What changed in this filing

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Item 1. Financial Statements

2021-02-12 compared with 2020-08-14 · 723 added, 1128 removed, 338 unchanged (85% of the section changed)

FINANCIAL STATEMENTS

FORWARD INDUSTRIES, INC.

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Accounts receivable, net

Prepaid expenses and other

current assets

Prepaid expenses and other current assets

Total current assets

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Line of credit

Note payable to Forward China

Accounts payable

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Current portion of notes payable

Current portion of capital leases payable

Deferred consideration

Current portion of finance lease liability

Current portion of deferred consideration

Current portion of operating lease liability

Accrued expenses and other

current liabilities

Accrued expenses and other current liabilities

Total current liabilities

Other liabilities:

Capital leases payable, less current portion

Deferred rent

Notes payable, less current portion

Operating lease liability, less current portion

Notes payable, less current

Finance lease liability, less current portion

Deferred consideration, less current portion

Total other liabilities

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40,000,000 shares authorized;

9,583,851 and 9,533,851 shares issued and outstanding at June 30, 2020 and September 30, 2019, respectively

9,886,351 and 9,883,851

shares issued and outstanding at December 31, 2020 and September 30, 2020, respectively

Additional paid-in capital

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Total shareholders' equity

Total liabilities and

shareholders' equity

Total liabilities and shareholders' equity

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

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AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended

For the Nine Months Ended

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended December 31,

Revenues, net

Cost of sales

Sales and marketing

General and administrative

Goodwill impairment

Sales and marketing expenses

General and administrative expenses

Loss from operations

Gain on forgiveness of note payable

Fair value adjustment of earn-out consideration

Fair value adjustment of deferred cash consideration

Interest income

Interest expense

Other expense, net

$ (1,668,473 )

$ (1,765,494 )

Net loss per share:

Other (income)/expense, net

Income/(loss) before income taxes

Provision for/(benefit from) income taxes

Net income/(loss)

Earnings/(loss) per share:

Weighted average common shares outstanding:

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CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Balance - September 30, 2019

$ (11,320,169 )

Share-based compensation

Balance - December 31, 2019

(11,401,826 )

Share-based compensation

Balance - March 31, 2020

For the Three Month Ended December 31, 2020

Balance at September 30, 2020

$ (13,095,450 )

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Stock options exercised

Balance - June 30, 2020

Balance at December 31, 2020

$ (11,896,414 )

Balance - September 30, 2018

For the Three Months Ended December 31, 2019

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

Balance at December 31, 2019

$ (11,401,826 )

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended

For the Three Months Ended

Operating Activities:

$ (1,668,473 )

$ (1,765,494 )

Adjustments to reconcile net loss to net cash used in operating activities:

Net income/(loss)

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

Share-based compensation

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Bad debt expense/(recovery)

Deferred rent

Gain on forgiveness of note payable

Change in fair value of earn-out consideration

Change in fair value of deferred cash consideration

Goodwill impairment

Fair value of cost method investment for services provided

Impairment of investment

Changes in operating assets and liabilities:

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Financing Activities:

Proceeds from line of credit borrowings

Repayment of line of credit borrowings

Repayment of notes payable

Proceeds from PPP loan

Cash proceeds from stock options exercised

Repayments of capital leases

Proceeds from stock options exercised

Repayments of finance leases

Payment of deferred cash consideration

Net cash provided by financing activities

Net cash used in financing activities

Net decrease in cash

Cash at beginning of period

Cash at end of period

Cash at beginning of year

Cash at end of year

Supplemental Disclosures of Cash Flow Information:

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Supplemental Disclosures of Non-Cash Information:

ROU assets from the adoption of ASC 842

Lease liabilities arising from obtaining ROU assets

Lease assets recorded upon adoption of ASC 842

Lease liabilities recorded upon adoption of ASC 842

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Forward Industries,

NOTE 1 OVERVIEW

Industries, Inc.

(“Forward”, “we”

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,

(“IPS”), 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

(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 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”).

or the “Company”) is a fully integrated design,

development and manufacturing solution provider for top tier medical and technology customers worldwide.

As a result of the

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

continued expansion of our design development capabilities through our wholly-owned subsidiaries, we are now able to

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

outside the Company.

Impact of COVID-19

The outbreak of

the COVID-19 virus impacted our results of operations.

While the most significant impact was realized in Fiscal 2020, the

virus had a less significant effect on our results of operations for the first quarter of Fiscal 2021.

The 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.

Additionally, demand for our design and development

services was reduced or delayed in response to the pandemic.

While revenues for the three months ended December 31, 2020

increased as compared to the three months ended December 31, 2019, they were lower than anticipated due to the impact of

COVID-19 and the resulting economic conditions.

The impact of lower than anticipated 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.

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.

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 may or may not require our services.

The long-term financial impact on our business cannot be reasonably estimated at

As a result, the effects of COVID-19 may not be fully reflected in our financial results until future periods.

Refer to “Part II, Item 1A —

Risk Factors”

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

Until a vaccine and

treatment are widely available, we expect business conditions to remain challenging.

In response to these challenges, we

will continue to focus on those factors that we can control:

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

and pursuing further improvements in the productivity and effectiveness of our development, selling and administrative activities.

NOTE 2 ACCOUNTING

Basis of Presentation

The accompanying

condensed consolidated financial statements include the accounts of Forward Industries, Inc.

and all of its subsidiaries:

Forward Industries (IN), Inc.

(“Forward US”), Forward Industries (Switzerland) GmbH (“Forward

Switzerland”), Forward Industries UK Limited (“Forward UK”), Intelligent Product Solutions, Inc.

(“IPS”) and Kablooe, Inc.

(“Kablooe”).

The terms “Forward”, “we”

“Company”

as used throughout this document are used to indicate Forward Industries, Inc.

and all of its

subsidiaries.

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

FORWARD INDUSTRIES,

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The acquisition

of Kablooe took place in August 2020 and its results of operations have been included in our condensed consolidated financial

statements since the acquisition date.

Accordingly, our results of operations for the three months ended December 31, 2020

include Kablooe’s results of operations, while our results of operations for the three months ended December 31, 2019

Key terms of the acquisition are contained in our Form 10-K filed with the Securities and Exchange Commission on

December 17, 2020.

In the opinion of

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Certain dollar amounts and percentages have been rounded to their approximate value.

Impact of COVID-19

In December 2019,

a novel strain of coronavirus known as COVID-19 was reported to have surfaced in China, and by March 2020 the spread of the virus

had resulted in a worldwide pandemic.

To date, the pandemic has surfaced in nearly all regions around the world and resulted in

business slowdowns and shutdowns, as well as global travel restrictions and government mandated stay at home orders.

These restrictions

have required substantially all our employees to work from home for most of the three months ended June 30, 2020 (the “2020

Quarter”).

Employees are starting to return to the office in August of 2020 with minimal operational challenges.

COVID-19 pandemic had a minimal impact on our financial results in the second quarter of fiscal 2020, the impact during the 2020

Quarter was somewhat more significant.

Business shutdowns have 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 revenues in the

2020 Quarter to be less than anticipated.

Additionally, our design segment reported lower revenues as demand for its design and

development services were reduced or delayed.

The impact from lower revenue was partially offset by a reduction from the second

quarter of fiscal 2020 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 equipment.

The pandemic had temporarily

impacted our liquidity in the 2020 Quarter, as collection of accounts receivable were somewhat delayed in the early part of the

2020 Quarter.

The Company received funding under the Paycheck Protection Program in the amount of $1,357,000 (see Note 12).

FORWARD INDUSTRIES,

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

While the economy

has started to open in certain jurisdictions, the future impacts of the pandemic and any resulting economic impact are largely

unknown and could be significant.

It is possible that the COVID-19 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 II, Item 1A —

Risk Factors”

in this Quarterly Report for a description of the material risks that

the Company currently faces in connection with COVID-19.

The impact of the COVID-19 pandemic may also exacerbate other risks discussed

in “Part I, Item 1A —

Risk Factors”

included in the Company’s Annual Report for the year ended September

As a result of revenue

and earnings shortfalls for the 2020 Quarter, due in part to the impact of COVID-19 and the related future uncertainty, in the

second quarter of fiscal 2020, the Company revised the outlook for the design reporting unit for the remainder of the year and

its long-term outlook.

This new outlook has impacted the Company’s carrying value of goodwill (see Note 4).

ahead to the remainder of 2020, our visibility is limited due to the uncertainty surrounding the duration and ultimate impact of

COVID-19 and the mitigation measures that are implemented by governmental authorities.

We also expect business conditions to remain

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

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.

ACCOUNTING POLICIES

For the three months

ended December 31, 2020, the Company generated net income of $1,199,000, and used $511,000 of cash flow in operating activities.

The Company has an accumulated deficit of $11,896,000 at December 31, 2020.

We believe our existing cash balance and working capital

will be sufficient to meet our liquidity needs at least through February 28, 2022.

Accounting Estimates

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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 condensed 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 condensed 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 condensed consolidated financial statements.

Basis of Presentation

The accompanying condensed

consolidated financial statements include the accounts of Forward Industries, Inc.

and its wholly owned subsidiaries:

Forward Industries

(IN), Inc., (“Forward US”), Forward Industries (Switzerland) GmbH, (“Forward Switzerland”), Forward Industries

UK Limited, (“Forward UK”) and IPS.

All significant intercompany transactions and balances have been eliminated in

consolidation.

Intercompany revenues of $17,000 and $44,000, respectively, for the three and nine months ended June 30, 2020 and

$9,000 and $215,000, respectively, for the three and nine months ended June 30, 2019, related to design and marketing work performed

by IPS for Forward US have been eliminated in consolidation.

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, i.e., transfer of control);

(ii) there are no other deliverables or performance obligations;

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

title to 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 condensed consolidated

balance sheets.

The distribution segment had no contract liabilities at December 31, 2020.

Contract liabilities at September 30,

2020 were $75,000 for the distribution segment.

