What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2020-12-17 compared with 2019-12-27 · 1003 added, 1197 removed, 616 unchanged (78% of the section changed)

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management

carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, of the

effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of

1934 (the “Exchange Act”).

Based on their evaluation, our Principal Executive Officer and

Principal Financial Officer concluded that our disclosure controls and procedures were effective as of September 30,

Our management carried

out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness

of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange

Based on their evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our

disclosure controls and procedures were effective as of September 30, 2020.

Management’s Report on Internal Control Over Financial

33 unchanged sentences

OTHER INFORMATION

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

DIRECTORS, EXECUTIVE

OFFICERS AND CORPORATE GOVERNANCE

The information required

2 unchanged sentences

Our Board has adopted a Code of Business Conduct

and Ethics applicable to all officers, directors and employees, which is available on our website (http://www.forwardindustries.com/#gov)

and Ethics applicable to all officers, directors and employees, which is available on our website (https://forwardindustries.com/investors/governance/)

under "Corporate Governance."

5 unchanged sentences

with the SEC within 120 days of the fiscal year ended September 30, 2020.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP

OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required

1 unchanged sentence

with the SEC within 120 days of the fiscal year ended September 30, 2020.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

CERTAIN RELATIONSHIPS

AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required

1 unchanged sentence

with the SEC within 120 days of the fiscal year ended September 30, 2020.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

PRINCIPAL ACCOUNTANT FEES

The information required

1 unchanged sentence

with the SEC within 120 days of the fiscal year ended September 30, 2020.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

EXHIBITS AND FINANCIAL STATEMENT

Documents filed as part of the report.

19 unchanged sentences

December 17, 2020

/s/ Michael Matte

Michael Matte

/s/ Anthony Camarda

Anthony Camarda

Principal Financial Officer and Chief Accounting Officer

10 unchanged sentences

Stock Purchase Agreement dated January 18, 2018 - Intelligent Product Solutions, Inc.+

Asset Purchase Agreement by and among Forward Industries, Inc., Kablooe, Inc., Kablooe Design, Inc.

and Tom KraMer dated August 17, 2020+

Restated Certificate of Incorporation

3 unchanged sentences

Description of securities registered under Section 12 of the Exchange Act of 1934

Promissory Note dated January 18, 2018 (as amended and restated)

Promissory Note dated January 18, 2018 –

Forward Industries (Asia-Pacific) (as amended and restated)

2011 Long Term Incentive Plan, as amended

2007 Equity Incentive Plan, as amended

Buying Agency and Supply Agreement - Forward Industries (Asia-Pacific) Corporation

9 unchanged sentences

Forward Industries (Asia-Pacific) Corporation

Amendment No.

5 to Buying Agency and Supply Agreement –

Forward Industries (Asia-Pacific) Corporation

Form of Employment Agreement dated January 18, 2018 +*

Employment Agreement dated May 16, 2018 - Terence Wise *

Employment Agreement dated May 16, 2018 - Michael Matte *

Amended and Restated Revolving Term Note dated September 28, 2018

Modification Agreement dated September 28, 2018

Employment Agreement with Douglas Matthews effective May 15, 2019 *

Employment Agreement between Forward Industries, Inc.

and Anthony Camarda, dated June 26, 2020*

Paycheck Protection Program Term Note payable to TD Bank, N.A.

dated April 18, 2020

List of Subsidiaries

18 unchanged sentences

request to Forward Industries, Inc.;

477 Rosemary Ave., Suite 219;

West Palm Beach, Florida 33401;

700 Veterans Memorial Hwy, Suite 100, Hauppauge, NY 11788;

Corporate Secretary.

9 unchanged sentences

Notes to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Forward Industries,

REPORT OF INDEPENDENT REGISTERED PUBLIC

ACCOUNTING FIRM

Directors and Shareholders of Forward Industries, Inc.

and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated

balance sheets of Forward Industries, Inc.

and Subsidiaries (the “Company”) as of September 30, 2019 and 2018, and

the related consolidated statements of operations, shareholders’

equity and cash flows for the years then ended, and the

related notes (collectively referred to as the consolidated financial statements).

In our opinion, the consolidated financial statements

present fairly, in all material respects, the financial position of the Company as of September 30, 2019 and 2018, and the results

of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the

United States of America.

Opinion on the Financial

audited the accompanying consolidated balance sheets of Forward Industries, Inc.

and Subsidiaries (the “Company”) as

of September 30, 2020 and 2019, and the related consolidated statements of operations, shareholders’

equity and cash flows

for the years then ended, and the related notes (collectively referred to as the consolidated financial statements).

In our opinion,

the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September

30, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting

principles generally accepted in the United States of America.

Change in Accounting

in Notes 2 and 13 to the consolidated financial statements, the Company has changed its method for accounting for leases as of

October 1, 2019 due to the adoption of Accounting Standards Codification Topic 842 Leases .

Basis for Opinion

These consolidated statements are the responsibility

of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements

based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)

(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities

laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with

the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether

the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required

to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are

required to obtain an understanding of the internal control over financial reporting, but not for the purpose of expressing an

opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such

Our audits included performing procedures

to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing

procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and

disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant

estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

that our audits provide a reasonable basis for our opinion.

/s/ CohnReznick LLP

We have served as the Company’s auditor since 2011.

Jericho, New York

December 27, 2019

FORWARD INDUSTRIES,

consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an

opinion on the Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered

with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with

respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities

and Exchange Commission and the PCAOB.

our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain

reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial

As part of our audits we are required to obtain an understanding of the internal control over financial reporting but

not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due

to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis,

evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the

accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the

consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

/s/ CohnReznick

served as the Company’s auditor since 2011.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

BALANCE SHEETS

CONSOLIDATED BALANCE SHEETS

September 30,

Current assets:

Accounts receivable, net

Prepaid expenses and other

current assets

Prepaid expenses and other current assets

Total current assets

1 unchanged sentence

Intangible assets, net

Liabilities and shareholders'

Operating lease right of use assets, net

Liabilities and shareholders' equity

Current liabilities:

Line of credit

Note payable to Forward China

Accounts payable

1 unchanged sentence

Deferred income

Notes payable - short-term portion

Capital leases payable - short-term portion

Deferred consideration - short-term portion

Accrued expenses and other

current liabilities

Current portion of notes payable

Current portion of capital leases payable

Current portion of deferred consideration

Current portion of operating lease liability

Accrued expenses and other current liabilities

Total current liabilities

Other liabilities:

Notes payable - long-term portion

Capital leases payable - long-term portion

Notes payable, less current portion

Operating lease liability, less current portion

Capital lease liability, less current portion

Deferred rent

Deferred consideration

- long-term portion

Deferred consideration, less current portion

Total other liabilities

2 unchanged sentences

Shareholders' equity:

Common stock, par value $0.01

Common stock, par value $0.01 per share;

40,000,000 shares authorized;

9,533,851 and 9,533,851 shares issued and outstanding, respectively

9,883,851 and 9,533,851 shares issued and outstanding at September 30, 2020 and 2019, respectively

Additional paid-in capital

1 unchanged sentence

(13,095,450 )

(11,320,169 )

Total shareholders' equity

Total liabilities and

shareholders' equity

Total liabilities and shareholders' equity

The accompanying

notes are an integral part of the consolidated financial statements.

FORWARD INDUSTRIES,

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

STATEMENTS OF OPERATIONS

the Fiscal Years Ended

September 30,

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Fiscal Years Ended September 30,

Revenues, net

Cost of sales

Operating expenses:

Sales and marketing

General and administrative

Total operating expenses

Income (loss) from operations

Other income (expenses):

Goodwill impairment

Loss from operations

Fair value adjustment of earn-out consideration

Fair value adjustment of deferred cash consideration

Interest income

Interest expense

Other expense

Total other income (expense)

Income (loss) before income taxes

Benefit from income taxes

Net income (loss)

Other expense, net

Loss before income taxes

Provision for (benefit from) income taxes

$ (1,775,281 )

Earnings (loss) per share:

Weighted average number of common and common

equivalent shares outstanding:

$ (3,604,030 )

Net loss per share:

Weighted average common shares outstanding:

The accompanying notes are an integral part of the consolidated financial statements.

FORWARD INDUSTRIES,

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

STATEMENTS OF SHAREHOLDERS’

THE FISCAL YEARS ENDED SEPTEMBER 30, 2019 AND 2018

Additional Paid-In

Accumulated Other Comprehensive

Balance - September 30, 2018

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

For the Fiscal Year Ended September 30, 2020

Balance at September 30, 2019

$ (11,320,169 )

Share-based compensation

Balance - December 31, 2018

Share-based compensation

Balance - March 31, 2019

Share-based compensation

Balance - June 30, 2019

Share-based compensation

Balance - September 30, 2019

Shares issued for Kablooe acquisition

Stock options exercised

Balance at September 30, 2020

$ (13,095,450 )

Balance - September 30, 2017

For the Fiscal Year Ended September 30, 2019

Balance at September 30, 2018

$ (7,716,139 )

Share-based compensation

Restricted stock award forfeitures

Foreign currency translation

Balance - December 31, 2017

Share-based compensation

Stock issuance for IPS purchase

Restricted stock award issuance

Cashless warrant exercise

Foreign currency translation

Balance - March 31, 2018

Share-based compensation

Restricted stock award forfeitures

Restricted stock award issuance

Cashless warrant exercise

Balance - June 30, 2018

Share-based compensation

Balance - September 30, 2018

Balance at September 30, 2019

$ (11,320,169 )

2 unchanged sentences

AND SUBSIDIARIES

STATEMENTS OF CASHFLOWS

the Fiscal Years Ended

September 30,

Cash Flows From Operating Activities:

Net income (loss)

STATEMENTS OF CASH FLOWS

For the Fiscal Years Ended September 30,

Operating Activities:

$ (1,775,281 )

Adjustments to reconcile

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

$ (3,604,030 )

Adjustments to reconcile net loss to net cash used in operating

Share-based compensation

Depreciation and amortization

Bad debt expense

Bad debt (recovery)/expense

Deferred rent

Deferred tax asset

Change in fair value of earn-out consideration

Change in fair value of deferred cash consideration

Fair value of cost method investment for services

Goodwill impairment

Fair value of cost method investment for services provided

Impairment of investment

Changes in operating assets and liabilities:

3 unchanged sentences

Deferred income

Accrued expenses and other

current liabilities

Net cash provided by

(used in) operating activities

Cash Flows From Investing Activities:

Operating lease liabilities

Accrued expenses and other current liabilities

Net cash used in operating activities

Investing Activities:

Purchases of property and equipment

Cash acquired in IPS purchase

Cash used to purchase IPS

cash used in investing activities

Cash Flows From Financing Activities:

Proceeds from Note issued to Forward China

Cash used in acquisition of Kablooe, Inc.

Cash acquired in acquisition of Kablooe, Inc.

Net cash used in investing activities

Financing Activities:

Proceeds from line of credit borrowings

1 unchanged sentence

Repayment of notes payable

Repayments on capital equipment leases

Cash Payment to Former

cash provided by financing activities

Proceeds from PPP loan

Cash proceeds from stock options exercised

Repayments of capital leases

Payment of deferred cash consideration

Net cash provided by financing activities

Net decrease in cash

4 unchanged sentences

Cash paid for taxes

Supplemental Disclosures of Non-Cash Investing

and Financing Activities:

Shares issued to purchase

Property and equipment

funded by capital lease borrowings

The accompanying notes are an integral part of the consolidated financial statements.

FORWARD INDUSTRIES,

Supplemental Disclosures of Non-Cash Information:

Lease assets recorded in accordance with

Lease liabilities recorded in accordance with ASC 842

Common stock issued in Kablooe acquisition

Fair value of Kablooe contingent earnout consideration

The accompanying

notes are an integral part of the consolidated financial statements.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 OVERVIEW

Forward Industries,

(“Forward”

or the “Company”) is a fully integrated design, development and manufacturing solution

provider for top tier medical and technology customers worldwide.

Through its acquisition of Intelligent Product Solutions, Inc.

(“IPS”), the Company has expanded its ability to design and develop solutions for our existing multinational client

base and expanded beyond the diabetic product line operations into a variety of industries with a full spectrum of hardware and

software product design and engineering services.

In addition to our existing design and distribution of carry and protective

solutions, primarily for handheld electronic devices, the Company is now a one-stop shop for design, development and manufacturing

solutions serving a wide range of clients in the industrial, commercial and consumer industries.

The Company’s previous principal

customer market has been original equipment manufacturers, or “OEMs”

(or the contract manufacturing firms of these

OEM customers), that either package our products as accessories “in box”

together with their branded product offerings

or sell them through their retail distribution channels.

The Company’s OEM products include carrying cases and other accessories

for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic products (such as sporting

and recreational products, bar code scanners, smartphones, GPS location devices, tablets, firearms).

The Company’s OEM customers

are located in:

is a fully integrated design, development and manufacturing solution provider for top tier medical and technology customers

Through its acquisitions of IPS and Kablooe, the Company has expanded its ability to design and develop solutions for

our existing multinational client base and expand beyond the diabetic product line into a variety of industries with a full spectrum

of hardware and software product design and engineering services.

In addition to our existing design and distribution of

carry and protective solutions, primarily for handheld electronic devices, the Company is now a one-stop shop for design, development

and manufacturing solutions serving a wide range of clients in the industrial, commercial and consumer industries.

The Company’s

previous principal customer market has been original equipment manufacturers, or “OEMs”

(or the contract manufacturing

firms of these OEM customers), that either package our products as accessories “in box”

together with their branded

product offerings or sell them through their retail distribution channels.

The Company’s OEM products include carrying cases

and other accessories for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic

products (such as sporting and recreational products, bar code scanners, smartphones, GPS location devices, tablets and firearms).

The Company’s OEM customers are located in:

(i) the Asia-Pacific region, which we refer to as the “APAC Region”;

(ii) Europe, the Middle East,

and Africa, which we refer to as the “EMEA Region”;

and (iii) the Americas.

The Company does not manufacture any of

its OEM products and sources substantially all of its OEM products from independent suppliers in China, through Forward China.

