What changed in this filing

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Item 1. Financial Statements

2021-05-13 compared with 2021-02-12 · 1039 added, 770 removed, 291 unchanged (86% of the section changed)

14 unchanged sentences

Line of credit

Note payable to Forward China

Current portion of note payable to Forward China

Accounts payable

8 unchanged sentences

Other liabilities:

Note payable to Forward China, less current portion

Notes payable, less current portion

9 unchanged sentences

9,952,766 and

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

9,883,851 shares issued and outstanding at March 31, 2021 and September 30, 2020, respectively

Additional paid-in capital

8 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended December 31,

For the Three Months Ended

For the Six Months Ended

Revenues, net

2 unchanged sentences

General and administrative expenses

Goodwill impairment

Loss from operations

Gain on forgiveness of note payable

Fair value adjustment of earn-out consideration

Fair value adjustment of earnout consideration

Fair value adjustment of deferred cash consideration

Interest income

Interest expense

Other (income)/expense, net

Income/(loss) before income taxes

Other expense, net

(Loss)/income before income taxes

Provision for/(benefit from) income taxes

Net income/(loss)

Earnings/(loss) per share:

Net (loss)/income

$ (1,371,614 )

$ (1,453,271 )

(Loss)/earnings per share:

Weighted average common shares outstanding:

3 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

For the Three Month Ended December 31, 2020

For the Three and Six Months Ended March 31, 2021

Balance at September 30, 2020

4 unchanged sentences

(11,896,414 )

For the Three Months Ended December 31, 2019

Share-based compensation

Stock options exercised

Balance at March 31, 2021

$ (12,731,142 )

For the Three and Six Months Ended March 31, 2020

Balance at September 30, 2019

3 unchanged sentences

(11,401,826 )

Share-based compensation

Balance at March 31, 2020

$ (12,773,440 )

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

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended

For the Six Months Ended

Operating Activities:

Net income/(loss)

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

$ (1,453,271 )

Adjustments to reconcile net

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

Share-based compensation

2 unchanged sentences

Gain on forgiveness of note payable

Change in fair value of earn-out consideration

Change in fair value of earn-out

consideration

Change in fair value of deferred

cash consideration

Goodwill impairment

Impairment of investment

Changes in operating assets and liabilities:

Accounts receivable

Prepaid expenses and other current assets

Accounts payable and due to Forward China

Prepaid expenses and other current

Accounts payable and due to Forward

Deferred income

Operating lease liabilities

Accrued expenses and other current liabilities

Net cash used in operating activities

Accrued expenses

and other current liabilities

Net cash used

in operating activities

Investing Activities:

Purchases of property and equipment

Net cash used in investing activities

property and equipment

Net cash used

in investing activities

Financing Activities:

Proceeds from line of credit borrowings

Repayment of line of credit borrowings

Repayment of notes payable

1 unchanged sentence

Repayments of finance leases

Payment of deferred cash consideration

Net cash used in financing activities

Payment of deferred

cash consideration

Net cash used

in financing activities

Net decrease in cash

Cash at beginning of year

Cash at end of year

Cash at beginning of period

Cash at end of period

Supplemental Disclosures of Cash Flow Information:

Cash paid for interest

Cash paid for taxes

Supplemental Disclosures of Non-Cash Information:

Lease assets recorded upon adoption of ASC 842

Lease liabilities recorded upon adoption of ASC 842

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.

FORWARD INDUSTRIES,

AND SUBSIDIARIES

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 OVERVIEW

Industries, Inc.

Forward 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.

As a result of the

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.

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 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

The outbreak of the COVID-19

virus continues to impact 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 half 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 continues to be reduced or delayed as a result

of the pandemic as certain customers have reduced discretionary spending.

While revenues for the three and six months ended March 31,

2021 increased as compared to the three and six months ended March 31, 2020, they were lower than anticipated due in part to the impact

of COVID-19 and the resulting economic conditions.

The impact of lower than anticipated revenue was further complicated by a significant

increase in freight costs due to the global shipping container shortage caused by the pandemic.

These challenges were partially offset

by a reduction in certain selling and travel related expenses resulting from government mandated travel restrictions.

The economy has continued

to open in more jurisdictions.

However, there continue to be areas impacted by new strains of the virus that could cause government officials

to enact more restrictions on how businesses operate.

The future impacts of the pandemic and any resulting economic impact are largely

unknown and could be significant.

It is possible that the pandemic, the measures taken by the governments of countries affected and the

resulting economic impact may negatively impact our results of operations, cash flows and financial position in future periods as well

as that of our customers, including their ability to pay for our services and choosing to allocate their budgets to new or existing projects

which may or may not require our services.

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

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 —

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:

Until the pandemic is under

control, 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.

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;

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.

To help mitigate the impact of these challenging business conditions, we

have implemented cost cutting initiatives and reduced executive pay and Board of Directors compensation for an undetermined period of

There is no assurance these measures will be successful.

See “Liquidity and Capital Resources”

section of Item 2.

“Management’s

Discussion and Analysis of Financial Condition and Results of Operations”

for further description of these cost cutting measures.

NOTE 2 ACCOUNTING

Basis of Presentation

The accompanying

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

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.

Forward Industries (IN),

(“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.

“Forward”, “we”

or the “Company”

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

and all of its subsidiaries.

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

FORWARD INDUSTRIES,

AND SUBSIDIARIES

FORWARD INDUSTRIES, INC.

