $11.6 millionin the 2008 Period.  These results were driven by lower sales to our largestcustomer, which decreased by $2.8 million, or 39%, in the 2009 Period comparedto the 2008 Period primarily due to lower unit volumes in the 2009 Period.  Thisdecrease was partially offset by higher sales to our other major diabeticproduct customers, which in the aggregate, increased $1.6 million. Theseincreases were primarily attributable to several new in-box programs in thefirst fiscal quarter of 2009 as well as higher volumes of existing in boxprograms.  

Salesof carrying cases for blood glucose monitoring kits represented 76% of ourtotal net sales in the 2009 Period and the 2008 Period. 

*OtherProduct Sales*

Beginningwith the first fiscal quarter of 2009, we changed our presentation of sales byproduct line by combining cell phone product sales with “other product sales”as the amounts of cell phone product revenues ceased to warrant separatepresentation.  For purposes of the discussion below, the 2008 Period resultshave, for consistency of presentation with 2009 Period, been calculatedretroactively to combine “other products” with cell phone products.  Sales ofother products declined $0.4 million, or 10%, to $3.3 million in the 2009Period from $3.6 million in the 2008 Period. This decline was primarily the resultof lower aftermarket sales of cell phone carry solutions in the 2009 Period,which decreased $0.2 million from the 2008 Period. Also contributing to thisdecline were smaller decreases in sales to several other customers of theseproducts, which in the aggregate amounted to $0.3 million in the 2009 Periodcompared to the 2008 Period. These declines were offset, in part, by higher salesto one cell phone customer, which increased $0.1 million in the 2009 Periodcompared to the 2008 Period.

Salesof other products represented 24% of our net sales in the 2009 Period and the2008 Period.

**Gross Profit**

           Grossprofit decreased $0.3 million, or 9%, to $2.6 million in the 2009 Period from$2.9 million in the 2008 Period. This was primarily due to the $1.6 milliondecline in net sales and, to a lesser extent, to higher costs incurred in theoperation of our Hong Kong facility (which costs are included in cost of goodssold)  in connection with the relocation of  the Hong Kong facility and relatedstaffing changes there that increased Hong Kong personnel expense. Highercompliance, warehouse, rent, and travel costs in the 2009 Period alsocontributed to the higher level of Hong Kong costs.  These drags on grossprofit were partly offset by reductions in tooling and testing costs and adecrease in our reserve for obsolete inventory (both of which are reflected in“cost of goods sold”). 

23

 

 

 

 

**Forward Industries, Inc.**

 

 

As apercentage of net sales, our gross profit was 19% in the 2009 and 2008 Periods.

**Selling, General, and Administrative Expenses**

Operatingexpenses decreased $0.5 million, or 12%, to $3.9 million in the 2009 Periodfrom $4.4 million in the 2008 Period due to a $0.2 million reduction inpersonnel costs, a $0.2 million reduction in royalty and commission expense,and a $0.1 million reduction in professional fees, as well as smallerreductions in other operating expenses.   The decline in personnel expense was asa result of the expiration at December 31, 2007, of employment agreements oftwo executives and related severance; and the reduction in royalty expense wasdue to the modification of the terms of the license that expired June 30, 2009compared to royalty expense incurred under the prior license in the 2008Period. 

**Other Income**

Otherincome, primarily interest income on cash balances, declined 60% to $0.2 millionin the 2009 Period, from $0.5 million in the 2008 Period due primarily to loweraverage interest rates in the 2009 Period on slightly lower cash balancescompared to the 2008 Period and to a lesser extent as a result of net foreigncurrency losses incurred in respect of the 2009 Period compared to net foreigncurrency gains realized in the 2008 Period.

**Pretax Loss**

Pretaxloss increased 8% to $1.0 million in the 2009 Period compared to $0.9 millionin the 2008 Period as a result of the changes as described above.

**Income Taxes**

Werecorded income tax expense of $0.3 million in the 2009 Period compared to abenefit from income taxes of $0.2 million in the 2008 Period primarily due to theestablishment of a full valuation allowance against our deferred tax assets inthe 2009 Period. See “Critical Accounting Policies and Estimates—DeferredIncome Taxes”, above, and “Note 7 – Income Taxes” in our Notes to ConsolidatedFinancial Statements set forth elsewhere in this Quarterly Report on Form 10-Q.