As a result of the

expansion of the design development capabilities through its wholly-owned subsidiary, IPS (acquired in January 2018), the Company

now plans to introduce proprietary products to the market from concepts brought to it from a number of different sources, both

inside and outside the Company.

The Company provides clients, both big and small, a true, authentic “one-stop-shop”

for product design, development and manufacturing solutions.

(ii) Europe, the Middle East, and Africa, which we refer to as the “EMEA Region”;

and (iii) the geographic area encompassing

North America, Central America and South America, which we refer to as the “Americas”.

The Company does not manufacture

any of its OEM products and sources substantially all of its OEM products from independent suppliers in China, through Forward

Industries Asia-Pacific Corporation, a British Virgin Islands corporation (“Forward China”), See Note 14.

As a result of

the expansion of the design development capabilities through its wholly-owned subsidiaries, IPS and Kablooe, the Company is now able

to introduce proprietary products to the market from concepts brought to it from a number of different sources, both inside

and outside the Company.

Within this report,

certain dollar amounts and percentages have been rounded to their approximate values.

Impact of COVID-19

The outbreak of the

COVID-19 virus in China and its subsequent spread throughout the world has impacted our Fiscal 2020 results of operations.

to contain the virus, authorities have implemented travel restrictions, quarantines, business limitations and shutdowns.

the majority of our workforce is based in New York, these restrictions have required substantially all our employees to work from

home for much of Fiscal 2020.

During the third quarter of Fiscal 2020, productivity of our direct labor employees was reduced,

which caused a decline in revenue and gross profit.

As some of these restrictions were relaxed in the fourth quarter of Fiscal

2020, employees started to return to the office with minimal operational challenges.

Business shutdowns resulting from the pandemic

disrupted our supply chain and the manufacture or shipment of our products and have delayed the rollout of our smart enabled retail

products to big box retail stores, causing our distribution segment revenues in Fiscal 2020 to be less than anticipated.

Additionally,

our design segment reported lower revenues as demand for its design and development services were reduced or delayed.

from lower revenue was partially offset by a reduction in certain selling and travel related expenses resulting from government

mandated stay-at-home orders and travel restrictions as well as revenues derived from sales and sourcing of personal protective

The pandemic had temporarily impacted our liquidity in Fiscal 2020, as collections of accounts receivable were somewhat

delayed at certain times.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The economy started

to open in certain jurisdictions where the virus was considered under control.

However, there continue to be areas with increased

rates of infection that could cause government officials to enact more restrictions on how businesses operate.

The future impacts

of the pandemic and any resulting economic impact are largely unknown and could be significant.

It is possible that the pandemic,

the measures taken by the governments of countries affected and the resulting economic impact may negatively impact our results

of operations, cash flows and financial position in future periods as well as that of our customers, including their ability to

pay for our services and choosing to allocate their budgets to new or existing projects which require our services.

The long-term

financial impact on our business cannot be reasonably estimated at this time.

As a result, the effects of COVID-19 may not be fully

reflected in our financial results until future periods.

Refer to “Part I, Item 1A —

Risk Factors”

in this Annual

Report for a description of the material risks that the Company currently faces in connection with COVID-19.

As a result of revenue

and earnings shortfalls in the second quarter of Fiscal 2020, due in part to COVID-19 and the related future uncertainty, the Company

revised revenue and operational projections for IPS for the later part of Fiscal 2020 and future periods.

These events impacted

the carrying value of goodwill (see Note 4).

Until there is a vaccine and treatment that is widely distributed, we expect business

conditions to remain challenging.

In response to these challenges, we will continue to focus on those factors that we can

closely managing and controlling our expenses;

aligning our design and development schedules with demand in a proactive

manner as there are changes in market conditions to minimize our cash operating costs;

and pursuing further improvements in the

productivity and effectiveness of our development, selling and administrative activities.

NOTE 2 ACCOUNTING

2 unchanged sentences

the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United

States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities

and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues

and expenses during the reporting periods.

States of America (“U.S.

GAAP”) requires management to make estimates and assumptions that affect the reported amounts

of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the

reported amounts of revenues and expenses during the reporting periods.

Actual results could differ from those estimates and assumptions.

The worldwide spread

of COVID-19 has resulted in a global slowdown of economic activity which is likely to decrease demand for a broad variety of goods

and services, while also disrupting sales channels, marketing activities and general business operations for an unknown period

of time until the disease is contained.

At this point, the extent to which COVID-19 may impact our financial condition or results

of operations is uncertain, and as of the date of issuance of these consolidated financial statements, we are not aware of any

specific event or circumstance that would require us to update our estimates, judgments or adjust the carrying value of our assets

or liabilities.

These estimates may change, as new events occur and additional information is obtained, and are recognized in the

consolidated financial statements as soon as they become known.

Actual results could differ from those estimates and any such differences

may be material to our consolidated financial statements.

Basis of Presentation

2 unchanged sentences

and its wholly-owned subsidiaries (Forward US, Forward Switzerland,

Forward UK and IPS).

Forward UK, IPS and Kablooe).

All significant intercompany transactions and balances have been eliminated in consolidation.

sales of approximately $221,000 and $305,000 from IPS to Forward have been eliminated in consolidation for Fiscal 2019 and Fiscal

2018, respectively.

incurred a net loss of approximately $3.6 million for the fiscal year ended September 30, 2019 and generated negative cash

flow from operations of approximately $2.0 million.

We believe our existing cash balance and working capital will be

sufficient to meet our liquidity needs at least through December 2020.

sales of $49,000 and $221,000 from IPS to Forward US have been eliminated in consolidation for Fiscal 2020 and Fiscal 2019, respectively.

The Company incurred

a net loss of $1,775,000 for Fiscal 2020 and generated negative cash flow from operations of $263,000.

We believe our existing

cash balance and working capital will be sufficient to meet our liquidity needs at least through December 2021.

FORWARD INDUSTRIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 ACCOUNTING

POLICIES (Continued)

Segment Reporting

Operating segments

are defined as components of an enterprise about which separate financial information is available that is regularly evaluated

by a chief operating decision maker, or Forward management, in deciding how to allocate resources and in assessing performance.

As a result of the acquisition of IPS, management conducts business through two distinct operating segments, which are also our

The Company has two

reportable segments:

distribution and design.

Forward US, Forward Switzerland and Forward UK

comprise the distribution operating segment and IPS is the design operating segment.

It should be noted that the segment reporting

for design for Fiscal 2018 covers the period following the closing of the acquisition of IPS on January 18, 2018 through September

The distribution segment consists of two reporting units (Forward US and Forward

Switzerland, that collectively comprise one operating segment) that source and distribute carrying cases and other accessories

for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic devices.

The design segment

consists of two operating segments (IPS and Kablooe, which have been aggregated into one reportable segment) that provide a full

spectrum of hardware and software product design and engineering services.

Organizing our business

through two operating segments allows us to align our resources and manage the operations.

Our management team regularly reviews

operating segment revenue and operating income (loss) when assessing financial results of operating segments and allocating resources.

through these operating segments allows us to align our resources and manage our operations.

Our chief operating decision maker

regularly reviews operating segment revenue and profitability when assessing financial results of operating segments and allocating

We measure the performance

of our operating segments based upon operating segment revenue and operating income (loss).

Segment operating income (loss) includes

of our operating segments based upon operating segment revenue and operating income or loss.

Segment operating income or loss includes

revenues earned and expenses incurred directly by the operating segment, including cost of sales and selling, marketing, and general

and administrative costs (see Note 16 for more discussion on operating segments).

Goodwill is an asset

representing the future economic benefits arising from other assets acquired in a business combination that are not individually

identified and separately recognized.

Goodwill was recognized as a result of the acquisition of IPS in January 2018.

Goodwill is reviewed

for impairment at least annually, and when triggering events occur, in accordance with the provisions of Financial Accounting Standards

Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, “Intangibles –

Goodwill and Other.”

The Company has two reporting units for purposes of evaluating goodwill impairment and perform our annual

goodwill impairment test on September 30 at the end of the fiscal year.

The Company has the option to perform a qualitative assessment

to determine if an impairment is more likely than not to have occurred.

If the Company can support the conclusion that it is not

more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company would not need

to perform the impairment test for the reporting unit.

If the Company cannot support such a conclusion or does not elect to perform

the qualitative assessment, then the Company will compare the fair value of the reporting unit with its carrying amount, including

If the fair value

of the reporting unit exceeds its carrying value, no impairment charge is recognized.

If the fair value of the reporting unit

is less than its carrying value, an impairment charge will be recognized for the amount by which the reporting unit’s carrying

amount exceeds its fair value.

A significant amount of judgment is required in performing goodwill impairment tests including

estimating the fair value of a reporting unit and the implied fair value of goodwill.

Management compared the fair value of the

reporting unit, the design segment which holds the goodwill, with its carrying value.

Based on management’s evaluation,

there were no impairments to goodwill at September 30, 2019.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 ACCOUNTING

POLICIES (Continued)

and administrative expenses (see Note 16 for more discussion on operating segments).

The Company reviews

goodwill for impairment at least annually, or more often if triggering events occur.

The Company has two reporting units with goodwill

(IPS and Kablooe) and we perform our annual goodwill impairment test on September 30, the end of the fiscal year, or upon the occurrence

of a triggering event.

The Company has the option to perform a qualitative assessment to determine if an impairment is more likely

than not to have occurred.

If the Company can support the conclusion that it is not more likely than not that the fair value of

a reporting unit is less than its carrying amount, then the Company would not need to perform the impairment test for the reporting

If the Company cannot support such a conclusion or does not elect to perform the qualitative assessment, then the Company

will compare the fair value of the reporting unit with its carrying amount, including goodwill.

If the fair value of the reporting

unit exceeds its carrying value, no impairment charge is recognized.

If the fair value of the reporting unit is less than its carrying

value, an impairment charge will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair

A significant amount of judgment is required in performing goodwill impairment tests including estimating the fair value

of a reporting unit and the implied fair value of goodwill.

During Fiscal 2020, the Company recorded an impairment charge of $1,015,000

related to goodwill (See Note 4).

Intangible Assets

Intangible assets

include trademark and customer relationships, which were acquired as part of the acquisition of IPS in January 2018 (see Note 3

for details on intangible assets acquired as part of the acquisition) and are recorded based on the estimated fair value in purchase

price allocation.

The intangible assets are amortized over their estimated useful lives, which are periodically evaluated for reasonableness.

include trademarks and customer relationships, which were acquired as part of the acquisitions of IPS in Fiscal 2018 and Kablooe

in Fiscal 2020 (see Note 3) and are recorded based on their estimated fair value determined in conjunction with the purchase price

These intangible assets are amortized over their estimated useful lives, which are periodically evaluated for reasonableness.

Our intangible assets

are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not

be recoverable.

are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be

In assessing the recoverability of our intangible assets, we must make estimates and assumptions regarding future

cash flows and other factors to determine the fair value of the respective assets.

These estimates and assumptions could have

a significant impact on whether an impairment charge is recognized and also the magnitude of any such charge.

These estimates and assumptions could have a

significant impact on whether an impairment charge is recognized and also the magnitude of any such charge.

Fair value estimates

8 unchanged sentences

at September 30, 2020.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Cash and Cash Equivalents

4 unchanged sentences

the United States (that at times may exceed federally insured limits of $250,000 per financial institution) and Switzerland.

September 30, 2019 and 2018, there were deposits totaling approximately $2.8 million (which includes approximately $650,000 in

a foreign bank) and $4.1 million (which includes approximately $1.9 million in a foreign bank), respectively, held in excess of

federally insured limits.

Historically, we have not experienced any losses due to such cash concentrations.

September 30, 2020 and 2019, there were deposits totaling $2,300,000 (which includes $770,000 in a foreign bank) and $2,800,000

(which includes $650,000 in a foreign bank), respectively, held in excess of federally insured limits.

Historically, we have not

experienced any losses due to such cash concentrations.

Accounts Receivable

6 unchanged sentences

from net thirty (30) days to net one hundred twenty (120) days.

At September 30, 2019, there were allowances for doubtful accounts

of approximately $159,000 and $2,033,000 relating to the Company’s distribution segment and design segment accounts receivable,

respectively.

At September 30, 2018, the Company had allowances for doubtful accounts of approximately $0 and $126,000 related

to the Company’s distribution segment and design segment accounts receivable, respectively.

The increase in allowance for

doubtful accounts for the design segment is primarily due to a full provision for bad debt on trade receivables for a major design

segment customer for approximately $1.6 million.

The Company also has an investment in this customer (see Note 6).

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 ACCOUNTING

POLICIES (Continued)

At September 30, 2020, the Company had allowances for doubtful

accounts of $249,000 and $347,000 related to the Company’s distribution segment and design segment accounts receivable, respectively.

At September 30, 2019, the Company had allowances for doubtful accounts of $159,000 and $2,033,000 relating to the Company’s

distribution segment and design segment accounts receivable, respectively.

The decrease in allowance for doubtful accounts for

the design segment is primarily due to the conversion of the accounts receivable balance from a customer, and the associated allowance

for doubtful accounts, of $1,626,000, to a note receivable (see Note 6).

Inventories consist

14 unchanged sentences

Property and equipment

consist of furniture, fixtures, and equipment and leasehold improvements and are recorded at cost.

consist of furniture, fixtures, equipment and leasehold improvements and are recorded at cost.

Expenditures for major additions

9 unchanged sentences

of the remaining lease term or the estimated useful lives of the improvements.

The Company enters

into various lease agreements in conducting its business.

At the inception of each lease, the Company evaluates the lease agreement

to determine whether the lease is an operating or capital lease.

Leases may contain initial periods of free rent and/or periodic

When such items are included in a lease agreement, the Company records rent expense on a straight-line basis over

the initial term of a lease.

The difference between the rent payment and the straight-line rent expense is recorded as a deferred

rent liability.

The Company expenses any additional payments under its operating leases for taxes, insurance or other operating

expenses as incurred.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company adopted

Accounting Standards Codification (“ASC”) 842, "Leases", effective October 1, 2019 using the modified retrospective

transition method and elected to apply the available practical expedients to enable the preparation of financial information on

The practical expedients applied under the new standard allow the Company to carry forward the historical lease classification

and not reassess its prior conclusions about lease identification or initial direct costs.