Design Segment

The Company applies

the “cost to cost”

and “right to invoice”

methods of revenue recognition to the contracts with customers

in the design segment.

The design segment typically engages in two types of contracts:

(i) time and material and (ii) fixed price

The Company recognizes revenue over time on its time and material contracts utilizing a “right to invoice”

Revenues from fixed price 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, or the “cost

to cost”

Revenues from fixed price contracts that contain specific deliverables are recognized when the performance

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

FORWARD INDUSTRIES,

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the nine months

ended June 30, 2020, the Company incurred a net loss of $1,668,000, and used $760,000 of cash flow in operating activities.

Company has an accumulated deficit of $12,989,000 at June 30, 2020.

We believe our existing cash balance and working capital will

be sufficient to meet our liquidity needs at least through September 30, 2021.

Segment Reporting

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

As a result of the acquisition of IPS in January 2018, management conducts business

through two distinct operating segments, which are also our reportable segments:

distribution and

Forward US, Forward Switzerland and Forward UK comprise the distribution operating segment and IPS is the

design operating segment.

Organizing our business

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

Our management team regularly reviews

operating segment revenue and profitability when assessing financial results of operating segments and allocating resources.

We measure the performance

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

Segment operating income or loss includes

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

administrative expenses.

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 management

performs our annual goodwill impairment test on September 30, the end of the fiscal year, or upon the occurrence of a triggering

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 goodwill.

Recognized revenues

that will not be billed until a later date, or contract assets, are recorded as an asset and classified as a component of accounts

receivable in the accompanying condensed consolidated balance sheets.

Contract assets at December 31, 2020 and September 30, 2020

were $805,000 and $649,000, 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 condensed consolidated balance

Contract liabilities at December 31, 2020 and September 30, 2020 were $170,000 and $410,000, respectively, for the design

Goodwill represents

the future economic benefits of assets acquired in a business combination that are not individually identified or separately recognized.

The Company’s goodwill resulted from its acquisitions of IPS in January 2018 and Kablooe in August 2020.

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 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.

During the three months ended March 31, 2020, the Company

recorded an impairment charge related to goodwill (see Note 4).

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.

Based on management’s evaluation, there were no impairments to

goodwill at September 30, 2020 and there were no triggering events leading to an interim impairment analysis at December 31, 2020.

Intangible Assets

Intangible assets

include trademark and customer relationships, which were acquired as part of the acquisition of IPS in January 2018 and are recorded

based on their estimated fair value determined in conjunction with the purchase price allocation.

The intangible assets are amortized

over their estimated useful lives, which are periodically evaluated for reasonableness.

FORWARD INDUSTRIES,

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

include trademarks and customer relationships, which resulted from the acquisitions of IPS in Fiscal 2018 and Kablooe in Fiscal

2020 and are recorded based on their estimated fair value determined in conjunction with the purchase price allocations.

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 the magnitude of any such charge.

Fair value estimates

are made at a specific point in time, based on relevant information.

These estimates and assumptions could have a

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

Fair value estimates are

made at a specific point in time, based on relevant information.

These estimates are subjective in nature and involve uncertainties

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Management evaluated and concluded that there were no impairments of intangible assets

at June 30, 2020.

at December 31, 2020.

FORWARD INDUSTRIES,

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company recognizes

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benefits is more likely than not.

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

against all net deferred tax assets as it is not probable that such deferred tax assets will be realized.

Accordingly, any deferred

tax provision or benefit was offset by an equal and opposite change to the valuation allowance.

No current book income tax provision

was recorded against book net income due to the existence of significant net operating loss carryforwards.

Revenue Recognition

Distribution Segment

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 condensed consolidated balance

At June 30, 2020 and September 30, 2019, there were no contract liabilities relating to the distribution segment.

Design Segment

Under ASC 606, the

Company applies the “cost to cost”

and “right to invoice”

methods of revenue recognition to the contracts

with customers in the design segment.

The design segment typically engages in two types of contracts:

(i) time and material and

(ii) fixed price contracts.

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

to invoice”

Revenues from fixed price 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, or the “cost to cost”

Revenues from fixed price contracts that contain specific deliverables are

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

Recognized revenues

that will not be billed until a later date, or contract assets, are recorded as an asset and classified as a component of accounts

receivable in the accompanying condensed consolidated balance sheets.

Contract assets at June 30, 2020 and September 30, 2019 were

$899,000 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 condensed consolidated balance

Contract liabilities at June 30, 2020 and September 30, 2019 were $526,000 and $220,000, respectively.

At December 31, 2020, there was no change to our assessment that a full valuation allowance was

required against all net deferred tax assets as it is not probable that such deferred tax assets will be realized.

any deferred tax provision or benefit was offset by an equal and opposite change to the valuation allowance.

No current book income

tax provision was recorded against book net income due to the existence of significant net operating loss carryforwards.

During the three

months ended December 31, 2020, the Company’s application for forgiveness of debt was submitted and approved for their

loan received as part of the Payroll Protection Program (“PPP loan”) pursuant to the U.S.

Coronavirus Aid,

Relief, and Economic Security Act (“CARES Act”).

The aggregate loan principal amount forgiven was $1,357,000.

total amount forgiven will not be recognized as taxable income pursuant to the CARES Act.

Pursuant to the Consolidated

Appropriations Act, 2021, which was enacted by Congress and signed into law by the President on December 27, 2020, all

expenses utilizing funds from PPP loans will be deductible against taxable income.

Fair Value Measurements

We perform fair value

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

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

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.

FORWARD INDUSTRIES,

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Share-Based Compensation

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

condensed consolidated statements of operations over the related 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

adopted ASC 842, "Leases", effective October 1, 2019.

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

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on a straight-line basis over the lease term.

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

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

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

The current and long-term portions of operating

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

and finance lease liabilities are shown separately as such on the condensed consolidated balance sheets.

Business Combinations

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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 assumed.

FORWARD INDUSTRIES,

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Other estimates associated with the accounting for acquisitions may change as additional

information becomes available regarding the assets acquired and liabilities assumed.

Recent Accounting

1 unchanged sentence

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.

Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“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,

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 adopted this guidance in the first quarter

of Fiscal 2021 with no material impact to its condensed consolidated financial statements.

In November 2019,

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(Topic 606)”

ASU 2019-08 is an accounting pronouncement which expands the scope of 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.

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 its condensed consolidated financial statements along with the effects of ASU 2018-07

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 adopted this guidance in the first quarter of Fiscal 2021 with no material impact

to its condensed consolidated financial statements.

In November 2019,

1 unchanged sentence

Credit 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 ASU 2016-03.

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 its condensed consolidated financial statements.

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.

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.

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 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 condensed consolidated financial statements.

FORWARD INDUSTRIES,

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The deferred consideration

of $296,000 on our condensed consolidated balance sheets as of June 30, 2020 is the present value of a $300,000 payment due on

September 30, 2020 per the Stock Purchase Agreement as part of the acquisition price of IPS.

The separate contingent earn-out consideration

portion of the IPS purchase price was adjusted down in the second quarter of fiscal 2020 from a fair value of $350,000 to $0 due

to the low likelihood of reaching the EBITDA targets as outlined in the Stock Purchase Agreement.

The following table

presents the placement in the fair value hierarchy and summarizes the changes in fair value of the aforementioned consideration

payments for the three and nine months ended June 30, 2020:

Fair value measurement at reporting date using

Quoted prices in active markets for identical assets

Significant other observable inputs

Significant unobservable inputs

September 30, 2019

Payout of deferred cash consideration

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 use.

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 adopted this guidance in the

first quarter of Fiscal 2021 with no material impact to its condensed consolidated financial statements.

In December 2019,

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

Simplifying the Accounting for Income Taxes.”

This guidance

removes certain exceptions to the general principles in Topic 740 and provides consistent application of U.S.

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 permitted.

The Company is currently evaluating

the timing of adoption and impact of the updated guidance on its condensed consolidated financial statements.

NOTE 3 INTANGIBLE

The Company’s intangible assets resulted

from the acquisitions of Kablooe in August 2020 and IPS in January 2018 and are all held under the design segment of our business.

Amortization expense related to intangible assets was $53,000 and $41,000 for the three months ended December 31, 2020 and 2019,

respectively, which is included in general and administrative expenses on the condensed consolidated statements of operations.

The Company’s intangible assets consist

of the following:

December 31, 2020

Decrease in fair value of earn-out consideration

Increase in fair value of deferred cash consideration

March 31, 2020

Increase in fair value of deferred cash consideration

June 30, 2020

The cost method investment

of $327,000 on our condensed consolidated balance sheet at September 30, 2019 is common stock received from a customer as compensation

for product design services provided by the Company.

The shares represent less than a 2% ownership in the customer.

the initial fair value of the investment 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.

The Company determined that the inputs used to value the common stock, at

the date of the initial valuation, are observable, either directly or indirectly, and therefore classified as a Level 2 valuation.

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 condensed consolidated balance sheet.

In August 2020,

the Company received $98,000 from this customer, which was applied to past due interest, penalties and principal.

During the three months

ended March 31, 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 is fully reserved on the Company’s condensed consolidated balance sheet at June 30, 2020.

The impairment

charge of $327,000 was recorded in the second quarter of fiscal 2020 and is included in the general & administrative expenses

of the condensed consolidated statement of operations for the nine months ended June 30, 2020 (the “2020 Period”).

September 30, 2020

Customer Relationships

Total Intangible Assets

Customer Relationships

Total Intangible Assets

Gross carrying amount

Less accumulated amortization

Net carrying amount

At December 31, 2020, estimated amortization

expense for the Company’s intangible assets for each of the next five years and thereafter is as follows:

Remainder of Fiscal 2021

FORWARD INDUSTRIES,

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company has recorded

intangible assets, such as goodwill, trademark, and customer relationships on the IPS reporting unit’s books and accounts

for these in accordance with ASC 350, which requires an annual test of goodwill and indefinite-lived assets for impairment, unless

circumstances dictate more frequent assessments.

