Forward Industries Inc.
Annual Report 2012

Plain-text annual report

Morningstar® Document Research℠ FORM 10-KFORWARD INDUSTRIES INC - FORDFiled: December 20, 2012 (period: September 30, 2012)Annual report with a comprehensive overview of the companyThe information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The userassumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot belimited or excluded by applicable law. Past financial performance is no guarantee of future results. UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K(Mark One)[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended September 30, 2012[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission File Number: 0-6669FORWARD INDUSTRIES, INC.(Exact name of registrant as specified in its charter) New York13-1950672(State or other jurisdiction of(I.R.S. Employer Identification No.)incorporation or organization) 477 Rosemary Ave., West Palm Beach, FL 33410 (Address of principal executive offices, including zip code)(561) 456-0030(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:NoneSecurities registered pursuant to Section 12(g) of the Act:Common Stock, $0.01 par value per shareIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.[ ] Yes [ X ] NoIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.[ ] Yes [ X ] NoIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirementsfor the past 90 days. [ X ] Yes [ ] NoIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required tobe submitted and posted pursuant to Rue 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required tosubmit and post such files). [ X ] Yes [ ] NoIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the bestof Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form10-K. [X] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See thedefinitions 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 smaller reporting company) [ ] Accelerated filer [X] Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] NoThe aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equitywas last sold, as of the last business day of the Registrant’s most recently completed second fiscal quarter was: $12,294,881.Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.As of December 3, 2012, 8,105,185 shares of the Registrant’s common stock were outstanding.Documents Incorporated by ReferenceThe registrant intends to file, not later than January 28, 2013, a definitive proxy statement pursuant to Regulation 14A, promulgated under the SecuritiesExchange Act of 1934, as amended, to be used in connection with the registrant’s annual meeting of stockholders. The information required in response to PartIII (Items 10-14) of this Annual Report on Form 10-K is hereby incorporated by reference to such proxy statement. 2Forward Industries, Inc.Table of Contents PART IPage No.Item 1.Business5 Item 1A.Risk Factors10 Item 1B.Unresolved Staff Comments13 Item 2.Properties14 Item 3.Legal Proceedings14 Item 4.Mine Safety Disclosures15 PART II Item 5.Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities15 Item 6.Selected Financial Data16 Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations16 Item 7A.Quantitative and Qualitative Disclosures About Market Risk25 Item 8.Financial Statements and Supplementary Data25 Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure25 Item 9A.Controls and Procedures25 Item 9B.Other Information27 PART III Item 10.Directors, Executive Officers and Corporate Governance27 Item 11.Executive Compensation27 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters27 Item 13.Certain Relationships and Related Transactions, and Director Independence27 Item 14.Principal Accountant Fees and Services28 PART IV Item 15.Exhibits and Financial Statement Schedules28 Signatures55 3Note Regarding Use of Certain TermsSource: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.In this Annual Report on Form 10-K, unless the context otherwise requires, the following terms have the meanings assigned to them as set forth below:"we", "our", and the "Company" refer to Forward Industries, Inc., a New York corporation, together with its consolidated subsidiaries; “Forward” or “Forward Industries” refers to Forward Industries, Inc.; “common stock” refers to the common stock, $.01 par value per share, of Forward Industries, Inc.; "Forward US" refers to Forward Industries’ wholly owned subsidiary Forward Industries (IN), Inc., an Indiana corporation; “Forward HK” refers to Forward Industries’ wholly owned subsidiary Forward Industries HK, Ltd., a Hong Kong corporation;“Forward Switzerland” refers to Forward Industries’ wholly owned subsidiary Forward Industries (Switzerland) GmbH, a Swiss corporation; “Forward APAC” refers to Forward Industries’ wholly owned subsidiary Forward Asia Pacific Limited, a Hong Kong corporation;“Forward UK” refers to Forward Industries’ wholly owned subsidiary Forward Ind. (UK) Limited, a limited company of England and Wales;“Forward China” refers to Forward Industries Asia-Pacific Corporation (f/k/a Seaton Global Corporation), Forward’s exclusive sourcing agent in the Asia-Pacific region;“SGC” refers to Seaton Global Corporation, a British Virgin Islands registered corporation that is the exclusive buying agent for Forward in the APAC region;“GAAP” refers to accounting principles generally accepted in the United States; “Commission” refers to the United States Securities and Exchange Commission; “Exchange Act” refers to the United States Securities Exchange Act of 1934, as amended;“Fiscal 2012” refers to our fiscal year ended September 30, 2012;“Fiscal 2011” refers to our fiscal year ended September 30, 2011; “Europe” refers to the countries included in the European Union; “EMEA Region” means the geographic area encompassing Europe, the Middle East and Africa;“APAC Region” refers to the Asia Pacific Region, consisting of Australia, New Zealand, 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;“Retail” refers to the retail distribution channel; and“Corporate” refers to the corporate distribution channel. 4 PART IITEM 1. BUSINESSGeneralForward Industries, Inc. was incorporated under the laws of the State of New York and began operations in 1961 as a manufacturer and distributorof specialty and promotional products. We design, market, and distribute carry and protective solutions, primarily for hand held electronic devices. Ourprincipal customer market is original equipment manufacturers, or “OEMs” (or the contract manufacturing firms of these OEM customers), that eitherpackage our products as accessories “in box” together with their branded product offerings, or sell them through their retail distribution channels. Our OEMproducts include carrying cases and other accessories for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronicproducts (such as sporting and recreational products, bar code scanners, smartphones, GPS and location devices, tablets and firearms). Our OEMcustomers are located in the Americas, the EMEA Region, and the APAC Region. We do not manufacture any of our OEM products and source substantiallyall of our OEM products from independent suppliers in China.On June 21, 2012, we determined to exit our global retail business (“discontinued operations”) and focus solely on growing our OEM business. Our decision to eliminate the retail division was primarily driven by the longer than estimated path to bring it to profitability and the strong top line growthand cost rationalizations in the OEM business.Corporate History Forward Industries was incorporated in 1961 under the laws of the State of New York as a manufacturer and distributer of advertising specialty andpromotional products. In 1989, we acquired Forward US (then known as Koszegi Industries, Inc.), a manufacturer of soft-sided carrying cases. Thecarrying case business became our predominant business, and in September 1997, we sold the assets relating to the production of advertising specialty andpromotional products, ceasing to operate in that segment.In May 2001, we formed Forward Switzerland to facilitate distribution of aftermarket products under our licenses for cell phone cases with a majorNorth American multinational and to further develop our OEM European business presence. After the expiration of the last of these licenses in March 2009,staff at Forward Switzerland was significantly reduced and in recent years has primarily served our OEM European customers. As part of our strategy todevelop a global retail distribution capability, we are reinvesting in both staff and infrastructure at Forward Switzerland and have established it as our EMEAheadquarters from which we are coordinating our sales and marketing activities throughout the EMEA region. ProductsWe design and market to our OEM customers’ order carry and protective solutions for hand held consumer electronics and other products, includingSource: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.soft-sided carrying cases, bags, clips, hand straps, protective plates, and other accessories made of leather, nylon, vinyl, plastic, PVC and other syntheticmaterials. Our OEM products are used by consumers for protecting and carrying or transporting portable electronic and other products such as blood glucosemonitoring kits, bar code scanners, GPS and location devices, cellular telephones, firearms, sporting and recreational products, and other products. Ourcarrying cases are designed to enable these devices to be stowed in a pocket, handbag, briefcase, or backpack, clipped to a belt or shoulder strap, or strappedto an arm, while protecting the consumer electronic or other product from scratches, dust, and mishandling.Diabetic ProductsWe sell carrying cases for blood glucose diagnostic kits directly to OEMs (or their contract manufacturers) of these electronic, monitoring kits made foruse by diabetics. We typically sell these cases at prices ranging from approximately $0.50 to $3.00 per unit. Unit volumes are sold predominantly at thelower end of this price range. The OEM customer (or its contract manufacturer) packages our carry cases “in box” as a custom accessory for the OEM’sblood glucose testing and monitoring kits, or to a much lesser extent, sells them through their retail distribution channels. These kits typically include asmall, electronic blood glucose monitor, testing strips, lancets for drawing a drop of blood and our carrying case, customized with the manufacturer’s logoand designed to fit and secure the glucose monitor, testing strips, and lancets in separate straps, pouches, and holders. As the kits and technology change,our carrying case designs change to accommodate the changes in size, shape and layout of the electronic monitoring device, strips and lancet.5 Other Products We also sell carrying and protective solutions to OEMs for a diverse array of other portable electronic and other products, including sporting andrecreational products, bar code scanners, smartphones, GPS and location devices, tablets, and firearms, on a made-to-order basis that are customized to fit theproducts sold by our OEM customers. Our selling prices for these products also vary across a broad range, depending on the size and nature of the productfor which we design and sell the carry solution.Product DevelopmentIn our OEM business, the product life cycle in distributing and selling our technology solutions to our OEM customers is as described below. Wetypically receive requests to submit product designs in connection with a customer’s introduction and rollout to market of a new product that the customer hasdetermined to accessorize and customize with a carry solution. Our OEM customers furnish the desired functionality, size and other basic specifications forthe carrying solutions or other product, including the OEM’s identifying logo imprint on the product. Our design and production resources develop moredetailed product specifications and design options for our customer’s evaluation. We then furnish the customer with product samples. Working with oursuppliers and the customer, samples are modified and refined. Once approved for commercial introduction and order by our customer, we work with oursuppliers to ensure conformity of commercial production to the definitive product samples and specifications. Manufacture and delivery of products inproduction quantities are coordinated with the customer’s manufacturing and shipment schedules so that our carry solution products are available with thecustomer’s product (and included “in box”, as the case may be) prior to shipment and sale, or to a lesser extent sold by our customer through its retaildistribution channels.Marketing, Distribution, and SalesGeographic Sales DistributionThrough our wholly owned subsidiaries, Forward US and Forward Switzerland, we distribute and sell our products globally. The approximatepercentages of net sales to OEM customers by their geographic location for Fiscal 2012 and 2011 are as follows: Net SalesFiscal Years Ended September 30,Geographic Location:2012 2011APAC......................................................................39% 46%Americas.................................................................36% 28%Europe.....................................................................25% 26%Totals..................................................................100% 100%The importance of the APAC region is attributable to the fact that certain of our key customers outsource product manufacture to contractmanufacturers located in China or elsewhere in Asia. In these instances, we ship product to, and product is packaged “in box” at, such contractmanufacturer’s facility. If payment to us is due from the contract manufacturer, we identify the sale to its geographic location rather than that of the customerfor whom the contract manufacturer is supplying product. The decrease in APAC contribution to net sales in Fiscal 2012 compared to Fiscal 2011 was due tothe increase in revenue contribution from several existing customers in the Americas region. See Note 17 to the audited consolidated financial statementsincluded in Item 8 of this Annual Report. 6Channels of DistributionWe primarily ship our products directly to our OEM customers (or their contract manufacturers), who package our accessory products “in box” withtheir branded products. Some of our customers also purchase certain of our products and offer them for sale as stand-alone accessories to complement theirproduct offerings.Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Sales by Product LineSales of carry and protective solutions for “Diabetic Products” and for “Other Products” (all products other than diabetic carry cases for blood glucosemonitor kits) accounted for approximately the following percentages of total net sales in Fiscal 2012 and 2011: Fiscal Year EndedSales:2012 2011Diabetic Products.................................................74% 73%Other Products .....................................................26% 27%Totals..................................................................100% 100% Sales ConcentrationWe have approximately 74 active OEM customers. Of these, three customers (including their affiliates and contract manufacturers) accounted forapproximately 62% and 69% of our net sales from continuing operations in Fiscal 2012 and 2011, respectively. All three of these “major” customers areOEMs of diabetic monitoring kits. These customers package our carry and protective solutions “in box” with their branded products, or to a lesser extent, sellthem through their retail distribution channels. The approximate percentages of net sales contributed by each of these three customers to continuing operationsfor Fiscal 2012 and Fiscal 2011 are as follows: Fiscal Year EndedCustomer:2012 2011Diabetic Customer A...............................................33% 37%Diabetic Customer B................................................13% 16%Diabetic Customer C................................................16% 16%Totals*..................................................................62% 69%* Tables may not total due to rounding.Sales ForceDuring Fiscal 2012 and 2011, all net sales of OEM products were made directly by our employees, which are assigned key accounts or definedgeographic sales territories. See “Risk Factors” in Item 1A. of this Annual Report - “Our business could suffer if the services of key sales personnel we relyon were lost to us.”OEM Distribution HubsWe have distribution hub arrangements with three OEM customers. These arrangements obligate us to supply our products to our customer’sdistribution hubs (may be multiple locations) where their products are manufactured, kitted, and/or warehoused pending sale, and where our products arepackaged in-box with the OEM customer’s products or, to a much lesser extent, distributed for retail sale. The product quantities we are required to supply toeach distribution hub are based on the OEM customer’s purchase orders and forecasts. We do not recognize revenue for product shipped to a hub until wehave been notified by our customer that our product has been withdrawn from the distribution hub and “consumed”. Hub arrangements have had the generaleffect of extending financing for our customers’ inventory build by extending the time between our placement of orders to our suppliers in order to ship andsupply the hubs and the time that we are able to recognize revenue. The corollary effect is an increase in our inventory levels. 7 Credit RiskWe generally sell our OEM products on 45- to 90-day credit terms customary in the industry. Historically, we have not had significant credit problemswith our customers. Our significant OEM customers are large, multi-national companies with good credit histories. None of these customers is or has been indefault to us, and payments from all customers are generally received from them on a timely basis. Three OEM customers (including their affiliates or contractmanufacturers) accounted for approximately 76% and 72% of our accounts receivable at September 30, 2012 and 2011, respectively.When we ship products to our OEM customer’s designated contract manufacturer and invoice such manufacturer (and not the OEM customer), eventhough our order flows originate with and depend on our relationship with the OEM, our accounts receivable credit risk lies with the contract manufacturer. Our OEM customer does not guarantee the credit of the contract manufacturer to whom the OEM requests us to ship our carrying case products, and suchorder volumes may be significant from time to time. In most cases, these contract manufacturers are themselves major multinational enterprises with goodcredit. See Item 1A of this Annual Report on Form 10-K: “Risk Factors”.Product SupplyManufacturingThe manufacture of custom carrying cases and other carry and protective solutions generally consists of die cutting fabrics and heat sealing, gluing,sewing, and decorating (affixing logos to) the cut-outs by means of silk screening, hot-stamping, embroidering or embossing. The principal materials used inthe manufacture of our products are vinyl, nylon, leather, metal and plastic parts (for clips, buckles, loops, hinges and other hardware), foam padding andcardboard, all of which are obtained according to our specifications from suppliers. We do not believe that any of the component materials or parts used byour suppliers in the manufacture of our products is supply constrained. We believe that there are adequate available alternative sources of supply for all of thematerials used to manufacture, package, and ship our products.Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Sourcing AgentOn March 12, 2012, we entered into a Buying Agency and Supply Agreement (the “Agreement”) with Forward Industries Asia-Pacific Corporation(“Forward China” f/k/a Seaton Global Corporation), a British Virgin Islands corporation, dated as of March 7, 2012. The Agreement provides that, upon theterms and subject to the conditions set forth therein, Forward China shall act as our exclusive buying agent and supplier of Products (as defined in theAgreement) in the Asia Pacific region. We purchase products at Forward China’s cost, and shall pay a service fee on the net purchase price. The Agreementshall terminate on March 11, 2014, subject to renewal. Terence Wise, a director of the Company, is a principal of Forward China.SuppliersWe procure substantially all our supply of carrying solutions products from independent suppliers in China through Forward China. We purchasedapproximately 90% of our OEM products from four such suppliers in Fiscal 2012 and 2011. One such China supplier accounted for approximately 54% and58% of our OEM product purchases in Fiscal 2012 and 2011, respectively. Depending on the product, we may require several different suppliers to furnishcomponent parts or pieces.We place orders with one or more suppliers at the time we receive firm purchase orders and/or forecasts from our OEM customers for a particularproduct. Accordingly, we do not have minimum supply requirement agreements with our suppliers to guarantee us supply of finished product, nor have wemade purchase commitments to purchase minimum amounts from any of our suppliers. However, from time to time, we may order products from oursuppliers in advance of receiving a customer purchase order, or in quantities in excess of those forecasted to us by our customer, to which they arecontractually obligated to us for, in order to meet our customer’s delivery demands. 