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

management, the accompanying condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q reflect

all normal recurring adjustments necessary to present fairly the financial position and results of operations and cash flows for

the interim periods presented herein, but are not necessarily indicative of the results of operations for the year ending September

These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated

financial statements included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2020, and with the disclosures

and risk factors presented therein.

The September 30, 2020 condensed consolidated balance sheet has been derived from the audited

consolidated financial statements.

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

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.

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 and six months ended March 31, 2021 include Kablooe’s results

of operations, while our results of operations for the three and six months ended March 31, 2020 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.

In the opinion of management,

the accompanying condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q reflect all normal recurring

adjustments necessary to present fairly the financial position and results of operations and cash flows for the interim periods presented

herein, but are not necessarily indicative of the results of operations for the year ending September 30, 2021.

These condensed consolidated

financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its

Annual Report on Form 10-K for the fiscal year ended September 30, 2020, and with the disclosures and risk factors presented therein.

The September 30, 2020 condensed consolidated balance sheet has been derived from the audited consolidated financial statements.

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

For the six months ended

March 31, 2021, the Company generated net income of $364,000 and used $398,000 of cash flows in operating activities.

The Company has

an accumulated deficit of $12,731,000 at March 31, 2021.

We believe our existing cash balance and working capital will be sufficient to

meet our liquidity needs through at least June 30, 2022.

Accounting Estimates

The preparation of

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

the United States of America (“U.S.

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

amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated

financial statements and the reported amounts of revenues and expenses during the reporting periods.

Actual results could differ

from those estimates and assumptions.

The preparation of the Company’s

condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America

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

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

of revenues and expenses during the reporting periods.

Actual results could differ from those estimates and assumptions.

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.

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 March 31, 2021 or September 30, 2019 and $75,000 of contract liabilities at September 30, 2020.

Design Segment

The Company applies

the “cost to cost”

The Company applies the “cost

to cost”

and “right to invoice”

methods of revenue recognition to the contracts with customers

in the design segment.

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,

AND SUBSIDIARIES

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.

The design segment had contract assets of $863,000, $649,000 and $611,000 at

March 31, 2021, September 30, 2020 and September 30, 2019, 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 sheets.

The design segment had contract liabilities of $137,000, $410,000 and $220,000 at March 31, 2021, September

30, 2020 and September 30, 2019, respectively.

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

Accounts Receivable

Accounts receivable consist

of unsecured trade accounts with customers.

The Company maintains an allowance for doubtful accounts, which is recorded as a reduction

to accounts receivable on the condensed consolidated financial statements.

Collectability of accounts receivable is estimated by evaluating

the number of days accounts are outstanding, customer payment history, recent payment trends and perceived creditworthiness, adjusted

as necessary based on specific customer situations.

At March 31, 2021 and September 30, 2020, the Company had allowances for doubtful

accounts of $249,000 and $249,000, respectively, for the distribution segment and $861,000 and $347,000, 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

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 a quantitative 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 perform the quantitative impairment

test by comparing the fair value of the reporting unit with its carrying amount, including goodwill.

If the fair value of the reporting

1 unchanged sentence

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

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

Intangible Assets

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

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 are subjective in nature and involve uncertainties

and matters of significant judgments and therefore cannot be determined with precision.

Changes in assumptions could significantly

affect the estimates.

If these estimates or material related assumptions change in the future, we may be required to record impairment

charges related to our intangible assets.

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

at December 31, 2020.

FORWARD INDUSTRIES,

AND SUBSIDIARIES

Intangible assets include

trademarks and customer relationships, which resulted from the acquisitions of IPS in January 2018 and Kablooe in August 2020 and are

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

These intangible assets are

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

Our intangible assets are

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

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 are subjective in nature and involve uncertainties and matters of significant judgments and therefore

cannot be determined with precision.

Changes in assumptions could significantly affect the estimates.

If these estimates or material related

assumptions change in the future, we may be required to record impairment charges related to our intangible assets.

Management evaluated

and concluded that there were no impairments of intangible assets at March 31, 2021.

The Company recognizes future

tax benefits and liabilities measured at enacted rates attributable to temporary differences between financial statement and income tax

bases of assets and liabilities and to net tax operating loss carryforwards to the extent that realization of these benefits is more likely

At March 31, 2021, 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.

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company recognizes

future tax benefits and liabilities measured at enacted rates attributable to temporary differences between financial statement

and income tax bases of assets and liabilities and to net tax operating loss carryforwards to the extent that realization of these

benefits is more likely than not.

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.

In December 2020, the Company’s

application for forgiveness of its 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”) was approved.

The aggregate loan principal amount forgiven

was $1,357,000.

The 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.

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

We perform fair value measurements

in accordance with the guidance provided by Accounting Standards Codification (“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

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;

1 unchanged sentence

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,

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

an implicit rate, nor is one readily available.

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

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

and lease liability.

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

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

Lease expense for lease payments is recognized

on a straight-line basis over the lease term.

Operating lease assets are shown as right of use assets and 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 finance lease liabilities are shown separately as such on the condensed consolidated balance sheets.

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

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

rate, nor is one readily available.

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

to exercise such option, the Company will include the renewal option terms in determining the lease asset and lease liability.

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

obligation to make lease payments arising from the lease.

Lease expense for lease payments is recognized on a straight-line basis over

the lease term.

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

separately as such on the condensed consolidated balance sheets.

Business Combinations

The Company allocates

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

estimated fair values.

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

is recorded as goodwill.

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

estimates and assumptions, especially with respect to intangible assets.

Critical estimates

in valuing certain intangible assets include, but are not limited to, future expected cash flows from customer relationships and

developed technology, discount rates and terminal values.