During the three months

ended March 31, 2020, the Company experienced triggering events that prompted the testing of its goodwill for impairment.

triggering events include the reduction in fair value of the contingent earn-out consideration discussed in Note 3 and revised

revenue and operational projections for IPS for the remainder of the fiscal year 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 include 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.

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

We concluded the reporting unit’s fair value was below its carrying value by $1,015,000 and an impairment charge was recognized

for this amount in the three months ended March 31, 2020.

Below is the rollforward

of goodwill for IPS, the only reporting unit with goodwill.

NOTE 4 FAIR VALUE

deferred consideration of $60,000 and $90,000 at December 31, 2020 and September 30, 2020, respectively, represents the fair value

of the contingent earnout consideration related to the acquisition of Kablooe.

The current and non-current portions of this liability

are shown in the corresponding categories on the condensed consolidated balance sheets in each period presented.

During the three

months ended December 31, 2020, the Company reduced this liability from $90,000 to $60,000 based on the low likelihood of Kablooe

reaching the first year’s earnings target.

The following table

presents the placement in the fair value hierarchy and summarizes the changes in fair value of the aforementioned liability for

the three months ended December 31, 2020:

value measurement at reporting date using

prices in active markets for identical assets

other observable inputs

unobservable inputs

September 30, 2020

Goodwill impairment

June 30, 2020

SEGMENT INFORMATION

The Company, post

IPS acquisition, conducts its business through two operating segments, which are also its reportable segments:

in fair value of Kablooe contingent earnout consideration

December 31, 2020

NOTE 5 SEGMENT INFORMATION

The Company has two

reportable segments:

distribution and design.

The 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 as well as smart-enabled and other products.

The design segment provides a full spectrum of hardware and software product design and engineering

We measure the performance of our operating segments based upon revenue and operating income or loss.

Operating income/(loss)

and net income/(loss) before income taxes are shown in the table below:

FORWARD INDUSTRIES,

2 unchanged sentences

For the Three Months Ended

For the Nine Months Ended

Revenues, net

2 unchanged sentences

Total cost of sales

(Loss) / income from operations

Total loss from operations

Other (expense) / income, net

Total other (expense) / income, net

Net (loss) / income

Total net loss

$ (1,668,473 )

Income/(loss) from operations

Total income/(loss) from operations

Other (income)/expense, net

Total other (income)/expense, net

$ (1,366,000 )

Income/(loss) before income taxes

Total income/(loss) before income taxes

The following table presents total assets

4 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SHARE-BASED COMPENSATION

NOTE 6 SHARE-BASED

Stock Options

February 11, 2020, the Company granted 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 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.

were no options granted during the three months ended June 30, 2020.

The options granted during the nine months ended June 30,

2020 had a weighted average grant date fair value of $0.58 per share.

the three months ended June 30, 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

February 5, 2019, the Company granted options to three 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 vested one year from the date of grant, expire five years from

the date of grant and had an aggregate grant date fair value of $120,000, which was recognized ratably over the vesting period.

February 5, 2019, the Company granted options to two non-employee directors to purchase an aggregate of 140,460 shares of its common

stock at an exercise price of $1.54 per share.

The options 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.

were no options granted during the three months ended June 30, 2019.

The options granted during the nine months ended June 30,

2019 had a weighted average grant date fair value of $0.78 per share.

The fair value of

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.

Company utilizes the “simplified”

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

employee 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

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.

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.

applying the Black-Scholes option pricing model to options granted, the Company used the following assumptions:

For the Three Months Ended

For the Nine Months Ended

Expected term (years)

Expected volatility

Risk-free interest rate

Expected dividends

Estimated annual forfeiture rate

FORWARD INDUSTRIES,

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

following table summarizes stock option activity during the nine months ended June 30, 2020:

Outstanding, September 30, 2019

Outstanding, June 30, 2020

Exercisable, June 30, 2020

The following table

provides additional information regarding stock option awards that were outstanding and exercisable at June 30, 2020:

Options Outstanding

Options Exercisable

Remaining Life

$0.64 to $1.23

$1.44 to $1.67

$2.73 to $2.73

$3.73 to $3.79

Company recognized compensation expense for stock option awards of $38,000 and $33,000 during the three months ended June 30, 2020

and 2019, respectively, and $107,000 and $178,000 during the nine months ended June 30, 2020 and 2019, respectively, in its condensed

consolidated statements of operations.

June 30, 2020, there was $95,000 of total unrecognized compensation cost related to nonvested stock option awards that is expected

were no options granted during the three months ended December 31, 2020 or 2019.

the three months ended December 31, 2020, the Company issued 2,500 shares of its common stock pursuant to the exercise of stock

options at an exercise price of $0.67 per share for aggregate cash proceeds of $2,000.

Company recognized compensation expense for stock option awards of $41,000 and $33,000 during the three months ended December 31,

2020 and 2019, respectively, in its condensed consolidated statements of operations.

December 31, 2020, there was $34,000 of total unrecognized compensation cost related to nonvested stock option awards that is expected

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

NOTE 7 EARNINGS/(LOSS)

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 shares that would be issued upon

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

A reconciliation of basic and diluted earnings/(loss)

per share is as follows:

For the Three Months Ended

Net income/(loss)

Weighted average common shares outstanding

Dilutive common share equivalents

Weighted average diluted shares outstanding

Earnings/(loss) per share:

FORWARD INDUSTRIES,

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Restricted Stock Awards

Company recognized no compensation expense during the three months ended June 30, 2020 and 2019, and $0 and $3,000 during the nine

months ended June 30, 2020 and 2019, respectively, for restricted stock awards in its condensed consolidated statements of operations.

At June 30, 2020, there was no unrecognized compensation expense related to nonvested restricted stock awards.

LOSS PER SHARE

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 in each period because their inclusion would have been anti-dilutive:

were excluded from the calculation of diluted earnings/(loss) per share in each period because their inclusion would have been

anti-dilutive:

For the Three Months Ended

For the Nine Months Ended

Total potentially dilutive shares

CONCENTRATIONS

NOTE 8 CONCENTRATIONS

Concentration of

Revenues and Accounts Receivable

For the three and

nine months ended June 30, 2020 and 2019, the Company had significant customers whose individual percentage of the Company’s

total revenues was 10% or greater.

The risk of collecting accounts receivable from all customers is enhanced as a result of the

economic impact of the COVID-19 pandemic.

The concentrations of revenues and accounts receivable for each reporting segment are

For the three months

ended December 31, 2020 and 2019, the Company had significant customers whose individual percentage of the Company’s total

revenues was 10% or greater.

The concentrations of revenues and accounts receivable for each reportable segment are as follows:

Distribution Segment Revenues Concentration

For the Three Months Ended

For the Nine Months Ended

Design Segment Revenues Concentration

For the Three Months Ended

FORWARD INDUSTRIES,

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Design Segment Revenues Concentration

For the Three Months Ended

For the Nine Months Ended

At June 30, 2020 and

September 30, 2019, concentrations of accounts receivable with significant customers representing 10% or greater of segment accounts

receivable were as follows:

At December 31, 2020

and September 30, 2020, concentrations of accounts receivable with significant customers representing 10% or greater of segment

accounts receivable were as follows:

Distribution Segment Accounts Receivable

4 unchanged sentences

September 30,

INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

RELATED PARTY TRANSACTIONS

NOTE 9 RELATED

PARTY TRANSACTIONS

Buying Agency and

Supply Agreement

On March 12, 2012,

the Company entered into a Buying Agency and Supply Agreement (the “Supply Agreement”) with Forward China.

Agreement, as amended, provides that, upon the terms and subject to the conditions set forth therein, Forward China will act as

the Company’s exclusive buying agent and supplier of Products (as defined in the Supply Agreement) in the Asia-Pacific region.

Company purchases products at Forward China’s cost and also pays to Forward China a monthly service fee equal to the sum

(i) $100,000;

and (ii) 4% of “Adjusted Gross Profit”, which is defined as the selling price less the cost from

Forward China.

The amended Supply Agreement expires October 22, 2020.

Terence Wise, Chief Executive Officer and Chairman of the

Company, is the owner 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 recorded service fees to Forward China of $346,000 and $353,000

during the three months ended June 30, 2020 and 2019, respectively, and $1,022,000 and $1,056,000 during the nine months ended

June 30, 2020 and 2019, respectively, which are included as a component of cost of sales when revenue is recognized on sales of

the related products.

The Company has

a Buying Agency and Supply Agreement (the “Supply Agreement”) with Forward Industries Asia-Pacific Corporation

(“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 agent and supplier of Products (as defined in the

Supply Agreement) in the Asia-Pacific region.

The Company purchases products at Forward China’s cost and

also pays to Forward China a monthly service fee equal to the sum of:

(i) $100,000 and (ii) 4% of “Adjusted Gross

Profit”, which is defined as the selling price less the cost from Forward China.

The Supply Agreement expires October

Terence Wise, Chief Executive Officer and Chairman of the Company, is the owner of Forward China.

Yu, a Managing Director of Forward China, beneficially owns more than 5% of the Company’s common stock.

Company recorded service fees to Forward China of $343,000 and $338,000 during the three months ended December 31, 2020 and

2019, respectively, which are included as a component of cost of sales upon sales of the related

The Company has a

separate agreement with Forward China to address the potential impact of customers sourcing directly from Forward China.

event a customer bypasses the services of the Company and does business directly with Forward China, Forward China will pay a commission

of 50% of the net revenue, less direct costs, generated from the products or services sold.

No commissions have been received under

this agreement.

FORWARD INDUSTRIES,

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company made prepayments

to Forward China for inventory purchases of $14,000 and $107,000 at December 31, 2020 and September 30, 2020, respectively, which

is included in prepaid expenses and other current assets on the condensed consolidated balance sheets.

Promissory Note

On January 18, 2018,

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 September 30, 2020.

The maturity date of the note has been extended on several occasions

to assist the Company with liquidity.