At June 30, 2009, we had approximately $3.9 million of earnings attributable to our foreignsubsidiaries for which no provisions have been recorded for income tax thatcould occur upon repatriation. Except to the extent such earnings can berepatriated tax efficiently, they are permanently invested abroad. It is notpracticable to determine the amount of income taxes payable in the event allsuch foreign earnings are repatriated.

**LIQUIDITY AND CAPITALRESOURCES**

During the 2009 Period, we used $0.2 million of cashin operations compared to generating $37 thousand in the 2008 Period. Our netcash used in operating activities in the 2009 Period consisted of a net loss of$1.3 million, reduced by $0.6 million for non-cash items, and changes in workingcapital items of $0.5 million. As to working capital items, accounts payabledecreased $0.7 million, which had the effect of using cash in operating activities.This change was offset by decreases in accounts receivable, inventories, andprepaid expenses and other current assets of $0.3 million, $0.6 million, and $0.2million, respectively. The decrease in accounts receivable is attributable tothe lower sales levels in the 2009 Period and the timing in which theseaccounts receivable were originated. The decrease in inventories and accountspayable is primarily due to the lower level of sales in the 2009 Period andlower average unit costs of inventory purchases during the 2009 Period. Thedecrease in prepaid expenses and other current assets is primarily due to thetiming of payments made for our insurance policies and in connection with theinception of our lease for our Hong Kong facility. 

 

24

 

 

 

 

**Forward Industries, Inc.**

 

 

Duringthe 2008 Period, we generated $37 thousand of cash from operations consistingof a net loss of $0.8 million, decreased by $0.4 million for non-cash items,and $0.4 million for net changes in working capital items. Working capitalitems included changes in accounts payable and prepaid and other current assetsof $1.1 million and $0.3 million, respectively, which increased net cashprovided by operating activities, whereas changes in inventory and accountsreceivable of $0.8 million and $0.3 million, respectively, decreased net cashprovided by operating activities. 

Investingactivities used $0.1 million in the 2009 Period for purchases of property,plant and equipment, primarily leasehold improvements and furniture andfixtures for our new Hong Kong procurement and quality control facility. In the2008 Period, net investing activities used $24 thousand for purchases ofproperty, plant and equipment, primarily computer and telecommunicationshardware and software. 

Netfinancing activities generated $14 thousand in the 2009 Period as the result ofdisgorgement of short-swing profits us by a former 10% shareholder inaccordance with applicable rules and regulations under the Exchange Act.  Weaccounted for the cash receipt as a contribution from a shareholder andreflected the proceeds, net of tax, as an increase in additional paid-incapital in our consolidated balance sheets.   Financing activities generated$39 thousand in proceeds from the exercise of stock options in the 2008 Period.

At June 30, 2009, our current ratio (current assets divided by current liabilities) was 14.2;our quick ratio (current assets less inventories divided by currentliabilities) was 13.7; and our working capital (current assets less currentliabilities) was $22.3 million.  As of such date, we had no short or long-termdebt outstanding. 

Ourprimary source of liquidity is our cash on hand. The primary demands on ourworking capital are: operating losses and accounts payable arising in theordinary course of business, the most significant of which arise when ourcustomers place orders and we order from our suppliers. Historically, oursources of liquidity have been adequate to satisfy working capital requirementsarising in the ordinary course of business. We anticipate that our liquidityand financial resources for the twelve months will be adequate to manage ourfinancial requirements. 

ForwardInnovations maintains a credit facility with a Swiss bank that provides for anuncommitted line of credit in the maximum amount of $400,000.  Amountsborrowed under the facility may be structured as a term loan or loans, with amaximum repayment Period of 12 months, or as a guarantee facility, or anycombination of the foregoing.  Either party may terminate the facility atany time; however, such termination would not affect the stated maturity of anyterm loan outstanding under the facility.  Amounts borrowed other than asa term loan must be settled quarterly or converted into term loans. Amountsdrawn under this credit facility bear interest at variable rates established bythe bank (5.35% as June 30, 2009). At June 30, 2009, Forward Innovations is contingently liable to the bank under a letter of credit issued on its behalf inthe amount of €224,000 (equal to approximately $315,000 as of June 30, 2009) in favor of Forward Innovations' freight forwarder and customs agent.  Theeffect of the issuance of the letter of credit is to reduce the availability ofthe credit line in an amount equal to the face amount of the letter of credit. See Notes 4 and 10 to the unaudited consolidated Financial Statements set forthin Item 1.