Our estimate of fair value is based upon assumptions believed to be reasonable,

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.

Recent Accounting

Pronouncements

In August 2018, the

Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASU”) 2018-13,

“Fair Value Measurement - Disclosure Framework (Topic 820)”

The Company allocates the

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

The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.

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

especially with respect to intangible assets.

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Critical estimates in valuing

certain intangible assets include, but are not limited to, future expected cash flows from customer relationships and developed technology,

discount rates and terminal values.

Our estimates of fair value are based upon assumptions believed to be reasonable, 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.

Reclassifications

Certain amounts in the accompanying

condensed consolidated financial statements for the three and six months ended March 31, 2020 have been reclassified to conform to the

March 31, 2021 presentation.

Recent Accounting Pronouncements

In August 2018, the Financial

Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 adopted this guidance in the first quarter

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

In November 2019,

the FASB issued ASU 2019-08, “Compensation –

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

(Topic 606)”

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,

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

The updated guidance is effective

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

Early adoption is permitted for any

removed or modified disclosures.

The Company adopted this guidance in the first quarter of Fiscal 2021 with no material impact to its

condensed consolidated financial statements.

In November 2019, the FASB

issued ASU 2019-08, “Compensation –

Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606)”

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

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

In November 2019, the FASB

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

Credit Losses.”

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

concurrently with the adoption of such earlier guidance.

This pronouncement is effective for 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,

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

August 2018, the FASB issued ASU 2018-15 “

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

350-40)”

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.

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.

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

fiscal years beginning after December 15, 2019 and interim periods within those fiscal years.

Early adoption is permitted.

The Company 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):

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.

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

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.

The Company is currently evaluating the effects of the pronouncement 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,

ASSETS AND GOODWILL

The Company’s intangible

assets 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 March 31, 2021 and 2020, respectively, and $106,000 and $81,000 for the six months ended March 31, 2021 and

2020, respectively, which is included in general and administrative expenses on the condensed consolidated statements of operations.

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company’s intangible assets consist

of the following:

December 31, 2020

September 30, 2020

Customer Relationships

Total Intangible Assets

Customer Relationships

Relationships

Intangible Assets

Relationships

Total Intangible Assets

2 unchanged sentences

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:

At March 31, 2021, 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,

AND SUBSIDIARIES

During the three months ended

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

Those triggering events

included the reduction in fair value of the IPS continent earnout consideration discussed in Note 4 and revised revenue and operational

projections for IPS for the remainder of the 2020 fiscal year and future periods.

Based on these factors, the Company 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.

The estimates

and assumptions utilized in the estimated fair value calculation 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.

The Company concluded

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

amount in the three months ended March 31, 2020.

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

at September 30, 2020 and there were no triggering events leading to an interim impairment analysis at March 31, 2021.

VALUE MEASUREMENTS

deferred consideration of $60,000 and $90,000 at March 31, 2021 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.

In December 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.

In connection with the acquisition

of IPS in January 2018, the Company agreed to pay deferred cash consideration and contingent earnout consideration to the selling shareholders

of IPS and these liabilities were measured at fair value each reporting period.

In March 2020, the fair value of the earnout consideration

was reduced from $350,000 to $0 due to the low likelihood of IPS reaching the underlying earnings target.

At September 30, 2020, the Company

had no remaining obligation for consideration payments related to the acquisition of IPS.

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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:

The following table presents

the placement in the fair value hierarchy and summarize the changes in fair value of the aforementioned liabilities for the three and

six months ended March 31, 2021:

value measurement at reporting date using

prices in active markets for identical assets

other observable inputs

unobservable inputs

September 30, 2020

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,

AND SUBSIDIARIES

Quoted prices in active

markets for identical assets

Significant other observable

Significant unobservable

Deferred consideration at September 30, 2020

Decrease in fair value of Kablooe

contingent earnout consideration

Deferred consideration at December 31, 2020

Change in fair value of Kablooe contingent

earnout consideration

Deferred consideration at March 31, 2021

During Fiscal 2019, the Company

received common stock from a customer as compensation for services provided, which was recorded as a cost-method investment with an estimated

fair value of $327,000.

This initial fair value was 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.

Management determined that the inputs used to value the investment were observable,

either directly or indirectly, and therefore classified as a level 2 valuation measurement.

In March 2020, due to the performance of the

business in which the Company was invested, it concluded the investment was impaired and recorded an impairment charge of $327,000, which

was recorded as a component of general and administrative expenses on the condensed consolidated statement of operations.

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 SEGMENT

The Company has two reportable

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 services.

We measure the performance

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

Operating income/(loss) and net income/(loss) are shown in

the table below:

For the Three Months Ended

For the Six Months Ended

Revenues, net

2 unchanged sentences

Total cost of sales

Income/(loss) from operations

Total income/(loss) from operations

Other (income)/expense, net

Total other (income)/expense, net

Loss from operations

Total loss from operations

$ (1,667,000 )

Income/(loss) before income taxes

Total income/(loss) before income taxes

The following table presents total assets

by operating segment:

$ (1,696,000 )

Other expense/(income), net

Total other expense/(income), net

$ (1,348,000 )

Net (loss)/income

Total net (loss)/income

$ (1,372,000 )

$ (1,453,000 )

The following table presents total assets by operating

September 30,

FORWARD INDUSTRIES,

AND SUBSIDIARIES

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 SHARE-BASED

Equity Incentive Plan

February 2021, shareholders of the Company approved the 2021 Equity Incentive Plan (the “2021 Plan”), which is administered

by the Compensation Committee of the Board of Directors and authorizes 1,291,000 shares of common stock for grants of various types of

equity awards to officers, directors, employees and consultants.