For the three months ended June 30, 2020 and 2019, the Company incurred and paid $32,000,

and for the nine months ended June 30, 2020 and 2019, the Company incurred and paid $96,000, in interest payments associated with

The entire note payable is classified as a current liability and included as a component of notes payable on the accompanying

condensed consolidated balance sheets.

the Company issued a $1,600,000 promissory note payable to Forward China to fund the acquisition of IPS.

The promissory note bears

an interest 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 $32,000 in interest expense associated with this note in both the three months

ended December 31, 2020 and 2019.

The maturity date of this note was extended to December 31,

Related Party Sales

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 of the Board’s Audit and Compensation committee.

The Company sold design services to this customer of $0 and $80,000 in for the three months ended June 30, 2020 and 2019, respectively,

and $44,000 and $140,000 for the nine months ended June 30, 2020 and 2019, respectively.

At June 30, 2020 and September 30, 2019,

there were outstanding receivables of $0 and $9,000, respectively, from this customer.

LEGAL PROCEEDINGS

Company’s design division provided services to a customer whose former Chief Operating and Financial Officer and equity

owner is an immediate family member of a director on the Company’s Board of Directors.

The director is a member of the

Board’s Audit, Governance and Compensation Committees.

The Company sold design services to this customer of $38,000 for

the three months ended December 31, 2019.

There were no sales to this customer for the three months ended December 31,

Related Party Activity

During the three months

ended December 31, 2020, the Company began selling smart-enabled furniture, which is sourced by Forward China and sold in the U.S.

under the Koble brand name.

The Koble brand is owned by The Justwise Group Ltd., a company owned by Terrence Wise, Chief Executive

Officer and Chairman of the Company.

The Company recognized revenues from the sale of Koble products in the U.S.

of $186,000 during

the three months ended December 31, 2020.

NOTE 10 LEGAL

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 of New York.

The complaint, which contains no specific amount of claimed 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 legal actions or proceedings in the ordinary course of its business.

At June 30, 2020, there

were no such actions or proceedings, either individually or in the aggregate, that, if decided adversely to the Company’s

the Company may become a party to other legal actions or proceedings in the ordinary course of its business.

At December 31, 2020,

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.

specifically IPS, has a $1,300,000 revolving line of credit with a bank which was renewed at the discretion of the lender on

August 5, 2020.

The line of credit has a maturity date of May 31, 2021, is guaranteed by the Company and is secured by all of

The interest rate on the line of credit is 0.75% above The Wall Street Journal prime rate.

effective interest rate was 4.0% at both December 31, 2020 and September 30, 2020.

At December 31, 2020, the Company had

$300,000 available under the line of credit.

The Company is subject to certain debt-service ratio requirements which are

measured annually.

At September 30, 2020, the Company was in violation of the required debt-service ratio covenants but was

granted a waiver of the violation from the lender.

FORWARD INDUSTRIES,

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

LINE OF CREDIT

The Company, specifically

IPS, has a $1,300,000 revolving line of credit which was renewed at the discretion of the lender on August 5, 2020.

date has been extended to May 31, 2021.

The line of credit is guaranteed by the Company and is secured by all of IPS’

The interest rate on the line of credit is 0.75% above The Wall Street Journal prime rate.

The effective interest rate at

June 30, 2020 and September 30, 2019 was 4.0% and 5.75%, respectively.

At 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.

At June 30, 2020, the

Company had $300,000 available under the line of credit.

The Company is subject to certain debt-service ratio requirements which

are measured annually.

With a net loss for the nine months ended June 30, 2020 of $875,000 for IPS, there is a likely risk of failing

the annual covenant testing at September 30, 2020.

As such, the lender may demand payment in full upon default.

On April 1, 2016,

IPS entered into a term loan with a lender in the amount of $325,000.

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

by all of IPS’

assets and was guaranteed by the Company.

The outstanding balance at September 30, 2019 was $52,000.

was paid off in April 2020 per the agreement and therefore there is no remaining balance for this loan on the balance sheet at

June 30, 2020.

On December 11, 2017,

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 included 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 June 30, 2020 and September 30, 2019, respectively.

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 must pay monthly principal and interest

payments on the outstanding principal balance of the PPP Loan amortized over the term of the loan beginning November 18, 2020 until

maturity when the entire principal balance remaining unpaid, along with all accrued and unpaid interest, shall be due and payable

This loan is unsecured, and subject to forgiveness in accordance with the terms of the CARES Act.

The application is subject

to review by the Small Business Administration.

We have accounted for these proceeds as a loan and the current and long- term portions

of $597,000 and $760,000, respectively, are included in the corresponding categories of notes payable on the condensed consolidated

balance sheets.

MOONI AGREEMENT

2020, the Company entered into a loan in an aggregate principal amount of $1,357,000 under the Paycheck Protection Program of

the CARES Act.

The loan was unsecured, bore interest at a rate of 1% per annum, and was scheduled to mature on April 18,

We accounted for these proceeds as a loan and the current and long-term portions of $827,000 and $530,000,

respectively, were included in the corresponding categories of notes payable on the condensed consolidated balance sheet at

September 30, 2020.

In October 2020, the Company filed for forgiveness of this loan and in December 2020, the Small Business

Administration approved our forgiveness request for this loan.

The forgiveness has been accounted for as an extinguishment of

debt and the resulting gain has been recorded as forgiveness of note payable on the condensed consolidated statement of

operations for the three months ended December 31, 2020.

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 December 31, 2020 and September 30, 2020 was $115,000

and $156,000, respectively.

NOTE 13 MOONI

On January 29, 2019,

the Company entered into a three-year Distribution Agreement (the “Agreement”) with Mooni International AB (“Mooni”)

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, 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 have been effective

on the 12-month anniversary of the effective date of the Agreement.

and its 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, 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 have been effective on the 12-month anniversary of the effective

date of the Agreement.

This option was not exercised and therefore expired.

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.

At June 30, 2020, the unamortized fee of $211,000 is included in prepaid expenses and other current assets

and other assets for the short-term and long-term components, respectively, in the accompanying condensed consolidated balance

Amortization of the cost for the three and nine months ended June 30, 2020 of $33,000 and $100,000, respectively, and for

both the three and nine months ended June 30, 2019 of $56,000, is included in the sales and marketing expenses in the accompanying

condensed consolidated statement of operations.

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 Company generated

revenues from this agreement of $202,000 and $141,000 in the three months ended December 31, 2020 and 2019, respectively.

and long-term portions of the unamortized fee of $133,000 and $11,000, respectively, at December 31, 2020 and $133,000 and $45,000,

respectively, at September 30, 2020, are included in prepaid expenses and other current assets and other assets, respectively,

in the accompanying condensed consolidated financial statements.

Amortization of the cost for both the three months ended December

31, 2020 and 2019 of $33,000 is included in sales and marketing expenses in the accompanying condensed consolidated statements

of operations.

NOTE 14 LEASES

The Company’s

operating leases are primarily for corporate, sales and administrative office space.

Total operating lease expense was $153,000

and $132,000 for the three months ended December 31, 2020 and 2019, respectively, and is recorded in general and administrative

expenses on the condensed consolidated statements of operations.

The Company leases

certain computer equipment through various finance lease agreements expiring through July 2022.

The net book value of assets under

finance leases was $21,000 and $23,000 at December 31, 2020 and September 30, 2020, respectively.

Interest expense related to assets

under finance leases was $1,000 for both the three months ended December 31, 2020 and 2019.

FORWARD INDUSTRIES,

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Additional information

related to operating and finance leases at December 31, 2020 and September 30, 2020 is as follows:

September 30,

Weighted Average Remaining Lease Term (Yrs):

Operating Leases

The Company leases

office space 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 escalated at 3% per year.

The monthly rent payment was $7,700, which included common area maintenance

In June 2020, the

Company signed a lease for new office space in West Palm Beach, Florida.

This lease is for a 24-month term commencing in October

2020 and expiring in September 2022.

Rent payments under the new operating lease escalate 4% each year and the agreement contains

two annual renewal options.

The monthly rent payment is $3,500, which includes taxes and operating expenses as defined in the agreement.

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 Swiss Francs, which is approximately $1,600.

IPS leases office

space in Hauppauge, New York under a non-cancelable lease agreement expiring in February 2027.

The monthly rent payment is $29,000,

which includes power utilities, and the Company has the option to renew the lease for an additional five years in accordance with

the terms of the lease.

IPS leases office

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

The monthly rent payment is $4,400.

At June 30, 2020,

other than the aforementioned new lease in West Palm Beach, Florida, the Company did not have additional operating and financing

leases that have not yet commenced.

Total operating lease expense was $127,000

and $117,000 for the three months ended June 30, 2020 and 2019, respectively, and $382,000 and $366,000, for the nine months ended

June 30, 2020 and 2019, respectively, and is recorded in general and administrative expenses on the condensed consolidated statements

of operations.

Finance Leases

The Company, specifically

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

Amortization expense related

to assets under finance leases were $5,500 and $28,500 for the three and nine months ended June 30, 2020, respectively.

expense related to assets under finance leases were $650 and $2,500 for the three and nine months ended June 30, 2020, respectively.

At June 30, 2020,

additional information related to operating and finance leases was as follows:

Weighted Average Remaining Lease Term:

Weighted Average Discount Rate:

Operating Leases

Finance Leases

Weighted Average Discount Rate:

At December 31, 2020,

future minimum payments under non-cancellable operating and finance leases were as follows:

Operating Leases

Finance Leases

FORWARD INDUSTRIES,

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Future minimum payments

under non-cancellable operating and finance leases as of June 30, 2020 were as follows:

For the Years Ending September 30,

Remainder of 2020

Remainder of Fiscal 2021

Total future minimum lease payments

amount representing imputed interest

SUBSEQUENT EVENT

The Company has entered into a non-binding

letter of intent to acquire all of the assets of a design-development company focused on products in the medical industry for consideration

of cash and stock, and assumption of liabilities in an aggregate amount of approximately $1,500,000.