8 Quality AssuranceTo ensure that our products manufactured by our Chinese suppliers meet our quality assurance standards our products are inspected by independentcontractors in China, which may be affiliated with one or more of our suppliers. These contractors were subject to the control and supervision of our qualityassurance employees based in Hong Kong and/or by Forward China, our exclusive sourcing agent (refer to “Sourcing Agent” under the “Product Supply”section). In July 2012, Forward China received its ISO 9001:2008 quality certification, which covers all ISO activities previously covered under Forward’sISO quality certification.LogisticsOnce our products are approved for shipment by our quality assurance procedures, our products are typically shipped to our customer’s destinationport in the Americas and EMEA regions on ocean-going container vessels, or by ground transport to our APAC customer’s locations in China or Hong Kong.In certain cases, and primarily at our customer’s request, we will expedite the shipment of our products by using air transportation. Most ocean-goingshipments bound for the United States are off-loaded at the port of Los Angeles or San Francisco, but certain customers arrange for shipments to East coastports, such as Miami or Philadelphia. EMEA destined shipments generally are routed via Rotterdam. See “Item 1A. in this Annual Report “Risk Factors—Our shipments of products via container freight to customers in the United States and Europe may become subject to delays or cancellation at portfacilities due to work stoppages or slowdowns, damage caused by weather or terrorism and congestion due to inadequacy of equipment and othercauses.”Insurance We maintain commercial loss and liability, business interruption, and general claims and other insurance customary for our business. We do notmaintain credit insurance for our trade accounts receivable.CompetitionThe business in which we engage is highly competitive in terms of product pricing, design, delivery terms, and customer service. In the production ofour OEM products, we compete with numerous United States and foreign producers and distributors. Some of our competitors are substantially larger thanwe are and have greater financial and other resources. We believe that we sustain our competitive position through maintenance of an effective product designcapability, rapid response time to customer requests for proposals and product shipment, reliable product delivery and product quality, and competitivepricing. We believe that our ability to compete based on product quality assurance considerations is enhanced by the local presence of our Chinese basedquality control and shipment capabilities. See Item 1A. in this Annual Report on Form 10-K: “Risk Factors - The carrying solutions business is highlycompetitive and does not pose significant barriers to entry.”EmployeesAt September 30, 2012, we had 18 full-time employees, of whom two are employed in executive capacities, eight are employed in administrative andclerical capacities, seven are employed in sales and sales support capacities, and one is employed in a design capacity. We consider our employee relations tobe satisfactory. None of our employees are covered by a collective bargaining agreement.Since June 2003, we have employed our U.S. employees through a co-employment agreement with a Professional Employer Organization (“PEO”). Theobjective of this arrangement is for the PEO to assume many of the legal and administrative responsibilities of human resources management, health benefits,workers' compensation, payroll, payroll tax compliance, 401(K) plan administration and unemployment insurance and to perform these functions at lesserexpense than if we were to perform them directly.Regulation and Environmental Protection Our business is subject to various regulations in various jurisdictions, including the United States and member states of the European Community,Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.that restrict the use or importation of products manufactured with compounds deemed to be hazardous. We work with our suppliers to ensure compliancewith such regulations. In addition, from time to time one or more customers may require testing of our products to ensure compliance with applicableconsumer safety rules and regulations or the customer’s safety or packaging protocols. Because we do not manufacture the products that we sell anddistribute, compliance with federal, state and local laws and regulations pertaining to the discharge of materials into the environment, or otherwise relating tothe protection of the environment, has not had, and is not anticipated to have, any direct material effect upon our capital expenditures, earnings, or competitiveposition. However, compliance with such laws and regulations on the part of our suppliers may result in increased costs of supply to us, particularly ifdomestic environmental regulation in China becomes more prevalent.9 We have not been engaged in any environmental litigation or incurred any material costs related to compliance with environmental or other regulations. From time to time we incur chemical and/or safety laboratory testing expense in order to address customer requests regarding our product materials or methodof manufacture or regarding their packaging methods and standards.ITEM 1A. RISK FACTORS Please read the note regarding "Cautionary statement for purposes of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of1995" that appears on page 16 of this Annual Report on Form 10-K.We have a history of losses and negative cash flow from operations. We cannot assure you that we will achieve profitability in 2013.We have incurred significant losses and negative cash flows from operations in recent years. We incurred net losses of approximately $9.6 million and$2.9 million for the fiscal years ended September 30, 2012 and 2011, respectively, and had net uses of cash in operating activities of approximately $10.8million and $1.8 million for the fiscal years ended September 30, 2012 and 2011, respectively. Further, we may continue to incur net losses in future reportingperiods as we incur expenses associated with the continuation of our business as well as its subsequent development, which development cannot beguaranteed. There is no assurance our future operations will be profitable. If we cannot generate sufficient revenues to operate profitably, we may be forced tocease or suspend operations, or we may be required to raise additional capital to maintain or grow our operations. There is no assurance that we will be able toraise such additional capital. There can be no assurance that the restructuring we have begun to implement will be successful.In June 2012 we announced our plans to exit the global retail business and focus solely on growing our OEM business, which we believe will enable usto use working capital more effectively and improve organizational effectiveness. In connection with exiting the global retail business we also commenced arestructuring of our business, including: reducing annualized operating expense by over 50% through headcount reductions; closing offices in Santa Monica,London, Dubai and Saarbrucken; and relocating the corporate headquarters to Florida, where costs of operation are anticipated to be lower. We alsoimplemented a variable, lower cost sourcing and quality assurance solution through a third party Asia-based sourcing agent. While we believe these measures,along with other steps to be taken, will be sufficient to return the Company to profitability, there can be no assurance that this will be the case, or thatadditional steps will not be required. If additional steps are required, there can be no assurance that they will be properly implemented or will be successful. The cash investment required to execute our OEM growth strategy is likely to be substantial relative to our cash resources.We have recently invested and expect to continue to invest substantial incremental cash resources to execute our OEM growth strategy. While we believethat our existing cash resources are sufficient to support our growth strategy, there can be no assurances that our growth strategy will be successful or that wewill earn a return on these investments.Our business remains highly concentrated in our Diabetic Products line, posing risks to our financial condition and results of operationscompared to periods when revenue from customers from two principal product lines were more balanced. If our Diabetic Products line were to sufferthe loss of a principal customer or a material decline in or loss of sales, our business would be materially and adversely affected.10 Sales of diabetic cases to OEM customers accounted for approximately 74% of net revenues from continuing operations in Fiscal 2012. While net salesof “Other Products” increased 26%, our business remains characterized by high product line as well as customer concentration. In such circumstances, ourfinancial condition and results of operations are subject to higher risk from the loss of a diabetic case customer or from changes in the business practices ofOEMs of blood glucose monitors, for example, a decision to reduce or eliminate inclusion of cases in box with the electronic device or a decision to focus oninsulin pumps instead of insulin by injection.Our business is and has been characterized by a high degree of customer concentration. Our three largest customers accounted forapproximately 62% and 69% of net sales from continuing operations in Fiscal 2012 and Fiscal 2011, respectively; the loss of, or material reduction inorders from, any of these customers would materially and adversely affect our results of operations and financial condition.At present the predominant percentage of our sales revenues is concentrated in three large OEM customers for our diabetic blood glucose carry cases,including their affiliates and/or their contract manufacturers. The loss of any of these customers, whether as a result of its purchase of its carry solutionrequirements from another vendor, its decision to manufacture its own carrying cases, its decision to award its orders to one of our competitors, or otherwise,Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.would have a material adverse effect on our financial condition, liquidity and results of operations. If any one or more of our OEM customers elect to reduce or discontinue inclusion of cases “in-box”, our results of operations and financialcondition would be materially and adversely affected.The predominant percentage of our revenues is derived from sales of case accessories to our OEM customers who package our cases “in-box” with theirelectronics. With the global recession and weak recovery, OEMs have sought continuously to reduce expenses. If one or more of our OEM customersgenerally begin to reduce or discontinue the practice of including carry case accessories in-box, we would incur a significant decline in revenues and our resultsof operations and financial condition would be materially and adversely affected.At any time, a significant percentage of our accounts receivable risk may be concentrated in a small number of customers.Three customers accounted for approximately 76%, and 72% of our accounts receivable at September 30, 2012 and 2011, respectively. The failure toreceive or collect such amounts when and as due could have a material adverse effect on our financial condition, liquidity, and results of operations.We continue to encounter pressures from our largest OEM customers to maintain or even roll back prices or to supply lower priced carrysolutions, and expect such pressure to persist. The effects of such price constraints on our business may be exacerbated by inflationary pressures thataffect our costs of supply.During Fiscal 2012 and 2011, we experienced significant pricing pressure from our largest OEM customers to maintain or even reduce the prices wecharge them. When we are unable to extract comparable concessions from our suppliers on prices they charge us, product sales margins erode. In addition tomargin compression from customers, in general, we are encountering increased pricing from our Chinese suppliers who are reacting to inflationary increases inmaterials and labor costs incurred by them. We believe that Fiscal 2011, Fiscal 2012, and the present represent a period of such inflationary pressures. Inaddition, prices that our Chinese vendors charge to us may reflect appreciation of the Chinese currency against the U.S. dollar, which can be passed throughto us in the form of higher U.S. dollar prices. This in turn will tend to reduce gross profit percentage if we are unable to raise prices. We anticipate thatconstraints on our ability to maintain or increase prices to our major customers will continue to exert downward pressure on our gross margin in the fiscal yearending September 30, 2013. Our results of operations are subject to the risks of fluctuations in the values of foreign currencies relative to the U.S. Dollar.Our results of operations are expressed in U.S. Dollars. When the U.S. Dollar appreciates or depreciates in value against a currency in which all or asignificant portion of revenues or other accounts receivable are denominated, such as the Euro, our results of operations can be adversely affected or benefited,respectively. The degree of impact is proportional to the amount of foreign currency expense or revenue, as the case may be, and the fluctuations in exchangerates over the period in which the effect is measured on our financial statements. 11 Future revenues are difficult to predict and are likely to show significant variability as a consequence of customer concentration.Because our revenues are highly concentrated in a few large customers, and because the volumes of these customers' order flows to us can fluctuatemarkedly in a short period of time, our quarterly revenues, and consequently our results of operations, may be highly variable and subject to significantchanges over a relatively short period of time. Our largest OEM customers may keep consumer products with which our carry solutions are packaged "in-box"in active promotion for many months, or for a very short period of time, depending on various factors, including sales trends for the product, productdevelopment cycles, new product introductions, and our customers' competitors' product offerings. As demand for the consumer product relating to the in-boxprogram matures and decreases, we may be forced to accept significant price and/or volume reductions in customer orders for our carry solutions, which willadversely affect revenue. These factors tend to lead to a high degree of variability in our quarterly revenue levels. Significant, rapid shifts in our operatingresults may occur if and when one or more of these customers increase or decrease the size(s) of, or eliminate, their orders from us by amounts that arematerial to our business. Our gross margins, and therefore our profitability, vary considerably by customer and by product, and if the revenue contribution from one ormore OEM customers or products changes materially, relative to total revenues, our gross profit percentage may fluctuate.Our gross profit margins on the products we sell can vary widely depending on the product type, customer, and order size. Because of the broadvariability in price ranges and product types, we anticipate that gross margins, and accordingly their impact on operating income or loss, may fluctuatedepending on the relative revenue contribution from each customer or product.Product manufacture is often outsourced by our OEM customers to contract manufacturing firms in China and in these cases it is the contractmanufacturer to which we must look for payment.Such firms are performing manufacturing, assembly, and product packaging functions, including the bundling of our product accessories with theOEM customer's product. As a consequence of this business practice, we often sell our carry solution products to the contract manufacturing firm. This isparticularly significant in the case of diabetic product sales to certain customers. In these cases, we invoice the contract manufacturing firm and not the OEMcustomer. Therefore, it is the contract manufacturing firm's credit to which we must look for payment in such cases and not that of our OEM customer. Thismay alter the credit profile of our customer base and may involve significant purchase order volumes. In some, but not all cases, the manufacturing firm isitself a large, multinational entity with significant financial resources.Our dependence on foreign manufacturers creates quality control and other risks to our business. From time to time we may experience certainSource: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Our dependence on foreign manufacturers creates quality control and other risks to our business. From time to time we may experience certainquality control, on-time delivery, cost, or other issues that may jeopardize customer relationships.Our reliance on foreign suppliers, manufacturers, and other contractors involves significant risks, including risk of product quality issues andreduced control over quality assurance, manufacturing yields and costs, pricing, timely delivery schedules, the potential lack of adequate manufacturingcapacity and availability of product, the lack of capital, and potential misappropriation of our designs.Our shipments of products via container may become subject to delays or cancellation due to work stoppages or slowdowns, piracy, damage toport facilities caused by weather or terrorism, and congestion due to inadequacy of port terminal equipment and other causes.To the extent that there are disruptions or delays in loading container cargo in ports of origin or off-loading cargo at ports of destination as a result oflabor disputes, work-rules related slowdowns, tariff or World Trade Organization-related disputes, piracy, physical damage to port terminal facilities orequipment caused by severe weather or terrorist incidents, congestion in port terminal facilities, inadequate equipment to load, dock and offload containervessels or energy-related tie-ups or otherwise, or for other reasons, product shipments to our customers will be delayed. In any such case, our customer maycancel or change the terms of its purchase order, resulting in a cancellation or delay of payments to us. A closure or partial closure of port facilities or othercauses of delays in the loading, importation, offloading or movement of our products to the shipping destination agreed with our customer could result inincreased expenses, as we try to avoid such delays, delayed shipments or cancelled orders, or all of the above. Depending on the severity of suchconsequences, this may have an adverse effect on our financial condition and results of operations.12 The OEM carrying solutions business is highly competitive and does not pose significant barriers to entry.There are many competitors in the sale of carry solutions products to OEMs, and competition is intense. Since little or no significant proprietarytechnology is involved in the design, production, or distribution of the types of products we sell, others may enter the business with relative ease and competeagainst us. Such competition may result in the diminution of our market share or the loss of one or more major OEM customers, thereby adversely affectingour net sales, results of operations, and financial condition. Many of our competitors are larger, better capitalized, and more diversified than we are and maybe better able to withstand a downturn in the general economy or in the product areas in which we specialize. These competitors may also have less salesconcentration than we do and be better able to withstand the loss of a key customer or diminution in its orders. Our business could suffer if the services of key sales personnel we rely on were lost to us.We are highly dependent on the efforts and services of certain key sales representatives who have account responsibility for, and have longstandingrelationships with one or more of our largest customers. Our business could be materially and adversely affected if we lost the services of any suchindividual. If we lost the services of a key sales representative, we might experience a material reduction in orders from his customers, resulting in a loss ofrevenues, which would materially and adversely affect our results of operations and financial condition.We do not pay dividends on our common stock.We have not paid any cash dividends on our common stock since 1987. The payment in the future of cash dividends by us, if any, will depend uponour results of operations, short-term and long-term cash availability, working capital, working capital needs, and other factors, as determined by our Board ofDirectors. We do not anticipate that cash dividends will be paid in the foreseeable future. The absence of dividend payments on a common stock might makesuch stock susceptible to greater market price swings.We have in place anti-takeover measures and charter provisions that may prevent a hostile or unwanted effort to acquire Forward.Our Board of Directors is authorized to issue up to 4,000,000 shares of "blank check" preferred stock. Our Board of Directors has the authority,without shareholder approval, to issue such preferred stock in one or more series and to fix the relative rights and preferences thereof including theirredemption, dividend and conversion rights. Our ability to issue the authorized but unissued shares of preferred stock could be used to impede takeovers ofour company. Under certain circumstances, the issuance of the preferred stock could make it more difficult for a third party to gain control of Forward,discourage bids for the common stock at a premium, or otherwise adversely affect the market price of our common stock. In addition, our certificate ofincorporation requires the affirmative vote of two-thirds of the shares outstanding to approve a business combination such as a merger or sale of all orsubstantially all assets. Such provision and blank check preferred stock may discourage attempts to acquire Forward. Applicable laws that imposerestrictions on, or regulate the manner of, a takeover attempt may also have the effect of deterring any such transaction. We are not aware of any attempt toacquire Forward.We maintain cash balances in our bank accounts that exceed the FDIC insurance limitation.We maintain our cash assets at commercial banks in the U.S. in amounts in excess of the Federal Deposit Insurance Corporation insurance limit of$250,000 and in Europe in amounts that may exceed any applicable deposit insurance limits. In the event of a failure at a commercial bank where we maintainour deposits or uninsured losses on money market or other cash equivalents in which we maintain cash balances, we may incur a loss to the extent such lossexceeds the insurance limitation, which could have a material adverse effect upon our financial conditions and our results of operations.ITEM 1B. UNRESOLVED STAFF COMMENTS Not Applicable 13Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ITEM 2. PROPERTIESIn September 2012, we relocated our executive offices from Santa Monica, California to West Palm Beach, Florida, which consists of approximately2,815 square feet, which we rent for approximately $6,200 per month under a lease agreement scheduled to expire in July 2020.In April 2011, we relocated our executive offices from Pompano Beach, Florida to offices in Santa Monica, California, which consists of approximately3,400 square feet for which we rent at $13,500 per month under lease agreements, which expire in October 2016. In light of our return to Florida in September2012, we anticipate sub-leasing this space for the remainder of our lease term at rates equal or above those that we are contractually obligated to.We sub-lease approximately 1,300 square feet of office space in Cham, Switzerland on a month-to-month basis from a tenant at the same location. Weuse this office as our EMEA headquarters from which we coordinate our sales and sales support activities throughout the EMEA region.In October 2011, we entered into a lease for approximately 1,000 square feet of office space in London, England at $8,000 per month under a leaseagreement that expired in September 2012. We used this office space to perform administrative and sales support (such as accounting, operational, andcustomer service functions) primarily to our EMEA-based Retail sales team. Consequently, this lease was not renewed as part of our exit from our Retailbusiness (refer to “Discontinued Operations”). All OEM sales, sales support and administrative activities in the EMEA region are coordinated from ourbranch office in Cham, Switzerland.In April 2012, we renewed our license through the Jebel Ali Free Zone Authority (JAFZA) to maintain a registered branch office in the Jebel Ali Free Zone(JAFZ) of the United Arab Emirates. Under this license, we rent approximately 638 square feet of office space at annual rate of $35,000 through March 2013.We used this office space to facilitate sales of our Retail products in the Middle-East and India region through July 2012, at which time we shut down thisoffice space as part of our exit from our Retail business (refer to “Discontinued Operations”).In July 2011, we renewed our lease for approximately 4,400 square feet of office space in Kowloon, Hong Kong, which extends through October 2014 ata monthly rate of $15,000. We used this office space as our APAC headquarters from which we coordinated and conducted our Asia-based sourcing, qualityassurance, and logistics activities. In September 2012, we vacated this office space in connection with our use of an exclusive sourcing agent in the APACregion (refer to “Sourcing Agent” section under Item 1 – “Product Supply”).We believe that each of the foregoing leased properties is adequate for the purposes for which it is used. All leases are with independent third parties. Webelieve that the loss of any lease would not have a material adverse effect on our operations, as we believe that we could identify and lease comparable facilitiesupon approximately equivalent terms.ITEM 3. LEGAL PROCEEDINGSTargus Group International, Inc., et al. v., Forward Industries, Johnson, et al.On September 19, 2011, Forward, Mr. Brett Johnson (our former President and Chief Executive Officer), and one of our employees were named in aComplaint filed in Orange County Superior Court by Targus Group International, Inc. and two of its affiliates. The Complaint alleged a claim for breach ofcontract against Mr. Johnson. The Complaint further alleged a “breach of fiduciary duty/duty of loyalty” against the employee, and it asserted claims againstMr. Johnson and Forward for allegedly aiding and abetting that alleged breach. The Complaint also asserted a cause of action against all Defendants for unfaircompetition. An Amended Complaint was filed on October 11, 2011. In addition to the claims asserted in the original Complaint, the Amended Complaintadded an additional Targus affiliate as a plaintiff and named an additional employee of Forward as a defendant. The Amended Complaint asserted a claimagainst that employee for breach of contract and for “breach of fiduciary duty/duty of loyalty, ” and it added new claims against Forward and Mr. Johnson forallegedly interfering with that employee’s contract and for allegedly aiding and abetting his breach of duty. The claim for unfair competition in the AmendedComplaint relies on these new allegations as well. Forward entered into a Settlement Agreement, effective as of October 17, 2012, which resolved claimsbetween the Company and the other defendants, on the one hand, and Targus Group International, Inc. and the other plaintiffs, on the other hand, related tothis action. In connection with the Settlement Agreement, a payment was made to the plaintiffs, substantially all of which was made by Forward’s insurer. 