Upon approval of the 2021 Plan, no additional awards were granted under

the 2011 Long Term Incentive Plan (the “2011 Plan”), which expired according to its terms in March 2021.

Shares authorized

under the 2021 Plan include 1,000,000 new shares and 291,000 shares that remained available under the 2011 Plan.

Awards which are forfeited

or expire are eligible for regrant under the 2021 Plan.

The exercise prices of stock options granted may not be less than the fair market

value of the common stock as quoted on the Nasdaq stock market on the grant date and the expiration date of option awards may not exceed

Stock Options

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.

options were granted during the three or six months ended March 31, 2021.

February 2020, the Company granted options to non-employee directors to purchase an aggregate of 248,000 shares of its common stock at

an exercise price of $1.13 per shares.

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 $145,000, which was recognized ratably over the vesting period.

These options, which were the

only options granted during the three and six months ended March 31, 2020, had a grant-date fair value of $0.58 per share.

the six months ended March 31, 2021, the Company issued 69,000 shares of its common stock pursuant to the exercise of stock options for

aggregate cash proceeds of $144,000.

There were no options exercised during the six months ended March 31, 2020.

Company recognized compensation expense for stock option awards of $21,000 and $36,000 during the three months ended March 31, 2021 and

2020, respectively, and $63,000 and $69,000 during the six months ended March 31, 2021 and 2020, respectively, in its condensed consolidated

statements of operations.

March 31, 2021, there was $10,000 of total unrecognized compensation cost related to nonvested stock option awards that is expected to

be recognized over a weighted average period of 1.0 year.

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:

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

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

For the Three Months Ended

Net income/(loss)

For the Six Months Ended

Net (loss)/income

$ (1,372,000 )

$ (1,453,000 )

Weighted average common shares outstanding

1 unchanged sentence

Weighted average diluted shares outstanding

Earnings/(loss) per share:

FORWARD INDUSTRIES,

AND SUBSIDIARIES

(Loss)/earnings per share

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following securities

were excluded from the calculation of diluted earnings/(loss) 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 Six Months Ended

Total potentially dilutive shares

NOTE 8 CONCENTRATIONS

Concentration of

Revenues and Accounts Receivable

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.

Concentration of Revenues and Accounts Receivable

For the three and six months

ended March 31, 2021 and 2020, the Company had customers whose individual percentage of their respective segment’s revenues and

accounts receivable was 10% or greater.

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

1 unchanged sentence

For the Three Months Ended

For the Six Months Ended

Design Segment Revenues Concentration

For the Three Months Ended

FORWARD INDUSTRIES,

AND SUBSIDIARIES

For the Six Months Ended

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

1 unchanged sentence

September 30,

Design Segment Accounts Receivable

Concentration

Design Segment Accounts Receivable Concentration

September 30,

1 unchanged sentence

PARTY TRANSACTIONS

Buying Agency and

Supply Agreement

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

Buying Agency and Supply Agreement

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.

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

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

Agreement expires October 22, 2023.

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 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

Company recorded service fees to Forward China of $340,000 and $339,000 during the three months ended March 31, 2021 and 2020, respectively,

and $683,000 and $676,000 during the six months ended March 31, 2021 and 2020, respectively, which are included as a component of cost

of sales upon sales of the related products.

The Company has a separate

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

In the 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.

The Company recognized $12,000 of commissions related to

this agreement during the six months ended March 31, 2021.

No commissions were recognized during the three or six months ended March 31,

The Company had no prepayments

to Forward China for inventory purchases at March 31, 2021 and $107,000 of prepayments for inventory purchases at September 30, 2020,

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

FORWARD INDUSTRIES, INC.

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 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.

On January 18, 2018, 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 for the three months ended March 31, 2021 and 2020 and $64,000 for the six months ended March 31,

2021 and 2020 in interest expense associated with this note.

The maturity date of this note was extended to December 31, 2022.

Related Party Sales

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,

The 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

The Company sold design services to this customer of $6,000 and $44,000 for the three and six months ended March 31, 2020,

respectively.

There were no sales to this customer for the three or six months ended March 31, 2021.

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.

In October 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.

The Koble brand

is owned by The Justwise Group Ltd., a company owned by Terrence Wise, Chief Executive Officer and Chairman of the Company.

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

of $154,000 and $339,000 during the three and six months ended March 31,

2021, respectively.

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 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

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

The Company filed a motion to dismiss the complaint on December 14, 2020.

The court has not yet ruled on the Company’s

From time to time, the Company

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

At March 31, 2021, 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

The line of credit had a maturity date of May 31, 2021 at March 31, 2021, 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.

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,

AND SUBSIDIARIES

effective interest rate was 4.0% at both March 31, 2021 and September 30, 2020.

In March 2021, the Company paid down the outstanding

balance on the line of credit and $1,300,000 was available at March 31, 2021.

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.

In May 2021, the bank renewed the line of credit with a

maturity date of May 31, 2022.

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

On April 18, 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.

unsecured, bore interest at a rate of 1% per annum, and was scheduled to mature on April 18, 2022.

In October 2020, the Company filed

for forgiveness of this loan and in December 2020, the Small Business Administration (“SBA”) 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 six months ended March 31, 2021.

There is a six-year period

during which the SBA can review the Company’s forgiveness.

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 March 31, 2021 and September 30, 2020 was $72,000 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”)

On January 29, 2019, the

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

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.

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.

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.

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.