Less imputed interest

Present value of lease liabilities

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020.

following discussion and analysis compares our consolidated results of operations for the three and nine months ended June 30,

2020 (the “2020 Quarter”

and “2020 Period”, respectively) with those for the three and nine months ended

June 30, 2019 (the “2019 Quarter”

and “2019 Period”, respectively).

All dollar amounts and percentages

presented herein have been rounded to approximate values.

following discussion and analysis compares our consolidated results of operations for the three months ended December 31, 2020

(the “2021 Quarter”) with those for the three months ended December 31, 2019 (the “2020 Quarter”).

All dollar amounts and percentages presented herein have been rounded to approximate values.

Cautionary Note Regarding Forward-Looking

This report contains

“forward-looking statements”, as such term is used within the meaning of the Private Securities Litigation Reform Act

These statements include, among other things, statements regarding:

our liquidity,

expectations regarding the impact of the pandemic on our business,

expectations regarding the length of the pandemic’s business disruption,

expectations regarding revenues,

plans regarding the repayment of debt, and

beliefs regarding our capital

as well as other statements regarding our

future operations, financial condition and prospects and business strategies.

Forward-looking statements can be identified by words

such as “anticipates,”

“intends,”

“plans,”

“seeks,”

“believes,”

“estimates,”

“expects,”

“predicts,”

“projects,”

“will be”

and “will continue”

similar expressions.

Forward-looking statements are based on our current expectations and assumptions regarding our business, the

economy and other future conditions.

Because forward-looking statements relate to the future, they are subject to inherent uncertainties,

risks and changes in circumstances that are difficult to predict.

Our actual results may differ materially from those contemplated

by the forward-looking statements.

We caution you therefore against relying on any of these forward-looking statements.

neither statements of historical fact nor guarantees or assurances of future performance.

Important factors that could cause actual

results to differ materially from those in the forward-looking statements include the failure to receive material orders, our ability

to successfully market and sell products that we develop, the effects of the COVID-19 outbreak, including levels of consumer, business

and economic confidence generally, the duration of the COVID-19 outbreak and severity of such outbreak, the pace of recovery following

the COVID-19 outbreak, the effect on our supply chain, our ability to implement cost containment;

and the adverse effects of the

COVID-19 outbreak on our business or the market price of our common stock, failure to diversify the industries in which we

sell our products, potential imposed tariffs or other restrictions placed on imports by the U.S.

government, and continued pricing

pressure on our products.

Further information on our risk factors is contained in our filings with the SEC, including our Form

10-K for the year ended September 30, 2020.

Any forward-looking statement made by us speaks only as of the date on which it is

Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for

us to predict all of them.

We undertake no obligation to publicly update any forward-looking statement, whether as a result of

new information, future developments or otherwise, except as may be required by law.

Business Overview

Forward Industries,

(“Forward”, “we”

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

solution provider for top tier medical and technology customers worldwide.

Through our acquisition of IPS, we have expanded our

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.

to our existing design and distribution of carry and protective solutions, primarily for handheld electronic devices, we are now

a one-stop shop for design, development and manufacturing solutions serving a wide range of clients in the industrial, commercial

and consumer industries.

Our 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.

Our 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).

Our 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.

manufacture any of our OEM products and we source substantially all of our OEM products from independent suppliers in China, through

Forward China.

As a result of the

expansion of the design development capabilities through our wholly owned subsidiary, IPS, we are now able to introduce proprietary

products to the market from concepts brought to us from a number of different sources, both inside and outside the Company.

By virtue of our strategic

collaboration and distribution agreements, we have secured a portfolio of smart enabled products which we have begun distributing

to retail outlets in the United States.

The rollout of these products has been delayed by COVID-19 as discussed below.

of this collaboration and other product initiatives, we invested in and began to build out a retail distribution network responsible

for getting products into big box retailers for retail consumption.

This build out is a continuation of our strategy to be a one-stop

shop for product development, manufacture and distribution and represents a significant achievement in completing the strategic

process of taking a product from concept to the consumer.

Through the manufacture

representative agreements we currently have in place, we expect to gain sales coverage to retailers such as Best Buy, Target, Walmart,

Costco, CVS, Walgreens, Staples, Office Depot and many others.

The manufacture representative model allows us to engage and support

a large sales team and cover a lot of territory with a variable cost model as these representatives work on commission only.

In December 2019,

a novel strain of coronavirus known as COVID-19 was reported to have surfaced in China, and by March 2020 the spread of the virus

had resulted in a world-wide pandemic.

economy has been largely shut down by mass quarantines and government mandated

stay-in-place orders (the “Orders”) to halt the spread of the virus.

These Orders have required substantially all of

our employees to work from home for most of the 2020 Quarter.

Employees have begun returning to the office in August of 2020 with

minimal operating challenges.

While the COVID-19 pandemic had a minimal impact on our financial results for second quarter of fiscal

2020, the impact during the 2020 Quarter was somewhat more significant.

Business shutdowns have 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 revenues in the 2020 Quarter to be less than anticipated.

Additionally, our design segment reported lower revenues

as demand for its design and development services were reduced or delayed.

The impact from lower revenue was partially offset by

a reduction from the second quarter of fiscal 2020 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 equipment.

The pandemic had temporarily impacted our liquidity in the 2020 Quarter, as collection of accounts receivable were somewhat delayed

in the early part of the 2020 Quarter.

The Company received funding under the Paycheck Protection Program in the amount of $1,357,000

(see Note 12 to the condensed consolidated financial statements).

While the economy

has started to open in certain jurisdictions, the future impacts of the pandemic and any resulting economic impact are largely

unknown and could be significant.

It is possible that the COVID-19 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.

As a result of revenue

and earnings shortfalls for the 2020 Quarter, due in part to the impact of COVID-19 and the related future uncertainty, in the

second quarter of fiscal 2020, the Company revised the outlook for the design reporting unit for the remainder of the year and

its long-term outlook.

This new outlook has impacted the carrying value of our goodwill (see Note 4).

Looking ahead to the

remainder of 2020, our visibility is limited due to the uncertainty surrounding the duration and ultimate impact of COVID-19 and

the mitigation measures that are implemented by governmental authorities.

We also expect business conditions to remain challenging.

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

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.

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

As a result of the continued expansion of our design development capabilities through our wholly-owned subsidiaries,

IPS and Kablooe, we are now able to introduce proprietary products to the market from concepts brought to us from a number of different

sources, both inside and outside the Company.

The acquisition

of Kablooe took place in August 2020 and its results of operations have been included in our condensed consolidated financial

statements since the acquisition date.

Accordingly, our results of operations for the 2021 Quarter include Kablooe’s

results of operations, while our results of operations for the 2020 Quarter do not.

Key terms of the acquisition are

contained in our Form 10-K filed with the Securities and Exchange Commission on December 17, 2020.

The future impacts

of the COVID-19 pandemic and any resulting economic impact are largely unknown and could be significant.

It is possible that the

COVID-19 pandemic, the measures taken by the governments of countries affected and the resulting economic impact may continue to

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 may or

may not require our services.

The long-term financial impact on our business cannot be reasonably estimated at this time.

result, the effects of COVID-19 may not be fully reflected in our financial results until future periods.

Until a vaccine

and treatment are widely available, we expect business conditions to remain challenging.

In response to these challenges,

we will continue to focus on those factors that we can control:

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

pursuing further improvements in the productivity and effectiveness of our development, selling and administrative activities

and, where appropriate, taking advantage of opportunities to enhance our business growth and strategy.

Refer to “Part

II, Item 1A —

Risk Factors”

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

Variability of Revenues

and Results of Operations

Because a high percentage

of our net revenues is highly concentrated in a few large customers, and because the volumes of these customers’

to us are highly variable, with short lead times, our quarterly revenues, and consequently our results of operations, are susceptible

to significant variability over a relatively short period of time.

Since the acquisition of IPS, the variability has diminished

A significant portion

of our revenue is concentrated with several large customers, some of which are the same and some of which change over time.

from some of these customers can be highly variable, with short lead times, which can cause our quarterly revenues, and consequently

our results of operations, to vary over a relatively short period of time.

Critical Accounting

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RESULTS OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2020 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2019

The results of operations

disclosed below presents Forward’s distribution business and IPS’

design segments as distinct operating units.

continues to expand our retail efforts for the distribution segment in an attempt to improve profitability.

Management believes

the profitability for the design segment will continue to improve as the Company streamlines operating expenses.

Net (Loss) / Income

FOR THE THREE MONTHS ENDED DECEMBER 31, 2020 COMPARED TO THE THREE MONTHS ENDED DECEMBER 31, 2019

Net Income/(Loss)

Distribution Segment

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net loss was $343,000 in the 2021 Quarter compared to $477,000 in the 2020 Quarter.

The decrease to the net loss in the 2020 Quarter

was primarily due to lower sales and marketing expenses, coupled with higher gross profit as reflected in the table below.

The decrease to the net loss was primarily

due to an increase in gross profit, lower general and administrative expenses, partially offset by higher sales and marketing expenses,

as reflected in the table below.

Design Segment

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income was $1,542,000 in the 2021 Quarter compared to $395,000 in the 2020 Quarter.

The decrease in net income in the 2020 Quarter

was primarily driven by lower gross profit and higher general and administrative expenses, partially offset by lower sales and

marketing expenses and a decrease in other expense, as reflected in the table below.

Components of Net (Loss) / Income

The net income generated was primarily driven

by the $1,357,000 forgiveness of note payable associated with the PPP loan.

Higher gross profit, partially offset by higher general

and administrative expenses, also contributed to the fluctuation, as reflected in the table below:

Components of Net Income/(Loss)

(amounts in thousands)

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General and administrative expenses

Operating (loss)/income

Other income (expenses)

Net loss / (income)

Consolidated basic and diluted loss per

share was $0.02 for the 2020 Quarter and $0.01 for the 2019 Quarter.