14 Other LitigationFrom time to time, the Company may become a party to other legal actions or proceedings in the ordinary course of its business. As of September 30,2012, there were no such actions or proceedings, either individually or in the aggregate, that, if decided adversely to the Company’s interests, the Companybelieves would be material to its business.ITEM 4. NOT APPLICABLEPART IISource: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIESMarket for Common StockThe principal market for our common stock is the NASDAQ SmallCap Market. Our common stock is traded under the symbol "FORD". Thefollowing table sets forth the high and low closing bid quotations for our common stock on the NASDAQ SmallCap Market for each quarter in the last twofiscal years. Bid Price Information for Common Stock* Fiscal 2012 Fiscal 2011 High BidLow Bid High BidLow Bid First Quarter$2.24$1.55 $4.06$2.89 Second Quarter$3.24$1.65 $4.10$3.02 Third Quarter$2.83$1.68 $4.59$2.52 Fourth Quarter$1.83$1.02 $3.11$2.01 _______________________________*High and low bid price information as furnished by The NASDAQ Stock Market Inc. On December 3, 2012, the closing bid quotation for our common stock was $1.20Holders of common stock. As of December 3, 2012, there were approximately 112 holders of record of our common stock, excluding approximately 7,827 beneficial holders ofcommon stock whose shares are held in street name.DividendsWe have not paid any cash dividends on our common stock since 1987 and do not plan to pay cash dividends in the foreseeable future. The paymentof dividends in the future, if any, will depend upon our results of operations, as well as our short-term and long-term cash availability, working capital,working capital needs, and other factors, as determined by our Board of Directors. Currently, except as may be provided by applicable laws, there are nocontractual or other restrictions on our ability to pay dividends if we were to decide to declare and pay them.Recent sales of unregistered securitiesDuring Fiscal 2012 and 2011, we did not sell any shares of common stock, or securities exercisable for or exchangeable into common stock, or anyother securities that were not registered under the Securities Act of 1933.15 Securities authorized for issuance under equity compensation plans.For information relating to this topic, see Part III, Item 11 of this Annual Report. “Executive Compensation—Securities Authorized for Issuance underEquity Compensation Plans”, which is incorporated in this Annual Report on Form 10-K by reference to our 2012 Proxy Statement.Purchase of Equity SecuritiesNo repurchase of any shares of our common stock or other equity security was made by or on behalf of the Company during Fiscal 2012 or 2011.ITEM 6. SELECTED FINANCIAL DATANot applicable.ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion and analysis should be read in conjunction with our audited Consolidated Financial Statements and the notes theretoand other financial information appearing in Item 8 of this Annual Report on Form 10-K. This discussion and analysis compares our consolidatedresults of operations for the Fiscal year ended September 30, 2012 ("Fiscal 2012"), with those for the Fiscal year ended September 30, 2011 ("Fiscal2011"), and is based on or derived from the audited Consolidated Financial Statements included in Item 8 in this Annual Report. All figures in thefollowing discussion are presented on a consolidated basis. All dollar amounts and percentages presented herein have been rounded to approximatevalues.Cautionary statement for purposes of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995The following management’s discussion and analysis includes “forward-looking statements”, as such term is used within the meaning of the PrivateSecurities Litigation Reform Act of 1995. These “forward-looking statements” are not based on historical fact and involve assessments of certain risks,developments, and uncertainties in our business looking to the future. Such forward looking statements can be identified by the use of forward-lookingSource: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.terminology such as “may”, “will”, “should”, “expect”, “anticipate”, “estimate”, “intend”, “continue”, or “believe”, or the negatives or other variations ofthese terms or comparable terminology. Forward-looking statements may include projections, forecasts, or estimates of future performance and developments. Forward-looking statements contained in this Annual Report are based upon assumptions and assessments that we believe to be reasonable as of the date ofthis Annual Report. Whether those assumptions and assessments will be realized will be determined by future factors, developments, and events, which aredifficult to predict and may be beyond our control. Actual results, factors, developments, and events may differ materially from those we assumed andassessed. Risks, uncertainties, contingencies, and developments, including those discussed in this Management’s Discussion and Analysis of FinancialCondition and Results of Operations and those identified in “Risk Factors” in Item 1A of this Annual Report on Form 10-K, could cause our future operatingresults to differ materially from those set forth in any forward looking statement. There can be no assurance that any such forward looking statement,projection, forecast or estimate contained can be realized or that actual returns, results, or business prospects will not differ materially from those set forth inany forward looking statement.Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims anyobligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflectfuture results, events or developments.Business OverviewTrends and Economic EnvironmentIn June 2012, we determined to exit our global retail business and focus solely on growing our OEM business. Our decision to eliminate our retaildivision was based primarily on the longer than estimated path to bring it to profitability and the strong top-line growth and cost rationalizations achieved inthe OEM business over the past two years. 16 In connection with the exit of our retail business, we entered into a second Memorandum of Understanding (the “New MOU”) with G-Form. Inaccordance with this New MOU we have assisted G-Form on a short-term basis with transitioning certain operational and sales functions previouslyperformed by Forward for G-Form products. We continue to work with G-Form to distribute our remaining retail product inventory and are working with themto settle on the amount of funds owed to us as a result of the net effect of certain transactions between G-Form and us, as contemplated under the New MOU.As part of our ongoing restructuring, we implemented several key measures beginning in mid-Fiscal 2012 to improve our operating performance andreturn our company to profitability. These actions included replacing our legacy sourcing and quality assurance infrastructure with a variable, lower cost,solution through our use of an exclusive, Asia-based, sourcing agent (refer to Note 14 in our Notes to Financial Statements). We believe that this agencyrelationship will yield meaningful, longer-term benefits, in terms of negotiating favorable material costs, improving the quality of our products, anddiversifying our supplier base. With regard to lowering our fixed overhead, we have closed our offices in London, Dubai Saarbrucken, and Santa Monica,and relocated our corporate headquarters to West Palm Beach, where we expect costs of operation to be lower. In addition, we have significantly reducedheadcount through elimination of personnel dedicated to our Retail business and reinvested a portion of these costs savings to expand and restructure our sales,design, customer service, finance and IT personnel focused on growing our OEM business. Lastly, we have begun to implement a rigorous cost rationalizationplan with regard to other components of our operating expenses that we believe will result in a more streamlined and efficient use of our working capital.With regard to our OEM business, it remains highly concentrated by customer and product type, especially with respect to our Diabetic Products line,where we continue to operate in a very challenging price sensitive environment. We continue to experience pricing pressure from our major Diabetic Productscustomers, but especially with respect to certain of our longer-lived programs for which price concessions are expected to be granted to them over an extendedperiod of time. Moreover, we are encountering higher costs from our China-based suppliers due to materials and labor price increases that place continuingpressure on our profit margins. In certain cases, we are not able to pass these higher costs through to customers, particularly when replacement programproducts resemble their predecessors or historically similar products, for which customers have become accustomed to a narrow price range. Through ourexclusive sourcing agent in the APAC region, we have intensified our search for alternative sources of supply to expand and diversify our manufacturingcapabilities in order to mitigate this trend.In late Fiscal 2011, we were awarded several large programs by Diabetic Products customers C and D that have contributed meaningfully to our netsales and overall product mix in Fiscal 2012. As we expected, these new programs increased our sales volume, but depressed our overall gross margin in theFiscal 2012, as the gross margins on these programs are lower than those seen in Fiscal 2011. We expect that these new programs will continue to represent asignificant portion of our overall product mix during Fiscal 2013 and anticipate that our overall gross margin for will continue to reflect this.Our gross margin in Fiscal 2012 was also negatively impacted by a significant level of quality remediation charges, as well as transition andtermination costs in respect of the restructure of our sourcing and quality operations. We believe these to be non-recurring.Variability of Revenues and Results of OperationBecause a high percentage of our sales revenues is highly concentrated in a few large customers, and because the volumes of these customers’ orderflows to us are highly variable, with short lead times, our quarterly revenues, and consequently our results of operations, are susceptible to significantvariability over a relatively short period of time. Critical Accounting Policies and EstimatesWe have identified the accounting policies and significant estimation processes below as critical to our business operations and the understanding of ourresults of operations. The discussion below is not intended to be comprehensive. In many cases, the accounting treatment of a particular transaction isspecifically dictated by accounting principles generally accepted in the United States, with no need for management’s judgment of a particular transaction. InSource: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.other cases, management is required to exercise judgment in the application of accounting principles with respect to particular transactions. The impact andany associated risks related to these policies on our business operations are discussed throughout this “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” where such policies affect reported and expected financial results. For a detailed discussion of the applications of theseand other accounting policies, refer to Item 8. “Financial Statements and Supplementary Data” in this Annual Report. Our preparation of our consolidatedfinancial statements requires us to make estimates and assumptions that are believed to be reasonable under the circumstances. There can be no assurance thatactual results will not differ from those estimates and such differences could be significant.17 Cash and Cash EquivalentsCash and cash equivalents consist primarily of cash on deposit and highly liquid money market accounts, short-term bonds, and certificates ofdeposit with original contractual maturities of three months or less, predominately in U.S. dollar denominated instruments. We may purchase these short-termbonds with anticipated maturity of 90 days or less at a premium or discount. We record these investments as cash and cash equivalents net of amortization ofpremium or discount. We minimize our credit risk associated with cash and cash equivalents by investing in high quality instruments and by periodicallyevaluating the credit quality of the primary financial institution issuers of such instruments. We hold cash and cash equivalents at major financial institutionsin the United States, at which cash amounts may significantly exceed FDIC insured limits. At September 30, 2012, this amount was approximately $4.4million. Historically, we have not experienced any losses due to such cash concentrations.Marketable SecuritiesThe Company has investments in marketable equity securities that are classified as available-for-sale and are recorded at fair value with the correspondingunrealized holding gains or losses, net of taxes, recorded as a separate component of “Accumulated Other Comprehensive Loss” within shareholders’ equity.Unrealized losses that are determined to be other-than-temporary, based on current and expected market conditions, are recognized in earnings. The fair valueof marketable securities is determined based on quoted market prices at the balance sheet dates. The cost of marketable securities sold is determined by thespecific identification method.Accounts ReceivableAccounts receivable consist of unsecured trade accounts with customers or their contract manufacturers. We perform periodic credit evaluations of itscustomers including an evaluation of days outstanding, payment history, recent payment trends, and perceived credit worthiness, and believes that adequateallowances for any uncollectible receivables are maintained. Credit terms to customers generally range from net thirty (30) days to net ninety (90) days. Wehave not historically experienced significant credit or collection problems with our OEM customers or their contract manufacturers. In addition, we maintaincredit insurance that provides up to 90% coverage on trade accounts with customers in the EMEA region. At September 30, 2012, no allowance for doubtfulaccounts relating to our continuing operations was deemed necessary. At September 30, 2011, the allowance for doubtful accounts was approximately $14,000.InventoriesInventories consist primarily of finished goods and are stated at the lower of cost (determined by the first-in, first-out method) or market. Based onmanagement’s estimates, an allowance is made to reduce excess, obsolete, or otherwise un-saleable inventories to net realizable value. The allowance isestablished through charges to cost of goods sold in the Company’s consolidated statements of operations. As reserved inventory is disposed of, the Companycharges off the associated allowance. In determining the adequacy of the allowance, management’s estimates are based upon several factors, includinganalyses of inventory levels, historical loss trends, sales history, and projections of future sales demand. The Company’s estimates of the allowance maychange from time to time based on management’s assessments, and such changes could be material. At September 30, 2012, the allowance for obsoleteinventory of the Company’s continuing operations was approximately $99,000. At September 30, 2011, no allowance for obsolete inventory was deemednecessary. 18 Property and EquipmentProperty and equipment consist of furniture, fixtures, and equipment and leasehold improvements and are recorded at cost. Expenditures for majoradditions and improvements are capitalized, and minor replacements, maintenance, and repairs are charged to expense as incurred. When property andequipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is includedin the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method.The estimated useful life for furniture, fixtures and equipment ranges from three to ten years. Amortization of leasehold improvements is computed using thestraight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements. For the fiscal years ended September 30,2012 and 2011, we recorded approximately $103,000 and $54,000 of depreciation and amortization expense from continuing operations, respectively.Depreciation and amortization for selling and general and administrative related property and equipment is included as a component of operating expenses ofcontinuing operations in the accompanying consolidated statements of operations.Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Income TaxesWe account for income taxes in accordance with accounting principles generally accepted in the United States of America, which requires, among otherthings, recognition of future tax benefits and liabilities measured at enacted rates attributable to temporary differences between financial statement and incometax bases of assets and liabilities and to net tax operating loss carryforwards to the extent that realization of these benefits is more likely than not. Weperiodically evaluate the realizability of our net deferred tax assets. Our policy is to account for interest and penalties relating to income taxes, if any, in“income tax expense” in its consolidated statement of operations and include accrued interest and penalties within the “accrued liabilities” in its balance sheets,if applicable. For fiscal years ended September 30, 2012 and 2011, no income tax related interest or penalties were assessed or recorded.Revenue RecognitionWe generally recognize revenue from product sales to our customers when: (1) title and risk of loss are transferred (in general, these conditions occur ateither point of shipment or point of destination, depending on the terms of sale); (2) persuasive evidence of an arrangement exists; (3) we have no continuingobligations to the customer; and (4) collection of the related accounts receivable is reasonably assured.Shipping and Handling CostsWe classify shipping and handling costs (including inbound and outbound freight charges, purchasing and receiving costs, quality assurance costs,and internal transfer costs), as a component of cost of goods sold in the accompanying consolidated statements of operations.Advertising and Promotion CostsAdvertising and promotion costs, consisting primarily of sampling related costs, are expensed as incurred. Advertising and promotion costs forcontinuing operations are included in selling expenses in the accompanying consolidated statements of operations and amounted to approximately $43,000 and$158,000 for the fiscal years ended September 30, 2012 and 2011, respectively. Foreign Currency TransactionsThe functional currency of the Company and its wholly owned foreign subsidiaries is the U.S. dollar. Foreign currency transactions may generatereceivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid. Fluctuations in exchange rates between suchforeign currency and the functional currency increase or decrease the expected amount of functional currency cash flows upon settlement of the transaction.These increases or decreases in expected functional currency cash flows are foreign currency transaction gains or losses that are included in “other income(expense), net” in the accompanying consolidated statements of operations. The net loss from foreign currency transactions and translations for continuingoperations was approximately $55,000 and $33,000 for the fiscal years ended September 30, 2012 and 2011, respectively. 19 Comprehensive LossWe calculate comprehensive loss as the total of our net loss and all other changes in equity (other than transactions with owners), including foreigncurrency translation adjustments. Comprehensive loss was approximately $(9,670,000) for the fiscal year ended September 30, 2012. We did not have anymaterial components of comprehensive loss, other than net loss, for the fiscal year ended September 30, 2011.Fair Value of Financial InstrumentsFor certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and other accrued liabilities, thecarrying amount approximates fair value due to the short-term maturities of these instruments.Share-Based Payment ExpenseWe recognize share-based equity compensation in our consolidated statements of operations at the grant-date fair value of stock options and other equity-based compensation. The determination of grant-date fair value is estimated using the Black-Scholes option-pricing model, which includes variables such asthe expected volatility of our share price, the exercise behavior of its grantees, interest rates, and dividend yields. These variables are projected based on ourhistorical data, experience, and other factors. Changes in any of these variables could result in material increases to the valuation of options granted in futureperiods and increases in the expense recognized for share-based payments. In the case of awards with multiple vesting periods, we have elected to use thegraded vesting attribution method, which recognizes compensation cost on a straight-line basis over each separately vesting portion of the award as if theaward was, in-substance, multiple awards. In addition, we recognize share-based compensation to non-employees based upon the fair value, using the Black-Scholes pricing model, determined at the deemed measurement dates over the related contract service period.RESULTS OF OPERATIONS FOR FISCAL 2012 COMPARED TO FISCAL 2011Loss from Continuing OperationsLoss from continuing operations increased $1.3 million to $3.3 million in Fiscal 2012 from $2.0 million in Fiscal 2011. The increase is primarily dueto: i) decreased gross profit on a higher sales base, ii) higher sales and marketing expenses, iii) higher general and administrative expenses and, to a lesserextent, iv) changes in other (expense) income and income taxes, as reflected in the table below:Main Components of Net Loss from Continuing Operations (thousands of dollars)Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (thousands of dollars) Fiscal 2012Fiscal 2011Increase (Decrease)Net sales...................................................................................... $29,403$22,763 $6,640Gross profit................................................................................. 3,9745,081 (1,107)Sales and marketing expenses................................................. (1,676)(2,591) (917)General and administrative expenses (5,562)(4,630)932Other (expense) income............................................................ (34)58(92) Income taxes expense (benefit).............................................. (15)5671Loss from continuing operations*........................................ $(3,313)$(2,025) 1,288* Table may not total due to rounding.Loss from continuing operations per basic and diluted share was $(0.41) and $(0.25) for Fiscal 2012 and 2011, respectively. 20 Net SalesNet sales increased $6.6 million, or 29%, to $29.4 million in the Fiscal 2012 from $22.8 million in Fiscal 2011 due primarily to higher sales ofDiabetic Products, which increased $5.0 million, and to a lesser extent, higher sales of Other Products, which increased $1.6 million. The tables below setforth sales by channel, product line, and geographic location of our customers for the periods indicated.Net Sales for Fiscal 2012 (millions of dollars) APACAmericasEuropeTotal*Diabetic products.............................