The Company generated revenues

from this agreement of $454,000 since it began selling Mooni products in Fiscal 2020.

The current and long-term portions of the unamortized

fee of $111,000 and $0, respectively, at March 31, 2021 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 the three and six months ended March 31, 2021 of $33,000 and $67,000, respectively, and for the three and

six months ended March 31, 2020 of $33,000 and $67,000, respectively, 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,

AND SUBSIDIARIES

The Company’s operating

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

Total operating lease expense was $152,000 and $304,000 for

the three and six months ended March 31, 2021, respectively, and $122,000 and $255,000 for the three and six months ended March 31, 2020,

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 $18,000 and $23,000 at March 31, 2021 and September 30, 2020, respectively.

In March 2021, the Company

signed a renewal to extend the term of its lease in Minnesota for an additional 60 months.

The renewal of this operating lease commences

July 1, 2021 and payments under it escalate 2.75% per year.

The monthly rent payment is $10,000 per month, which includes taxes and operating

expenses as defined in the agreement.

FORWARD INDUSTRIES, INC.

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:

Additional information related

to operating and finance leases at March 31, 2021 and September 30, 2020 is as follows:

September 30,

5 unchanged sentences

Finance leases

At December 31, 2020,

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

At March 31, 2021, future

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

Operating Leases

6 unchanged sentences

The following discussion

and analysis should be read in conjunction with our unaudited condensed consolidated financial statements, and the notes thereto,

and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial

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 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:

and analysis should be read in conjunction with our unaudited condensed consolidated financial statements, and the notes thereto, and

other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements

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

The following discussion

and analysis compares our consolidated results of operations for the three and six months ended March 31, 2021 (the “2021 Quarter”

and the “2021 Period”, respectively) with those for the three and six months ended March 31, 2020 (the “2020 Quarter”

and the “2020 Period”, respectively).

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

Cautionary Note Regarding Forward-Looking Statements

This report contains “forward-looking

statements”, as such term is used within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements include,

among other things, statements regarding:

our liquidity,

4 unchanged sentences

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,”

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,”

8 unchanged sentences

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.

and similar expressions.

Forward-looking

statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions.

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.

They are 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 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 by law.

Business Overview

Forward Industries,

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:

Forward Industries, Inc.

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

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 and the 2021 Period include Kablooe’s results of operations,

while our results of operations for the 2020 Quarter and the 2020 Period 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.

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

in our financial results until future periods.

Until the pandemic is under

control, 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 —

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;

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.

To help mitigate the impact of these challenging business conditions, we

have implemented cost cutting initiatives and reduced executive pay and Board of Directors compensation for an undetermined period of

There is no assurance these measures will be successful.

See “Liquidity and Capital Resources”

section for further description

of these cost cutting measures.

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

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

Policies and Estimates

We discuss the material

accounting policies that are critical in making the estimates and judgments in our Annual Report on Form 10-K for the fiscal year

ended September 30, 2020, under the caption “Management’s Discussion and Analysis—Critical Accounting Policies

and Estimates”.

There has been no material change in critical accounting policies or estimates during the period covered

by this report.

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

Variability of Revenues and Results of Operations

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.

Orders 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 Policies and Estimates

We discuss the material accounting

policies that are critical in making the estimates and judgments in our Annual Report on Form 10-K for the fiscal year ended September

30, 2020, under the caption “Management’s Discussion and Analysis—Critical Accounting Policies and Estimates”.

There has been no material change in critical accounting policies or estimates during the period covered by this report.

Recent Accounting Pronouncements

For information on

recent accounting pronouncements and impacts, see Note 2 to the unaudited condensed consolidated financial statements.

RESULTS OF OPERATIONS

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

For information on recent

accounting pronouncements and impacts, see Note 2 to the unaudited condensed consolidated financial statements.

RESULTS OF OPERATIONS FOR THE THREE MONTHS

ENDED MARCH 31, 2021 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2020

Distribution Segment

Distribution segment net

loss was $573,000 in the 2021 Quarter compared to $71,000 in the 2020 Quarter.

The increase to the net loss was primarily due to a reduction

in the non-cash fair value adjustments to reduce acquisition-related earnout liabilities (see Note 4) coupled with higher sales and marketing

expenses, as reflected in the table below.

Design Segment

Design segment net loss

was $262,000 in the 2021 Quarter compared to $1,301,000 in the 2020 Quarter.

The reduction to the net loss was primarily due to a

reduction in impairment charges (see Notes 3 and 4) and higher gross profit, partially offset by higher general and administrative

expenses, as reflected in the table below:

Components of Net Loss

(amounts in thousands)

Sales and marketing expenses

General and administrative expenses

Goodwill impairment

Operating loss

Other expense/(income), net

Basic and diluted

loss per share were $0.08 and $0.14, respectively, for the 2021 Quarter and the 2020 Quarter.

Distribution Segment

Net revenues in the distribution

segment decreased $141,000, or 3.0%, to $4,483,000 in the 2021 Quarter from $4,624,000 in the 2020 Quarter, the result of a decrease in

diabetic product line revenue, partially offset by an increase in other product revenue.

Revenues from diabetic products decreased $252,000

and revenue from other products increased $111,000.

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

diabetic product sales will continue to 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 the 2021 Quarter

(amounts in thousands)

Diabetic products

Other products

Total net revenues

Net Revenues for the 2020 Quarter

(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 original equipment manufacturers

(“OEM”s) or their contract manufacturers.

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

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

decreased $252,000, or 6.2%, to $3,836,000 in the 2021 Quarter from $4,088,000 in the 2020 Quarter.