Operating income/(loss)

Other (income)/expense, net

Net income/(loss)

Consolidated basic

and diluted earnings/(loss) per share were $0.12 and $(0.01), respectively, for the 2021 Quarter and the 2020 Quarter.

Distribution Segment

Net revenues in the

distribution segment increased $367,000, or 6.1%, to $6,389,000 in the 2020 Quarter from $6,022,000 in the 2019 Quarter as a result

of an increase in other product revenue, partially offset by a decline in our diabetic product line revenue.

distribution segment increased $910,000, or 19.4%, to $5,606,000 in the 2021 Quarter from $4,696,000 in the 2020 Quarter, the result

of an increase in both other product revenue and diabetic product line revenue.

Revenues from other products increased $625,000

and revenue from diabetic products increased $285,000.

In future periods, we believe other product sales will increase while diabetic

product sales will decline.

The following tables

set forth revenues by channel, product line and geographic location of our distribution segment customers for the periods indicated:

Net Revenues for 2020 Quarter

Net Revenues for the 2021 Quarter

(amounts in thousands)

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Total net revenues

Net Revenues for 2019 Quarter

Net Revenues for the 2020 Quarter

(amounts in thousands)

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manufactures to the order of, and sells carrying cases for, blood glucose diagnostic kits directly to OEMs (or their contract manufacturers).

The OEM customer or its contract manufacturer packages our carry cases “in box”

The OEM customer or its contract manufacturer packages our carrying cases “in box”

as a custom accessory for the OEM’s

1 unchanged sentence

Revenues from diabetic

products declined $548,000, or 10.1%, to $4,894,000 in the 2020 Quarter from $5,442,000 in the 2019 Quarter.

This decline was due

to reduced demand and pricing pressures from most of our major diabetic product customers.

Management believes that revenues from

diabetic customers will continue to decline.

products increased $285,000, or 6.8%, to $4,466,000 in the 2021 Quarter from $4,181,000 in the 2020 Quarter.

This increase was

primarily due to higher revenues from two major diabetic customers (Diabetic Products Customers D and B).

The higher revenue from

these two customers was partially offset by revenue declines from other diabetic customers, which were less significant.

above, management believes that revenues from diabetic customers will decline in future periods.

The following table

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(amounts in thousands)

Increase (Decrease)

Diabetic Products Customer A

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All other Diabetic Products Customers

Total Diabetic Revenue

Revenues from diabetic

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Other Product Revenues

Our distribution segment

also designs and sells cases and protective solutions to OEMs for a diverse array of portable electronic and non-electronic products

(such as sporting and recreational products, bar code scanners, smart phones, GPS location devices, tablets and firearms) on a

made-to-order basis that are customized to fit the products sold by our OEM customers.

Other product revenues

include cases and protective solutions sourced and sold to OEMs for a diverse array of portable electronic and non-electronic products

(such as sporting and recreational products, bar code scanners, GPS location devices, tablets and firearms) on a made-to-order

basis that are customized to fit the products sold by our OEM customers.

Other product revenues also include sales of smart-enabled

products sold through our retail distribution network.

Revenues from other

products increased $915,000 to $1,495,000 in the 2020 Quarter from $580,000 in the 2019 Quarter, primarily due to the sale of certain

personal protective equipment sourced by the Company in the amount of $758,000.

We will continue to focus on our sales and sales

support teams in our continued efforts to expand and diversify our other products customer base as well as take advantage of opportunities

that arise for which we can source products.

products increased $625,000 to $1,140,000 in the 2021 Quarter from $515,000 in the 2020 Quarter, due to the increase in sales of

non-medical cases and protective solutions and smart enabled products, both driven by an increase in customers and higher sales

We will continue to focus on our sales and sales support teams in our continued efforts to expand and diversify our other

products customer base as well as take advantage of opportunities to source other products.

Revenues from other

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Net revenues in the

design segment declined $727,000, or 18.7%, to $3,160,000 in the 2020 Quarter from $3,887,000 in the 2019 Quarter.

in revenues was due to the reduction or delay in demand for design and development projects, partially related to COVID-19.

following table sets forth our design segment net revenues by major customers for the 2020 Quarter:

design segment increased $415,000, or 11.2%, to $4,112,000 in the 2021 Quarter from $3,697,000 in the 2020 Quarter.

Revenues generated

by Kablooe, which was acquired in August 2020, accounted for an increase of $447,000.

The remaining variance was driven by a decline

in revenue from certain existing customers as projects were either completed or spending was reduced in response to COVID-19, partially

offset by new business from both new and existing customers.

The following table sets forth our design segment net revenues by

major customers for the 2021 Quarter:

(amounts in thousands)

Increase (Decrease)

Design Segment Customer A

Design Segment Customer B

Design Segment Customer C

Design Segment Customer D

Design Segment Customer 1

Design Segment Customer 2

Design Segment Customer 3

Design Segment Customer 5

Design Segment Customer 6

Design Segment Customer 7

All other Design Segment Customers

Distribution Segment

While gross profit

for the distribution segment increased $18,000, or 2.0%, to $939,000 in the 2020 Quarter as compared to $921,000 in the 2019 Quarter,

gross margin declined from 15.3% to 14.7% in the same period.

The decrease in gross margin was due to a shift to lower margin cases

and pricing pressures on diabetic products from customers.

The decline in gross margin from our diabetic products was partially

offset by higher gross margins on the sale of personal protective equipment during the 2020 Quarter.

We continue to work on expanding

our product offering to include higher margin products as well as enhancing our sales efforts to raise top side gross sales and

total gross profit.

Design Segment

While gross profit

for the design segment decreased $137,000, or 14.1%, to $836,000 in the 2020 Quarter from $973,000 in the 2019 Quarter, gross margin

improved from 25.0% to 26.5% in the same period.

Gross margin in the 2020 Quarter has improved due to the continued efficient management

Depreciation expense, which is allocated to cost of sales for the design segment, was $21,000 and $35,000 for the

2020 Quarter and 2019 Quarter, respectively.

Sales and Marketing

Distribution Segment

Sales and marketing

expenses for the distribution segment decreased $46,000, or 11.2%, to $364,000 in the 2020 Quarter from $410,000 in the 2019 Quarter.

The decrease was primarily due to a drop in sampling and prototype related expenses.

Sales and marketing expenses for the distribution

segment decreased to 5.7% of revenues in the 2020 Quarter as compared to 6.8% in the 2019 Quarter.

Design Segment

Sales and marketing

expenses for the design segment decreased $29,000, or 22.5%, to $100,000 in the 2020 Quarter from $129,000 in the 2019 Quarter.

The decrease in sales and marketing expenses is due to a $15,000 reduction in payroll related costs as we shifted some sales resources

from external consultants to internal employees, an $8,000 reduction in entertainment related expenses, and a $6,000 decrease in

various other marketing related expenses.

Sales and marketing expenses for the design segment decreased slightly to 3.2% of revenues

in the 2020 Quarter from 3.3% of revenues in the 2019 Quarter.

General and Administrative

Distribution Segment

General and administrative

expenses in the distribution segment increased $5,000, or 0.6%, to $786,000 in the 2020 Quarter from $781,000 in the 2019 Quarter.

During the 2020 Quarter we incurred $120,000 in severance costs, partially offset by a $79,000 decrease in professional fees (expenses

related to responding to an SEC subpoena decreased $182,000 while other professional fees increased $103,000) and a decrease in

travel expenses of $47,000.

Other fluctuations were not material individually or in the aggregate.

General and administrative expenses

for the distribution segment decreased to 12.3% of revenues in the 2020 Quarter as compared to 13.0% in the 2019 Quarter.

Design Segment

General and administrative

expenses for the design segment increased $76,000, or 12.2%, to $700,000 in the 2020 Quarter from $624,000 in the 2019 Quarter.

The increase is primarily driven by additional payroll related costs of $75,000, additional professional fees of $11,000, partially

offset by a reduction in bad debt expense of $21,000.

Other fluctuations were not material individually or in the aggregate.

and administrative expenses for the design segment increased to 22.2% of revenues in the 2020 Quarter as compared to 16.1% in the

2019 Quarter.

Other Income / (Expense)

Distribution Segment

Other expense for

the distribution segment remained steady at $35,000 in the 2020 Quarter as compared to $34,000 in the 2019 Quarter.

Other expense

consists primarily of interest expense on the note payable to Forward China.

Design Segment

Other expense in the

design segment decreased $15,000 from $20,000 in the 2019 Quarter to $5,000 in the 2020 Quarter.

The decline is due to lower interest

expense resulting from a decrease in the average amount of debt outstanding in each respective period.

For the three months

ended June 30, 2020, the Company generated a net loss of $215,000.

statutory tax rate for the fiscal year ending September

30, 2020 is 21%.

The Company maintains significant net operating loss carryforwards and does not recognize income tax expense /

(benefit) as its deferred tax provision is typically offset by a full valuation allowance on its net deferred tax asset.

RESULTS OF OPERATIONS

FOR THE NINE MONTHS ENDED JUNE 30, 2020 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 2019

Distribution Segment

Distribution segment

net loss was $793,000 in the 2020 Period compared to $987,000 in the 2019 Period.

The decrease to the net loss in the 2020 Period

was primarily driven by a reduction in general and administrative expenses, other income resulting from the fair value adjustment

to the contingent earn-out consideration portion of the IPS purchase price, partially offset by lower gross profit, as reflected

in the table below.

Design Segment

Design segment net

loss was $875,000 in the 2020 Period compared to $779,000 in the 2019 Period.

The increase to the net loss in the 2020 Period was

primarily due to the goodwill impairment of $1,015,000 discussed in Note 4 of the Notes to the Condensed Consolidated Financial

Statements, an increase in general and administrative expenses, partially offset by an improvement in gross profit, as reflected

in the table below.

Components of Net Loss

(amounts in thousands)

Sales and marketing expenses

General and administrative

Goodwill impairment

Operating loss

Other income (expenses)

Consolidated basic and diluted loss per

share was $0.18 for the 2020 Period and $0.19 for the 2019 Period.