$10.6$5.0$6.1$21.7Other products..................................1.05.61.17.7Total net sales*................... .$11.6$10.6$7.2$29.4 Net Sales for Fiscal 2011 (millions of dollars) APACAmericasEuropeTotal*Diabetic products.............................$9.1$2.6$5.0$16.7Other products..................................1.43.80.96.1Total net sales*...................$10.4$6.4$5.9$22.8* Tables may not total due to rounding.Diabetic Product SalesWe design to the order of, and sell carrying cases for blood glucose diagnostic kits directly to, OEMs (or their contract manufacturers). The OEMcustomer or its contract manufacturer packages our carry cases “in box” as a custom accessory for the OEM’s blood glucose testing and monitoring kits, or toa lesser extent, sell them through their retail distribution channels.Sales of Diabetic products increased $5.0 million, or 30%, to $21.7 million in Fiscal 2012, from $16.7 million in Fiscal 2011. This increase wasprimarily due to the addition of a new major Diabetic Products customer in Fiscal 2012, and to higher sales to our largest long-standing Diabetic Productscustomer.The following table sets forth our sales by Diabetic Products customer for the periods indicated. (millions of dollars) Fiscal 2012Fiscal 2011Increase (Decrease)Diabetic Customer A...........................................$9.7$8.4$1.3Diabetic Customer B...........................................3.73.70.0Diabetic Customer C...........................................4.63.70.9Diabetic Customer D...........................................2.4--2.4All other Diabetic Product Customers.............1.30.80.5Totals*.........................................................$21.7$16.7$5.0* Table may not total due to rounding.Sales of Diabetic Products represented 74% of our total net sales in Fiscal 2012 compared to 73% of our total net sales in Fiscal 2011.Other Product SalesWe design and sell cases and protective solutions to OEMs for a diverse array of portable electronic devices (such as smartphones, tablets, GPSdevices, and bar code scanners), as well as a variety of other products (such as firearms, sporting, and other recreational products) on a made-to-order basisSource: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.that are customized to fit the products sold by our OEM customers.21 Sales of Other products increased $1.6 million, or 26%, to $7.7 million in Fiscal 2012 from $6.1 million in Fiscal 2011. This increase was primarilydue to higher sales to two existing customers, as well as contributions from two new customers added in Fiscal 2012. With regard to the two existingcustomers, sales to a sporting and recreational products customer increased $0.9 million to $1.5 million in Fiscal 2012, whereas sales to a long-standingcellular customer increased $0.6 million to $1.2 million in Fiscal 2012. With regard to the two new customers added in Fiscal 2012, a tablet customercontributed $0.6 million of sales, whereas a personal computer/laptop customer contributed $0.4 million of sales, which we believe to be non-reoccurring. Inaddition, in Fiscal 2011, we sold $0.4 million of products to Flash Ventures, Inc. (refer to Note 5 – Notes Receivable in the Notes to Financial Statements),under their brand, which we considered as non-recurring business. Smaller changes in a number of Other Products customers largely offset each other, noneof which changes individually was material.Sales of Other Products represented 26% of our net sales in Fiscal 2012 compared to 27% of our total net sales in Fiscal 2011.Gross ProfitGross profit decreased $1.1 million, or 22%, to $4.0 million in Fiscal 2012 from $5.1 million in Fiscal 2011. As a percentage of sales, our grossprofit declined to 14% in Fiscal 2012 from 22% in Fiscal 2011. This decline was driven primarily by our Diabetic Products business, and in particular,factors specific to three major Diabetic customers, as discussed more fully below:Net Sales to Diabetic Customer B were $3.7 million in both Fiscal 2012 and 2011; however, price concessions granted on two larger, longer-livedprograms, combined with increases in materials, labor, and other production costs passed on to us from our suppliers, compressed our grossmargins on such programs and decreased our total gross margin for this Diabetic Customer by approximately 6%.Our total unit sales to Diabetic Customer C increased 28% in Fiscal 2012 from Fiscal 2011; however, our average sales price in respect of severalnew and replacement programs are significantly lower than the average sales price of their predecessor programs in Fiscal 2011. In addition, ouraverage cost for such new and replacement programs have also increased, partly as a result of product mix, and partly as a result of a generalincrease in materials, labor, and other production costs that we our suppliers are passing on to us.Several large programs that were recently awarded to us by Diabetic Customer D, contributed $2.4 million to our net sales in Fiscal 2012;however, as expected, gross margins on these new programs are significantly lower than the average gross margins we realized from our othermajor Diabetic Products customers in Fiscal 2011. Consequently, these new programs had the effect of depressing our total gross margin in Fiscal2012.In the third quarter of Fiscal 2012, we experienced quality issues with Diabetic Customers B and C. As a result, during the second half of Fiscal2012, we incurred significantly higher levels of inspection, warehousing, handling, and freight costs in remediating these quality issues, whichnegatively impacted our gross profit margin by approximately 3% in Fiscal 2012. 22 In March 2012, we initiated a restructuring plan with respect to our Asia-based sourcing and quality assurance operations (refer to Note 14 - “BuyingAgency and Supply Agreement” to our consolidated financial statements). As a result of such restructuring, in the second half of Fiscal 2012, service feesincurred in respect of our Buying Agency and Supply Agreement were significantly lower than the costs of maintaining our legacy Asia-based sourcing andquality assurance operations in prior reporting periods. However, the benefit of this lower cost agency arrangement to our gross profit in Fiscal 2012 was offsetby one-time costs incurred to implement such arrangement and exit our legacy operations (refer to Note 14 – Buying Agency and Supply Agreement to ourconsolidated financial statements).Sales and Marketing ExpensesSales and marketing expenses decreased $0.9 million, or 35%, to $1.7 million in Fiscal 2012 compared to $2.6 million in Fiscal 2011 due primarilyto the following:$0.6 million decrease in personnel expense resulting from the restructure of our sales, marketing, and product development team, as well as therecovery of share-based compensation expense from stock option forfeitures.$0.2 million decrease in travel and entertainment expenses resulting from reduced travel and entertainment activities by our restructured andscaled down sales and design team during Fiscal 2012, as well as our reinforcement of cost controls and policies relative to travel andentertainment.$0.1 million decrease in advertising and promotion costs resulting primarily from narrowing our focus on supporting our core customer base.Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Lesser fluctuations in other components of sales and marketing expenses were immaterial.General and Administrative ExpensesGeneral and administrative expenses increased $0.9 million, or 20%, to $5.6 million in Fiscal 2012 from $4.6 million in Fiscal 2011 due primarily tothe following:·$0.7 million increase in professional fees resulting primarily from: i) $0.7 million in higher legal and litigation settlment costs; and ii) $0.3million in consulting fees, expense reimbursements, and equity compensation paid to our Chief Executive Officer prior to his appointment to suchposition while serving as a strategic consultant to the Company (refer to “Employment Agreements” under Note 12 – Commitments andContingencies to our consolidated financial statements). These increases were offset, in part, by a $0.2 million reduction in accounting fees andinvestment banking fees.$0.4 million increase in personnel costs resulting primarily from: i) the restructuring and expansion of our finance and information technologydepartments; ii) the hire of an executive officer (refer “Employment Agreements” under Note 12 – Commitments and Contingencies to ourconsolidated financial statements ); and iii) relocation bonuses awarded to certain personnel, including an executive officer (refer to Note 12–Employment Agreements in Notes to Financial Statements).$78 thousand increase in occupancy costs resulting from higher rent and related expense incurred in occupying the Company’s executive officesin Santa Monica, California throughout Fiscal 2012 compared to a portion of Fiscal 2011, prior to which we occupied lower cost executive officesin Pompano Beach, Florida.These increases in general and administrative expenses were offset, in part, by a $0.2 million decrease in office expenses resulting from lower computerand postage expenses; and a $0.1 million decrease in public costs resulting from i) lower meeting fees; ii) lower share-based compensation to directors; and iii)lower filing and stock transfer agent fees. Lesser fluctuations in other components of general and administrative expenses were immaterial. 23 Other Income (Expense)Other income (expense), consisting of interest income on cash and cash equivalent balances and short-term notes receivable (refer to Note 5 – NotesReceivable in Notes to Financial Statements), as well as foreign currency transaction gains and losses, declined $92 thousand, to $34 thousand of expense inFiscal 2012 from $58 thousand of income in the 2011. This resulted primarily from a $48 thousand decline in interest income and increases in foreigncurrency losses and other expenses of $44 thousand in the aggregate.RESULTS OF DISCONTINUED OPERATIONS FOR FISCAL 2012 COMPARED TO FISCAL 2011On June 21, 2012, we determined to exit our global Retail business and focus solely on growing our OEM business. The decision to eliminate theRetail division was primarily driven by the longer than estimated path to bring it to profitability and the strong top line growth and cost rationalizations in theOEM business. Accordingly, the results of operations for the Retail division have been recorded as discontinued operations in the accompanying consolidatedfinancial statements for the fiscal years presented.Loss from Discontinued OperationsLoss from discontinued operations increased $5.4 million to $6.3 million in Fiscal 2012 from $0.9 million in Fiscal 2011. The increase is due to a$1.9 million gross loss and a $3.5 million increase in operating expenses. Loss from discontinued operations per basic and diluted share was $(0.78) and$(0.11) for Fiscal 2012 and 2011, respectively.Net SalesNet sales from discontinued operations of $2.2 million in Fiscal 2012 resulted from first time sales of Retail Products to several new customers in theAmericas and EMEA regions, which were net of sales returns, discounts, and price protection of $2.8 million. Sales from discontinued operations in Fiscal2011 were 14 thousand.Gross LossWe realized a gross loss on sales from discontinued operations of $1.9 million in Fiscal 2012 primarily as a result of a provision charges of $2.8million in sales returns, discounts, and price protection (referred to above); $0.7 million to write down inventory to net realizable value; and $0.2 million towrite-off forfeited advances made to suppliers. Gross loss from discontinued operations in Fiscal 2011 was 4 thousand.Operating ExpensesOperating expenses of discontinued operations were $4.4 million in Fiscal 2012 compared to $0.9 million in Fiscal 2011. This increase was dueprimarily to higher personnel expenses, which increased $2.6 million in Fiscal 2012; and to a lesser extent, increases in travel and entertainment expenses,royalties and commissions, and occupancy costs of $0.2 million, $0.2 million, and $0.1 million, respectively. Lesser fluctuations in other components ofoperating expenses were immaterial.Other ExpenseSource: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Other expense of discontinued operations, consisting primarily of foreign currency losses, was $68 thousand of expense in Fiscal 2012. There was nooperating income (expense) from discontinued operations in Fiscal 2011. LIQUIDITY AND CAPITAL RESOURCESDuring Fiscal 2012, we used $10.8 million of cash in operations, which consisted of a net loss of $9.6 million, adjusted by $1.3 million for non-cashitems (primarily write-downs of retail inventory), and a net use in working capital items of $2.4 million. As to working capital items, cash used in operatingactivities consisted of increases in accounts receivable and inventories of $3.7 million and $3.5 million, respectively. These changes were offset, in part, byincreases in accounts payable and accrued expenses and other current liabilities of $3.0 million and $1.3 million, respectively; and a decrease in prepaid andother current assets of $0.4 million. The increase in accounts receivable was primarily due to the timing and higher volume of sales recorded in the three-monthperiod ended September 30, 2012 Quarter compared to the three-month period ended September 30, 2011. The increases in inventories and accounts payableare due to higher materials purchases made in the three-month period ended September 30, 2012 in support of sales orders received from our customers,compared to the three month-period ended September 30, 2011. The decrease in prepaid and other current assets is due primarily to utilization of advancesmade to a prospective joint venture partner (refer to “Binding Memorandum of Understanding” in Note 13 – in our Notes to Consolidated FinancialStatements) and amortization of annual general casualty insurance premiums. The increase in accrued expenses and other current liabilities is primarily due toreceipts of inventory from our suppliers; and incurrence of third party inspection services and professional fees, for which we had not yet received invoices asof September 30, 2012. 24 During Fiscal 2011, we used $1.8 million of cash in operations consisting of a net loss of $2.9 million, reduced by $0.5 million for non-cash items,and increased by net changes in working capital items of $0.6 million. As to working capital items, cash increased primarily as a result of a decrease inaccounts receivable of $0.7 million and an increase in accounts payable of $0.5 million. These changes were offset, in part, by a decrease in accrued expensesand other current liabilities of $0.3 million and an increase in prepaid expenses of $0.3 million.In Fiscal 2012, net investing activities generated $0.5 million of cash, which consisted of $1.0 million in payments received on a loan made to FlashVentures, Inc. (refer to Note 5 – Notes Receivable in our Notes to Financial Statements), purchases of marketable equity securities of $0.4 million, andpurchases of property and equipment, primarily computer and telecommunications hardware and software, of $72 thousand. In Fiscal 2011, net investingactivities used $1.8 million of cash, primarily in short-term loans of $1.5 million made to prospective strategic partners (refer to Note 5 – Notes Receivable inour Notes to Financial Statements), and to a lesser extent, in purchases of $0.3 million of property and equipment, primarily computer andtelecommunications hardware and software. There were no financing activities in Fiscal 2012 and 2011.At September 30, 2012, our current ratio (current assets divided by current liabilities) was 2.15; our quick ratio (current assets less inventories dividedby current liabilities) was 1.67; and our working capital (current assets less current liabilities) was $9.1 million. As of such date, we had no short or long-term debt outstanding.Our primary source of liquidity is our cash and cash equivalents on hand. The primary demands on our working capital currently are: i) operatinglosses, should they occur, and ii) accounts payable arising in the ordinary course of business, the most significant of which arise when we order productsfrom our suppliers. Historically, our sources of liquidity have been adequate to satisfy working capital requirements arising in the ordinary course ofbusiness. We anticipate that our liquidity and financial resources for the next twelve months will be adequate to manage our operating and financialrequirements. We expect to substantially complete our exit of our retail business by January 31, 2013 and do not expect to have any continuing involvement inthe retail business after this date. We anticipate an additional loss from discontinued operations of approximately $0.2 million to $0.4_million, which weanticipate incurring between October 2012 and January 2013.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKNot applicableITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe consolidated financial statements and notes thereto included in this Annual Report may be found at pages 32 to 54 of this Annual Report on Form10-K.ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENoneITEM 9A. CONTROLS AND PROCEDURESOur management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) under theExchange Act) that is designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Actis recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Disclosure controls and proceduresinclude, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files orsubmits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer or officers andSource: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. 25 In accordance with Exchange Act Rule 13a-15(b), our management, under the supervision and with the participation of our Principal Executive Officerand Principal Financial Officer, performed an evaluation of the effectiveness of the Company's disclosure controls and procedures as of the end of the periodcovered by this Report (the fourth quarter of the Fiscal year ended September 30, 2012, in the case of this Annual Report on Form 10-K). Based on thatevaluation, the Company's Principal Executive Officer and Principal Financial Officer concluded that the Company's disclosure controls and procedures wereeffective, as of the end of the period covered by this Report (the fourth quarter of the Fiscal year ended September, 30, 2012, in the case of this Annual Reporton Form 10-K), to provide reasonable assurance that information required to be disclosed in the Company's reports filed or submitted under the Exchange Actis recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms.Management’s Report on Internal Control Over Financial ReportingOur Principal Executive Officer and our Principal Financial Officer are responsible for establishing and maintaining adequate internal control overfinancial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, orunder the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes inaccordance with generally accepted accounting principles and includes those policies and procedures that:pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of ourassets;provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements inaccordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only inaccordance with authorizations of management and our directors; andprovide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assetsthat could have a material effect on the financial statements.Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systemsdetermined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.Our Principal Executive Officer and our Principal Financial Officer assessed the effectiveness of our internal control over financial reporting as ofSeptember 30, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the TreadwayCommission (“COSO”) in Internal Control — Integrated Framework.Based on this assessment, our Principal Executive Officer and our Principal Financial Officer believe that, as of September 30, 2012, our internalcontrol over financial reporting is effective based on those criteria.This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control overfinancial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules ofthe Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report. 26 This report shall not be deemed to be filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, unless theregistrant specifically states that the report is to be considered “filed” under the Exchange Act or incorporates it by reference into a filing under the SecuritiesAct or the Exchange Act.Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Changes in Internal ControlOur management, with the participation of our Principal Executive Officer and Principal Financial Officer, performed an evaluation required by Rule13a-15(d) of the Exchange Act as to whether any change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act)occurred during the last Fiscal quarter of the Fiscal year ended September 30, 2012. Based on that evaluation, our Principal Executive Officer and ourPrincipal Financial Officer concluded that no change occurred in the Company's internal control over financial reporting during the last Fiscal quarter of theFiscal year ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financialreporting.ITEM 9B. OTHER INFORMATIONNonePART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by this item regarding directors and executive officers is incorporated to this Annual Report on Form 10-K by reference to ourDefinitive Proxy Statement to be filed with the Securities and Exchange Commission not later than January 28, 2013, in connection with our Annual Meetingof Stockholders (the “2012 Proxy Statement”) under the headings “Election of Directors”, “Structure and Practices of the Board of Directors”, and “SecurityOwnership of Certain Beneficial Owners and Management and Related Stockholder Matters;—Section 16(a) Beneficial Ownership Reporting Compliance”. Information regarding executive officers is also incorporated to this Annual Report on Form 10-K by reference to the 2012 Proxy Statement under the caption“Executive Officers.” The information required by this item relating to Corporate Governance, including Code of Ethics, is incorporated to this Annual Reporton Form 10-K by reference to the 2012 Proxy Statement under the heading “Structure and Practices of the Board of Directors.”ITEM 11. EXECUTIVE COMPENSATIONThe information required by this item is incorporated to this Annual Report on Form 10-K by reference to the 2012 Proxy Statement under the heading“Executive Compensation and Related Information.”ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe information required by this item is incorporated to this Annual Report on Form 10-K by reference to the 2012 Proxy Statement under the headings“Executive Compensation and Related Information—Securities Authorized for Issuance Under Equity Compensation Plans” and “Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters.”ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this item is incorporated to this Annual Report on Form 10-K by reference to the 2012 Proxy Statement under the headings“Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters—Certain Relationships, Director Independence, andRelated Transactions” and “Structure and Practices of the Board of Directors;—Board of Directors and Director Independence.” 27 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information required by this item is incorporated to this Annual Report on Form 10-K by reference to the 2012 Proxy Statement under the heading“Matters Relating to Independent Registered Public Accountants;—Principal Accountant Fees and Services.”PART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES a. Financial Statements Reports of Independent Registered Public Accounting FirmConsolidated Balance Sheets Consolidated Statements of OperationsConsolidated Statements of Shareholders’ EquityConsolidated Statements of Cash FlowsNotes to Consolidated Financial Statements Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. b.Exhibits 3. Articles of Incorporation and By-Laws 3(i)Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3 to the Company's Annual Report on Form10-K, as filed with the Commission on December 8, 2010). 