This decrease was primarily due to

lower revenues from three major diabetic customers (Diabetic Products Customers A, B and D), partially offset by an increase in revenue

from Diabetic Products Customer C.

As mentioned above, management believes that revenues from diabetic customers will continue to decline

in future periods.

The following table sets

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

Diabetic Revenues

(amounts in thousands)

Diabetic Products Customer A

Diabetic Products Customer B

Diabetic Products Customer C

Diabetic Products Customer D

All other Diabetic Products Customers

Total Diabetic Revenue

Revenues from diabetic products

represented 86% of our distribution segment’s net revenues in the 2021 Quarter compared to 88% in the 2020 Quarter.

Other Product Revenues

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 and other products sold through

our retail distribution network.

Revenues from other products

increased $111,000, or 20.7%, to $647,000 in the 2021 Quarter from $536,000 in the 2020 Quarter, primarily due to the increase in sales

of smart-enabled and other products sold through our retail distribution network, driven by new product offerings and the expansion of

our retail distribution network.

This increase was partially offset by a decline in sales of non-medical cases and protective solutions.

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 products

represented 14% of our net revenues in the 2021 Quarter compared to 12% of our net revenues in the 2020 Quarter.

Design Segment

Net revenues in the design

segment increased $605,000, or 18.3%, to $3,912,000 in the 2021 Quarter from $3,307,000 in the 2020 Quarter, primarily driven by revenues

generated by Kablooe, which was acquired in August 2020.

The remaining variance was driven by new business from existing customers, partially

offset by a decline in revenue from certain other customers as projects were either completed or spending was reduced in response to COVID-19.

The following table sets forth our design segment net revenues by major customers for the 2021 Quarter:

Design Revenues

(amounts in thousands)

Design Segment Customer 1

Design Segment Customer 2

Design Segment Customer 3

Design Segment Customer 4

Design Segment Customer 5

All other Design Segment Customers

Total design segment revenues

Distribution Segment

Gross profit for the distribution

segment increased $11,000, or 2.0%, to $572,000 in the 2021 Quarter as compared to $561,000 in the 2020 Quarter, and gross margin improved

from 12.1% to 12.8% 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 other 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 $279,000, or 31.3%, to $1,171,000 in the 2021 Quarter from $892,000 in the 2020 Quarter.

improved from 27.0% to 29.9% in the same period.

The acquisition of Kablooe in August 2020 accounted for the improvement in

both gross profit and margin in the 2021 Quarter, which was partially offset by lower utilization rates in the beginning of the 2021

Depreciation expense, which is allocated to cost of sales for the design segment, was $24,000 and $28,000 for the 2021

Quarter and 2020 Quarter, respectively.

Sales and Marketing Expenses

Distribution Segment

Sales and marketing expenses

for the distribution segment increased $129,000, or 36.8%, to $480,000 in the 2021 Quarter from $351,000 in the 2020 Quarter.

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

Sales and marketing expenses for the distribution

segment increased to 10.7% of revenues in the 2021 Quarter as compared to 7.6% of revenues in the 2020 Quarter.

Design Segment

Sales and marketing expenses

for the design segment decreased $31,000, or 24.0%, to $98,000 in the 2021 Quarter from $129,000 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 decreased to

2.5% of revenues in the 2021 Quarter from 3.9% of revenues in the 2020 Quarter.

General and Administrative Expenses

Distribution Segment

General and administrative

expenses in the distribution segment increased $32,000, or 5.4%, to $620,000 in the 2021 Quarter from $588,000 in the 2020 Quarter.

increase was primarily comprised of an insurance settlement recovery of $80,000 received in the 2020 Quarter, an increase in professional

fees and higher insurance premiums, partially offset by a $55,000 decrease in software implementation costs and a $52,000 reduction in

Board of Director expenses.

General and administrative expenses for the distribution segment increased to 13.8% of revenues in the 2021

Quarter as compared to 12.7% of revenues in the 2020 Quarter.

Design Segment

General and administrative

expenses for the design segment increased $324,000, or 31.2%, to $1,361,000 in the 2021 Quarter from $1,037,000 in the 2020 Quarter.

increase is primarily driven by a $470,000 increase in bad debt expense, general and administrative costs of $267,000 generated by Kablooe,

which was acquired in August 2020, partially offset by a decrease in investment impairment expense of $327,000 (see Note 4) and an $85,000

reduction in professional fees, primarily due to reduced software implementation costs.

General and administrative expenses for the design

segment increased to 34.8% of revenues in the 2021 Quarter as compared to 31.4% of revenues in the 2020 Quarter.

Other Income / (Expense)

Distribution Segment

The distribution segment

reported other expense of $45,000 in the 2021 Quarter as compared to other income of $307,000 in the 2020 Quarter.

The variance is primarily

due the net $341,000 fair value adjustments recorded in the 2020 Quarter associated with the reduction of the IPS contingent earnout liability

(see Note 4).

Design Segment

The design segment reported

other income of $26,000 in the 2021 Quarter as compared to other expense of $12,000 in the 2020 Quarter, primarily related to interest

income on the note receivable from a customer which was fully reserved in Fiscal 2019 and lower interest expense due to a reduction in

the average amount of debt outstanding.

For the 2021 Quarter, the

Company generated a net loss of $835,000.

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 SIX MONTHS ENDED

MARCH 31, 2021 COMPARED TO THE SIX MONTHS ENDED MARCH 31, 2020

Net Income/(Loss)

1 unchanged sentence

Distribution segment

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

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.

net loss was $916,000 in the 2021 Period compared to $547,000 in the 2020 Period.