In accordance with this guidance, lease

assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term, using

the Company’s incremental borrowing rate commensurate with the lease term, since the Company’s lessors do not provide

an implicit rate, nor is one readily available.

The Company has certain leases that may include an option to renew and when it

is reasonably probable to exercise such option, the Company will include the renewal option terms in determining the lease asset

and lease liability.

Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities

represent the Company’s obligation to make lease payments arising from the lease.

Lease expense for lease payments is recognized

on a straight-line basis over the lease term.

Operating lease assets are shown as right of use assets and financing lease assets

are a component of property and equipment on the consolidated balance sheets.

The current and long-term portions of operating and

financing lease liabilities are shown separately as such on the consolidated balance sheets.

Upon adoption of ASC 842, the Company

recognized right of use assets of $3,649,000 and corresponding lease liabilities of $3,729,000 pertaining to its operating leases

on its consolidated balance sheets.

The Company recognizes

2 unchanged sentences

benefits is more likely than not.

As of September 30, 2019, there was no change to our assessment that a full valuation allowance

At September 30, 2020, there was no change to our assessment that a full valuation allowance

was required against all net deferred tax assets.

1 unchanged sentence

opposite change to the valuation allowance.

No material current book income tax provision was recorded in 2019 due to net loss

and the existence of significant net operating loss carryforwards, however, approximately $4,000 current year income tax refund

was recorded due to prior year AMT credits being partially refunded in the current year.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 ACCOUNTING

POLICIES (Continued)

Our income tax provision or benefit is generally not significant due to the existence

of significant net operating loss carryforwards.

Revenue Recognition

Distribution Segment

The Company generally

recognizes revenue in its distribution segment when:

(i) finished goods are shipped to our distribution customers (in general,

these conditions occur at either point of shipment or point of destination, depending on the terms of sale);

(ii) there are no

other deliverables;

and (iii) there are no further obligations to the customer after the title of the goods has transferred.

Company defers revenue when it receives consideration before achieving the criteria previously mentioned.

The Company adopted

ASC 606, “Revenue Recognition”

effective October 1, 2018.

In accordance with this guidance, the Company generally recognizes

revenue in its distribution segment when:

(i) finished goods are shipped to our distribution customers (in general, these conditions

occur at either point of shipment or point of destination, depending on the terms of sale, i.e., transfer of control);

are no other deliverables or performance obligations;

and (iii) there are no further obligations to the customer after the title

of the goods has transferred.

When the Company receives consideration before achieving the criteria previously mentioned, it records

a contract liability, which is classified as a component of deferred income in the accompanying consolidated balance sheets.

liabilities at September 30, 2020 and 2019 were $75,000 and $0 for the distribution segment.

Design Segment

14 unchanged sentences

when the performance obligation has been satisfied or the transfer of goods to the customer has been completed and accepted.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recognized revenues

1 unchanged sentence

receivable in the accompanying consolidated balance sheets.

Contract assets at September 30, 2019 and 2018 were approximately

$611,000 and $0, respectively.

Contracts where collections to date have exceeded recognized revenues, or contract liabilities,

are recorded as a liability and classified as a component of deferred income in the accompanying consolidated balance sheets.

Contract liabilities at September 30, 2019 and 2018 were approximately $220,000 and $125,000, respectively.

Contract assets at September 30, 2020 and 2019 were $649,000 and $611,000,

respectively.

Contracts where collections to date have exceeded recognized revenues, or contract liabilities, are recorded as a

liability and classified as a component of deferred income in the accompanying consolidated balance sheets.

Contract liabilities

at September 30, 2020 and 2019 were $410,000 and $220,000, respectively.

Shipping and Handling Fees

7 unchanged sentences

These increases or decreases in expected functional currency cash flows

are foreign currency transaction gains or losses that are included in “other income (expense)”

in the accompanying

consolidated statements of operations.

The approximate net losses from foreign currency transactions were approximately $14,000

and $10,000 for the fiscal years ended September 30, 2019 and 2018, respectively.

Such foreign currency transaction losses were

primarily the result of Euro denominated revenues from certain customers.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 ACCOUNTING

POLICIES (Continued)

are foreign currency transaction gains or losses that are included in other expense in the accompanying consolidated statements

of operations.

The approximate net losses from foreign currency transactions were $3,000 and $14,000 for the fiscal years ended

September 30, 2020 and 2019, respectively.

Such foreign currency transaction losses were primarily the result of Euro denominated

revenues from certain customers.

Fair Value Measurements

We perform fair value

measurements in accordance with the guidance provided by ASC 820.

ASC 820 defines fair value as the price that would be received

from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement

When determining the fair value measurements for assets and liabilities required to be recorded at their fair values, we

consider the principal or most advantageous market in which we would transact and consider assumptions that market participants

would use when pricing the assets or liabilities, such as inherent risk, transfer restrictions, and risk of nonperformance.

measurements in accordance with the guidance provided by ASC 820, “Fair Value Measurement.”

ASC 820 defines fair value

as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market

participants at the measurement date.

When determining the fair value measurements for assets and liabilities required to be recorded

at their fair values, we consider the principal or most advantageous market in which we would transact and consider assumptions

that market participants would use when pricing the assets or liabilities, such as inherent risk, transfer restrictions, and risk

of nonperformance.

ASC 820 establishes

5 unchanged sentences

quoted prices in active markets for identical assets or liabilities;

inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets

for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active,

or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets

or liabilities;

unobservable inputs that are supported by little or no market activity and that are significant to the fair values

of the assets or liabilities.

Reclassifications

Certain amounts in

the accompanying fiscal 2018 financial statements have been reclassified to conform to the fiscal 2019 presentation.

Share-Based Compensation Expense

The Company recognizes

employee and director share-based compensation in its consolidated statements of operations at the grant date fair value of stock

options and other equity-based compensation.

The determination of stock option grant date fair value is estimated using the Black-Scholes

option-pricing model, which includes variables such as the expected volatility of the Company’s share price, the exercise

behavior of its grantees, interest rates, and dividend yields.

These variables are projected based on the Company’s historical

data, experience, and other factors.

In the case of awards with multiple vesting periods, the Company has elected to use the graded

vesting attribution method, which recognizes compensation cost on a straight-line basis over each separately vesting portion of

the award as if the award was, in substance, multiple awards (See Note 9 - Share-Based Compensation).

In addition, the Company

recognizes share-based compensation to non-employees based upon the fair value, using the Black-Scholes option pricing model, determined

at the deemed measurement dates over the related contract service period.

Business Combinations

The Company allocates

the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based

on their estimated fair values.

The excess of the purchase consideration over the fair values of these identifiable assets and

liabilities is recorded as goodwill.

When determining the fair values of assets acquired and liabilities assumed, the Company makes

significant estimates and assumptions, especially with respect to intangible assets.

inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities;

unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities.

FORWARD INDUSTRIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2 ACCOUNTING POLICIES (Continued)

The Company recognizes

the purchase of assets and the assumption of liabilities as an asset acquisition, if the transaction does not constitute a business

The excess of the fair value of the purchase price is allocated on a relative fair value basis to the identifiable

assets and liabilities.

No goodwill is recorded in an asset acquisition.

Share-Based Compensation Expense

The Company estimates

the fair value of employee and non-employee director share-based compensation on the date of grant using the Black-Scholes option

pricing model, which includes variables such as the expected volatility of the Company’s share price, the exercise behavior

of its grantees, interest rates, and dividend yields.

These variables are projected based on the Company’s historical data,

experience, and other factors.

The fair value of employee and non-employee director share-based compensation is recognized in the

consolidated statements of operations over the related service or vesting period of each grant.

In the case of awards with multiple

vesting periods, the Company has elected to use the graded vesting attribution method, which recognizes compensation cost on a

straight-line basis over each separately vesting portion of the award as if the award was, in substance, multiple awards (see Note

Business Combinations

The Company allocates

the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their

estimated fair values.

The excess of the purchase consideration over the fair values of these identifiable assets and liabilities

is recorded as goodwill.

When determining the fair values of assets acquired and liabilities assumed, the Company makes significant

estimates and assumptions, especially with respect to intangible assets.

Critical estimates

3 unchanged sentences

but actual results may differ from estimates.

Other estimates associated

with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities

Reclassifications

Certain amounts in

the accompanying Fiscal 2019 financial statements have been reclassified to conform to the Fiscal 2020 presentation.

R ecent Accounting Pronouncements

In May 2014, the FASB

issued Accounting Standards Update (“ASU”) No.

2014-09, “Revenue from Contracts with Customers,”

2014-09”).

ASU 2014-09 supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition”

605”) and most industry-specific guidance throughout ASC 605.

ASU 2014-09 establishes principles for recognizing revenue

upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in

exchange for those goods or services.

The guidance in ASU 2014-09 was revised in July 2015 to be effective for interim periods

beginning on or after December 15, 2017 and should be applied on a transitional basis either retrospectively to each prior reporting

period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial

In 2016, FASB issued additional ASUs that clarify the implementation guidance on principal versus agent considerations

(ASU 2016-08), on identifying performance obligations and licensing (ASU 2016-10), and on narrow-scope improvements and practical

expedients (ASU 2016-12) as well as on the revenue recognition criteria and other technical corrections (ASU 2016-20).

standards became effective during the first quarter of fiscal 2019 and were adopted using the modified retrospective method.

Company has performed a review of ASU 2014-09 as compared to its previous accounting policies for our products and services revenues

and did not identify any material impact to revenue.

Therefore, there was no adjustment to retained earnings for a cumulative effect.

Effective October

1, 2018, the Company adopted ASC 606 and has elected the modified retrospective method on existing contracts at the date of adoption.

The Company has implemented the necessary changes to such business processes, controls and systems to effectively review and account

for the new contracts under this standard.

Revenues recognized

from the distribution segment under ASC 606 are consistent with previous revenue recognition standards under ASC 605, whereby revenue

is typically recognized at either the point of shipment or point of destination, depending on the terms of the sale.

Regarding the Company’s

design segment, the Company has evaluated the changes from adopting this new standard on its financial reporting, disclosures and

its various revenue streams.

The Company now recognizes revenue over time on its time and material contracts utilizing a “right

to invoice”

method which is similar to previous revenue recognition standards under ASC 605.

Revenues from fixed-price type

contracts that require performance of services that are not related to the production of tangible assets are recognized by using

cost inputs to measure progress toward the completion of its performance obligations.

This method is similar to the method formerly

applied to certain of the Company’s contracts covered by the previous revenue recognition standards under ASC 605.

cases, contracts contain an arrangement of specific deliverables or production of prototypes, or a distinct performance obligation,

and the Company allocates the transaction price to the performance obligation on a relative standalone selling price basis.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2 ACCOUNTING POLICIES (Continued)

In February 2016,

the FASB issued ASU 2016-02, “Leases (Topic 842),”

which will require lessees to report most leases as assets

and liabilities on the balance sheet, while lessor accounting will remain substantially unchanged.

This ASU requires a modified

retrospective transition approach for existing leases, whereby the new rules will be applied to the earliest year presented.

new standard is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted.

adopted ASU 2016-02 effective October 1, 2019 and upon adoption of Topic 842 the Company expects recognition of additional assets

and corresponding liabilities pertaining to its operating leases on its consolidated balance sheets.

The Company expects the adoption

will result in an increase in other assets and an increase in other liabilities of approximately $3.7 million.

The Company does

not expect the adoption of the new standard to have a significant impact on its consolidated statements of operations and cash

In August 2018, the

FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230):

Classification of Certain Cash Receipts and Cash Payments,”

providing additional guidance on several cash flow classification issues, with the goal of the update to reduce the current and

potential future diversity in practice.

The amendments in this update are effective for fiscal years beginning after December 15,

2017, and interim periods within those fiscal years.

The Company early adopted ASU No.

2016-15 and the adoption did not have any

impact on the Company’s consolidated financial statements.

In the first quarter

of 2019, the Company adopted FASB ASU No.

2016-16, “Income Taxes (Topic 740):

Intra-Entity Transfers of Assets Other Than

Inventory”

(“ASU 2016-16”), which requires the recognition of the income tax consequences of an intra-entity

transfer of an asset, other than inventory, when the transfer occurs.

The adoption of ASU 2016-16 did not have an impact to the

consolidated financial statements due to the Company’s maintenance of a full valuation allowance on the Company’s net

deferred tax asset.

In January 2017,

the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill

Impairment.”

ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating the requirement to compare

the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test referenced in

ASC 350, “Intangibles - Goodwill and Other (“ASC 350”).”

As a result, an entity should perform

its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.

impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair

However, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting

ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019, including any interim

impairment tests within those annual periods, with early application permitted for interim or annual goodwill impairment

tests performed on testing dates after January 1, 2017.

The Company adopted ASU 2017-04 in the first quarter of Fiscal 2019

and the adoption did not have any impact on the Company’s consolidated financial statements.

In May 2017, the FASB

issued ASU No.

2017-09, “Scope of Modification Accounting”, to provide guidance on which changes to the terms

or conditions of a share-based payment award require an entity to apply modification accounting.

The Company adopted ASU No.

in the first quarter of Fiscal 2019 and the adoption did not have any impact on the Company’s consolidated financial statements.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 ACCOUNTING

POLICIES (Continued)

In March 2018, the

FASB issued ASU 2018-05, “Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin

The ASU adds various Securities and Exchange Commission (“SEC”) paragraphs pursuant to the issuance

of the December 2017 SEC Staff Accounting Bulletin No.

118, “Income Tax Accounting Implications of the Tax Cuts and Jobs

Act (“SAB 118”)”, which was effective immediately.

The SEC issued SAB 118 to address concerns about reporting

entities’

ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Cuts and Jobs

Act in the period of enactment.

SAB 118 allows disclosure that determination of some or all of the income tax effects from the

Tax Cuts and Jobs Act may be incomplete by the due date of the financial statements and, if possible, provide a reasonable estimate.

The Company has accounted for the tax effects of the Tax Cuts and Jobs Act under the guidance of SAB 118.