3(ii)Third Amended and Restated By-Laws of Forward Industries, Inc., as of August 10, 2010 (incorporated by reference to Exhibit 3 tothe Company's Annual Report on Form 10-K, as filed with the Commission on December 8, 2010). 3(iii) Amendment to the Third Amended and Restated By-Laws of Forward Industries, Inc. (incorporated by reference to Exhibit 3.1 toForm 8-K, as filed with the Commission on February 14, 2012). 4.Instruments Defining the Rights of Security Holders 4.1 Shareholder Protection Rights Agreement, dated as of June 9, 2010, by and between Forward Industries, Inc. and American StockTransfer & Trust Company LLC, as Rights Agent (incorporated by reference to Exhibit 4.1 to the Company’s Current Report onForm 8-K, as filed with the Commission on June 15, 2010) 4.2Amendment, dated as of August 10, 2010, to Shareholder Protection Rights Agreement, dated as of June 9, 2010, by and betweenForward Industries, Inc. and American Stock Transfer & Trust Company LLC, as Rights Agent (incorporated by reference toExhibit 4.1 to the Company’s Current Report on Form 8-K, as filed with the Commission on August 16, 2010), which amendmentterminated the Right Agreement 10.Material Contracts 28 10.1 1996 Stock Incentive Plan of Forward Industries, Inc. (incorporated by reference to Exhibit 4 to the Registration Statement onForm S-8 of the Company, as filed on April 25, 2003). 10.2Forward Industries, Inc. 2007 Equity Incentive Plan, as amended (incorporated by reference to Exhibit 4.1 to the RegistrationStatement on Form S-8 of the Company, Reg. File No. 333-165075, as filed with the Commission on February 25, 2010). 10.3Settlement Agreement, dated as of August 10, 2010, by and among Forward Industries, Inc., LaGrange Capital Partners, L.P., andcertain Affiliates of LaGrange Capital Partners, L.P. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report onForm 8-K, as filed with the Commission on August 16, 2010). 10.4 Severance and Release Agreement, dated as of August 10, 2010, by and between Douglas W. Sabra and Forward Industries, Inc.(incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, as filed with the Commission on August16, 2010). 10.5Retention Agreement, dated as of August 10, 2010, between Forward Industries, Inc. and James O. McKenna, (incorporated byreference to Exhibit 10.4 to the Company’s Current Report on Form 8-K, as filed with the Commission on August 16, 2010). 10.6 Amended Employment Agreement, dated as of April 1, 2011, between Forward Industries, Inc. and James O. McKenna,(incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q, as filed with the Commission on May11, 2011). 10.7Letter Agreement, dated October 31, 2011, between Forward Industries, Inc. and RGJR Capital Partners LLC, (incorporated byreference to Exhibit 99.1 to the Company’s Current Report on Form 8-K, as filed with the Commission on November 7, 2011). 10.8†Memorandum of Understanding, dated August 30, 2011, between Forward Industries, Inc. and G-Form LLC (incorporated byreference to the Annual Report on Form 10-K, as filed with the Commission on December 15, 2011).10.9Buying Agency and Supply Agreement between Forward Industries, Inc. and Seaton Global Corporation, a British Virgin Islandscorporation (“SGC”), dated as of March 7, 2012 (incorporated by reference to the Form 10-Q, as filed with the Commission onMay 10, 2012).Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 10.10Employment Agreement by and between Forward Industries, Inc. and Robert Garrett, Jr., effective as of March 1, 2012(incorporated by reference to Form 8-K, as filed with the Commission on April 6, 2012). 10.11Employment Agreement by and between Forward Industries, Inc. and Brett Johnson, effective as of March 1, 2012 (incorporatedby reference to Form 8-K, as filed with the Commission on April 6, 2012). 10.12Memorandum of Understanding, dated June 21, 2012, between Forward Industries, Inc. and G-Form LLC (incorporated byreference to Form 10-Q, as filed with the Commission on August 20, 2012). 10.13Amended Employment Agreement, dated as of November 8, 2012, between Forward Industries, Inc. and James O. McKenna. 29 21. Subsidiaries of the Registrant 21.1List of Subsidiaries of Forward Industries, Inc. 23.Consent of Independent Registered Public Accounting Firm 23.1Consent of CohnReznick LLP 31.Certifications Pursuant to Rule 13a-14(a) (Section 302 of Sarbanes-Oxley) 31.1Certification of Robert Garrett Jr. 31.2Certification of James O. McKenna 32.Certifications Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350 (Section 906 of Sarbanes-Oxley) 32.1Certifications of Robert Garrett Jr. and James O. McKenna (furnished herewith) † Portions have been omitted pursuant to request for confidential treatment and the omitted portions have been separately filed with the Commission. 30REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and Shareholders of Forward Industries, Inc.We have audited the accompanying consolidated balance sheets of Forward Industries, Inc. and Subsidiaries as of September 30, 2012 and 2011, andthe related consolidated statements of operations, shareholders' equity and cash flows for the years then ended. These financial statements are the responsibilitySource: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ForwardIndustries, Inc. and Subsidiaries as of September 30, 2012 and 2011, and their results of operations and cash flows for the years then ended, in conformitywith accounting principles generally accepted in the United States of America. /s/ CohnReznick LLP New York, New YorkDecember 20, 2012 31 FORWARD INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSSEPTEMBER 30, 2012 AND 2011 September 30, September 30, 2012 2011Assets Current assets: Cash and cash equivalents...................................................................$4,608,246 $14,911,844Marketable securities.............................................................................420,605 --Accounts receivable, net ......................................................................7,533,491 3,894,118Inventories, net.......................................................................................3,380,813 1,014,195Prepaid expenses and other current assets........................................367,552 378,008Current assets of discontinued operations........................................621,879 1,671,243Total current assets..................................................................16,932,586 21,869,408 Property and equipment, net.....................................................................138,774 302,158Other assets.................................................................................................40,442 88,716Total Assets................................................................................................$17,111,802 $22,260,282 Liabilities and shareholders’ equity Current liabilities: Accounts payable...................................................................................$5,936,848 $2,787,263 Accrued expenses and other current liabilities...................................1,725,185 465,995Current liabilities of discontinued operations.....................................261,806 324,335Total liabilities...........................................................................7,923,839 3,577,593Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Commitments and contingencies............................................................. Shareholders’ equity: Preferred stock, par value $0.01 per share; 4,000,000 shares authorized;no shares issued and outstanding............................................... -- --Common stock, par value $0.01 per share; 40,000,000 shares authorized, 8,811,595 and 8,794,296 shares issued; and8,105,185 and 8,087,886 shares outstanding, respectively........ 88,116 87,943Capital in excess of par value................................................................17,020,771 16,845,673Treasury stock, 706,410 shares at cost................................................(1,260,057) (1,260,057)Retained earnings (accumulated deficit).............................................(6,624,926) 3,009,130Accumulated other comprehensive loss.............................................(35,941) --Total shareholders’ equity.......................................................................9,187,963 18,682,689Total liabilities and shareholders’ equity.............................................$17,111,802 $22,260,282 The accompanying notes are an integral part of the consolidated financial statements. 32 FORWARD INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS For the Fiscal Years Ended September 30, 2012 2011Net sales...............................................................................$29,403,004 $22,763,280Cost of goods sold...............................................................25,429,096 17,682,301Gross profit.........................................................................3,973,908 5,080,979 Operating expenses: Sales and marketing....................................................1,675,680 2,590,515General and administrative........................................5,562,019 4,630,421Total operating expenses..................................7,237,699 7,220,936 Loss from operations........................................................(3,263,791) (2,139,957) Other income (expense): Interest income............................................................61,882 109,737Other expense, net......................................................(96,069) (51,301)Total other (expense) income...........................(34,187) 58,436 Loss from continuing operations before income tax expense (benefit)…...........(3,297,978) (2,081,521)Income tax expense (benefit)............................................15,110 (56,050)Loss from continuing operations ..................................(3,313,088) (2,025,471)Loss from discontinued operations, net of tax of $0...(6,320,968) (875,068)Net loss………………………………………………$(9,634,056) $(2,900,539) Net loss per basic and diluted common share: Loss from continuing operations............................$(0.41) $(0.25)Loss from discontinued operations........................$(0.78) $(0.11)Net loss per share……………………………………$(1.19) $(0.36) Weighted average number of common and common equivalent shares outstanding[ Basic and diluted ..............................................8,101,661 8,080,344 The accompanying notes are an integral part of the consolidated financial statements. 33 Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.FORWARD INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYFOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2012 AND 2011 Common Stock Treasury Stock Total Number ofSharesPar ValueAdditional Paid-inCapital RetainedEarnings(AccumulatedDeficit)Number of SharesAmountAccumulated OtherComprehensive LossBalance at October 1, 2010$21,206,3708,761,629$87,616$16,469,142$5,909,669706,410$(1,260,057)$--Share-based compensation376,85832,667327376,531--------Net loss(2,900,539)------(2,900,539)------Balance at September 30, 201118,682,6898,794,29687,94316,845,6733,009,130706,410(1,260,057)--Share-based compensation175,27117,299173175,098--------Comprehensive loss: Foreign currency translation(12,197)------------(12,197)Unrealized loss on marketablesecurities(23,744)------------(23,744)Net loss(9,634,056)------(9,634,056)------Total Comprehensive Loss(9,669,997) Balance at September 30, 2012$9,187,9638,811,595$88,116$17,020,771$(6,624,926)706,410$(1,260,057)$(35,941) The accompanying notes are an integral part of the consolidated financial statements. 34 FORWARD INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS For the Fiscal Years Ended September 30, 2012 2011 Operating activities: Net loss........................................................................................$(9,634,056) $(2,900,539) Adjustments to reconcile net loss to net cash used in operating activities: Provision for obsolete inventory...................................817,573 11,525 Share-based compensation............................................175,271 376,858 Loss on disposal of property and equipment.............130,178 15,373 Depreciation and amortization.......................................103,973 74,307 Bad debt expense............................................................23,504 1,222 Changes in operating assets and liabilities: Accounts receivable.......................................................(3,689,063) 725,841 Inventories.......................................................................(3,504,109) (20,358) Prepaid expenses and other current assets.................407,624 (287,576) Other assets.....................................................................48,274 (42,684) Accounts payable..........................................................3,035,160 508,289 Accrued expenses and other current liabilities..........1,298,889 (255,301) Net cash used in operating activities.......................................(10,786,782) (1,793,043) Investing activities: Issuance of notes receivable...................................................-- (1,490,000) Repayments received from notes receivable........................1,000,000 - Purchases of marketable securities........................................(444,349) - Purchases of property and equipment..................................(72,467)KC(276,633) Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Net cash provided by (used in) investing activities.................483,184 (1,766,633) Net decrease in cash and cash equivalents..............................(10,303,598) (3,559,676) Cash and cash equivalents at beginning of year.....................14,911,844 18,471,520 Cash and cash equivalents at end of year.................................$4,608,246 $14,911,844 Supplemental Disclosures of Cash Flow Information: Cash paid during the Fiscal year for: Income Taxes................................................................$ -- $ 514 Supplemental Disclosures of Non-Cash Operating and Investing Activities: Conversion of note receivable to advanced royalties is reflected in prepaid expenses and other current assets (refer to Note 13)...........................$ -- $ 490,000 The accompanying notes are an integral part of the consolidated financial statements. 35 FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 OVERVIEW Forward Industries, Inc. was incorporated under the laws of the State of New York and began operations in 1961 as a manufacturer and distributorof specialty and promotional products. The Company designs, markets, and distributes carry and protective solutions, primarily for hand held electronicdevices. The Company’s principal customer market is original equipment manufacturers, or “OEMs” (or the contract manufacturing firms of these OEMcustomers), that either package its products as accessories “in box” together with their branded product offerings, or sell them through their retail distributionchannels. The Company’s OEM products include carrying cases and other accessories for medical monitoring and diagnostic kits and a variety of otherportable electronic and non-electronic products (such as sporting & recreational products, bar code scanners, smartphones, GPS &location devices, tablets,and firearms,). The Company’s OEM customers are located in the Americas, the EMEA Region, and the APAC Region. The Company does not manufactureany of its OEM products and sources substantially all of its OEM products from independent suppliers in China (refer to Note 14 – Buying Agency andSupply Agreement).On June 21, 2012, the Company determined to exit its global retail business and focus solely on growing its OEM business. The decision to eliminatethe retail division was primarily driven by the longer than estimated path to bring it to profitability and the strong top line growth and cost rationalizations inthe OEM business.NOTE 2 ACCOUNTING POLICIESAccounting EstimatesThe preparation of the Company's consolidated financial statements in conformity with accounting principles generally accepted in the United States ofAmerica requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assetsand liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differfrom those estimates and assumptions.Basis of PresentationThe accompanying consolidated financial statements include the accounts of Forward Industries, Inc. ("Forward") and its wholly owned subsidiaries(Forward US, Forward Switzerland, Forward HK, Forward APAC, and Forward UK). All significant intercompany transactions and balances have beeneliminated in consolidation.ReclassificationsCertain prior period amounts have been reclassified, in addition to discontinued operations as disclosed in Note 3, to conform to the current periodpresentation.Cash and Cash EquivalentsCash and cash equivalents consist primarily of cash on deposit and highly liquid money market accounts, short-term bonds, and certificates ofdeposit with original contractual maturities of three months or less, predominately in U.S. dollar denominated instruments. The Company may purchase theseshort-term bonds with anticipated maturity of 90 days or less at a premium or discount. The Company records these investments as cash and cashequivalents net of amortization of premium or discount. The Company minimizes its credit risk associated with cash and cash equivalents by investing inhigh quality instruments and by periodically evaluating the credit quality of the primary financial institution issuers of such instruments. The Companyholds cash and cash equivalents at major financial institutions in the United States, at which cash amounts may significantly exceed FDIC insured limits. AtSeptember 30, 2012, this amount was approximately $4.4 million. Historically, the Company has not experienced any losses due to such cash concentrations.Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.36 NOTE 2 ACCOUNTING POLICIES (CONTINUED)Marketable SecuritiesThe Company has investments in marketable equity securities that are classified as available-for-sale and are recorded at fair value with thecorresponding unrealized holding gains or losses, net of taxes, recorded as a separate component of “Accumulated Other Comprehensive Loss” withinshareholders’ equity. Unrealized losses that are determined to be other-than-temporary, based on current and expected market conditions, are recognized inearnings. The fair value of marketable securities is determined based on quoted market prices at the balance sheet dates. The cost of marketable securities soldis determined by the specific identification method.Accounts ReceivableAccounts receivable consist of unsecured trade accounts with customers or their contract manufacturers. The Company performs periodic creditevaluations of its customers including an evaluation of days outstanding, payment history, recent payment trends, and perceived credit worthiness, andbelieves that adequate allowances for any uncollectible receivables are maintained. Credit terms to customers generally range from net thirty (30) days to netninety (90) days. The Company has not historically experienced significant credit or collection problems with its OEM customers or their contractmanufacturers. In addition, the Company maintains credit insurance that provides up to 90% coverage on trade accounts with customers in the EMEA region.At September 30, 2012, no allowance for doubtful accounts relating to the Company’s continuing operations was deemed necessary. At September 30, 2011,the allowance for doubtful accounts was approximately $14,000.InventoriesInventories consist primarily of finished goods and are stated at the lower of cost (determined by the first-in, first-out method) or market. Based onmanagement’s estimates, an allowance is made to reduce excess, obsolete, or otherwise un-saleable inventories to net realizable value. The allowance isestablished through charges to cost of goods sold in the Company’s consolidated statements of operations. As reserved inventory is disposed of, the Companycharges off the associated allowance. In determining the adequacy of the allowance, management’s estimates are based upon several factors, includinganalyses of inventory levels, historical loss trends, sales history, and projections of future sales demand. The Company’s estimates of the allowance maychange from time to time based on management’s assessments, and such changes could be material. At September 30, 2012, the allowance for obsoleteinventory of the Company’s continuing operations was approximately $99,000. At September 30, 2011, no allowance for obsolete inventory was deemednecessary.Property and EquipmentProperty and equipment consist of furniture, fixtures, and equipment and leasehold improvements and are recorded at cost. Expenditures for majoradditions and improvements are capitalized, and minor replacements, maintenance, and repairs are charged to expense as incurred. When property andequipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is includedin the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method.The estimated useful life for furniture, fixtures and equipment ranges from three to ten years. Amortization of leasehold improvements is computed using thestraight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements. For the fiscal years ended September 30,2012 and 2011, the Company recorded approximately $103,000 and $54,000 of depreciation and amortization expense from continuing operations,respectively. 37 NOTE 2 ACCOUNTING POLICIES (CONTINUED)Income TaxesThe Company accounts for its income taxes in accordance with accounting principles generally accepted in the United States of America, whichrequires, among other things, recognition of future tax benefits and liabilities measured at enacted rates attributable to temporary differences between financialstatement and income tax bases of assets and liabilities and to net tax operating loss carryforwards to the extent that realization of these benefits is more likelythan not. The Company periodically evaluates the realizability of its net deferred tax assets. See Note 10 to these Notes to Consolidated Financial Statements.The Company’s policy is to account for interest and penalties relating to income taxes, if any, in “income tax expense” in its consolidated statements ofoperations and include accrued interest and penalties within the “accrued liabilities” in its balance sheets, if applicable. For fiscal years ended September 30,2012 and 2011, no income tax related interest or penalties were assessed or recorded.Revenue RecognitionThe Company generally recognizes revenue from product sales to its customers when: (1) title and risk of loss are transferred (in general, theseconditions occur at either point of shipment or point of destination, depending on the terms of sale); (2) persuasive evidence of an arrangement exists; (3) theCompany has no continuing obligations to the customer; and (4) collection of the related accounts receivable is reasonably assured.Shipping and Handling CostsThe Company classifies shipping and handling costs (including inbound and outbound freight charges, purchasing and receiving costs, inspectionSource: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.costs, warehousing costs, internal transfer costs, and other costs associated with the Company’s Asia-based distribution capability, as a component of cost ofgoods sold in the accompanying consolidated statements of operations.Advertising and Promotion CostsAdvertising and promotion costs, consisting primarily of samples and tradeshow costs, are expensed as incurred. Advertising and promotion costs forcontinuing operations are included in selling expenses in the accompanying consolidated statements of operations and amounted to approximately $43,000 and$158,000 for the fiscal years ended September 30, 2012 and 2011, respectively. Foreign Currency TransactionsThe functional currency of the Company and its wholly owned foreign subsidiaries is the U.S. dollar. Foreign currency transactions may generatereceivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid. Fluctuations in exchange rates between suchforeign currency and the functional currency increase or decrease the expected amount of functional currency cash flows upon settlement of the transaction.These increases or decreases in expected functional currency cash flows are foreign currency transaction gains or losses that are included in “other income(expense), net” in the accompanying consolidated statements of operations. The net loss from foreign currency transactions and translations for continuingoperations was approximately $55,000 and $37,000 for the fiscal years ended September 30, 2012 and 2011, respectively.Accumulated Other Comprehensive LossAccumulated other comprehensive loss, which is included as a component of Shareholders’ Equity, includes unrealized gains or losses on available-for-sale securities and currency translation adjustments related to the Company’s foreign subsidiaries. 