On September 27, 2002, our Board of Directors authorized the repurchase of up to 400,000shares of our outstanding common stock, or approximately 7% of the number ofshares then outstanding. On January 21, 2004, our Board increased the amount ofshares authorized for repurchase to 486,200. Under that authorization, as of June 30, 2009, we had repurchased an aggregate of 172,603 shares at a cost ofapproximately $0.4 million. In addition, in connection with an exercise ofoutstanding stock options, 72,917 shares were purchased during Fiscal 2008 in anon-cash transaction, which was outside the foregoing authorizations.  No repurchaseswere made during the 2009 Period.  The repurchase program may be discontinuedor terminated at any time.

25

 

 

 

 

**Forward Industries, Inc.**

 

 

**CONTRACTUAL OBLIGATIONS ANDCOMMERCIAL COMMITMENTS**

TheCompany has entered into various contractual obligations and commercialcommitments that, under GAAP are not recorded as a liability.   The followingis a summary of such contractual cash obligations as of June 30, 2009:

**Contractual  Obligation or 	Commitment**

**Jul 09 – Jun 10**

**Jul 10 – Jun 12**

**Jul 12 – Jun 14**

**Thereafter**

Employment Agreements

$213,000

$            -- 

$    --

$       --

Operating Leases

261,000

417,000

--

--

**Totals**

**$474,000**

**$417,000**

**$    --**

**    $      --**

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

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

Notapplicable.

**ITEM4. CONTROLS AND PROCEDURES **

**Evaluationof Disclosure Controls and Procedures**

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

Inaccordance with Exchange Act Rule 13a-15(b), our management, under thesupervision and with the participation of our Chief Executive Officer and ChiefFinancial Officer, performed an evaluation of the effectiveness of theCompany's disclosure controls and procedures as of the end of the fiscalquarter covered by this Quarterly Report. Based on that evaluation, theCompany's Chief Executive Officer and Chief Financial Officer concluded thatthe Company's disclosure controls and procedures were effective, as of the endof the 2009 Quarter, to provide reasonable assurance that information requiredto be disclosed in the Company's reports filed or submitted under the ExchangeAct is recorded, processed, summarized and reported within the time periodsspecified in the Commission's rules and forms. 

**Changesin internal controls**

Inaccordance with paragraph (d) of Exchange Act Rule 13a-15, our management, withthe participation our Chief Executive Officer and Chief Financial Officer,performed an evaluation as to whether any change in our internal controls overfinancial reporting  occurred during the 2009 Quarter.  Based on thatevaluation, our Chief Executive Officer and our Chief Financial Officerconcluded that no change occurred in the Company's internal controls overfinancial reporting during the 2009 Quarter that has materially affected, or isreasonably likely to materially affect, the Company's internal controls overfinancial reporting.

26

 

 

 

 

**Forward Industries, Inc.**

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

Fromtime to time, the Company may become a party to legal actions or proceedings inthe ordinary course of its business.  As of June 30, 2009, there were no such actions or proceedings, either individually or in the aggregate, that, ifdecided adversely to the Company’s interests, the Company believes would bematerial to its business. 

**ITEM1A. RISK FACTORS**

Thefollowing risk factors are new or have been expanded or updated from those setforth in our Annual Report on Form 10-K for the fiscal year ended September 30, 2008, but the factors below do not constitute all the risk factors thatpertain to our business.  Please review our Annual Report on Form 10-K for acomplete description of “Risk Factors” that pertain to our business. Pleaserefer to ITEM 2. “Cautionary statementfor purposes of the “Safe Harbor” provisions of the Private SecuritiesLitigation Reform Act of 1995 on page 16 of this Quarterly Report onForm 10-Q.