In June 2018, the

FASB issued ASU 2018-07, “Compensation —

Stock Compensation (Topic 718),”

(“ASU 2018-07”).

is intended to reduce cost and complexity and to improve financial reporting for nonemployee share-based payments.

Currently, the

accounting requirements for nonemployee and employee share-based payment transactions are significantly different.

expands the scope of Topic 718, Compensation —

Stock Compensation (which currently only includes share-based payments to

employees) to include share-based payments issued to nonemployees for goods or services.

Consequently, the accounting for share-based

payments to nonemployees and employees will be substantially aligned.

This ASU supersedes Subtopic 505-50, “Equity —

Equity-Based Payments to Nonemployees.”

The amendments in this ASU are effective for fiscal years beginning after December

15, 2018, and interim periods within that fiscal year.

Early adoption is permitted, but no earlier than a company’s adoption

date of Topic 606, Revenue from Contracts with Customers.

The Company early adopted ASU 2018-07 effective October 1, 2019.

adoption of ASU 2018-07 did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the

FASB issued ASU 2018-13, “Fair Value Measurement - Disclosure Framework (Topic 820).”

The updated guidance improves

the disclosure requirements on fair value measurements.

The updated guidance is effective for fiscal years, and interim periods

within those fiscal years, beginning after December 15, 2019.

FASB issued ASU 2018-13 “Fair Value Measurement –

Disclosure Framework (Topic 820)”

to improve the disclosure

requirements on fair value measurements.

The updated guidance is effective for fiscal years, and interim periods within those fiscal

years, beginning after December 15, 2019.

Early adoption is permitted for any removed or modified disclosures.

The Company is currently assessing the timing and impact of adopting the updated provisions.

The Company does

not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

In November 2019,

the FASB issued ASU 2019-08, “Compensation –

Stock Compensation (Topic 718) and Revenue from Contracts with Customers

(Topic 606).”

ASU 2019-08 is an accounting pronouncement which expands the scope of ASC Topic 718 to provide guidance for

share-based payment awards granted to a customer in conjunction with selling goods or services accounted for under Topic 606.

pronouncement is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years.

Company is currently evaluating the effects of this pronouncement on our consolidated financial statements along with the effects

of ASU 2018-07 noted above.

2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments –

Losses.”

ASU 2019-11 is an accounting pronouncement that amends ASU 2016-13, “Financial Instruments –

Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.”

The ASU 2019-11 amendment provides

clarity and improves the codification to ASU 2016-03.

The pronouncement would be effective concurrently with the adoption of

The pronouncement is effective for fiscal years beginning after December 15, 2019 and interim periods within

those fiscal years.

The Company is currently evaluating the effects of this pronouncement on our consolidated financial

the FASB issued ASU 2019-08, “Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic

to provide guidance for share-based payment awards granted to a customer in conjunction with selling goods or services

accounted for under Topic 606.

The pronouncement is effective for fiscal years beginning after December 15, 2019 and interim periods

within those fiscal years.

The Company does not expect the adoption of this guidance to have a material impact on its consolidated

financial statements.

FORWARD INDUSTRIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In November 2019,

the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments –

Credit Losses.”

ASU 2019-11 is an accounting pronouncement that provides clarity to and amends earlier guidance on this topic and would be effective

concurrently with the adoption of such earlier guidance.

This pronouncement is effective for the Company for fiscal years beginning

after December 15, 2022 and interim periods within those fiscal years.

The Company is currently evaluating the effects of this

pronouncement on its consolidated financial statements.

August 2018, the FASB issued ASU 2018-15 “

Intangibles - Goodwill and Other - Internal-Use Software (Subtopic

350-40)”

addressing customers’

accounting for implementation costs incurred

in a cloud computing arrangement that is a service contract, which requires customers to apply internal-use software guidance

to determine the implementation costs that are able to be capitalized.

Capitalized implementation costs are required to be

amortized over the term of the arrangement, beginning when the cloud computing arrangement is ready for its intended

The effective date of the new guidance for public companies is for fiscal years beginning after December 15,

2019 and interim periods within those fiscal years.

Early adoption is permitted.

The Company does not expect the

adoption of this guidance to have a material impact on its consolidated financial statements.

2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes.”

guidance removes certain exceptions to the general principles in Topic 740 and provides consistent application of

GAAP by clarifying and amending existing guidance.

The effective date of the new guidance for public companies is for

fiscal years beginning after December 15, 2020 and interim periods within those fiscal years.

Early adoption is

The Company is currently evaluating the timing of adoption and impact of the updated guidance on its consolidated

financial statements.

NOTE 3 ACQUISITION

On January 18, 2018,

the Company entered into a Stock Purchase Agreement (the “Agreement”) by and among the Company, IPS, the holders of

all of the common stock of IPS, Inc.

(the “Sellers”) and Mitchell Maiman, President of IPS, representing the Sellers.

In consideration for the acquisition of all of IPS’

outstanding securities, the Company:

(i) paid approximately $1.9 million

(ii) assumed approximately $1.5 million of outstanding debt;

(iii) issued a total of 401,836 shares of the Company’s

common stock to the two owners of IPS;

(iv) agreed to pay $1,000,000 of deferred cash consideration (with the first payment of

$500,000 due and paid on May 31, 2018, the second payment of $200,000 due on September 30, 2019, and third payment of $300,000

due on September 30, 2020);

and (v) agreed to pay up to $2.2 million of earnout payments based upon IPS meeting certain EBITDA

milestones (as defined in the Agreement) over a three-year period.

Additionally, the Company entered into three-year employment

agreements with both Mitchell Maiman and Paul Severino (Chief Operating Officer of IPS), and agreed to pay them each $256,000 per

In order to fund the acquisition of IPS, the Company issued a $1.6 million promissory note payable to Forward China Industries

(Asia-Pacific) Corporation (“Forward China”) due January 18, 2019.

The promissory note bears an interest

rate of 8% per annum and requires monthly interest payments commencing February 18, 2018.

Forward China is an entity which

is principally owned by the Company’s Chairman and Chief Executive Officer.

As part of the Agreement, IPS entered into

at-will employment agreements with two additional key employees.

Pursuant to the employment agreements, the employees were issued

a total of 40,184 shares of the Company’s common stock of which 40% vested immediately with the remainder vesting in two

equal increments on the six-month and twelve-month anniversary of the grant date, subject to continued employment on such vesting

On August 17, 2020, in order to further

diversify its customer base and the industries in which it sells its products, the Company and Kablooe, Inc.

(a newly formed wholly-owned

subsidiary of the Company) entered into an Asset Purchase Agreement (the “Agreement”) with Kablooe Design, Inc.

(“Kablooe

Design”) and its sole shareholder.

Kablooe Design is an innovative medical and consumer design and development company whose

clients include leading brands in medical devices.

In consideration for the acquisition of substantially all of the assets of Kablooe

Design, the Company:

(i) paid $353,000 in cash;

(ii) issued 300,000 shares of its common stock;

(iii) agreed to pay up to an aggregate

$500,000 in contingent earnout payments based on Kablooe meeting certain earnings milestones (as defined in the Agreement) over

a five-year period;

and (iv) agreed to make two additional $50,000 retention payments to Kablooe’s Chief Executive Officer

on the fourth and fifth anniversaries of the acquisition based on his continued employment with Kablooe and the achievement of

the earnings milestones (as defined in the Agreement).

Additionally, in conjunction with this acquisition, the Company entered

into a five-year employment agreement with Kablooe’s Chief Executive Officer and agreed to pay him a salary of $250,000 per

At the date of acquisition,

the purchase consideration consists of cash, equity in Forward’s (“Buyer’s”) stock, deferred cash and contingent

consideration based on earn-out performance over a three-year period.

Acquisition-related costs were expensed as incurred and are

included in the general and administrative expenses within the consolidated statements of operations.

The purchase consideration

components are summarized in the table below (amounts stated in thousands):

the consideration transferred consisted of cash, shares of Forward’s common stock, and contingent consideration based on

the earnings performance of Kablooe over a five-year period.

The acquisition date fair value of consideration transferred consisted

of the following:

Cash at closing (1)

Value of Equity in Buyer's Common Stock (2)

Fair Value of Earn-Out Consideration (3)

Fair Value of Deferred Cash Consideration (4)

Total Purchase Consideration

(1) Cash paid by Forward at closing funded, in part, by a $1.6 million promissory note issued to Forward

China, a related party of Forward.

The remainder of the cash was funded by Forward’s operating cash account.

(2) Forward issued 401,836 shares of common stock valued at the January 18, 2018 closing price of $1.24

per share for an aggregated value of approximately $500,000.

(3) Fair Value of the Earn-Out consideration is measured using the Black-Scholes option pricing method.

Earn-Out is to be paid in cash only upon meeting certain EBITDA milestones over a three-year period.

(4) Fair value of the Deferred Cash consideration is the present value of the $1,000,000 payable in

three increments with an applied discount rate ranging between 4.73% and 5.33%.

Value of Forward's common stock (2)

Fair value of contingent earnout consideration (3)

Cash paid by Forward at closing.

Forward issued 300,000 shares of its common stock valued at $1.23 per share, which represents the August 17, 2020 closing price of $1.37 per share, less an estimated 10% reduction in fair value related to restrictions that limit their marketability for a period of six months.

Fair value of the contingent consideration is measured using the Black-Scholes option pricing method.

Contingent consideration is to be paid in cash only upon Kablooe meeting certain earnings milestones over a five-year period.

FORWARD INDUSTRIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 ACQUISITION (Continued)

The following table

summarizes the allocation of the assets acquired and liabilities assumed based on their estimated fair values on the acquisition

date and the related estimated useful lives of the amortizable intangible assets acquired (in thousands, except for estimated useful

Current Assets:

Preliminary estimated useful life

Cash and Equivalents

summarizes the estimated fair values of the assets acquired and liabilities assumed on the acquisition date:

Accounts receivable

Other Current Assets

Total Current Assets

Current Liabilities:

Customer relationships (8 yr life)

Trademark (15 yr life)

Property and equipment

Total identifiable assets acquired

Accounts payable

Accrued liabilities

Deferred revenue

Accrued and Other Current Liabilities

Total Current Liabilities

Property and Equipment

Other Long-Term Assets

Deferred Tax Liability

Finite-Lived Intangible Assets:

Customer Relationships

Total Intangible Assets

On June 30, 2018,

the Earn-out consideration was revalued and adjusted down by $510,000 due to the high likelihood that IPS would not meet certain

EBITDA milestones per the Stock Purchase Agreement for Fiscal year 2018.

On September 30, 2019, the Earn-out consideration was

revalued and adjusted up by $260,000 based on the updated projections in meeting the EBITDA milestones (see Note 6 - Fair Value

Measurements).

Total liabilities assumed

Net identifiable assets acquired

Net assets acquired

In relation to our

acquisition of IPS, we incurred approximately $296,000 of expenses in Fiscal 2018 related to the transaction, including legal costs,

financial and legal diligence, tax accounting, and valuation.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 ACQUISITION (Continued)

Pro Forma Impact

The following schedule

presents unaudited consolidated pro forma results of operations for Fiscal 2018 as if the IPS acquisition had occurred on October

This information does not purport to be indicative of the actual results that would have occurred if the IPS acquisition

had actually been completed on October 1, 2017, nor is it necessarily indicative of the future operating results or the financial

position of the combined companies.

The unaudited pro forma results of operations do not reflect the cost of any integration activities

or benefits that may result from synergies that may be derived from any integration activities.

Year Ended September 30,

Net income (loss)

$ (3,604,030 )

Net income (loss) per share:

Weighted Average Outstanding Shares

acquisition of Kablooe, we incurred $78,000 of acquisition related costs in Fiscal 2020, including legal and valuation costs.

costs were expensed as incurred and included as a component of general and administrative expenses on the consolidated statement

of operations.

Kablooe’s results of operations have been included in the consolidated financial statements since the acquisition

Our consolidated statement of operations for Fiscal 2020 includes revenue of $172,000 for Kablooe.

NOTE 4 INTANGIBLE

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Intangible Assets

The following table

provides information regarding the Company’s intangible assets, which consist of the following:

The Company’s

intangible assets consist of the following:

September 30, 2020

September 30, 2019

Customer Relationships

8 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INTANGIBLE ASSETS and GOODWILL (Continued)

The Company’s

intangible assets were acquired as a result of the acquisition of IPS on January 18, 2018 and are amortized over their expected

useful lives.

The useful lives are 15 years for the Trademark and 8 years for the Customer Relationships.

The intangible assets

are held under the design segment of our business.

During the years ended September 30, 2019 and 2018, the Company recorded amortization

of approximately $162,000 and $114,000, respectively, which is included under the general and administrative expenses in the Company’s

consolidated statements of operations.

Estimated amortization

expense for the Company’s intangible assets for each of the five succeeding years and thereafter at September 30, 2019 is

intangible assets were acquired as a result of the acquisitions of Kablooe and IPS in Fiscal 2020 and Fiscal 2018, respectively,

and are amortized over their expected useful lives.

The useful lives are 15 years for the trademarks and 8 years for the customer

relationships.

The intangible assets are held under the design segment of our business.

During Fiscal 2020 and Fiscal 2019, the

Company recorded amortization expense related to intangible assets of $167,000 and $162,000, respectively, which is included in

general and administrative expenses in the Company’s consolidated statements of operations.

30, 2020, estimated amortization expense for the Company’s intangible assets for each of the next five years and thereafter

is as follows:

Years Ending September 30,

Company recognized goodwill as a result of the acquisition of IPS on January 18, 2018 in the amount of approximately $2,182,000.

Company’s goodwill resulted from the acquisitions of Kablooe and IPS in Fiscal 2020 and Fiscal 2018, respectively.

the Company’s goodwill is held under the design segment of our business.

Goodwill is not deductible for tax purposes.

On June 30, 2018,

the Company adjusted down the fair value of the earn-out consideration in connection with the IPS acquisition as a result of a

shortfall in earnings performance for IPS.

The shortfall in the performance was also considered a triggering event with regards

to the evaluation of the carrying value of our trademark and customer relationship intangible assets as well as the goodwill resulting

from the acquisition of IPS.