The increase to the net loss was primarily due to

a reduction in other income resulting from non-cash fair value adjustments to acquisition related earnout liabilities (see Note 4)

and an increase in sales and marketing expenses, partially offset by higher gross profit, as reflected in the table below.

Design Segment

Design segment net

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

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)

income was $1,280,000 in the 2021 Period compared to a net loss of $906,000 in the 2020 Period.

The net income generated in the 2021

Period resulted from the $1,357,000 forgiveness of note payable associated with the PPP loan.

A reduction in impairment charges (see

Notes 3 and 4) and higher gross profit, primarily due to the acquisition of Kablooe in August 2020, were partially offset by higher

general and administrative expenses, as reflected in the table below:

Main Components of Net Income/(Loss)

(amounts in thousands)

Increase (Decrease)

Sales and marketing expenses

General and administrative expenses

Operating income/(loss)

Goodwill impairment

Operating 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.

Basic and diluted

earnings/(loss) per share were $0.04 and $(0.15), respectively, for the 2021 Period and the 2020 Period.

Distribution Segment

Net revenues in the

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 the 2021 Quarter

Net revenues in the distribution

segment increased $768,000, or 8.2%, to $10,088,000 in the 2021 Period from $9,320,000 in the 2020 Period, primarily due to an increase

in other product revenue.

Revenues from other products increased $731,000 and revenue from diabetic products increased $37,000.

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 the 2021 Period

(amounts in thousands)

2 unchanged sentences

Total net revenues

Net Revenues for the 2020 Quarter

Net Revenues for the 2020 Period

(amounts in thousands)

8 unchanged sentences

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

Revenues from diabetic

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.

Revenues from diabetic products

increased $37,000, or 0.4%, to $8,305,000 in the 2021 Period from $8,268,000 in the 2020 Period.

This increase was primarily due to higher

revenues from three major diabetic customers (Diabetic Products Customers B, C and D).

The higher revenue from these three customers was

partially offset by revenue declines from Diabetic Products Customer A and other diabetic customers, which were less significant.

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

The following table

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

(amounts in thousands)

The following table sets

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

Increase (Decrease)

Diabetic Products Customer A

4 unchanged sentences

Total Diabetic Revenue

Revenues from diabetic

products represented 80% of our distribution segment’s net revenues in the 2021 Quarter compared to 89% in the 2020 Quarter.

Other Product Revenues

Revenues from diabetic products

represented 82% of our distribution segment’s net revenues in the 2021 Period compared to 89% in the 2020 Period.

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 $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

products represented 20% of our net revenues in the 2021 Quarter compared to 11% of our net revenues in the 2020 Quarter.

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 and other products sold through

our retail distribution network.

Revenues from other products

increased $731,000, or 69.5%, to $1,783,000 in the 2021 Period from $1,052,000 in the 2020 Period, 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 volume.

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 products

represented 18% of our net revenues in the 2021 Period compared to 11% of our net revenues in the 2020 Period.

Design Segment

Net revenues in the

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:

Net revenues in the design

segment increased $1,021,000, or 14.6%, to $8,025,000 in the 2021 Period from $7,004,000 in the 2020 Period, primarily driven by revenues

generated by Kablooe, which was acquired in August 2020.

The remaining variance was driven by a decline in revenue from certain existing

customers as projects were either completed or customer 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 Period:

Design Revenues

(amounts in thousands)

Design Segment Customer 1

Increase (Decrease)

Design Segment Customer 1

4 unchanged sentences

All other Design Segment Customers

Total net revenues

Total design segment revenues

Distribution Segment

Gross profit for the

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.

Gross profit for the distribution

segment increased $133,000, or 11.4%, to $1,297,000 in the 2021 Period as compared to $1,164,000 in the 2020 Period, and gross margin

improved from 12.5% to 12.9% 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 other 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

Design Segment

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

Gross profit for the design

segment increased $700,000, or 34.8%, to $2,709,000 in the 2021 Period from $2,009,000 in the 2020 Period.

Gross margin improved

from 28.7% to 33.8% in the same period.

The acquisition of Kablooe accounted for the majority of the increase in both gross profit

and margin in the 2021 Period.

Gross margin gains in the first quarter of Fiscal 2021 resulting from higher billing rates were partially

offset by lower utilization rates in the 2021 Quarter.

Depreciation expense, which is allocated to cost of sales for the design segment,

was $62,000 and $54,000 for the 2021 Period and 2020 Period, respectively.

Sales and Marketing Expenses

Distribution Segment

Sales and marketing

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.

for the distribution segment increased $225,000, or 30.3%, to $967,000 in the 2021 Period from $742,000 in the 2020 Period.

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

Sales and marketing expenses for the distribution

segment increased to 9.6% of revenues in the 2021 Period as compared to 8.0% of revenues in the 2020 Period.

Design Segment

Sales and marketing

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

General and Administrative

Sales and marketing expenses

for the design segment decreased $58,000, or 21.3%, to $214,000 in the 2021 Period from $272,000 in the 2020 Period.

The decrease in sales

and marketing expenses is primarily due to lower payroll costs.

Sales and marketing expenses for the design segment decreased to 2.7%

of revenues in the 2021 Period from 3.9% of revenues in the 2020 Period.

General and Administrative Expenses

Distribution Segment

General and administrative

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.

expenses in the distribution segment decreased $41,000, or 3.3%, to $1,202,000 in the 2021 Period from $1,243,000 in the 2020 Period.