Distribution Segment

Net revenues in the

distribution segment declined $1,363,000, or 8.0%, to $15,709,000 in the 2020 Period from $17,072,000 in the 2019 Period primarily

as a result of decreased diabetic product line revenue partially offset by a $530,000 increase in other product revenue.

The following

tables set forth revenues by channel, product line and geographic location of our distribution segment customers for the periods

Net Revenues for 2020 Period

(amounts in thousands)

Diabetic products

Other products

Total net revenues

Net Revenues for 2019 Period

(amounts in thousands)

Diabetic products

Other products

Total net revenues

Diabetic Product Revenues

Our distribution segment

manufactures to the order of, and sells carrying cases for, blood glucose diagnostic kits directly to OEMs (or their contract manufacturers).

The OEM customer or its contract manufacturer packages our carry cases “in box”

as a custom accessory for the OEM’s

blood glucose testing and monitoring kits, or to a lesser extent, sells them through their retail distribution channels.

Revenues from diabetic

products declined $1,893,000, or 12.6%, to $13,162,000 in the 2020 Period from $15,055,000 in the 2019 Period.

This decline was

primarily due to lower revenues from two major diabetic products customers (Diabetic Products customers B and C).

Revenues from

other major diabetic customers were less significant and were offset by an increase in revenue from all other diabetic products

Management believes that revenues from diabetic customers will continue to decline.

The following table

sets forth our distribution segment net revenues by diabetic products customer for the periods indicated:

(amounts in thousands)

Increase (Decrease)

Diabetic Products Customer A

Diabetic Products Customer B

Diabetic Products Customer C

Diabetic Products Customer D

All other Diabetic Products Customers

Revenues from Diabetic

Products represented 84% of our net revenues in the 2020 Period compared to 88% of our net revenues in the 2019 Period.

Other Product Revenues

Our distribution segment

also designs and sells cases and protective solutions to OEMs for a diverse array of portable electronic and non-electronic products

(such as sporting and recreational products, bar code scanners, smart phones, GPS location devices, tablets and firearms) on a

made-to-order basis that are customized to fit the products sold by our OEM customers.

Revenues from other

products increased $530,000 to $2,547,000 in the 2020 Period from $2,017,000 in the 2019 Period.

Sales of personal protective equipment

increased $758,000, partially offset by a net reduction in sales from various other customers of $228,000.

Revenues from Other

Products represented 16% of our net revenues in the 2020 Period compared to 12% of our net revenues in the 2019 Period.

Design Segment

Net revenues in the

design segment declined $1,029,000, or 9.2%, to $10,164,000 in the 2020 Period from $11,193,000 in the 2019 Period.

in revenues was due to the reduction or delay in demand for design and development projects, partially related to COVID-19.

following table sets forth our design segment net revenues by major customers for periods indicated:

(amounts in thousands)

Increase (Decrease)

Design Segment Customer A

Design Segment Customer B

Design Segment Customer C

Design Segment Customer D

All other Design Segment Customers

Distribution Segment

Gross profit for the

distribution segment declined $556,000, or 20.9%, to $2,103,000 in the 2020 Period from $2,659,000 in the 2019 Period.

also declined, to 13.4% in the 2020 Period from 15.6% in the 2019 Period.

These declines are due to lower sales revenue and a shift

to lower-margin cases and pricing pressures on diabetic products from customers.

The decline in gross margin from our diabetic

products was partially offset by higher gross margins on the sale of personal protective equipment during the 2020 Period.

working on expanding our product offering to include higher margin products as well as enhancing our sales efforts to raise top

side gross sales to raise total gross profit.

distribution segment increased $123,000, or 20.4%, to $726,000 in the 2021 Quarter as compared to $603,000 in the 2020 Quarter,

and gross margin improved from 12.8% to 13.0% in the same period.

The increase in both gross profit and margin are driven by higher

margins on the sale of non-medical cases and protective solutions and smart-enabled products.

This increase in profit margin was

partially offset by the continued decline in gross margin on diabetic products due to a shift to lower margin cases and pricing

pressures on diabetic products from customers.

We continue to work on expanding our product offering to include higher margin products

and enhancing our sales efforts to grow revenue and increase gross profit.

Design Segment

Gross profit for

the design segment increased $996,000, or 53.9%, from $1,849,000 in the 2019 Period to $2,845,000 in the 2020 Period.

improved from 16.5% in the 2019 Period to 28.0% in the 2020 Period.

Gross margin for the 2019 Quarter is significantly lower than

historical performance for the design segment of our business.

The decline was the result of project overruns on two significant

customers in the 2019 Period.

Depreciation expense, which is allocated to cost of sales for the design segment, was $75,000 in

the 2020 Period and $105,000 for the 2019 Period.

Gross profit for the

design segment increased $420,000, or 37.6%, to $1,537,000 in the 2021 Quarter from $1,117,000 in the 2020 Quarter.

margin improved from 30.2% to 37.4% in the same period.

The acquisition of Kablooe contributed $249,000 to gross profit in

the 2021 Quarter.

The improvement in gross margin primarily results from improved billing rates, while continuing to efficiently

manage costs.

The acquisition of Kablooe accounted for a smaller portion of the increase in gross margin.

Depreciation expense,

which is allocated to cost of sales for the design segment, was $39,000 and $26,000 for the 2021 Quarter and 2020 Quarter, respectively.

Sales and Marketing

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Sales and marketing

expenses for the distribution segment increased $56,000, or 5.3%, to $1,106,000 in the 2020 Period from $1,050,000 in the 2019

The increase was primarily due to an additional $44,000 of amortization on the cost of the Mooni Agreement (see Note 13

to the condensed consolidated financial statements).

Sales and marketing expenses for the distribution segment increased to 7.0%

of revenues in the 2020 Period from 6.2% in the 2019 Period.

expenses for the distribution segment increased $97,000, or 24.8%, to $488,000 in the 2021 Quarter from $391,000 in the 2020 Quarter.

The increase was primarily due to expenses associated with growing our retail distribution network.

Sales and marketing expenses

for the distribution segment increased to 8.7% of revenues in the 2021 Quarter as compared to 8.3% of revenues in the 2020 Quarter.

Design Segment

Sales and marketing

expenses for the design segment decreased $14,000, or 3.6%, from $387,000 in the 2019 Period to $373,000 in the 2020 Period.

decrease was primarily due to declines in sales promotions and entertainment expenses.

expenses for the design segment decreased $29,000, or 20.1%, to $115,000 in the 2021 Quarter from $144,000 in the 2020 Quarter.

The decrease in sales and marketing expenses is primarily due to lower payroll costs.

Sales and marketing expenses for the design

segment increased to 3.7% of revenues in the 2020 Period from 3.5% in the 2019 Period.

segment decreased to 2.8% of revenues in the 2021 Quarter from 3.9% of revenues in the 2020 Quarter.

General and Administrative

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General and administrative

expenses in the distribution segment declined $461,000, or 18.5%, to $2,029,000 in the 2020 Period from $2,490,000 in the 2019

This decline resulted primarily from a $433,000 reduction in legal fees related to responding to an SEC subpoena in the

2019 Period (which includes an $80,000 insurance settlement received in the 2020 Period) a $159,000 reduction in bad debt expense,

a $57,000 reduction in directors share based compensation, partially offset by $120,000 of severance costs and an increase in professional

fees of $74,000 related to internal software implementation projects.

Fluctuations in other components of general and administrative

expenses were not material individually or in the aggregate.

General and administrative expenses as a percentage of revenue for

the distribution segment decreased to 12.9% in the 2020 Period from 14.6% in the 2019 Period.

expenses in the distribution segment decreased $73,000, or 11.1%, to $582,000 in the 2021 Quarter from $655,000 in the 2020 Quarter.

The decrease was primarily due to a $35,000 decrease in travel expenses, a $27,000 decrease in legal fees and a $20,000 reduction

in technology related expenses.

General and administrative expenses for the distribution segment decreased to 10.4% of revenues

in the 2021 Quarter as compared to 13.9% of revenues in the 2020 Quarter.

Design Segment

General and administrative

expenses for the design segment increased $109,000, or 5.0%, to $2,296,000 in the 2020 Period from $2,187,000 in the 2019 Period.

The increase is a mix of fluctuations including the investment impairment discussed in Note 3 of the Notes to Condensed Consolidated

Financial Statements of $327,000, additional payroll related expenses of $163,000, and an increase in professional fees of $97,000

related to internal software implementation projects.

These increases were partially offset by a reduction in bad debt expense

of $379,000 and a $47,000 reduction in legal fees.

Fluctuations in other components of general and administrative expenses were

not material individually or in the aggregate.

General and administrative expenses as a percentage of revenue for the design segment

increased to 22.6% in the 2020 Period from 19.5% in the 2019 Period.

expenses for the design segment increased $686,000 to $1,245,000 in the 2021 Quarter from $559,000 in the 2020 Quarter.

is primarily driven by a $253,000 increase in payroll related costs, general and administrative costs of $239,000 generated by

Kablooe, which was acquired in August 2020, and a $143,000 increase in bad debt expense.

General and administrative expenses for

the design segment increased to 30.3% of revenues in the 2021 Quarter as compared to 15.1% of revenues in the 2020 Quarter.

Other Income / (Expense)

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reported other income of $1,000 in the 2021 Quarter as compared to other expense of $34,000 in the 2020 Quarter.

results primarily from the $350,000 fair value adjustment to the contingent earn-out consideration portion of the IPS purchase

price discussed in Note 3 of the Notes to Condensed Consolidated Financial Statements.

The variance is

primarily due to the $30,000 fair value adjustment recorded in the 2021 Quarter associated with the reduction of the Kablooe contingent

earnout liability.

Design Segment

Other expense in the design segment decreased

$18,000, or 33.3%, from $54,000 for the 2019 Period to $36,000 in the 2020 Period.

This decrease relates to a reduction in interest

expense resulting from a decrease in the average amount of debt outstanding in each respective period.