As such, the Company performed an assessment of the carrying values considering specific qualitative

facts and circumstances, macroeconomic factors and utilizing the initial inputs and projections that supported the initial fair

value valuations of the intangible assets acquired from IPS.

Based on these assessments, the Company concluded that the trademark,

customer list and goodwill were not impaired during Fiscal 2018.

The Company performed

the annual goodwill impairment test for the year ended September 30, 2019 and determined no impairment.

During Fiscal 2020,

the Company experienced triggering events that prompted the testing of its goodwill for impairment.

Those triggering events included

the reduction in fair value of the IPS contingent earn-out consideration discussed in Note 6 and revised revenue and operational

projections for IPS for the later part of Fiscal 2020 and future periods.

Based on these factors, we concluded that it was more

likely than not that the fair value of the IPS reporting unit had declined below its carrying amount.

The Company then calculated

the fair value of this reporting unit using Level 3 inputs, which is a combination of asset-based, income and market approaches.

These estimates and assumptions included discount rate, terminal growth rate, selection of peer group companies and control premium

applied as well as forecasts of revenue growth rates, gross margins, operating margins, and working capital requirements.

in the judgments, estimates, or assumptions used could produce significantly different results.

We concluded the IPS reporting

unit’s fair value was below its carrying value by $1,015,000 and an impairment charge was recognized for this amount in Fiscal

The Company performed the annual goodwill impairment test for Fiscal 2019 and determined there was no impairment.

Below is the rollforward

of goodwill for the design segment, the only reportable segment with goodwill:

Design Segment

Balance at September 30, 2019

Acquisition of Kablooe

IPS goodwill impairment

Balance September 30, 2020

FORWARD INDUSTRIES, INC.

4 unchanged sentences

Property and equipment and related accumulated

depreciation and amortization are summarized by reporting segment in the table below:

Computer software and hardware

depreciation and amortization are summarized by reportable segment in the table below:

Computer software

Furniture and fixtures

Leasehold improvements

Property and equipment, cost

accumulated depreciation and amortization

Property and equipment, net

Depreciation expense was approximately

$149,000 and $114,000 for the fiscal years ended September 30, 2019 and 2018, respectively.

and equipment, net

Depreciation expense was $105,000 and $149,000

for Fiscal 2020 and Fiscal 2019, respectively.

VALUE MEASUREMENTS

We perform fair value

measurements in accordance with the guidance provided by ASC 820.

ASC 820 defines fair value as the price that would be received

from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement

When determining the fair value measurements for assets and liabilities required to be recorded at their fair values, we

consider the principal or most advantageous market in which we would transact and consider assumptions that market participants

would use when pricing the assets or liabilities, such as inherent risk, transfer restrictions, and risk of nonperformance.

ASC 820 establishes

a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs

when measuring fair value.

An asset’s or liability’s categorization within the fair value hierarchy is based upon

the lowest level of input that is significant to the fair value measurement.

ASC 820 establishes three levels of inputs that may

be used to measure fair value:

quoted prices in active markets for identical assets or liabilities;

inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets

for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active,

or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets

or liabilities;

unobservable inputs that are supported by little or no market activity and that are significant to the fair values

of the assets or liabilities.

short-term deferred cash consideration of $834,000 on our consolidated balance sheet includes a deferred cash component with a

present value of $484,000 and an earn-out consideration component with a fair value of $350,000 measured using the Black-Scholes

option pricing method, a Level 3 valuation technique.

The fair value of the earn-out consideration was deemed to be $350,000 at

September 30, 2019 based on the likelihood of IPS reaching the projected EBITDA milestones.

INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FAIR VALUE MEASUREMENTS (Continued)

following table presents the placement in the fair value hierarchy and summarizes the change in fair value of the earn-out consideration

for the years ended September 30, 2018 and 2019:

deferred consideration of $90,000 at September 30, 2020 represents the fair value of the contingent earnout consideration related

to the acquisition of Kablooe.

The current and non-current portions of this liability of $45,000 each are shown in the corresponding

categories on the consolidated balance sheet at September 30, 2020.

The deferred consideration of $834,000 on our consolidated

balance sheet at September 30, 2019 was the $484,000 present value of the deferred cash consideration related to the acquisition

of IPS and the $350,000 estimated fair value of the contingent earnout consideration related to the acquisition of IPS.

earnout consideration was adjusted down to $0 in Fiscal 2020 due to the low likelihood of IPS reaching the earnings targets outlined

in the Stock Purchase Agreement.

The following table presents the placement

in the fair value hierarchy and summarizes the change in fair value of the earn-out consideration for Fiscal 2020 and Fiscal 2019:

Fair value measurement at reporting date using

3 unchanged sentences

September 30, 2018

Fair Value at date of acquisition - January 18, 2018

Decrease in fair value of earn-out consideration

Increase in fair value of IPS deferred cash consideration

Increase in fair value of IPS earn-out consideration

September 30, 2019

Increase in fair value of earn-out consideration

Increase in fair value of IPS deferred cash consideration

Decrease in the fair value of IPS earnout consideration

Payout of IPS deferred cash consideration

Fair value of Kablooe contingent earnout consideration

September 30, 2020

fair value of the earn-out consideration will be measured on a recurring basis at each reporting date.

The following table provides

the unobservable inputs and assumptions used to measure the earn-out consideration at September 30, 2019:

Valuation technique

Unobservable Inputs

Earn-out consideration

Black-Scholes

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

fair value of the Kablooe contingent earn-out consideration will be measured on a recurring basis at each reporting date.

The following

inputs and assumptions were used in the Black-Scholes valuation model to estimate the fair value of the Kablooe earn-out consideration

at September 30, 2020:

Risk free interest rate

1 unchanged sentence

Dividend yield

INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FAIR VALUE MEASUREMENTS (Continued)

the year ended September 30, 2019, the Company and a customer entered into an agreement, whereby the Company received common stock

in the customer as compensation for product design services provided by the Company.

The shares represent approximately a less

than 2% ownership interest in the customer.

Pursuant to ASC 820, management has estimated the value of the common stock consideration

to be $326,941, based on a recent private placement round of common stock issued to third party private investors of the customer

for cash, and has recognized revenue and a cost method investment for that amount.

Management has determined that the inputs used

to value the common stock are observable, either directly or indirectly, and therefore classified as a Level 2 valuation.

to ASC 820, the transaction price of the cash financing round establishes the fair value of the Common Stock issued as consideration

unless one of the following conditions exists:

Fiscal 2019, the Company and a customer entered into an agreement, whereby the Company received common stock in the customer as

compensation for product design services provided by the Company.

The shares represent less than a 2% ownership interest in the

Pursuant to ASC 820, management estimated the initial fair value of the investment to be $327,000, based on a private

placement round of common stock issued to third party private investors of the customer at a time close to the valuation date.

Based on this valuation, the Company recognized revenue and a cost method investment for that amount in Fiscal 2019.

determined that the inputs used to value the investment are observable, either directly or indirectly, and therefore classified

as a Level 2 valuation.

Pursuant to ASC 820, the transaction price of the cash financing round establishes the fair value of the

common stock issued as consideration unless one of the following conditions exists:

The transaction is between related parties,

The transaction takes place under duress or the seller is forced to accept the price in the transaction,

The unit of account represented by the transaction price is different from the unit of account

for the asset or liability measured at fair value, or

The market in which the transaction takes place is different from the principal market (or most

advantageous market).

following table presents the placement in the fair value hierarchy and summarizes the establishment of fair value of the cost method

investment during the year ended September 30, 2019:

The unit of account represented by the transaction price is different from the unit of account for the asset or liability measured at fair value, or

The market in which the transaction takes place is different from the principal market (or most advantageous market).

On January 21, 2020,

the Company executed a non-negotiable promissory note with a principal amount of $1,626,000 with the same design segment customer

in which we are invested to recover accounts receivable which had been reserved as bad debt in Fiscal 2019.

Beginning on April

1, 2020, monthly interest and principal payments, based on a one-year amortization schedule, were due and payable in arrears on

the first day of the month until March 1, 2021.

Interest accrues at a rate of 8% per annum.

Since no payments were received through

June 30, 2020, the note receivable is fully reserved on the Company’s consolidated balance sheets.

In the fourth quarter

of Fiscal 2020, the Company received $134,000 from this customer, of which $61,000 was applied to past due interest and penalties

and recorded as interest income, and $73,000 was applied to principal and recorded as a recovery of bad debt expense as a reduction

of general and administrative expense.

During Fiscal 2020,

as a result of the customer’s default on the promissory note, the impact of COVID-19, and performance of the business in

which the Company is invested, including its inability to generate revenue, management concluded the investment was also impaired

and it recorded an impairment charge of $327,000 to fully reserve the investment on the Company’s consolidated balance sheet

at September 30, 2020.

The impairment charge is included in the general and administrative expenses of the consolidated statement

of operations.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

following table presents the placement in the fair value hierarchy and summarizes the change in fair value of the cost method investment

during Fiscal 2020 and Fiscal 2019:

Fair value measurement at reporting date using

3 unchanged sentences

September 30, 2019

Common stock - cost method investment

Impairment of cost method investment

September 30, 2020

The Company recorded a full provision of

outstanding receivables of $1.6 million in Fiscal 2019 for the same customer in which we hold the investment noted above.

does not believe the investment is impaired as a result of the full provision for outstanding receivables for this customer.

INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 ACCRUED

1 unchanged sentence

Accrued expenses and other current liabilities

by operating segment as of the fiscal years ended September 30, 2019 and 2018 are summarized in the table below:

Accrued bonuses and sales commissions

Accrued vacation

Accrued contract labor

Accrued legal fees

Accrued expenses and other current liabilities

by operating segment at September 30, 2020 and 2019 are as follows:

Paid time off

Other payroll related costs

NOTE 8 SHAREHOLDERS’

13 unchanged sentences

of a share of Series A Preferred Stock, subject to adjustment.

Initially, no

separate Rights certificates will be distributed and instead the Rights will attach to all certificates representing shares

of outstanding Common Stock.

Subject to certain exceptions specified in the Rights Agreement, the Rights will separate from

the Common Stock and become exercisable on the distribution date (the "Distribution Date"), which will occur on the

earlier of (i) the 10th business day (or such later date as may be determined by the Board) after the public announcement

that an Acquiring Person (as defined in the Rights Agreement) has acquired beneficial ownership of 20% or more of the Common

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Initially, no separate

Rights certificates will be distributed and instead the Rights will attach to all certificates representing shares of outstanding

Common Stock.

Subject to certain exceptions specified in the Rights Agreement, the Rights will separate from the Common Stock and

become exercisable on the distribution date (the "Distribution Date"), which will occur on the earlier of (i) the 10th

business day (or such later date as may be determined by the Board) after the public announcement that an Acquiring Person (as

defined in the Rights Agreement) has acquired beneficial ownership of 20% or more of the Common Stock then outstanding;

the 10th business day (or such later date as may be determined by the Board) after a person or group announces a tender or exchange

offer that would result in a person or group of affiliated and associated persons beneficially owning 20% or more of the Common

Stock then outstanding.

or (ii) the 10th business day (or such later date as may be determined by the Board) after a person

or group announces a tender or exchange offer that would result in a person or group of affiliated and associated persons

beneficially owning 20% or more of the Common Stock then outstanding.

“Blank Check”

10 unchanged sentences

30, 2020 and 2019.

INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SHAREHOLDERS’

EQUITY (Continued)

Effective January

22, 2018 through January 24, 2018, nine warrant holders exercised (via cashless exercises) an aggregate of 521,621 warrants with

an exercise price of $1.84 per share and were issued an aggregate of 223,704 shares of the Company's common stock.

Effective June 26,

2018, a warrant holder exercised (via a cashless exercise) 50,890 warrants with an exercise price of $1.84 per share and was issued

8,520 shares of the Company's common stock.

As of September 30,

At September 30, 2020,

the Company had 151,335 warrants outstanding and exercisable.

The warrants have exercise prices ranging from $1.75 to $1.84

per share and have a weighted average exercise price of $1.80 per share.

76,335 warrants have a remaining life of 3.87 years and

75,000 warrants have an expiration date 90 days after a registration statement registering common stock (other than pursuant to

an employee benefit plan) is declared effective by the SEC.

NOTE 9 SHARE-BASED

The warrants have exercise prices ranging from $1.75 to $1.84 per

share and have a weighted average exercise price of $1.80 per share.

At September 30, 2020, 76,335 of these warrants have a remaining

life of 3.3 years and 75,000 warrants have an expiration date 90 days after a registration statement registering common stock (other

than pursuant to an employee benefit plan) is declared effective by the Securities and Exchange Commission.

Other Activity

In Fiscal 2020, the

Company issued 300,000 shares of its common stock in connection with the Kablooe acquisition (see Note 3) and issued 50,000 shares

of its common stock pursuant to the exercise of stock options (see Note 9).

SHARE-BASED COMPENSATION

2011 Long Term Incentive Plan

9 unchanged sentences

The Compensation Committee administers the 2011 Plan.

Options generally expire ten

years after the date of grant.

The total shares of common stock available for grants of equity awards under the 2011 Plan was 730,972

as of September 30, 2019.

Options generally expire five

to ten years after the date of grant.

The total shares of common stock available for grants of equity awards under the 2011 Plan

was 291,000 as of September 30, 2020.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2007 Equity Incentive Plan

2 unchanged sentences

expired in accordance with its terms in May 2017.

However, there remained 67,500 shares associated with unexercised options as

of September 30, 2019.

However, there remain 2,500 shares associated with unexercised options as of

September 30, 2020.

The exercise price of stock options granted may not be less than the fair market value of the common stock

5 unchanged sentences

The fair value of

each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the following assumptions.

each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions in the

following table.

The expected term represents the period over which the stock option awards are expected to be outstanding.

The Company utilizes

the “simplified”

method to develop an estimate of the expected term of “plain vanilla”

employee option

The expected volatility used is based on the historical price of the Company’s stock over the most recent period

commensurate with the expected term of the award.

Company utilizes the simplified method to develop an estimate of the expected term of “plain vanilla”

option grants.