The decrease was primarily driven by a $66,000 reduction in Board of Directors costs and a $60,000 reduction in technology expenses, primarily

due to lower software implementation costs, partially offset by an $80,000 insurance recovery received in the 2020 Period.

administrative expenses for the distribution segment decreased to 11.9% of revenues in the 2021 Period as compared to 13.3% of revenues

in the 2020 Period.

Design Segment

General and administrative

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.

administrative expenses for the design segment increased $1,010,000, or 63.2%, to $2,607,000 in the 2021 Period from $1,597,000 in

the 2020 Period.

The increase is primarily driven by a $228,000 increase in payroll related costs, general and administrative costs

of $507,000 generated by Kablooe, which was acquired in August 2020, and a $613,000 increase in bad debt expense, partially offset

by a decrease in impairment charges (see Note 4) and lower professional fees related to a reduction in software implementation

General and administrative expenses for the design segment increased to 32.5% of revenues in the 2021 Period as compared to

22.8% of revenues in the 2020 Period.

Other Income / (Expense)

Distribution Segment

The distribution segment

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

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.

The distribution

segment reported other expense of $44,000 in the 2021 Period as compared to other income of $274,000 in the 2020 Period.

variance is primarily due to the decrease in other income related to fair value adjustments associated with the Kablooe and IPS

contingent earnout liabilities (see Note 4).

Design Segment

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

Our primary source

of liquidity is our operations.

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

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.

The design segment reported

other income of $1,392,000 in the 2021 Period as compared to other expense of $31,000 in the 2020 Period.

The primary component of other

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

Other less 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 2021 Period, the

Company generated net income of $364,000, primarily resulting from the $1,357,000 forgiveness of the PPP loan, which will not be recognized

as taxable income per 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 RESOURCES

Our primary source of liquidity

is our operations.

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 of business.

At March 31, 2021, our

working capital was $5,245,000 compared to $3,396,000 at September 30, 2020.

In an abundance of

caution and to proactively conserve the Company’s cash flow, we implemented certain cost-cutting measures which became

effective in April 2021.

These cost cutting measures included (i) our executive officers agreeing to a temporary pay cut and our

Chief Executive Officer temporarily forgoing his base salary, (ii) a reduction in our head count and amounts paid to outside

consultants and (iii) non-employee Board members agreeing to reduce their board fees for the remainder of the fiscal year.

Company anticipates that these pay cuts and other reductions will last for three months and result in approximately $200,000 of cash

savings in the third quarter of Fiscal 2021.

The Company will reevaluate the continuing need for these measures.

In light of these circumstances, the Compensation Committee of the Board of Directors deferred a

recommendation for director equity compensation until such time as the Company’s performance improved.

Therefore, in

addition to cash savings, the resulting reduction in equity compensation will lower the Company’s non-cash expenses in future

At April 30, 2021, we had

approximately $1,300,000 cash on hand and $1,300,000 available under our line of credit which matures May 31, 2022.

Additionally, Forward

China holds a $1,600,000 promissory note which matures December 31, 2022.

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 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

anticipate the need to purchase additional material capital assets in order to carry out our business, it may be necessary for

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

During the three months

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

We anticipate that our liquidity

and financial resources will be adequate to manage our operating and financial requirements until at least June 30, 2022.

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.

Although we do not anticipate

the need to purchase additional material capital assets in order to carry out our business, it may be necessary for us to purchase equipment

and other capital assets in the future, depending on need.

During the six months ended

March 31, 2021 and 2020, our sources and uses of cash were as follows:

Operating Activities

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 $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.

During the 2021 Period, cash

used in operating activities of $398,000 primarily resulted from an operating loss of $984,000, a decrease in deferred income of $348,000,

an increase in inventories of $874,000, a decrease in accrued expenses of $161,000, partially offset by non-cash expenses of $748,000

relating to depreciation, amortization, share-based compensation and bad debt expense, a decrease of $757,000 in accounts receivable,

an increase of $395,000 in accounts payable and amounts due to Forward China and the net change in other operating assets and liabilities

During the 2020 Period, cash

used in operating activities of $554,000 primarily resulted from an operating loss of $1,696,000, an increase in accounts receivable of

$564,000, a decrease in accounts payable, accrued expenses and amounts due to Forward China of $1,019,000, an increase in prepaid expenses

and other current assets of $168,000, bad debt recoveries of $110,000 and net changes in other operating assets and liabilities of $7,000,

partially offset by a decline in inventories of $972,000, an increase in deferred income of $488,000, non-cash impairment charges of $1,342,000,

and other non-cash expenses of $208,000 relating to depreciation, amortization, and share-based compensation.

Investing Activities

Cash used in investing

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

Cash used in investing activities

in the 2021 Period and the 2020 Period of $38,000 and $27,000, respectively, resulted from purchases of property and equipment.

Financing Activities

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.

In the 2021 Period, cash

used in financing activities of $960,000 consisted of net repayments of the line of credit of $1,000,000, repayments of notes payable

and finance leases of $104,000, partially offset by proceeds from stock options exercised of $144,000.

In the 2020 Period, cash

used in financing activities of $1,163,000 consisted of $900,000 in net repayments on the line of credit, $200,000 paid out on deferred

cash consideration and $63,000 in repayments of notes payable and finance leases.

Related Party Transactions

For information on

related party transactions and their financial impact, see Note 9 to the unaudited condensed consolidated financial statements

contained herein.

For information on related

party transactions and their financial impact, see Note 9 to the unaudited condensed consolidated financial statements contained herein.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

1 unchanged sentence

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