38 NOTE 2 ACCOUNTING POLICIES (CONTINUED)Fair Value of Financial InstrumentsThe Company records its financial instruments that are accounted for under Accounting Standard Codification (“ASC”) 320, “Investments-Debt andEquity Securities” (“ASC 320”) at fair value. The determination of fair value is based upon the fair value framework established by ASC 820. ASC 820provides that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occcures in the principal market for the asset orliability or, in the absence of a principal market, the most advantageous market for the asset or liability. The fair value hierarchy is broken down into threelevels based on the source of inputs as follows: (a) Level 1 – valuations based on unadjusted quoted prices in active markets thar are accessible at themeasurement date for identical, unrestricted assets or liabilities; (b) Level 2 – valuations based on quoted prices in markets that are not active, or financialinstruments for which all significant inputs are observable; either directly or indirectly; and (c) Level 3 – valuations based on prices or valuation techniquesthat require inputs that are both significant to the fair value measurement and unobservable; thus, reflecting assumptions about the market participants.Share-Based Payment ExpenseThe Company recognizes share-based equity compensation in its consolidated statements of operations at the grant-date fair value of stock options andother equity-based compensation. The determination of grant-date fair value is estimated using the Black-Scholes option-pricing model, which includesvariables such as the expected volatility of the Company’s share price, the exercise behavior of its grantees, interest rates, and dividend yields. These variablesare projected based on the Company’s historical data, experience, and other factors. Changes in any of these variables could result in material increases to thevaluation of options granted in future periods and increases in the expense recognized for share-based payments. In the case of awards with multiple vestingperiods, the Company has elected to use the graded vesting attribution method, which recognizes compensation cost on a straight-line basis over eachseparately vesting portion of the award as if the award was, in-substance, multiple awards. Refer to Note 9 Share-Based Compensation. In addition, theCompany recognizes share-based compensation to non-employees based upon the fair value, using the Black-Scholes pricing model, determined at the deemedmeasurement dates over the related contract service period.Recent Accounting PronouncementsIn June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-05, Comprehensive Income (Topic 220) – Presentation ofComprehensive Income (“ASU 2011-05”). This update requires that the components of net income, the components of other comprehensive income and thetotal of comprehensive income be presented as a single continuous financial statement or in two separate but consecutive statements. The option of presentingother comprehensive income in the statement of stockholders’ equity is eliminated. This update also requires the presentation on the face of the financialstatements of reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where thecomponents of net income and the components of other comprehensive income are presented. In December 2011, the FASB issued ASU 2011-12, whichdeferred the guidance on whether to require entities to present reclassification adjustments out of accumulated other comprehensive income by component inboth the statement where net income is presented and the statement where other comprehensive income is presented for both interim and annual financialstatements. ASU 2011-12 reinstated the requirements for the presentation of reclassifications that were in place prior to the issuance of ASU 2011-05 and didnot change the effective date for ASU 2011-05. For public entities, the amendments in ASU 2011-05 and ASU 2011-12 are effective for fiscal years, andinterim periods within those years, beginning after December 15, 2011, and should be applied retrospectively. The adoption of this guidance for the fiscal yearended September 30, 2012 concerned disclosure only and did not have an impact on the Company's consolidated financial position or results of operations.Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.NOTE 3 DISCONTINUED OPERATIONSOn June 21, 2012, the Company determined to exit its global retail business and focus solely on growing its OEM business. The decision to eliminatethe retail division was primarily driven by the longer than estimated path to bring it to profitability and the strong top line growth and cost rationalizations inthe OEM business. 39 NOTE 3 DISCONTINUED OPERATIONS (CONTINUED)Accordingly, the results of operations for the retail division have been recorded as discontinued operations in the accompanying consolidatedfinancial statements for the fiscal years presented. During the fiscal year ended September 30, 2012, total discontinued operations include charges of $2.8million in sales returns, discounts, and price protection (referred to above); $0.6 million to write down inventory to net realizable value; and $0.2 million towrite-off forfeited advances made to suppliers. Summarized operating results of discontinued operations are presented in the following table: Fiscal Year Ended September 30, 2012 2011Net sales..................................................................................$2,199,008 $13,760Gross loss................................................................................(1,896,864) (4,350)Operating expenses...............................................................(4,356,402) (870,711)Other expense.........................................................................(67,702) (7)Loss from discontinued operations..............................$(6,320,968) $(875,068) Summarized assets and liabilities of discontinued operations are presented in the following table: September 30, September 30, 2012 2011Accounts receivable, net....................................................$26,186 $ --Inventory, net.......................................................................350,942 31,024Prepaid assets and other current assets...........................244,751 640,219Note receivable.....................................................................-- 1,000,000Total assets of discontinued operations...................$621,879 $1,671,243 Accounts payable................................................................$45,874 $160,300Accrued liabilities.................................................................215,932 164,035Total liabilities of discontinued operations………$261,806 $324,335The Company expects to substantially complete its exit of its retail business by January 31, 2013 and does not expect to have any continuinginvolvement in the retail business after this date. The Company anticipates an additional loss from discontinued operations of approximately $0.2 million to$0.4 million, which the Company anticipates incurring between October 2012 and January 2013. 40 NOTE 4 MARKETABLE SECURITIESThe Company accounts for its marketable securities in accordance with ASC 320. Accordingly, the Company classifies its marketable securities aseither (i) held-to-maturity, (ii) trading, or (iii) available-for-sale. The Company’s investments in marketable equity securities are classified as available-for-sale,which are recorded at fair value as determined by quoted market price, which is Level 1 input, as established by the fair value hierarchy under ASC 820. Thecorresponding unrealized holding gains or losses, net of taxes, recorded as a separate component of the Accuulated Other Comprehensive Loss withinshareholders’ equity. Unrealized losses that are determined to be other-than-temporary, based on current and expected market conditions, are recognized inSource: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.earnings. The Company’s marketable equity securities are summarized in the table below: September 30, September 30, 2012 2011Cost $444,349 $--Unrealized loss................................................................(23,744) --Fair value.................................................................$420,605 $--NOTE 5 NOTES RECEIVABLEOn January 5, 2011, the Company entered into a loan agreement with Flash Ventures, Inc. (“Flash”), an unrelated party, to provide a credit facility ofup to $1,000,000 that was originally due December 1, 2011. Pursuant to the agreement Flash, executed an unsecured, unsubordinated term note in favor of theCompany, bearing interest at 11% per annum on any unpaid principal, payable quarterly commencing March 31, 2011. On January 6, 2011 and January19, 2011, Flash drew $600,000 and $400,000, respectively, in funds under the note, leaving no further funding available. Effective December 1, 2011, theterms of the loan were amended to, among other things, extend the maturity date to April 1, 2012 and provide the Company with a security interest and lien onall of Flash’s assets. In connection with such amendment, Flash made a principal payment of $250,000 on December 1, 2011. Effective March 30, 2012, theterms of the loan were further amended to, among other things, extend the maturity date to June 1, 2012. In connection with such second amendment, Flashmade a principal payment of $150,000 on March 30, 2012. On May 14, 2012, Flash paid the remaining principal balance of $600,000 and satisfied the loanin full. The Company recorded approximately $449,000 in sales to Flash under its customary terms of sale during the fiscal year ended September 30, 2011.NOTE 6 PROPERTY AND EQUIPMENTProperty and equipment and related accumulated depreciation and amortization of continuing operations are summarized in the table below: September 30, 2012 2011Furniture, fixtures and equipment.......................................................... $397,049 $940,819Leasehold improvements........................................................................ 57,833 188,492Property and equipment, cost.......................................................... 454,882 1,129,311Less accumulated depreciation and amortization................... (316,108) (827,153)Property and equipment, net............................................................ $138,774 $302,158 41 NOTE 7 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIESAccrued expenses and other current liabilities of continuing operations are summarized in the table below: September 30, 2012 2011Personnel costs...................................................................... $507,269 $394,425Professional fees.................................................................... 297,060 4,355Due to customers................................................................... 581,343 --Taxes........................................................................................ 47,256 19,152Other........................................................................................ 292,257 48,063Accrued expenses and other current liabilities…… $1,725,185 $465,995NOTE 8 SHAREHOLDERS’ EQUITYAnti-takeover ProvisionsThe Company is authorized to issue up to 4,000,000 shares of "blank check" preferred stock. The Board of Directors has the authority and discretion,without shareholder approval, to issue preferred stock in one or more series for any consideration it deems appropriate, and to fix the relative rights andpreferences thereof including their redemption, dividend and conversion rights.NOTE 9 SHARE BASED COMPENSATION2011 Long Term Incentive PlanIn March 2011, shareholders of the Company approved the 2011 Long Term Incentive Plan (the “2011 Plan”), which authorizes 850,000 shares ofcommon stock for grants of various types of equity awards to officers, directors, employees, consultants, and independent contractors. Under the 2011 Plan,as of September 30, 2012, the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) has approved awards of stockoptions to purchase an aggregate of 965,000 shares of common stock to certain of the Company’s executive officers and employees (730,000 shares), aconsultant (160,000 shares), non-employee directors (70,000 shares), and to a non-employee executive officer (5,000 shares). Of these awards, as ofSeptember 30, 2012, 365,500 shares were forfeited and reverted to, and are eligible for re-grant under, the 2011 Plan. The total shares of common stockavailable for grants of equity awards under the 2011 Plan was 250,500 as of September 30, 2012. The prices at which equity awards may be granted and theSource: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.exercise prices of stock options granted may not be less than the fair market value of the common stock as quoted at the close on the Nasdaq Stock Market onthe grant date. The Compensation Committee administers the plan. Options generally expire ten years after the date of grant and vest one year from the date ofgrant for non-employee directors, and, in the case of initial grants to officers and employees, vest over five years with 50%, 25% and 25% vesting on thethird, fourth, and fifth anniversary of the grant date, respectively. Options granted under a consulting agreement in November 2011 expire three years after thegrant date and vested equally over the term of the consulting agreement, which concluded February 29, 2012. 42 NOTE 9 SHARE BASED COMPENSATION (CONTINUED)2007 Equity Incentive PlanThe 2007 Equity Incentive Plan (the “2007 Plan”), which was approved by shareholders of the Company in May 2007, and, as amended, in February2010, authorizes an aggregate of 800,000 shares of common stock for grants of restricted common stock and stock options to officers, employees, and non-employee directors of the Company. Under the 2007 Plan, the Compensation Committee of the Company’s Board of Directors approved awards of restrictedcommon stock and stock options of 836,000, in the aggregate, to certain officers, employees and non-employee directors. Of these awards, as of September 30,2012, 78,366 shares were forfeited and reverted to, and are eligible for re-grant under, the 2007 Plan. The total shares of common stock available for grantsof equity awards under the 2007 Plan was 42,366 as of September 30, 2012. The prices at which restricted common stock may be granted and the exerciseprice of stock options granted may not be less than the fair market value of the common stock as quoted at the close on the Nasdaq Stock Market on the grantdate. The Compensation Committee administers the 2007 Plan. Options generally expire ten years after the date of grant, and in the case of non-employeedirectors, vest on the first anniversary of the date of grant. In the case of officers and employees, options either vest in equal amounts over three to five years orvest over five years with 50%, 25% and 25% vesting on the third, fourth, and fifth anniversary of the grant date, respectively. Restricted stock grantsgenerally vest in equal proportions over three years.1996 Stock Incentive PlanThe Company’s 1996 Stock Incentive Plan (the “1996 Plan”) expired in accordance with its terms in November 2006. The exercise price of incentiveoptions granted under the 1996 Plan to officers, employees, and non-employee directors of the Company was required by 1996 Plan provisions to be equal atleast to the fair market value of the common stock at the date of grant. In general, options under this plan expire ten years after the date of grant and generallyvest in equal proportions over three years. Unexercised options granted prior to 1996 Plan expiration remain outstanding until the earlier of exercise or optionexpiration. Under the 1996 Plan 30,000 fully vested common stock options are the only awards that remain outstanding and unexercised, all at exercise priceshigher than the fair market value of the common stock at September 30, 2012.Stock Option AwardsUnder the 2011 and 2007 Plans, the Compensation Committee has approved awards of stock options to purchase an aggregate of 1,617,500 shares ofcommon stock to the Company’s current and certain former non-employee directors, to certain key employees, to current and certain former Companyofficers, and to a consultant, of which awards covering 55,000 shares from the 2007 Plan and 365,500 shares from the 2011 Plan of common stock wereforfeited, with such shares reverting to the respective plans and eligible for grant. The exercise prices of the awards granted was, in each case equal, to theclosing market value of the Company’s common stock on the Nasdaq Stock Market on the various grant dates.The Company recognized approximately $225,000 and $332,000 of compensation expense in continuing operations for stock option awards in itsconsolidated statements of operations for the fiscal years ended September 30, 2012 and 2011, respectively. The Company recognized a recovery of $(49,000)and an expense of $50,000 of compensation in discontinued operations for stock option awards in its consolidated statements of operations for the fiscal yearsended September 30, 2012 and 2011, respectively.As of September 30, 2012, there was approximately $299,000 of total unrecognized compensation cost related to 365,000 shares of unvested stockoption awards granted under the 2007 and 2011 Plans, which is expected to be recognized over the remainder of the weighted average vesting period (extendingto February 2017). 43 NOTE 9 SHARE BASED COMPENSATION (CONTINUED)Stock Option Awards (Continued)Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.The following table summarizes stock option activity under the 2011 Plan and 2007 Plan from September 30, 2011 through September 30, 2012 (therewas no activity during such period in respect of 1996 Plan grants): Shares Weighted AverageExercise Price WeightedAverageRemaining Contractual Term (Years) AggregateIntrinsicValueOutstanding at September 30, 20111,007,500 $3.45 5.9 Granted...................................................420,000 2.92 4.5 Exercised................................................-- -- -- Forfeited.................................................(285,500) 3.20 -- Expired....................................................-- -- -- Outstanding at September 30, 20121,142,000 $3.31 4.7 $ -- Options expected to vest at September 30, 2012.........................365,500 $3.49 8.9 $ -- Options vested and exercisable at September 30, 2012........................411,500 $3.05 5.0 $ -- The table below provides additional information regarding stock option awards that were outstanding and exercisable at September 30, 2012: Stock Options Outstanding and ExercisableRange of Exercise PricesOutstanding at September 30, 2012 WeightedAverageRemaining Contractual Term (Years) Weighted Average Exercise Price$1.80 to $2.43270,000 4.0 $2.13$2.73 to $3.79111,500 8.0 $3.57$6.0220,000 3.6 $6.02$15.9110,000 2.6 $15.91 411,500 5.0 $3.05 During the fiscal years ended September 30, 2012 and 2011, the Company granted 420,000 and 925,000 stock options at weighted average grant datefair values of $0.96 and $3.44, respectively. 44 NOTE 9 SHARE BASED COMPENSATION (CONTINUED)Stock Option Awards (Continued)The fair value of each stock option on the date of grant was estimated using a Black-Scholes option-pricing formula applying the followingassumptions for each respective period: For the Fiscal Years Ended September 30, 2012 2011Expected term (in years)..................................... 3.0 to 5.0 5.0Risk-free interest rate ......................................... 0.04% to 0.83% 0.1% to 2.2%Expected volatility .............................................. 63% to 69% 62% to 72%Expected dividend yield .................................... 0% 0%Estimated Annual Forfeiture rate 13% -- Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.The expected term represents the period over which the stock option awards are expected to be outstanding. The Company based the risk-free interestrate used in its assumptions on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equivalent to the award’sexpected term. The volatility factor used in the Company’s assumptions is based on the historical price of its stock over the most recent period commensuratewith the expected term of the award. The Company historically has not paid any dividends on its common stock and had no intention to do so on the date theshare-based awards were granted. Accordingly, the Company used a dividend yield of zero in its assumptions. The Company estimates the expected term,volatility and forfeitures of share-based awards based upon historical data. The Company adjusted its estimated forfeiture rate effective October 1, 2011 andrecognized a recovery of approximately $46,000 during the three-month period ended December 31, 2011.Restricted Stock AwardsUnder the 2007 Plan, the Compensation Committee has approved and granted awards of 183,500 shares of restricted stock, in the aggregate, to certainkey employees. Of these awards, 152,634 have vested and 23,366 shares of restricted stock were forfeited and reverted to, and are eligible for re-grant under,the 2007 Plan. No awards of restricted stock were made during the fiscal year ended September 30, 2012. Vesting of restricted stock awards is generallysubject to a continued service condition with one-third of the awards vesting each year on the three successive anniversary dates of the grant date, typicallycommencing on the first such anniversary date. The fair value of the awards granted was equal to the closing market value of the Company’s common stockas quoted on the Nasdaq Stock Market on the grant date. Compensation expense, net of forfeitures, was nominal for the fiscal year ended September 30, 2012.For the fiscal year ended September 30, 2011, the Company recognized approximately $(5,000) of compensation from continuing operations in itsconsolidated statements of operations related to restricted stock awards.The following table summarizes restricted stock activity under the 2007 Plan during the fiscal year ended September 30, 2012. Shares WeightedAverage Grant DateFair ValueNon-vested balance at September 30, 2011.............. 25,799$2.04Changes during the period:................................... Shares granted................................................... ----Shares forfeited................................................. 1,0002.02Shares vested.................................................... 17,2992.05Non-vested balance at September 30, 2012............. 7,500 $2.02 45 NOTE 9 SHARE BASED COMPENSATION (CONTINUED)Restricted Stock Awards (Continued)As of September 30, 2012, there was an insignificant amount of unrecognized compensation cost related to the 7,500 shares of unvested restrictedstock awards (reflected in the table above) granted under the 2007 Plan, as the remaining requisite service (vesting) period is approximately 2 months. The totalfair value of shares vested during the fiscal years ended September 30, 2012 and 2011 was approximately $35,000 and $68,000, respectively.WarrantsAs of September 30, 2012, warrants to purchase 75,000 shares of the Company’s common stock at an exercise price of $1.75 were outstanding. Bytheir terms these warrants expire 90 days after a registration statement registering common stock (other than pursuant to employee benefit plans) is declaredeffective by the Securities and Exchange Commission. As of September 30, 2012, no such registration statement has been filed with the Securities andExchange Commission.NOTE 10 INCOME TAXESThe Company’s provision (benefit) for income taxes from continuing operations consists of the following United States Federal and State, and foreigncomponents: For the Fiscal Years EndedSeptember 30, 2012 2011 U.S. Federal and state Current$15,110 $(56,050) Deferred(2,111,080) (996,876) Foreign: Current-- -- Deferred(326,047) 16,849 Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Change in valuation allowance2,437,127 980,027 Provision (benefit) from income taxes$15,110 $(56,050) The provision for income taxes of approximately $15,000 recorded in the fiscal year ended September 30, 2012 is attributable to U.S. state incometaxes in respect of Fiscal 2011. 