The expected volatility used is based on the historical price of the Company’s stock over the most recent period commensurate

with the expected term of the award.

The risk-free interest rate used is based on the implied yield of U.S.

zero-coupon issues with a remaining term equivalent to the award’s expected term.

The Company historically has not paid any

dividends on its common stock and had no intention to do so on the date the share-based awards were granted.

The estimated annual

forfeiture rate is based on management’s expectations and will reduce expense ratably over the vesting period.

The forfeiture

rate will be adjusted periodically based on the extent to which actual option forfeitures differ, or are expected to differ, from

the previous estimate, when it is material.

INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 SHARE-BASED COMPENSATION

Treasury zero-coupon

issues with a remaining term equivalent to the award’s expected term.

The Company historically has not paid any dividends

on its common stock and had no intention to do so on the date the share-based awards were granted.

The estimated annual forfeiture

rate is based on management’s expectations and will reduce expense ratably over the vesting period.

The forfeiture rate will

be adjusted periodically based on the extent to which actual option forfeitures differ, or are expected to differ, from the previous

estimate, when it is material.

In applying the Black-Scholes

option pricing model to options granted, the Company used the following assumptions:

For the Years Ended September 30,

Expected term (years)

3 unchanged sentences

Estimated annual forfeiture rate

5, 2019, the Company granted five-year options to directors to purchase an aggregate of 150,021 shares of common stock at an exercise

Fiscal 2020, the Company made the following option grants:

Options to non-employee directors to purchase an aggregate

of 248,019 shares of its common stock at an exercise price of $1.13 per share.

The options were granted in February 2020, vest

one year from the date of grant, expire five years from the date of grant and had an aggregate grant date fair value of $145,000,

which is being recognized ratably over the vesting period.

Options to its Chief Executive Officer to purchase 180,395 shares of its common stock at an exercise

price of $1.40 per share.

The shares vest one year from the grant date.

The options had an aggregate grant date fair value of $120,000,

which is being amortized over the vesting period of the options.

5, 2019, the Company granted five-year immediately vested options to directors to purchase an aggregate of 140,460 shares of common

stock at an exercise price of $1.54 per share.

The options had an aggregate grant date fair value of $107,800, which was recognized

On February 23, 2018,

the Company granted five-year options to employees to purchase an aggregate of 68,000 shares of common stock at an exercise price

of $1.67 per share.

The shares vest ratably over three years on the grant date anniversaries.

The options had an aggregate grant

date fair value of $77,128, which is being amortized over the vesting period of the options.

2018, the Company granted immediately vested ten-year options to purchase an aggregate of 40,816 shares of common stock to

two former directors and immediately vested five-year options to purchase 214,000 shares of common stock to a director, all

at an exercise price of $1.44 per share.

The options had an aggregate grant date fair value of $190,890, which was recognized

The options granted

during the years ended September 30, 2019 and 2018 had a weighted average grant date value of $0.78 and $0.83 per share, respectively.

The Company recognized

compensation expense of approximately $212,000 and $218,000 during the years ended September 30, 2019 and 2018, respectively, for

stock option awards in its consolidated statements of operations.

As of September 30,

2019, there was approximately $61,000 of unrecognized compensation cost related to nonvested stock option awards that is expected

to be recognized over a weighted average period of 0.6 years.

INDUSTRIES, INC.

These options were granted in September 2020, vested immediately, expire five years from the date of

grant and had an aggregate grant date fair value of $100,000, which was fully recognized on the date of grant.

Options to an employee to purchase 27,329 shares of its common stock at an exercise price of $1.42

These options were granted in August 2020, vest ratably over two years, expire five years from the date of grant and

had an aggregate grant date fair value of $20,000, which is being recognized ratably over the vesting period.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 SHARE-BASED COMPENSATION

In Fiscal 2019, the

Company made the following option grants:

Options to non-employee directors to purchase an aggregate of 150,021 shares of its common stock

at an exercise price of $1.54 per share.

The options were granted in February 2019, vested one year from the grant date, expire

five years from the date of grant and had an aggregate grant date fair value of $120,000, which is being amortized ratably over

the vesting period.

Options to non-employee directors to purchase an aggregate of 140,460 shares of common stock at

an exercise price of $1.54 per share.

The options were granted in February 2019, vested immediately, expire five years from the

date of grant and had an aggregate grant date fair value of $108,000, which was fully recognized on the date of grant.

granted during Fiscal 2020 and Fiscal 2019 had a weighted average grant date value of $0.58 and $0.78 per share, respectively.

The Company recognized compensation expense for stock option awards of $245,000 and $212,000 during Fiscal 2020 and Fiscal 2019,

respectively, in its consolidated statements of operations.

During Fiscal 2020,

the Company issued 50,000 shares of its common stock pursuant to the exercise of stock options at an exercise price of $0.64 per

share for aggregate cash proceeds of $32,000.

The intrinsic value of the options exercised was $33,000.

No options were exercised

in Fiscal 2019.

30, 2020, there was $75,000 of unrecognized compensation cost related to nonvested stock option awards that is expected to be recognized

over a weighted average period of 0.6 years.

The following table

summarizes stock option activity during the year ended September 30, 2019:

Number of Options

Weighted Average Exercise

Weighted Average Remaining Life

Intrinsic Value

summarizes stock option activity during Fiscal 2020:

Outstanding, September 30, 2019

1 unchanged sentence

Exercisable, September 30, 2020

The following table

provides additional information regarding stock option awards that were outstanding and exercisable at September 30, 2019:

Options outstanding

Options Exercisable

Remaining Life

$0.64 to $1.23

$1.44 to $1.67

$2.20 to $2.85

$3.73 to $3.79

Restricted Stock Awards

On January 18, 2018,

the Company granted 40,184 shares of restricted stock to two employees, of which 12,056 shares were forfeited upon an employee

resignation, pursuant to the 2011 Plan.

The shares vest as follows:

16,072 shares vested immediately, 12,056 shares vest on July

18, 2018 and 12,056 shares vest on January 18, 2019.

The awards had an aggregate grant date value of $49,828, which is being recognized

over the vesting period of the awards.

On April 25, 2018,

the Company granted 20,832 shares of immediately vested restricted stock to two former directors, pursuant to the 2011 Plan.

awards had an aggregate grant date value of $29,998, which was recognized immediately.

The Company recognized

compensation expense of approximately $3,000 and $72,000 during the years ended September 30, 2019 and 2018, respectively, for

restricted stock awards in its consolidated statements of operations.

As of September 30, 2019, there was no unrecognized compensation

expense related to nonvested restricted stock awards.

INDUSTRIES, INC.

at September 30, 2020 and September 30, 2019 have an exercise price between $0.64 and $3.73 per share.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 SHARE-BASED COMPENSATION

Restricted Stock Awards

The Company recognized

compensation expense of $0 and $3,000 during Fiscal 2020 and Fiscal 2019, respectively, for restricted stock awards in its consolidated

statements of operations.

At September 30, 2020, there was no unrecognized compensation expense related to nonvested restricted

stock awards.

NOTE 10 INCOME TAXES

The following table

summarizes restricted stock activity during the year ended September 30, 2019:

Non-vested, September 30, 2018

Non-vested, September 30, 2019

10 INCOME TAXES

The Company’s

provision (benefit) for income taxes consists of the following United States federal and state, and foreign components:

For the Fiscal Years Ended

September 30,

summarizes the Company’s consolidated provision/(benefit) for U.S.

federal, state and foreign taxes on income:

Change in valuation allowance

Income tax benefit

Income tax provision/(benefit)

FORWARD INDUSTRIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 of temporary differences, net operating loss carryforwards and changes in tax rates during the fiscal year.

The Company’s

deferred tax assets and liabilities are comprised of the following:

The deferred tax provision/(benefit)

is the change in the deferred tax assets and liabilities representing the tax consequences of changes in the amounts of temporary

differences, net operating loss carryforwards and changes in tax rates during the fiscal year.

The Company’s deferred tax

assets and liabilities are comprised of the following:

September 30,

3 unchanged sentences

Share-based compensation

Alternative minimum tax credit

Alternative minimum and other tax credits

Excess tax over book basis in inventory

Reserves and other

Reserves and other allowances

Deferred rent

2 unchanged sentences

Charitable contributions

Valuation allowance

Net deferred tax assets

Total deferred tax assets

Deferred tax liabilities

Prepaid insurance

Prepaid expenses

Intangible assets

481 Election (IPS)

Excess book over tax basis in fixed assets

For the fiscal years

ended September 30, 2019 and 2018, the Company recorded a provision for income taxes which includes a refund of $4,162 in the current

year, and a deferred tax benefit of $747,000 in the prior year.

The current year refund of $4,162 is related to a partial refund

of prior year AMT tax.

Total deferred tax liabilities

Valuation allowance

Net deferred tax assets

For Fiscal 2020

and Fiscal 2019, the Company recorded a provision for income taxes which includes net expense of $9,000 in Fiscal 2020, and a benefit

of $4,000 in Fiscal 2019.

The Fiscal 2020 net expense of $9,000 includes state income tax expenses of $13,000, partially offset

by a $4,000 refund of the remaining unused balance of alternative minimum tax (“AMT”) credits.

The $4,000 tax benefit

recorded in Fiscal 2019 related to a partial refund of AMT tax.

Under the Tax Cuts and Jobs Act of 2017, AMT was repealed.

tax code in turn provided for a refund of the tax credits that existed on December 31, 2017 at a 50% rate in tax years 2018, 2019

and 2020, with any remaining credits being fully refundable in 2021.

The CARES Act now allows corporations to immediately claim

unused AMT credits on their current year tax return.

State income tax expense is the result of taxable income in states where net

operating loss carryforwards (“NOLs”) are not available.

FORWARD INDUSTRIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 INCOME

TAXES (Continued)

At September 30, 2020,

2019, the Company had available net operating loss carryforwards (“NOLs”) for the U.S.

federal income tax purposes

of approximately $8,010,000.

NOLs generated prior to 2018 expire beginning in 2031.

NOLs generated after 2018 have an indefinite

carryforward period.

The net operating losses result in a deferred tax asset in respect of U.S.

federal taxes of approximately

In addition, at September 30, 2019, the Company had net operating losses available to carry forward for foreign income

tax purposes of approximately $3,815,000, resulting in a deferred tax asset of approximately $397,000, expiring through 2024.

The Company has capital loss carryovers of approximately $160,000 expiring through 2020, resulting in deferred tax assets in respect

federal and state income taxes of approximately $38,000.

Total net deferred tax assets, before valuation allowance, was

approximately $2,888,000 and $2,225,000 at September 30, 2019 and 2018, respectively.

Undistributed earnings of the Company's

foreign subsidiaries are considered to be permanently reinvested;

therefore, in accordance with accounting principles generally

accepted in the United States of America, no provision for U.S.

the Company had available net NOLs for U.S.

federal income tax purposes of $7,020,000.

NOLs generated prior to 2018 expire beginning

in 2031 while NOLs generated after 2018 have an indefinite carryforward period.

The NOLs result in a deferred tax asset with respect

federal income taxes of $1,700,000.

In addition, at September 30, 2020, the Company had available NOLs for foreign income

tax purposes of $610,000, resulting in a deferred tax asset of $114,000, expiring through 2024.

The Company has capital loss carryovers

of $160,000, which expired in Fiscal 2020, as no capital gain has been recognized to utilize this deferred tax asset.

deferred tax assets, before valuation allowance, were $1,887,000 and $2,666,000 at September 30, 2020 and 2019, respectively.

Undistributed

earnings of the Company's foreign subsidiaries are considered permanently reinvested;

therefore, in accordance with U.S.

no provision for U.S.

federal and state income taxes would result.

In the fiscal year

ended September 30, 2019, Forward Switzerland had a net loss of approximately $25,000, and Forward UK had a net loss of approximately

As of September 30, 2019, as part of its periodic evaluation of the necessity to maintain a valuation allowance against

its deferred tax assets, and after consideration of all factors, including, among others, projections of future taxable income,

current year net operating loss carryforward utilization and the extent of the Company's cumulative losses in recent years, the

Company determined that, on a more likely than not basis, it would not be able to use remaining deferred tax assets, except in

respect of the United States income taxes in the event the Company elects to effect repatriation of certain foreign source income

of its Swiss subsidiary, which income is currently considered to be permanently reinvested and for which no United States tax

liability has been accrued.

Accordingly, the Company has determined to maintain a full valuation allowance against its net deferred

As of September 30, 2019 and 2018, the valuation allowance was approximately $2,666,000 and $1,603,000, respectively.

In the future, the utilization of the Company's NOLs may be subject to certain change of control limitations.

If the Company determines

that it will be able to use some or all of its deferred tax assets in a future reporting period, the adjustment to reduce or eliminate

the valuation allowance would reduce its tax expense and increase after-tax income.

In Fiscal 2020, Forward Switzerland and Forward U.K.

income for tax purposes of $116,000 and $13,000, respectively.

At September 30, 2020,

as part of its periodic evaluation of the necessity to maintain a valuation allowance against its deferred tax assets, and after

consideration of all factors, including, among others, projections of future taxable income, current year NOL utilization and the

extent of the Company's cumulative losses in recent years, the Company determined that, on a more likely than not basis, it would

not be able to use remaining deferred tax assets, except with respect to the U.S.

federal income taxes in the event the Company

elects to effect repatriation of certain foreign source income of Forward Switzerland, which income is currently considered to

be permanently reinvested and for which no U.S.

tax liability has been accrued.

Accordingly, the Company has determined to maintain

a full valuation allowance against its net deferred tax assets.

At September 30, 2020 and 2019, the valuation allowance was $1,887,000

and $2,666,000, respectively.

In the future, the utilization of the Company's NOLs may be subject to certain change of control

If the Company determines that it will be able to use some or all of its deferred tax assets in a future reporting

period, the adjustment to reduce or eliminate the valuation allowance would reduce its income tax expense and increase after-tax

The significant elements

contributing to the difference between the United States federal statutory tax rate and the Company’s effective tax rate

are as follows:

For the Fiscal Years Ended

September 30,

US federal statutory rate

contributing to the difference between the U.S.

federal statutory tax rate and the Company’s effective tax rate are as follows:

federal statutory rate

State tax rate, net of federal benefit

Share-based compensation

Foreign rate differential

Change in tax credits

Effect of federal tax rate change

Effect of repatriating Swiss earnings

Effect of state tax rate change

Capital loss - expiration

Change in valuation allowance

Federal Alternative Minimum Taxes (AMT)

State income taxes

Permanent differences

Income tax benefit

As of September 30,

2019 and 2018, the Company has not accrued any interest and penalties related to uncertain tax positions.