For the nine months

ended June 30, 2020, the Company generated a net loss of $1,668,000.

statutory tax rate for the fiscal year ended September

30, 2020 is 21%.

The Company maintains significant net operating loss carryforwards and does not recognize income tax expense /

(benefit) as its deferred tax provision is typically offset by a full valuation allowance on its net deferred tax asset.

The design segment

reported other income of $1,365,000 in the 2021 Quarter as compared to other expense of $19,000 in the 2020 Quarter.

component of other income in the 2021 Quarter was the $1,357,000 forgiveness of note payable related to the PPP loan.

significant factors contributing to the change were interest income on the note receivable from a customer which was fully reserved

for in Fiscal 2019 and lower interest expense due to a reduction in the average amount of debt outstanding.

For the three

months ended December 31, 2020, the Company generated net income of $1,199,000, primarily resulting from the $1,357,000

forgiveness of the PPP loan, which will not be recognized as taxable income pursuant to the CARES Act.

The Company maintains

significant net operating loss carryforwards and does not recognize income tax expense / (benefit) as its deferred tax

provision is typically offset by a full valuation allowance on its net deferred tax asset.

LIQUIDITY AND CAPITAL

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of liquidity is our operations.

The primary demand on our working capital has historically been (i) operating losses, (ii) repayment

The primary demands on our working capital have historically been (i) operating losses, (ii) repayment

of debt obligations, and (iii) any increases in accounts receivable and inventories arising in the ordinary course of business.

Historically, our sources of liquidity have been adequate to satisfy working capital requirements arising in the ordinary course

As of the filing date

of this report, we had $300,000 available under our $1,300,000 line of credit which matures May 31, 2021.

The Company has paid

down the line of credit using available cash from operations.

Recently, the maturity date on the $1,600,000 Forward China promissory

note was extended to September 30, 2020 (see Note 9 –

Related Party Transactions).

Although this note has been extended on

multiple occasions to assist us with our liquidity position, we plan on funding the repayment at maturity using existing cash balances

and/or obtaining an additional credit facility as deemed necessary.

As discussed in Note

12 - Debt, 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”).

This loan is unsecured, and we intend to apply for forgiveness of the PPP Loan as soon as reasonably

practical and in accordance with the terms of the CARES Act when the forgiveness process becomes available by the bank and the

Small Business Administration.

We can provide no assurance that we will be successful in obtaining forgiveness for the PPP Loan.

At January 31, 2021,

we had $650,000 available under our $1,300,000 line of credit which matures May 31, 2021.

Additionally, Forward China holds a $1,600,000

promissory note which matures December 31, 2021.

Although this note has been extended on multiple occasions to assist us with our

liquidity position, we plan on funding the repayment at maturity using existing cash balances and/or obtaining an additional credit

facility as deemed necessary.

We can provide no assurance that Forward China will extend the note again if we request an extension

nor that any such credit facility will be available on terms acceptable to us or at all.

We anticipate that

our liquidity and financial resources for the 12 months following the date of the filing of this Form 10-Q will be adequate to

manage our operating and financial requirements.

If we have the opportunity to make a strategic acquisition or an investment in

a product or partnership, we may require additional capital beyond our current cash balance to fund the opportunity.

to raise additional capital, there is no assurance that we will be able to raise funds on terms that are acceptable to us or at

At June 30, 2020,

our current ratio (current assets divided by current liabilities) was 1.5 compared to 1.4 at September 30, 2019.

At June 30, 2020,

our quick ratio (current assets less inventories divided by current liabilities) was 1.4 compared to 1.2 at September 30, 2019.

At June 30, 2020, our working capital (current assets less current liabilities) was $4,176,000 compared to $3,543,000 at September

At July 31, 2020, we had $3,023,000 of cash on hand.

our liquidity and financial resources for the 12 months following the filing of this Form 10-Q will be adequate to manage our operating

and financial requirements.

If we have the opportunity to make a strategic acquisition (as we have in the past with the acquisitions

of IPS and Kablooe) or an investment in a product or partnership, we may require additional capital beyond our current cash balance

to fund the opportunity.

If we seek to raise additional capital, there is no assurance that we will be able to raise funds on terms

that are acceptable to us or at all.

At December 31, 2020,

our working capital was $4,231,000 compared to $3,396,000 at September 30, 2020.

At January 31, 2021, we had approximately $1,200,000

of cash on hand.

Although we do not

1 unchanged sentence

us to purchase equipment and other capital assets in the future, depending on need.

During the nine months

ended June 30, 2020 and 2019, our sources and uses of cash were as follows:

Cash Flows from

During the three months

ended December 31, 2020 and 2019, our sources and uses of cash were as follows:

Operating Activities

During the 2020 Period,

During the 2021 Quarter,

cash used in operating activities of $511,000 primarily resulted from an operating loss of $167,000, a decrease in deferred income

of $315,000, an increase in accounts receivable of $204,000, a decrease in accounts payable, accrued expenses and amounts due to

Forward China of $176,000, partially offset by non-cash expenses of $213,000 relating to depreciation, amortization, share-based

compensation and bad debt expense, an increase of $125,000 in prepaid expenses and other assets and the net change in other operating

assets and liabilities of $13,000.

During the 2020 Quarter,

cash used in operating activities of $784,000 primarily resulted from a net loss of $82,000, an increase in accounts receivable

of $1,448,000, the $350,000 non-cash reduction in the contingent earnout liability associated with the IPS acquisition and net

other activity of $25,000, offset by the $1,015,000 non-cash goodwill impairment charge, a decrease in inventory of $881,000, the

impairment of the investment of $327,000, an increase in deferred income of $306,000 and depreciation and amortization expense

During the 2019 Period,

cash used in operating activities of $2,201,000 resulted primarily from a net loss of $1,765,000, a decrease of Accounts Payable

(including due to Forward China) of $947,000, an increase in prepaid expenses and other assets of $503,000 and a net loss reconciling

adjustment of $327,000 for the fair value of cost method investment for services provided, partially offset by a decline in accounts

receivable of $143,000, a reduction of inventory of $265,000, an increase in accrued expenses of $65,000, an increase of deferred

income of $23,000, in addition to the add-backs for bad debt expense of $417,000, share-based compensation of $181,000, depreciation

and amortization of $235,000, and the add-back of deferred rent of $14,000.

Cash Flows from

of $560,000, a decrease in accounts payable, accrued expenses and amounts due to Forward China of $526,000, a decrease in deferred

income of $161,000 and bad debt recoveries of $65,000, partially offset by a decline in inventories of $508,000 and non-cash expenses

of $102,000 relating to depreciation, amortization, and share-based compensation.

Investing Activities

Cash used in investing

activities in the 2020 Period and the 2019 Period of $56,000 and $30,000, respectively, resulted from purchases of property and

Cash Flows from

activities in the 2021 Quarter and the 2020 Quarter of $30,000 and $6,000, respectively, resulted from purchases of property and

Financing Activities

In the 2020 Period,

cash provided by financing activities of $808,000 consisted of $1,357,000 proceeds from the PPP loan, borrowings of $900,000 under

the line of credit and $32,000 of proceeds from stock options exercised, partially offset by $1,200,000 in repayments on the line

of credit, $200,000 paid out on the deferred cash consideration, and $81,000 in repayments on notes payable and capital leases.

In the 2019 Period,

cash provided by financing activities of $570,000 consisted of $1,250,000 in borrowings on the line of credit, offset by $500,000

in repayments on the line of credit, $145,000 in repayments on notes payable and $34,000 in repayments on capital leases.

In the 2021 Quarter,

cash used in financing activities of $51,000 consisted of repayments of notes payable and capital leases of $52,000, partially

offset by proceeds from stock options exercised.

In the 2020 Quarter,

cash used in financing activities of $234,000 consisted of $200,000 paid out on deferred cash consideration and $34,000 in repayments

of notes payable and capital leases.

Related Party Transactions

2 unchanged sentences

contained herein.

Cautionary Note Regarding Forward-Looking

This report contains

“forward-looking statements”, as such term is used within the meaning of the Private Securities Litigation Reform Act

of 1995, including statements regarding our liquidity, expectations regarding the impact of the pandemic on our business, expectations

regarding the length of the pandemic’s business disruption, expectations regarding the forgiveness of the PPP Loan, beliefs

regarding the design segments future results of operations, anticipated distribution of products from the Mooni distribution agreement,

plans regarding the repayment of debt and beliefs regarding our capital.

Forward-looking statements can be identified by words

such as “anticipates,”

“intends,”

“plans,”

“seeks,”

“believes,”

“estimates,”

“expects”

and similar references to future periods.

Forward-looking statements are based on our current expectations

and assumptions regarding our business, the economy and other future conditions.

Because forward-looking statements relate to the

future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict.

results may differ materially from those contemplated by the forward-looking statements.

We caution you therefore against relying

on any of these forward-looking statements.

They are neither statements of historical fact nor guarantees or assurances of future

Important factors that could cause actual results to differ materially from those in the forward-looking statements

include the failure to receive material orders, our ability to successfully market and sell products that we develop, the effects

of the COVID-19 outbreak, including levels of consumer, business and economic confidence generally, the duration of the COVID-19

outbreak and severity of such outbreak, the pace of recovery following the COVID-19 outbreak, the effect on our supply chain, our

ability to implement cost containment;

and the adverse effects of the COVID-19 outbreak on our business or the market price of

our common stock, failure to diversify the industries in which we sell our products, potential imposed tariffs or other restrictions

placed on imports by the U.S.

government, and continued pricing pressure on our products.

Further information on our risk factors

is contained in our filings with the SEC, including our Form 10-K for the year ended September 30, 2019.

Any forward-looking statement

made by us speaks only as of the date on which it is made.

Factors or events that could cause our actual results to differ may

emerge from time to time, and it is not possible for us to predict all of them.

We undertake no obligation to publicly update any

forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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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-Q

Item 1. Financial Statements