46 NOTE 10 INCOME TAXES (CONTINUED)The deferred tax expense (benefit) is the change in the deferred tax assets and liabilities representing the tax consequences of changes in the amounts oftemporary differences, net operating loss carry forwards and changes in tax rates during the fiscal year. The Company’s deferred tax assets and liabilities arecomprised of the following: As of September 30, 2012 2011Deferred tax assets: Net operating losses..................................................$3,485,217 $1,185,053Share-based compensation......................................195,315 130,493Excess tax over book basis in inventory................132,525 28,717Alternative minimum tax credit................................99,757 99,757Reserve for obsolete inventory...............................73,798 --Allowance for accounts receivable…….................20,237 5,086Depreciation...............................................................-- 9,116 4,006,849 1,458,222Valuation allowance...................................................(3,817,896) (1,380,769)Net deferred tax assets..............................................188,953 77,453 Deferred tax liabilities: Prepaid insurance………...........................................(142,756)) (77,453)Depreciation................................................................(46,197) -- (188,953) (77,453) Total$ -- $ -- At September 30, 2012, the Company had available total net operating loss carryforwards for U.S. Federal and state income tax purposes ofapproximately $8,682,000 and $7,043,000, respectively, expiring through 2031, resulting in deferred tax assets in respect of U.S. Federal and state incometaxes of approximately $2,823,000 and $234,000, respectively. In addition, at September 30, 2012, the Company had total available net operating losscarryforwards for foreign income tax purposes of approximately $4,865,000 resulting in a deferred tax asset of approximately $428,000, expiring through2017. Total net deferred tax assets, before valuation allowances, was $3,818,000 and $1,381,000 at September 30, 2012 and 2011, respectively.Undistributed earnings of the Company’s foreign subsidiaries are considered to be permanently invested; therefore, in accordance with U.S. generally acceptedaccounting principles, no provision for U.S. Federal and state income taxes would result. As of September 30, 2012, there were no accumulated earnings ofany of the Company’s foreign subsidiaries.As of September 30, 2012, as part of its periodic evaluation of the necessity to maintain a valuation allowance against its deferred tax assets, and afterconsideration of all factors, both positive and negative (including, among others, projections of future taxable income, current year net operating losscarryforward utilization and the extent of the Company’s cumulative losses in recent years), the Company determined that, on a more likely than not basis, itwould not be able to use its remaining deferred tax assets (except in respect of United States income taxes in the event the Company elects to effect therepatriation of certain foreign source income of its Swiss subsidiary, which income is currently considered to be permanently invested and for which noUnited States tax liability has been accrued). Accordingly, the Company has determined to maintain a full valuation allowance against its total deferred taxassets. As of September 30, 2012 and 2011, the valuation allowances were approximately $3,818,000 and $1,381,000, respectively. If the Companydetermines in a future reporting period that it will be able to use some or all of its deferred tax assets, the adjustment to reduce or eliminate the valuationallowance would reduce its tax expense and increase after-tax income. Changes in deferred tax assets and valuation allowance are reflected in the “Income taxexpense (benefit)” line item of the Company’s consolidated statements of operations. Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.47 NOTE 10 INCOME TAXES (CONTINUED)The significant elements contributing to the difference between the United States Federal statutory tax rate and the Company’s effective tax rate are asfollows: For the Fiscal Years Ended September 30, 2012 2011Statutory U.S. Federal income tax rate................................34.0% 34.0%State taxes, net of Federal benefit..................................2.0% 1.9%Permanent differences..................................................... (0.1%) (3.3%)Foreign tax rate differential.............................................(17.1%) 1.8%Valuation allowance.........................................................(19.3%) (34.4%)Other..................................................................................0.0% 2.0%Effective tax rate.................................................................... (0.5%) 2.0% As of September 30, 2012 and 2011, the Company has not accrued any interest and penalties related to uncertain tax positions. It is the Company’spolicy to recognize interest and/or penalties, if any, related to income tax matters in income tax expense in the statement of operations. For the periods presentedin the accompanying statements of operations, no income tax related interest or penalties were assessed or recorded. All fiscal years prior to the fiscal yearended September 30, 2009 are closed to Federal and State examination, except with respect to net operating losses generated in prior fiscal years.NOTE 11 LOSS PER SHAREBasic per share data for each period presented is computed using the weighted-average number of shares of common stock outstanding during eachsuch period. Diluted per share data is computed using the weighted-average number of common and dilutive common-equivalent shares outstanding duringeach period. Dilutive common-equivalent shares consist of shares that would be issued upon the exercise of stock options and warrants, computed using thetreasury stock method. Diluted loss per share data for the fiscal years ended September 30, 2012 and 2011 exclude 1,224,500 and 668,299 of outstandingcommon equivalent shares as inclusion of such shares would be anti-dilutive.NOTE 12 COMMITMENTS AND CONTINGENCIESEmployment and AgreementsPursuant to their respective employment agreements, on April 2, 2012, the Company appointed Robert Garrett Jr. and Brett Johnson as Co-ChiefExecutive Officers of the Company. Mr. Garrett had previously served as a consultant to the Company pursuant to a consulting agreement since October 1,2011. In connection with Mr. Garrett’s appointment as the Company’s Co-Chief Executive Officer, the consulting agreement was terminated effective as ofFebruary 29, 2012. As of August 1, 2012, Forward and Co-CEO, Mr. Johnson opted not to renew Mr. Johnson’s employment contract and his employmentterminated August 31, 2012.Robert Garrett Employment AgreementUnder his employment agreement, which was effective as of March 1, 2012, Mr. Garrett is currently employed as the Company’s Chief ExecutiveOfficer at an annual salary of $250,000. In executing his employment agreement, Mr. Garrett received a signing bonus of $9,167. During Mr. Garrett’s firstyear of employment he shall receive a bonus not less than $50,000. In addition, during each year of his employment, Mr. Garrett is eligible to receive anannual bonus at the discretion of the Compensation Committee in a combination of cash or equity based compensation. Mr. Garrett’s employment agreementalso entitles him to awards of stock options to purchase an aggregate of 200,000 shares of the Company’s common stock pursuant to the 2011 Long TermIncentive Plan. 48 NOTE 12 COMMITMENTS AND CONTINGENCIES (CONTINUED)Employment and Agreements (Continued)Robert Garrett Employment Agreement (Continued)Mr. Garrett’s employment agreement provides for successive one-year renewal terms, unless either party provides written notice of its intention not torenew the agreement not later than 90 days prior to the end of the term (or renewal period). In the event of the termination of Mr. Garrett’s employment,depending on the circumstances, Mr. Garrett could be entitled to receive a severance payment which could be up to (12) twelve months of his salary, and undercertain circumstances, the immediate vesting of any unvested options pursuant to applicable equity compensation plans, as well as any accrued discretionarySource: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.bonus.Mr. Garrett’s employment agreement binds him to customary non-competition and non-solicitation covenants of up to one year following the expirationof the employment term.Brett Johnson Employment AgreementUnder his employment agreement, Mr. Johnson was employed as the Company’s Co-Chief Executive Officer, effective March 1, 2012, at an annualsalary of $250,000. Prior to such date, Mr. Johnson was employed as the Company’s Chief Executive Officer on an at-will basis. As of August 1, 2012,Forward and Co-CEO, Mr. Johnson, opted not to renew Mr. Johnson’s employment contract, with his employment terminating August 31, 2012. In connectionwith such termination of employment, Mr. Johnson is entitled to receive a severance payment equal to (12) twelve months of his salary. In connection withsuch termination, the Company incurred $250,000 of severance expense during the fiscal year ended September 30, 2012. In addition any unvested optionspursuant to applicable equity compensation plans were immediately vested. Mr. Johnson’s employment agreement binds him to customary non-competitionand non-solicitation covenants of up to one year following the expiration of the employment term.James McKenna Employment AgreementJames O. McKenna serves as the Company’s Chief Financial Officer, Treasurer and Assistant Secretary pursuant to an Amended EmploymentAgreement, dated as of April 1, 2011 (the “Employment Agreement”), between the Company and Mr. McKenna. On November 8, 2012, Mr. McKenna’sEmployment Agreement was further amended (the “Amendment”) in connection with his relocation from California to Florida at the Company’s requestpursuant to the move of the Company’s executive offices to West Palm Beach, Florida from Santa Monica, California. Among other things, the Amendmentreduced his base salary to $210,000 per annum from $225,000 per annum, eliminated his housing allowance of $90,000 per annum (paid pursuant to theEmployment Agreement), and provided for a bonus payment in the amount of $172,456, less applicable withholdings and deductions, all subject to theprovisions provided in the Amendment. Up to one half of such bonus payment may be applied to reduce future bonuses due to Mr. McKenna, if any, on orprior to September 2014, pursuant to the terms and provisions of the Amendment. The term of the Employment Agreement expires on December 31, 2013, withautomatic renewal for successive terms of one year each. Pursuant to the Employment Agreement, Mr. McKenna is entitled to a payment equal to one year ofhis salary as severance in the event of his termination “without cause” and termination for “good reason” (as such terms are defined in the EmploymentAgreement).Guarantee ObligationIn February 2010, Forward Switzerland and its European logistics provider (freight forwarding and customs agent) entered into a RepresentationAgreement whereby, among other things, the European logistics provider agreed to act as such subsidiary's Fiscal representative in The Netherlands for thepurpose of providing services in connection with any value added tax matters. As part of this agreement, which succeeds a substantially similar agreement(except as to the amount and term of the undertaking) between the parties that expired June 30, 2009, the subsidiary agreed to provide an undertaking (in theform of a bank letter of guarantee) to the logistics provider with respect to any value added tax liability arising in The Netherlands that the logistics provider isrequired to pay to Dutch tax authorities on the subsidiary's behalf. 49 NOTE 12 COMMITMENTS AND CONTINGENCIES (CONTINUED)Guarantee Obligation (Continued)As of February 1, 2010, such subsidiary entered into a guarantee agreement with a Swiss bank relating to the repayment of any amount up to €75,000(equal to approximately $96,000 as of September 30, 2012) paid by such bank to the logistics provider in order to satisfy such undertaking pursuant to thebank letter of guarantee. The subsidiary would be required to perform under the guarantee agreement only in the event that: (i) a value added tax liability isimposed on the Company's sales in The Netherlands, (ii) the logistics provider asserts that it has been called upon in its capacity as surety by the DutchReceiver of Taxes to pay such taxes, (iii) the subsidiary or the Company on its behalf fails or refuses to remit the amount of value added tax due to the logisticsprovider upon its demand, and (iv) the logistics provider makes a drawing under the bank letter of guarantee. Under the Representation Agreement thesubsidiary agreed that the letter of guarantee would remain available for drawing for three years following the date that its relationship terminates with thelogistics provider to satisfy any value added tax liability arising prior to expiration of the Representation Agreement but asserted by The Netherlands afterexpiration.The initial term of the bank letter of guarantee expired February 28, 2011, but renews automatically for one-year periods until February 28, 2014,unless the subsidiary provides the Swiss bank with written notice of termination at least 60 days prior to the renewal date. It is the intent of the subsidiary andthe logistics provider that the bank letter of guarantee amount be adjusted annually. In consideration of the issuance of the letter of guarantee, the subsidiaryhas granted the Swiss bank a security interest on all of the subsidiary’s assets on deposit with, held by, or credited to the subsidiary’s accounts with, theSwiss bank (approximately $751,000 at September 30, 2012). As of September 30, 2012, the Company had not incurred a liability in connection with thisguarantee.Lease CommitmentsThe Company rents certain of its facilities under leases expiring at various dates through September 2016. Total rent expense included in continuingoperations for the years ended September 30, 2012 and 2011, amounted to approximately $456,000 and $336,000, respectively. The following tablesummarizes the future minimum lease payments required under these leases.Fiscal Year Ended September 30, 2012 AmountSource: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 2013............................................................. $162,0002014............................................................. 250,0002015............................................................. 258,0002016............................................................. 267,0002017............................................................. 84,000Thereafter................................................... 251,000Total lease commitments.................... $1,272,000 50 NOTE 13 BINDING MEMORANDUM OF UNDERSTANDINGIn August 2011, the Company entered into a binding Memorandum of Understanding (the “Prior MOU”) with G-Form LLC (“G-Form”), amanufacturer of consumer and athletic products incorporating proprietary extreme protective technology. Under the Prior MOU, the Company was granted theexclusive right to use G-Form’s protective technology in the Company’s designated territory, subject to meeting certain minimum annual sales levels (or at theCompany’s option, the making of royalty payments at corresponding levels) commencing with the twelve-month period after shipment of the first Forward-branded licensed product that used this technology, with the minimum levels increasing in the subsequent second and third twelve-month periods. As ofSeptember 30, 2011, the Company had paid G-Form a $490,000 non-refundable advance against the first year’s royalties to be offset by cancellation of the$500,000 of loans made by the Company to G-Form in its capacity as a prospective joint venture partner. This amount increased to $500,000 as of March 30,2012. On June 21, 2012, in connection with the Company’s determination to exit its global retail business, the Company entered into a second Memorandumof Understanding (the “New MOU”) with G-Form. Pursuant to the New MOU, among other things; (i) G-Form has repurchased from the Company certainG-Form inventory held by the Company, (ii) the Company has assisted G-Form with certain operational and sales functions previously performed by Forwardfor G-Form products, (iii) G-Form has offered employment and employed certain of Forward’s non-US based employees, (iv) the Company and G-Form areworking together to distribute the Company’s remaining inventory of products and to transition the Company’s distribution channels relating to G-Formproducts to G-Form, and (v) the Company and G-Form have agreed on the settlement of advanced royalties paid under the Prior MOU. Pursuant to the NewMOU, the Prior MOU was terminated. The remaining balance of the advanced royalties as of September 30, 2012 was approximately $57,000 and includedin “Current assets of discontinued operations” in the Company’s consolidated balance sheets.NOTE 14 BUYING AGENCY AND SUPPLY AGREEMENTOn March 12, 2012, the Company, entered into a Buying Agency and Supply Agreement (the “Agreement”) with Forward Industries Asia-PacificCorporation (f/k/a Seaton Global Corporation), a British Virgin Islands corporation (“Forward China”), dated as of March 7, 2012. The Agreement providesthat, upon the terms and subject to the conditions set forth therein, Forward China shall act as the Company’s exclusive buying agent and supplier ofProducts (as defined in the Agreement) in the Asia Pacific region. The Company shall purchase products at Forward China’s cost, and shall pay a service feeon the net purchase price. The Agreement shall terminate on March 11, 2014, subject to renewal. Terence Wise, a director of the Company, is a principal ofForward China. During the fiscal year ended September 30, 2012, the Company recorded $691,000 of Forward China service fees, which are included as acomponent of costs of goods sold in continuing operations in the accompanying consolidated statements of operations. As a result of this agreement, as ofSeptember 30, 2012, the Company had substantially completed the shut down of its legacy Hong Kong sourcing, logistics and quality assurance operations. 51 NOTE 15 LEGAL PROCEEDINGSTargus Group International, Inc., et al. v., Forward Industries, Johnson, et al.On September 19, 2011, the Company, Mr. Brett Johnson (our former President and Chief Executive Officer), and one of the Company’s employeeswere named in a Complaint filed in Orange County Superior Court by Targus Group International, Inc. and two of its affiliates. The Complaint alleged aclaim for breach of contract against Mr. Johnson. The Complaint further alleged a “breach of fiduciary duty/duty of loyalty” against the employee, and itasserted claims against Mr. Johnson and the Company for allegedly aiding and abetting that alleged breach. The Complaint also asserted a cause of actionagainst all Defendants for unfair competition. An Amended Complaint was filed on October 11, 2011. In addition to the claims asserted in the originalComplaint, the Amended Complaint added an additional Targus affiliate as a plaintiff and named an additional employee of the Company as a defendant. The Amended Complaint asserted a claim against that employee for breach of contract and for “breach of fiduciary duty/duty of loyalty, ” and it added newclaims against the Company and Mr. Johnson for allegedly interfering with that employee’s contract and for allegedly aiding and abetting his breach of duty. The claim for unfair competition in the Amended Complaint relies on these new allegations as well. The Company entered into a Settlement Agreement,Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.effective as of October 17, 2012, which resolved claims between the Company and the other defendants, on the one hand, and Targus Group International,Inc. and the other plaintiffs, on the other hand, related to this action. In connection with the Settlement Agreement, a payment was made to the plaintiffs,substantially all of which was made by the Company’s insurer. The cost of this settlement and all related expenses have been recognized in the accompanyingfinancial statements.Other LitigationFrom time to time, the Company may become a party to other legal actions or proceedings in the ordinary course of its business. As of September 30,2012, there were no such actions or proceedings, either individually or in the aggregate, that, if decided adversely to the Company’s interests, the Companybelieves would be material to its business.NOTE 16 401(K) PLANThe Company maintains a 401(k) benefit plan allowing eligible United States-based employees to contribute a portion of their salary in an amount up tothe annual maximum amounts as set periodically by the Internal Revenue Service. In accordance with applicable Safe Harbor provisions, the Company hadelected to match 100% on the first 6% of eligible contributions by its employees through June 30, 2012, at which time the Company elected to discontinue thematching contribution. The Company's matching contributions relative to its continuing operations were approximately $48,000 and $69,000 for the yearsended September 30, 2012 and 2011, respectively, and are reflected in the accompanying consolidated statements of operations. The Company's contributionsvest immediately.NOTE 17 OPERATING SEGMENT INFORMATIONAs of September 30, 2012, and during its 2011 fiscal year, the Company reported and managed its continuing operations based on a single operatingsegment: the design and distribution of carry and protective solutions, primarily for hand held electronic devices. Products designed and distributed by thissegment include carrying cases and other accessories for medical monitoring and diagnostic kits, portable consumer electronic devices (such as smartphones,tablets, personnel computers, notebooks, and GPS devices), and a variety of other portable electronic and non-electronic products (such as firearms, sporting,and other recreational products). This segment operates in geographic regions that include primarily APAC, the Americas, and Europe. Geographic regions aredefined by reference primarily to the location of the customer or its contract manufacturer.On June 21, 2012, the Company determined to wind down its Retail segment, which commenced during the three-month period ended December 31,2011, and focus solely on growing its OEM business. The decision to eliminate the retail division was primarily driven by the longer than estimated path tobring it to profitability and the strong top line growth and cost rationalizations in the OEM business. The Company expects to complete its exit of its retailbusiness by December 31, 2012 and does not expect to have any continuing involvement in the retail business after this date. 52 NOTE 17 OPERATING SEGMENT INFORMATION (CONTINUED)Revenues from External CustomersThe following table presents net sales by geographic region. (dollars in thousands) Year Ended September 30, 2012 2011Americas: United States..................................................................$8,843 $2,310Other................................................................................1,483 4,089Total Americas.........................................................10,326 6,399 APAC: Hong Kong.....................................................................9,510 8,347Other................................................................................2,055 2,084Total APAC..............................................................11,565 10,431 Europe: Germany..........................................................................4,071 3,712Poland.............................................................................2,596 1,188Other...............................................................................845 1,033Total Europe............................................................7,512 5,933Total net sales...............................................................