Effective tax rate

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In November 2020,

the IRS issued Revenue Ruling 2020-27, providing its position regarding the deductibility for federal income tax purposes of otherwise

deductible expenses incurred when a taxpayer receives a PPP loan.

This ruling states the taxpayer may not deduct those expenses

in the taxable year in which the expenses were paid or incurred if the taxpayer reasonably expects to receive forgiveness of the

covered loan.

In accordance with this ruling, the Company has excluded these qualifying expenses from taxable income and recorded

this difference as a permanent item.

At September 30, 2020

and 2019, the Company has not accrued any interest or penalties related to uncertain tax positions.

It is the Company's policy

5 unchanged sentences

to federal and state examination.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 EARNINGS

(LOSS) PER SHARE

Basic earnings (loss)

per share data for each period presented is computed using the weighted average number of shares of common stock outstanding during

each such period.

Diluted earnings (loss) per share data is computed using the weighted average number of common and dilutive

common equivalent shares outstanding during each period.

Dilutive common-equivalent shares consist of (i) shares that would be

issued upon the exercise of stock options and warrants, computed using the treasury stock method, and (ii) shares of nonvested

restricted stock.

The Company calculated the potential diluted earnings per share in accordance with ASC 260, as follows:

For the Fiscal Years Ended

September 30,

Net income (loss) (numerator for basic and diluted earnings (loss) per share)

$ (3,604,030 )

Weighted average shares outstanding (denominator for basic earnings (loss) per share)

Effects of dilutive securities:

Assumed exercise of stock options, treasury stock method

Assumed vesting of restricted stock, treasury stock method

Dilutive potential common shares

Denominator for diluted earnings (loss) per share - weighted average

shares and assumed potential common shares

Basic earnings (loss) per share

Diluted earnings (loss) per share

The following securities

were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive:

As of September 30,

NOTE 11 LOSS PER

Basic loss per share

data for each period presented is computed using the weighted average number of shares of common stock outstanding during each

Diluted loss per share data is computed using the weighted average number of common and dilutive common equivalent

shares outstanding during each period.

Dilutive common-equivalent shares consist of shares that would be issued upon the exercise

of stock options and warrants, computed using the treasury stock method.

The following securities were excluded from the calculation

of diluted earnings per share because their inclusion would have been anti-dilutive:

Total potentially dilutive shares

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 COMMITMENTS

8 unchanged sentences

is required to pay to Dutch tax authorities on its behalf.

As of February 1,

In February 2010,

Forward Switzerland entered into a guarantee agreement with a Swiss bank relating to the repayment of any amount up to €75,000

(equal to approximately $82,000 as of September 30, 2019) paid by such bank to the logistics provider in order to satisfy such

undertaking pursuant to the bank letter of guarantee.

Forward Switzerland would be required to perform under the guarantee agreement

only in the event that (i) a value added tax liability is imposed on the Company's revenues in The Netherlands;

(ii) the logistics

provider asserts that it has been called upon in its capacity as surety by the Dutch Receiver of Taxes to pay such taxes;

Forward Switzerland or the Company on its behalf fails or refuses to remit the amount of value added tax due to the logistics

provider upon its demand;

(equal to approximately $88,000 at September 30, 2020) paid by such bank to the logistics provider in order to satisfy such undertaking

pursuant to the bank letter of guarantee.

Forward Switzerland would be required to perform under the guarantee agreement only in

the event that (i) a value added tax liability is imposed on the Company's revenues in The Netherlands;

(ii) the logistics provider

asserts that it has been called upon in its capacity as surety by the Dutch Receiver of Taxes to pay such taxes;

(iii) Forward

Switzerland or the Company on its behalf fails or refuses to remit the amount of value added tax due to the logistics provider

upon its demand;

and (iv) the logistics provider makes a drawing under the bank letter of guarantee.

Under the Representation

Agreement, Forward Switzerland agreed that the letter of guarantee would remain available for drawing for three years following

the date that its relationship terminates with the logistics provider to satisfy any value added tax liability arising prior to

expiration of the Representation Agreement but asserted by The Netherlands after expiration.

The initial term of

the bank letter of guarantee expired February 28, 2011, but renews automatically for one-year periods on February 28 of each subsequent

year unless Forward Switzerland provides the Swiss bank with written notice of termination at least 60 days prior to the renewal

It is the intent of Forward Switzerland and the logistics provider that the bank letter of guarantee amount be adjusted annually.

In consideration of the issuance of the letter of guarantee, Forward Switzerland has granted the Swiss bank a security interest

in all of its assets on deposit with, held by, or credited to Forward Switzerland’s accounts with, the Swiss bank (approximately

$650,000 at September 30, 2019).

As of September 30, 2019, the Company had not incurred a liability in connection with this guarantee.

Operating Lease Commitments

The Company leases

office space for its corporate headquarters in West Palm Beach, Florida under a 90-month agreement expiring in September 2020.

The operating lease granted six initial months of free rent and escalates at 3% per year.

The monthly rent payment is approximately

$7,700, which includes common area maintenance costs.

The Company leases

office space for its Distribution segment sales and administrative office in Cham, Switzerland on a month-to-month basis.

rent payment is $1,599 CHF, which is approximately $1,615.

IPS leases office

space in Hauppauge, New York under a noncancelable lease agreement expiring in February 2027.

The monthly rent payment is approximately

$29,000, which includes power utilities.

IPS leases office

space in Ronkonkoma, New York under a 3 year agreement expiring in January 2022.

The monthly rent payment is $4,400

Under the Representation Agreement,

Forward Switzerland agreed that the letter of guarantee would remain available for drawing for three years following the date that

its relationship terminates with the logistics provider to satisfy any value added tax liability arising prior to expiration of

the Representation Agreement but asserted by The Netherlands after expiration.

FORWARD INDUSTRIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 COMMITMENTS

AND CONTINGENCIES (Continued)

Capital Leases

The Company, specifically

IPS, leases computer equipment through various capital lease agreements expiring through January 2022.

The following is a summary

of computer equipment held under capital leases:

The initial term of

the bank letter of guarantee expired February 28, 2011, but it renews automatically for one-year periods on February 28 of each

subsequent year unless Forward Switzerland provides the Swiss bank with written notice of termination at least 60 days prior to

the renewal date.

It is the intent of Forward Switzerland and the logistics provider that the bank letter of guarantee amount be

adjusted annually.

In consideration of the issuance of the letter of guarantee, Forward Switzerland has granted the Swiss bank

a security interest in all of its assets on deposit with, held by, or credited to Forward Switzerland’s accounts with, the

Swiss bank (approximately $770,000 at September 30, 2020).

At September 30, 2020, the Company had not incurred a liability in connection

with this guarantee.

Legal Proceedings

On August 21, 2020,

IPS was named a third-party defendant in a patent dispute claim currently pending in the U.S.

District Court for the Eastern District

The complaint, which contains no specific amount of monetary damages, asserts that certain intellectual property was

misappropriated by IPS and one of its former employees.

IPS denies the allegations, believes the action is without merit

and intends to vigorously defend it.

The Company received permission from the District Court to file a motion to dismiss

the complaint and filed such motion on December 14, 2020.

From time to time,

the Company may become a party to other legal actions or proceedings in the ordinary course of its business.

At September 30, 2020,

there were no such actions or proceedings, either individually or in the aggregate, that, if decided adversely to its interests,

the Company believes would be material to its business.

NOTE 13 LEASES

On October 1, 2019, the Company adopted

the updated guidance on leases using the modified retrospective transition method.

Results for Fiscal 2020 are presented under

the updated guidance, while Fiscal 2019 is reported in accordance with historical lease accounting guidance.

The Company’s

operating leases are primarily for corporate, sales and administrative office space.

Total operating lease expense was $562,000

in Fiscal 2020 and total rent expense was $473,000 in Fiscal 2019.

These expenses are recorded in general and administrative expenses

on the consolidated statements of operations.

The Company leases

certain computer equipment through finance lease agreements expiring through July 2024.

Amortization expense related to assets

under finance leases was $42,000 for Fiscal 2020.

Interest expense related to assets under finance leases was $3,000 for Fiscal

The following is a summary of computer equipment held under capital leases:

September 30,

Computer equipment

Accumulated depreciation

Net book value

Future minimum payments under these capital

leases are as follows:

Year Ending September 30,

Total minimum lease payments

Total rent expense

for the years ended September 30, 2019 and 2018 amounted to approximately $473,000 and $342,000, respectively.

The following is

a schedule by years of future minimum rental payments required under operating leases that have initial or remaining noncancelable

lease terms in excess of one year as of September 30, 2019:

Fiscal Years Ended September 30,

Total lease commitments

FORWARD INDUSTRIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At September 30, 2020,

additional information related to operating and finance leases was as follows:

Weighted Average Remaining Lease Term:

Operating Leases

Finance Leases

Weighted Average Discount Rate:

Operating Leases

Finance Leases

Future minimum payments under non-cancellable

operating and finance leases are as follows:

Fiscal Years Ended September 30,

Operating Leases

Finance Leases

Total future minimum lease payments

Less imputed interest

NOTE 14 RELATED

1 unchanged sentence

Buying Agency and Supply Agreement

On September 9, 2015,

the Company entered into a Buying Agency and Supply Agreement (the “Supply Agreement”) with Forward Industries Asia-Pacific

Corporation, a British Virgin Islands corporation (“Forward China”).

The Supply Agreement, as amended, provides that,

The Company has a

Buying Agency and Supply Agreement (the “Supply Agreement”) with Forward China.

The Supply Agreement provides that,

upon the terms and subject to the conditions set forth therein, Forward China will act as the Company’s exclusive buying

3 unchanged sentences

of “Adjusted Gross Profit”, which is defined as the selling price less the cost from Forward China.

Terence Bernard

Wise, Chief Executive Officer and Chairman of the Company, is a principal of Forward China.

In addition, Jenny P.

Yu, a Managing

Director of Forward China, beneficially owns more than 5% of the Company’s shares of common stock.

The Company recognized

approximately $1,398,000 and $1,426,000 during the fiscal years ended September 30, 2019 and 2018, respectively, in service fees

paid to Forward China, which are included as a component of cost of goods sold in the accompanying consolidated statements of operations.

Effective October 22, 2019, the Company extended the term of the supply agreement to October 22, 2020 under the same terms, substantially.

The Supply Agreement

expires October 22, 2023.

Terence Wise, Chief Executive Officer and Chairman of the Company, is the owner of Forward China.

addition, Jenny P.

Yu, a Managing Director of Forward China, beneficially owns more than 5% of the Company’s common stock.

The Company recorded service fees to Forward China of $1,363,000 and $1,398,000 during Fiscal 2020 and Fiscal 2019, respectively,

which are included as a component of cost of sales when revenue is recognized on sales of the related products.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On August 14, 2018,

6 unchanged sentences

customer after deduction of direct costs.

No commissions have been received per agreement during Fiscal 2019 and 2018.

No commissions have been received per this agreement during Fiscal 2020 or Fiscal 2019.

At September 30, 2020,

the Company made $107,000 in prepayments to Forward China for inventory purchases, which is included in prepaid expenses and other

current assets on the consolidated balance sheet.

Promissory Note

On January 18, 2018,

the Company issued a $1.6 million promissory note payable to Forward China in order to fund the acquisition of IPS.

the Company issued a $1,600,000 promissory note payable to Forward China in order to fund the acquisition of IPS.

The promissory

note bears an interest rate of 8% per annum.

Monthly interest payments commenced on February 18, 2018.

The original maturity date

was January 18, 2019 and has been extended to January 17, 2020.

The maturity date of the note has been extended on several occasions

to assist the Company with liquidity.

The Company made approximately $128,000 and $85,000 in interest payments associated with

the note in Fiscal 2019 and Fiscal 2018, respectively.

note bears interest at a rate of 8% per annum and had an original maturity date of January 18, 2019.

Monthly interest payments

commenced on February 18, 2018.

The Company incurred and paid $128,000 in interest expense associated with this note in both Fiscal

2020 and Fiscal 2019.

At September 30, 2020, after being extended, the maturity date of this note was December 30, 2020.

date of the note has been extended on several occasions to assist the Company with liquidity.

In December 2020, the maturity date

of this note was extended to December 31, 2021.

Related Party Sales

During Fiscal 2019,

the Company’s design division provided services to a customer, Duality Advisers.

The Chief Operating and Financial Officer

and equity owner of Duality Advisers is an immediate family member of a director on the Company’s board and a member on the

Board’s Audit and Compensation committees.

The Company sold approximately $150,000 in design services to Duality Advisers

in Fiscal 2019.

At September 30, 2019, there was approximately $9,000 in accrued receivables for Duality Advisers.

LEGAL PROCEEDINGS

From time to time, the Company may become

a party to legal actions or proceedings in the ordinary course of its business.

As of September 30, 2019, there were no such actions

or proceedings, either individually or in the aggregate, that, if decided adversely to the Company’s interests, the Company

believes would be material to its business.

On February 13, 2019,

the SEC served certain of the Company’s executive officers and the custodian of records of the Company with subpoenas related

to its investigation on the trading in the Company’s securities surrounding the announcement of the acquisition of IPS.

Company has cooperated with the Staff’s requests and as recently as October 24, 2019 provided the Staff with requested documents.

December 18, 2019, the Company received communication from the SEC and the Staff informed us that the investigation has concluded.

The Company is anticipating a letter from the SEC formalizing the conclusion of the investigation.

the Company’s design division provided services to a customer whose Chief Operating and Financial Officer and equity owner

is an immediate family member of a director on the Company’s Board of Directors and a member on the Board’s Audit and

Compensation committees.

The Company sold design services to this customer of $44,000 and $150,000 in Fiscal 2020 and Fiscal 2019,

respectively.