**Deteriorationof economic conditions may continue to negatively impact our business**.

Ourbusiness has been, and may continue to be, adversely affected by the domesticand/or global recession and financial crisis and changes in economic conditionsbrought on by the recession/financial crisis, including changes in consumerpreferences or consumer spending rates, inflation/deflation expectations,interest or exchange rates, by the responses of our OEM customers to theseconditions, and by the effects of governmental initiatives to manage economicconditions. In the 2009 Quarter, we experienced continuing sales declines incertain product categories as well as a significant decline in sales to ourlargest customer for blood glucose monitors, a product line we believed mightbe relatively insulated from the deteriorating economy. Ongoing economic weaknessand/or changes in economic conditions could continue to adversely affect thedemand for our products, our OEM customer relationships in channels with highcustomer concentration, the cost of needed raw materials, ortransportation-related costs, thereby adversely affecting our business,operating results and financial condition.

Therecent disruptions in credit and other financial markets and deterioration ofnational and global economic conditions could, among other things: impair thefinancial condition of some of our customers and suppliers thereby increasingcustomer bad debts or non-performance by suppliers; or make it more difficultor costly for us to obtain financing in connection with an acquisition.  We cannot predict the duration of the financial crisis or severe economic recession.If the crisis persists or worsens and economic conditions remain weak over a protractedperiod, the likelihood of the crisis having a more significant impact on ourbusiness increases.

**If any one or more of our OEM customers elect toreduce their “in-box” accessory model, our results of operations and financialcondition would be materially and adversely affected.**

The predominant percentage of our revenues is derived from sales ofcase accessories to our OEM customers who package our cases “in-box” with theirconsumer electronics products.  Certain OEM customers have begun to adviseus of proposed changes in their “in box” business model whereby the carrysolution is a much lower cost, lower price simplified carry solution or wherebyour OEM customer may not include carry solution accessories “in box” at all.  Webelieve the proposed changes to lower priced cases and/or elimination of carrysolutions in the “in box” model are intended to reduce expense to the OEMcustomer as well as reduce the cost of the electronic device to the consumer.  Itis possible that the financial crisis and economic recession referred to abovemay serve to accelerate the rate at which our OEM customers may implementchange in the “in-box” model of delivering carry solutions accessories toconsumers of the OEMs’ consumer electronic devices.  If one or more of our OEMcustomers generally begin to simplify, reduce, and/or eliminate the accessoriesin box as described above, we would incur a significant decline in revenues andour results of operations and financial condition would be materially and adverselyaffected. 

27

 

 

 

 

**Forward Industries, Inc.**

 

 

Furthermore, as our cell phone product business weakened verysignificantly beginning in Fiscal 2007, our business presence in the so-called“aftermarket” distribution channel to wholesalers, retailers, and/or theconsumer directly weakened correspondingly, because our presence in thatdistribution channel has traditionally been tied to our success in our cellphone product business.  As a result, our business is now concentratedexclusively in distribution directly to OEM customers.  Accordingly, theeffects of any change or further weakness in our OEM business will be magnifiedand of the utmost significance in its adverse effects on our results ofoperations and financial condition.

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

**IssuerPurchases of Equity Securities**

During the 2009 Quarter we did not purchase any commonstock or other equity securities pursuant to publicly announced plans orprograms or otherwise. 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

None.

**ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

None

**ITEM5. OTHER INFORMATION**

None

**ITEM 6. EXHIBITS**

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

                31.2        Certification of the Chief Financial Officer underSection 302 of the Sarbanes-Oxley Act of 2002

 

32.1        Certification of the Chief Executive Officerand Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

28

 

 

 

 

**Forward Industries, Inc.**

 

 

**SIGNATURES**

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

 
Dated:  August 5, 2009
 
 
FORWARDINDUSTRIES, INC.
 
            (Registrant)
 
 
 
 
 
By:/s/ Douglas W. Sabra                     
 
 DouglasW. Sabra                               
 
ChiefExecutive Officer
 
 (PrincipalExecutive Officer)
 
 
 
 
 
By:/s/James O. McKenna                   
 
JamesO. McKenna                              
 
ChiefFinancial Officer
 
(PrincipalFinancial and Accounting Officer)
 
 

 

29************ |
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