$29,403 $22,763Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Long-Lived Assets (Net of Accumulated Depreciation and Amortization)Identifiable long-lived assets, consisting predominately of property, plant and equipment, by geographic region are as follows: (dollars in thousands) Year Ended September 30, 2012 2011Americas..............................................................................$178 $324Europe..................................................................................1 13APAC...................................................................................-- 54Total long-lived assets (net).......................................$179 $391Supplier ConcentrationThe Company procures substantially all of its supply of products from independent suppliers in China. Primary suppliers are Chinese businessentities located in China. Depending on the product, the Company may require several different suppliers to furnish component parts or pieces. TheCompany purchased approximately 90% of its products from four such suppliers in the Fiscal year ended September 30, 2012 and 2011. One such supplieraccounted for approximately 54% and 58% of the Company’s product purchases in the Fiscal years ended September 30, 2012 and 2011, respectively. 53 NOTE 17 OPERATING SEGMENT INFORMATION (CONTINUED)Major CustomersThe following customers or their affiliates or contract manufacturers accounted for more than ten percent of the Company’s net sales, by geographicregion. Fiscal Year Ended September 30, 2012 Americas APAC Europe TotalCompanyDiabetic Customer A............................2% 82% -- 33%Diabetic Customer B.............................21% 2% 18% 13%Diabetic Customer C............................12% -- 46% 16%Diabetic Customer D............................9% 1% 19% 8%Other Customer C.................................14% -- -- 5%Other Customer D.................................11% -- -- 4% Fiscal Year Ended September 30, 2011 Americas APAC Europe TotalCompanyDiabetic Customer A............................-- 80% 1% 37%Diabetic Customer B.............................36% 2% 21% 16%Diabetic Customer C.............................-- -- 63% 16%Other Customer A *..............................-- -- 13% 3%Other Customer B *..............................7% -- 12% 8%* Other Customer A and B represented less than ten percent of the Company’s net sales of any geographic region during the fiscal year ended September 30,2012.Three customers (including their affiliates or contract manufacturers) accounted for approximately 76% of the Company's accounts receivable atSeptember 30, 2012. Three customers, including their affiliates or contract manufacturers, accounted for approximately 72% of the Company's accountsreceivable at September 30, 2011.NOTE 18 SUBSEQUENT EVENTSOn November 8, 2012, the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) voted to adopt theForward Industries Incentive Compensation Plan (the “Incentive Plan”), to provide incentives to employees of the Company in the form of equity grants andcash bonus payments for achieving certain performance goals, and pursuant to which the Company will, subject to the terms therein, (1) grant a one-timerestricted stock unit bonus to certain employees, (2) pay bonuses as provided therein, and (3) provide that annual bonuses for employees be made in the formof cash and restricted stock units, as provided therein. Pursuant to the Incentive Plan and the Company’s 2011 Long Term Incentive Plan (the “2011 Plan”)and the 2007 Equity Incentive Plan, the Compensation Committee determined to award Robert Garrett, Jr., the Company’s Chief Executive Officer, and JamesSource: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.O. McKenna, the Company’s Chief Financial Officer/Treasurer, 125,000 and 105,000 restricted stock units, respectively, and the other employees specifiedin the Incentive Plan. In addition, on October 16, 2012, the Compensation Committee determined to award options to purchase 10,000 shares of the Company’s commonstock pursuant to the 2011 Plan to each of the Company’s non-employee directors, in accordance with the Company’s policy for compensation of its non-employee directors. 54 SIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalfby the undersigned, hereunto duly authorized.Dated: December 20, 2012 FORWARD INDUSTRIES, INC. (Registrant) By: /s/ Robert Garrett Jr. Robert Garret Jr. President and Chief Executive Officer(Principal Executive Officer) By: /s/James O. McKenna James O. McKenna Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 55POWER OF ATTORNEYKNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints jointly and severally, FrankLaGrange Johnson and Owen P.J. King, or either of them as his or her true and lawful attorneys-in-fact and agents, with full power of substitution andresubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effectiveamendments) to this Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities andExchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act andthing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying andconfirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtuehereof.IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the date indicated.In accordance with the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated: December 20, 2012/s/Robert Garrett Jr. Robert Garrett Jr.Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. President ,Chief Executive Officer and Director (Principal Executive Officer) December 20, 2012/s/James O. McKenna James O. McKenna Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 56 December 20, 2012/s/John Chiste John Chiste Director December 20, 2012/s/Timothy Gordon Timothy Gordon Director December 20, 2012/s/ Frank Johnson Frank LaGrange Johnson Chairman of the Board December 20, 2012/s/Owen King Owen P.J. King Director December 20, 2012/s/Howard Morgan Howard Morgan Director December 20, 2012/s/Terrance Wise Terrance Wise Director 57 Exhibit Index3. Articles of Incorporation and By-Laws 3(i) Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3 to the Company's Annual Report on Form 10-K, asfiled with the Commission on December 8, 2010) 3(ii)Third Amended and Restated By-Laws of Forward Industries, Inc., as of August 10, 2010 (incorporated by reference to Exhibit 3 to theCompany's Annual Report on Form 10-K, as filed with the Commission on December 8, 2010). 3(iii) Amendment to the Third Amended and Restated By-Laws of Forward Industries, Inc. (incorporated by reference to Exhibit 3.1 to Form 8-K,as filed with the Commission on February 14, 2012).Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 4.Instruments Defining the Rights of Security Holders 4.1Shareholder Protection Rights Agreement, dated as of June 9, 2010, by and between Forward Industries, Inc. and American Stock Transfer &Trust Company LLC, as Rights Agent (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, as filed withthe Commission on June 15, 2010) 4.2Amendment, dated as of August 10, 2010, to Shareholder Protection Rights Agreement, dated as of June 9, 2010, by and between ForwardIndustries, Inc. and American Stock Transfer & Trust Company LLC, as Rights Agent (incorporated by reference to Exhibit 4.1 to theCompany’s Current Report on Form 8-K, as filed with the Commission on August 16, 2010), which amendment terminated the RightAgreement 10. Material Contracts 10.11996 Stock Incentive Plan of Forward Industries, Inc. (incorporated by reference to Exhibit 4 to the Registration Statement on Form S-8 of theCompany, as filed on April 25, 2003). 10.2Forward Industries, Inc. 2007 Equity Incentive Plan, as amended (incorporated by reference to Exhibit 4.1 to the Registration Statement onForm S-8 of the Company, Reg. File No. 333-165075, as filed with the Commission on February 25, 2010). 10.3Settlement Agreement, dated as of August 10, 2010, by and among Forward Industries, Inc., LaGrange Capital Partners, L.P., and certainAffiliates of LaGrange Capital Partners, L.P. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, asfiled with the Commission on August 16, 2010). 10.4Severance and Release Agreement, dated as of August 10, 2010, by and between Douglas W. Sabra and Forward Industries, Inc.(incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, as filed with the Commission on August 16,2010). 10.5Retention Agreement, dated as of August 10, 2010, between Forward Industries, Inc. and James O. McKenna, (incorporated by reference toExhibit 10.4 to the Company’s Current Report on Form 8-K, as filed with the Commission on August 16, 2010). 10.6Amended Employment Agreement, dated as of April 1, 2011, between Forward Industries, Inc. and James O. McKenna, (incorporated byreference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q, as filed with the Commission on May 11, 2011). 58 10.7Letter Agreement, dated October 31, 2011, between Forward Industries, Inc. and RGJR Capital Partners LLC, (incorporated by reference toExhibit 99.1 to the Company’s Current Report on Form 8-K, as filed with the Commission on November 7, 2011). 10.8†Memorandum of Understanding, dated August 30, 2011, between Forward Industries, Inc. and G-Form LLC (incorporated by reference to theAnnual Report on Form 10-K, as filed with the Commission on December 15, 2011). 10.9Buying Agency and Supply Agreement between Forward Industries, Inc. and Seaton Global Corporation, a British Virgin Islandscorporation (“SGC”), dated as of March 7, 2012 (incorporated by reference to the Form 10-Q, as filed with the Commission on May 10,2012). 10.10Employment Agreement by and between Forward Industries, Inc. and Robert Garrett, Jr., effective as of March 1, 2012 (incorporated byreference to Form 8-K, as filed with the Commission on April 6, 2012). 10.11Employment Agreement by and between Forward Industries, Inc. and Brett Johnson, effective as of March 1, 2012 (incorporated by referenceto Form 8-K, as filed with the Commission on April 6, 2012). 10.12Memorandum of Understanding, dated June 21, 2012, between Forward Industries, Inc. and G-Form LLC (incorporated by reference toForm 10-Q, as filed with the Commission on August 20, 2012). 10.13Amended Employment Agreement, dated as of November 8, 2012, between Forward Industries, Inc. and James O. McKenna. 21.Subsidiaries of the RegistrantSource: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 21.1 List of Subsidiaries of Forward Industries, Inc. 23.Consent of Independent Registered Public Accounting Firm 23.1 Consent of CohnReznick LLP 31. Certifications Pursuant to Rule 13a-14(a) (Section 302 of Sarbanes-Oxley) 31.1Certification of Robert Garrett Jr. 31.2Certification of James O. McKenna 32. Certifications Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350 (Section 906 of Sarbanes-Oxley) 32.1Certifications of Robert Garrett Jr. and James O. McKenna (furnished herewith) † Portions have been omitted pursuant to request for confidential treatment and the omitted portions have been separately filed with the Commission. 59Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. AMENDMENT I TOEMPLOYMENT AGREEMENT AMENDMENT I TO EMPLOYMENT AGREEMENT (the “Amendment”) effective as of this 26th day of October,2012, by and between Forward Industries, Inc. (the “Company”) and James O. McKenna (“Executive”).WHEREAS, the Company and Executive entered into a certain Employment Agreement, effective August 10, 2010 (the“Agreement”); andWHEREAS, the Company and Executive wish to amend the terms of the Agreement; NOW, THEREFORE, in consideration of the promises and mutual covenants hereinafter contained, and in consideration ofExecutive’s continued employment, the parties hereto agree as follows:1. Defined Terms. All capitalized terms contained in this Amendment shall, for the purposes hereof, have the samemeaning ascribed to them in the Agreement unless the context hereof clearly provides otherwise or unless otherwise defined herein.2. Base Salary Reduction. Effective November 1, 2012, Executive’s Salary shall be reduced to $210,000 per annum. Executive agrees that such reduction shall not constitute a Good Reason termination pursuant to Section 5(c)(ii) of the Agreement andExecutive waives any claims that such reduction constitutes a Good Reason termination.3. Housing Allowance. Section 3(e), Housing Allowance, of the Agreement shall be deleted from the Agreement. TheHousing Allowance shall cease on October 31, 2012.4. IRC§409A. Section 3(h) is hereby deleted and restated as follows:(a) “The intent of the parties is that payments and benefits under this Agreement comply with, or be exemptfrom, Internal Revenue Code Section 409A and the regulations and guidance promulgated thereunder (collectively “Code Section409A”) and, accordingly, to the maximum extent permitted, this Agreement shall be interpreted to be in compliance therewith. (b) A termination of employment shall not be deemed to have occurred for purposes of any provision of thisAgreement providing for the payment of any amounts or benefits upon or following a termination of employment that are considered“nonqualified deferred compensation” under Code Section 409A unless such termination is also a “separation from service” within themeaning of Code Section 409A and, for purposes of any such provision of this Agreement, references to a “termination,” “terminationof employment” or like terms shall mean “separation from service.” If the Executive is deemed on the date of termination to be a“specified employee” within the meaning of that term under Code Section 409A(a)(2)(B), then with regard to any payment that isconsidered non-qualified deferred compensation under Code Section 409A payable on account of a “separation from service,” suchpayment or benefit shall be made or provided at the date which is the earlier of (A) the expiration of the six (6)-month period measuredfrom the date of such “separation from service” of the Executive, and (B) thirty (30) days from the date of the Executive’s death (the“Delay Period”). (c) With regard to any provision herein that provides for reimbursement of costs and expenses or in-kind benefits,except as permitted by Code Section 409A, (i) the right to reimbursement or in-kind benefits shall not be subject to liquidation orexchange for another benefit, (ii) the amount of expenses eligible for reimbursement, or in-kind benefits, provided during any taxableyear shall not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year, provided thatthe foregoing clause (ii) shall not be violated without regard to expenses reimbursed under any arrangement covered by InternalRevenue Code Section 105(b) solely because such expenses are subject to a limit related to the period the arrangement is in effect and(iii) such payments shall be made on or before the last day of Executive’s taxable year following the taxable year in which the expenseoccurred. Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.(d) For purposes of Code Section 409A, the Executive’s right to receive any installment payments pursuant to thisAgreement shall be treated as a right to receive a series of separate and distinct payments. Whenever a payment under this Agreementspecifies a payment period with reference to a number of days (e.g., “within sixty (60) days following the date of termination”), theactual date of payment within the specified period shall be within the sole discretion of the Company.”5. Relocation. Executive shall be required to relocate and work out of the Company’s offices in West Palm Beach,Florida. Executive agrees that such relocation shall not constitute a Good Reason termination pursuant to Section 5(c)(iv) of theAgreement and Executive waives any claims that such relocation constitutes a Good Reason termination.6. Good Reason. The location “Santa Monica, California” shall be removed from Section 5(c)(iv) of the Agreement andshall be replaced with “West Palm Beach, Florida”. 2 7. Relocation Bonus. In recognition of Executive’s reduction in salary and relocation to Florida, the Company shall pay toExecutive a lump sum relocation bonus in the amount of $172,456.37, less applicable withholdings and deductions (the “RelocationBonus”). The Relocation Bonus shall be fully paid within ten (10) days of the execution of this Amendment. Should Executive receivea bonus pursuant to Section 3(b) of the Agreement between the date this Amendment is executed and September 2014, the Companymay reduce each bonus in an amount up to one half of the Relocation Bonus until the total amount of all such reductions in the aggregateis equal to one half of the Relocation Bonus. Should Executive voluntarily resign from his employment with the Company withoutGood Reason prior to September 30, 2013, Executive shall pay $61,000.00 to the Company within ten (10) days of the resignation date. Any bonus received pursuant to Section 3(b) of the Agreement shall be paid no later than 2 ½ months after the close of the calendaryear following the fiscal year with respect to which the bonus was awarded.8. Covenants. Section 8(b) of the Agreement shall be deleted in its entirety. Section 8(d) of the Agreement shall bedeleted and shall be replaced with the following: “solicit or accept business from any Customers (as defined below) of the Company orencourage any such Customer to terminate or reduce its relationship with the Company. For purposes of this Agreement, the term"Customer(s)" shall mean any individual, corporation, partnership, business or other entity, whether for-profit or not-for-profit public,privately held (i) whose existence and business is known to the Executive as a result of the Employee’s access to the Company'sbusiness information, confidential or proprietary information, customer or vendor lists or customer account information; or (ii) withwhom the Company has done business or with whom the Executive has negotiated during the twenty-four (24) month period precedingthe termination of his employment or during the most recent twenty-four (24) month period of his employment.” 9. Conflicting Provisions. In the event of any conflict or inconsistency between the provisions of this Amendment and those contained in the Agreement, the provisions of this Amendment shall govern andcontrol and be binding upon the parties hereto.10. Miscellaneous Provisions. (a) This Amendment shall be governed by, and construed and enforced in accordance with, the laws of the Stateof New York, without regard to the conflict of laws provisions thereof. This Amendment is intended to comply with the InternalRevenue Code of 1986, as amended (the “Code”), and shall be construed in a manner consistent with that intent. Any action, suit orother legal proceeding that is commenced to resolve any matter arising under or relating to any provision of this Amendment shall besubmitted to the exclusive jurisdiction of any state or federal court in the State of New York or in the State of Florida.(b) Except as modified by this Amendment, the Agreement and all executory covenants, agreements, terms andconditions thereof shall remain in full force and effect and are hereby in all respects ratified and confirmed.(c) The covenants, agreements, terms and conditions contained in this Amendment shall bind and inure to thebenefit of the parties hereto and, except as may otherwise be provided in the Agreement, as hereby modified and supplemented, theirSource: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.respective legal successors and assigns.(d) This Amendment may not be changed orally but only by a writing signed by both parties hereto.[Signature Page Follows]3 IN WITNESS WHEREOF, the parties hereto have executed this Amendment onOctober 26, 2012. FORWARD INDUSTRIES, INC. By: Robert Garrett, Jr. Chief Executive Officer Agreed to and Accepted: James O. McKenna 4 Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Exhibit 21.1 List of Subsidiaries of Forward Industries, Inc. 1. Forward Industries (IN), Inc., an Indiana Corporation;2. Forward Industries HK Limited, a Hong Kong Limited Company;3. Forward Industries (Switzerland) GmbH, a Switzerland GmbH4. Forward Asia Pacific Limited, a Hong Kong Limited Company5. Forward Ind. (UK) Limited, Limited Company of England and WalesAll subsidiaries are wholly-owned by Forward Industries, Inc. Each does business under its name as set forth above. Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit 23.1 Consent of Independent Registered Public Accounting FirmWe hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (Registration File Nos. 333-104743, 333-144442, and333-165075) of Forward Industries, Inc., of our report on our audits of the consolidated financial statements of Forward Industries, Inc. andSubsidiaries as of and for the years ended September 30, 2012 and 2011, dated December 20, 2012, which report appears in this Annual Report onForm 10-K of Forward Industries, Inc. for the year ended September 30, 2012. /s/ CohnReznick LLPCertified Public Accountants December 20, 2012New York, New YorkSource: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Exhibit 31.1CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE EXCHANGE ACT I, Robert Garrett Jr., certify that: 1.I have reviewed this annual report on Form 10‑K for the fiscal year ended September 30, 2012, of Forward Industries, Inc. (“registrant”); 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a‑15(e) and 15d‑15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and we have: a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known tous by others within those entities, particularly during the period in which this report is being prepared; b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally accepted accounting principles; c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting. Date: December 20, 2012 /s/ Robert Garrett Jr.Robert Garrett Jr.President and Chief Executive Officer(Principal Executive Officer) Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit 31.2CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE EXCHANGE ACTI, James O. McKenna, certify that:1.I have reviewed this annual report on Form 10‑K for the fiscal year ended September 30, 2012, of Forward Industries, Inc. (“registrant”); 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a‑15(e) and 15d‑15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and we have: a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known tous by others within those entities, particularly during the period in which this report is being prepared; b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally accepted accounting principles; c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting. Date: December 20, 2012 /s/James O. McKennaJames O. McKennaChief Financial Officer(Principal Financial and Accounting Officer) Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Exhibit 32.1CERTIFICATIONS OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICERPURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002Robert Garrett Jr., Chief Executive Officer of Forward Industries, Inc. (”Forward”), and James O. McKenna, Chief Financial Officer of Forward, do eachcertify pursuant to 18 U.S.C. §1350 that, to the best of their knowledge:1. Forward’s annual report on Form 10-K for the fiscal year ended September 30, 2012 (the “Report”) fully complies with the requirements of Section13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Forward. IN WITNESS WHEREOF, the undersigned have set their hands hereto as of the 20th day of December 2012. /s/ ROBERT GARRETT JR.Robert Garrett Jr.President and Chief Executive Officer(Principal Executive Officer) /s/ JAMES O. MCKENNAJames O. McKennaChief Financial Officer(Principal Financial and Accounting Officer) Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Source: FORWARD INDUSTRIES INC, 10-K, December 20, 2012Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.

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