At September 30, 2020 and 2019, respectively, there was $0 and $9,000 in outstanding receivables from this customer.

NOTE 15 401(k)

The Company maintains

a 401(k) benefit plan allowing eligible employees to make pre-tax contributions of a portion of their salary in amounts subject

to IRS limitations.

The Company made matching contributions of $269,000 and $226,000 during Fiscal 2020 and Fiscal 2019, respectively,

which vested immediately and are reflected in the accompanying consolidated statements of operations as a components of cost of

sales and general and administrative expenses.

NOTE 16 SEGMENT

AND GEOGRAPHIC INFORMATION

The Company has two

reportable segments:

distribution and design.

See Note 1 for more information on the composition of our reportable segments.

distribution segment sources and distributes carrying cases and other accessories for medical monitoring and diagnostic kits and

a variety of other portable electronic and non-electronic devices.

This segment operates in the EMEA Region, the Americas and the

Geographic regions are defined by reference primarily to the location of the customer or its contract manufacturer.

The design segment provides a full spectrum of hardware and software product design and engineering services.

This segment operates

predominantly in the Americas region.

FORWARD INDUSTRIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15 401(K)

The Company maintains

a 401(k) benefit plan allowing eligible United States-based employees to contribute a portion of their salary in an amount up to

the annual maximum amounts as set periodically by the Internal Revenue Service.

In accordance with applicable Safe Harbor provisions,

the Company made matching contributions of approximately $226,000 and $126,000 during the fiscal years ended September 30, 2019

and 2018, respectively, which are reflected in the accompanying consolidated statements of operations.

The Company’s contributions

vest immediately.

NOTE 16 OPERATING

SEGMENT INFORMATION

The Company, post

IPS acquisition, conducts its business through two operating segments, which are also its reportable segments:

Distribution and

The Distribution segment

sources and distributes carry and protective product solutions, primarily for hand held electronic devices.

Products sourced by

this segment 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 the EMEA Region, the Americas and the APAC Region.

Geographic regions are defined by reference primarily to

the location of the customer or its contract manufacturer.

The Design segment

provides a full spectrum of hardware and software product design and engineering services.

This segment operates predominantly

in the Americas region.

It should be noted that financial performance and results of operations in the design segment for the

fiscal year ended September 30, 2018 covers the period following the closing of the acquisition of IPS on January 18, 2018 through

fiscal year end on September 30, 2018.

Segment operating income (loss) and net

income (loss) before taxes for the years ended September 30, 2019 and 2018 are shown in table below:

For the Year Ended September 30,

Total revenue

Segment operating loss and net loss before

income taxes are shown in table below:

Revenues, net

Total revenues, net

Cost of sales

Total cost of sales

Segment operating income (loss)

Loss from operations

$ (1,604,000 )

Total income (loss) from operations

$ (1,377,000 )

Other income (expenses)

Total other income (expense)

Income (loss) before income taxes

Total loss from operations

$ (1,982,000 )

Total income (loss) before income taxes

$ (3,097,000 )

Other (income)/expense, net

Total other (income)/expense, net

Loss before income taxes

$ (1,402,000 )

$ (1,815,000 )

Total loss before income taxes

$ (1,766,000 )

$ (3,608,000 )

Segment assets are shown in the table below:

September 30,

FORWARD INDUSTRIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 OPERATING

SEGMENT INFORMATION (Continued)

Revenues from External Customers

The following table

sets forth our consolidated net revenues by geographic region for the fiscal years ended September 30, 2019 and 2018.

All of design

segment customer revenues are classified under the United States within the Americas region:

(dollars in thousands)

For the Fiscal Years Ended

September 30,

sets forth our consolidated net revenues by geographic region for Fiscal 2020 and Fiscal 2019.

All of the design segment customer

revenues are classified under the United States within the Americas region:

Great Britain

Total EMEA Region

3 unchanged sentences

Total Net Revenues

[1] Includes $15.421 million of revenue attributed to IPS whose customers reside in the United States

Includes $13,726,000 and $15,421,000 of revenue in Fiscal 2020 and Fiscal 2019,

respectively, attributed to the design segment whose customers reside in the United States.

FORWARD INDUSTRIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 OPERATING

SEGMENT INFORMATION (Continued)

Major Customers and Concentrations by Geographic Region

Distribution Segment

In Fiscal 2020 and

Fiscal 2019, the Company had significant customers whose individual percentage of the Company’s total revenues was 10% or

The risk of collecting accounts receivable from all customers is enhanced as a result of the economic impact of the COVID-19

The concentrations of revenues and accounts receivable for each operating segment are detailed below.

Distribution Segment Revenues Concentration

The following customers

or their affiliates or contract manufacturers accounted for more than 10% of the distribution segment’s net revenues, by

geographic region, and in segment total for the fiscal years ended September 30, 2019 and 2018.

For the Fiscal Year Ended September 30, 2019

Diabetic Products Customer A

Diabetic Products Customer B

Diabetic Products Customer C

Diabetic Products Customer D

For the Fiscal Year Ended September 30, 2018

Diabetic Products Customer A

Diabetic Products Customer B

Diabetic Products Customer C

Diabetic Products Customer D

Four customers (including

their affiliates or contract manufacturers) accounted for approximately 90% and 86% of the Company's distribution segment accounts

receivable at September 30, 2019 and 2018, respectively.

Design Segment

geographic region, and in segment total for Fiscal 2020 and Fiscal 2019:

Design Segment Revenues Concentration

All of our design

segment customers operate in the United States.

Four customers accounted for approximately

67% of the Company’s design segment accounts receivable at September 30, 2018.

Two customers accounted for approximately

63% of the Company’s design segment accounts receivable at September 30, 2019.

The following customers accounted for more than 10% of the design segment’s

net revenues for Fiscal 2020 and Fiscal 2019:

FORWARD INDUSTRIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 OPERATING

SEGMENT INFORMATION (Continued)

The following table presents total assets

by operating segment for the years ended September 30, 2019 and 2018:

Distribution Segment Accounts Receivable Concentration

At September 30, 2020 and 2019, concentrations

of accounts receivable with significant customers representing 10% or more of distribution segment accounts receivable were as

September 30,

Design Segment Accounts Receivable Concentration

At September 30,

2020 and 2019, concentrations of accounts receivable with significant customers representing 10% or greater of design segment

accounts receivable were as follows:

September 30,

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Long-Lived Assets

2 unchanged sentences

and amortization.

All of the Company’s long-lived assets are geographically located in the United States or Americas region.

All of the Company’s long-lived assets are geographically located in the Americas region.

See table below:

5 unchanged sentences

September 30,

Total liabilities

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 OPERATING

SEGMENT INFORMATION (Continued)

Supplier Concentration

6 unchanged sentences

for design service projects.

All of the design segment

vendors are located in the United States.

NOTE 17 LINE OF CREDIT

Vendors are from the United

The Company, specifically

IPS, has a $1,300,000 revolving line of credit with TD Bank which renews at the discretion of the lender on April 30, 2019.

line of credit was amended and modified on September 28, 2018 to extend the line of credit limit from $1,000,000 to $1,300,000

and was also undersigned by Forward Industries, Inc.

as the guarantor and is secured by all of IPS’

IPS, has a $1,300,000 revolving line of credit which was renewed at the discretion of the lender on August 5, 2020.

credit has a maturity date of May 31, 2021, is guaranteed by the Company and is secured by all of IPS’

rate on the line of credit is 0.75% above The Wall Street Journal prime rate.

The effective interest rate at September 30,

As of September 30, 2019, the Company had $0 available under the line of credit.

The Company is subject to certain debt-service

ratio requirements which are measured annually.

As of September 30, 2019 the Company was in violation of the required debt-service

ratio covenants.

The Company was granted a waiver of the violation from the lender.

However, there is a potential risk that the

lender may demand payment in full upon default.

As part of the acquisition

of IPS, which was completed on January 18, 2018, the Company assumed the debt of the following:

On January 8, 2014,

2020 and 2019 was 4.0% and 5.75%, respectively.

As of September 30, 2020, the Company had $300,000 available under the line of

The Company is subject to certain debt-service ratio requirements which are measured annually.

At September 30, 2020 and

2019 the Company was in violation of the required debt-service ratio covenants but was granted a waiver of the violation from the

lender in both years.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On April 18, 2020,

the Company entered into a loan in an aggregate principal amount of $1,357,000 under the Paycheck Protection Program (the “PPP

Loan”) pursuant to the recently enacted U.S.

Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).

The loan matures on April 18, 2022 and bears an interest rate of 1.00% per annum.

The Company was originally scheduled to pay monthly

principal and interest payments on the outstanding principal balance of this loan beginning November 18, 2020 until maturity when

the entire principal balance remaining unpaid, along with all accrued and unpaid interest, was to be due and payable in full.

loan is unsecured, and subject to forgiveness in accordance with the terms of the CARES Act.

We have accounted for these proceeds

as a loan and the current and long-term portions of $827,000 and $530,000, respectively, are included in the corresponding categories

of notes payable on the consolidated balance sheets.

In October 2020, the Company filed for forgiveness of this loan and in December,

the Small Business Administration approved our forgiveness request for this loan.

In connection with

the acquisition of Kablooe, the Company assumed a loan payable with a principal amount of $170,000.

The loan matures in August

2021, bears interest at a rate of 6.0% per annum and is secured by all of Kablooe’s assets.

Interest and principal payments

of $15,000 are payable monthly until maturity.

The outstanding balance at September 30, 2020 was $156,000.

On April 1, 2016,

IPS entered into a term loan with a lender in the amount of $325,000.

The loan matured on January 8, 2019 and bore interest at

a rate of 4.230% per annum.

Interest and principal of $18,546 was paid on a monthly basis through maturity.

The loan matured on April 1, 2020 and bore interest at a

rate of 4.215% per annum.

Interest and principal of $7,378 were paid on a monthly basis through maturity.

This loan was secured

1 unchanged sentence

assets and was guaranteed by the Company.

Outstanding balance was $0 and $73,528 as of September 30, 2019

and 2018, respectively.

On April 1, 2016,

IPS entered into a term loan with a lender in the amount of $325,000.

The loan matures on April 1, 2020 and bears interest at a

rate of 4.215% per annum.

Interest and principal of $7,378 is paid on a monthly basis through maturity.

This loan is secured by

all of the IPS’

assets and is guaranteed by the Company.

Outstanding balance as of September 30, 2018 and 2019 was $51,688

and $135,389, respectively.

As of September 30, 2019 the Company was in violation of the required debt-service ratio covenants.

The Company was granted a waiver of the violation from the lender.

However, there is a potential risk that the lender may demand

payment in full upon default.

On October 19, 2016,

IPS entered into two term loans with a lender in the amount of $100,000 and $50,000 with the first three monthly payments being

interest only.

The loans were scheduled to mature on January 19, 2019 and bore an interest rate of 12% per annum.

The loans were

The loan balances of approximately $61,000 and $31,000 were paid off immediately after acquisition.

The outstanding balance at September 30, 2020 and 2019 was $0 and

$52,000, respectively.

On December 11, 2017,

IPS entered into an installment payment financing arrangement with a lender in the amount of approximately $23,000.

IPS makes monthly

payments of $1,035, which includes an implied interest rate of 9.5%, for 24 months.

The last payment is scheduled to be made in

December 2019.

The loan balance was approximately $3,000 and $16,000 at September 30, 2019 and 2018, respectively.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18 DEBT (Continued)

IPS entered into an installment payment financing arrangement with a lender in the amount of $23,000.

IPS made monthly payments

of $1,035, which includes an implied interest rate of 9.5%, for 24 months.

The last payment was made in December 2019.

balance was $0 and $3,000 at September 30, 2020 and 2019, respectively.

Future minimum principal

payment requirements under the working capital term loan agreements in each of the years subsequent to September 30, 2019 are

NOTE 19 MOONI AGREEMENT

payment requirements on our notes payable (including the PPP loan) are as follows:

NOTE 19 MOONI

On January 29, 2019,

the Company entered into a three-year Distribution Agreement (the “Agreement”) with Mooni International AB and its

owner, Staffan Bern (the “Owner”).

In accordance with the Agreement, the Company:

(i) was appointed as the exclusive

distributor of Mooni's current and future products (including future products developed or offered by Mooni and/or the Owner) in

North America, (ii) subject to certain repayment requirements, the Company paid $400,000 to Mooni, and (iii) was granted an option

to purchase a controlling interest of Mooni at a valuation not to exceed $5 million which, if exercised, would be effective on

the 12 month anniversary of the effective date of the Agreement.

Additionally, Forward China, a company owned by Terence Wise,

the Company's Chairman and Chief Executive Officer, was named the designated supplier under the Agreement.

As of September 30,

2019, the unamortized fee of approximately $311,000 is included in the prepaid and other current assets and other assets for the

short-term and long-term components, respectively, in the accompanying consolidated balance sheet.

Amortization of the cost for

Fiscal 2019 of approximately $89,000 is included in the Sales and Marketing expenses in the accompanying consolidated statement

of operations.

(i) was appointed as the exclusive distributor of Mooni's current and future

products (including future products developed or offered by Mooni and/or the owner) in North America, (ii) subject to certain repayment

requirements, the Company paid $400,000 to Mooni, and (iii) was granted an option to purchase a controlling interest of Mooni at

a valuation not to exceed $5 million which, if exercised, would be effective on the 12 month anniversary of the effective date

of the Agreement.

This option was not exercised and therefore expired.

The Company generated $263,000 of revenue from this agreement

in Fiscal 2020.

Additionally, Forward China, a company owned by Terence Wise, the Company's Chairman and Chief Executive Officer,

was named the designated supplier under the Agreement.

The current and long-term portions of the unamortized fee of $133,000 and

$45,000, respectively, at September 30, 2020 and $133,000 and $178,000, respectively, at September 30, 2019, are included in prepaid

and other current assets and other assets, respectively, in the accompanying consolidated balance sheets.

Amortization of the cost

for Fiscal 2020 and Fiscal 2019 of $133,000 and $89,000, respectively, is included in sales and marketing expenses in the accompanying

consolidated statements of operations.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures