What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-08-12 compared with 2021-05-13 · 339 added, 847 removed, 483 unchanged (71% of the section changed)

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Current portion of finance lease liability

Current portion of deferred consideration

Current portion of earnout consideration

Current portion of operating lease liability

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Finance lease liability, less current portion

Deferred consideration, less current portion

Earnout consideration, less current portion

Total other liabilities

4 unchanged sentences

40,000,000 shares authorized;

9,952,766 and

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

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

Additional paid-in capital

9 unchanged sentences

For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

Revenues, net

3 unchanged sentences

Goodwill impairment

Loss from operations

Income/(loss) from operations

( 1,870,732 )

Gain on forgiveness of note payable

( 1,356,570 )

Fair value adjustment of earnout consideration

3 unchanged sentences

Other expense, net

(Loss)/income before income taxes

Income/(loss) before income taxes

( 1,668,473 )

Provision for/(benefit from) income taxes

Net (loss)/income

Net income/(loss)

$ ( 215,202 )

$ ( 1,668,473 )

(Loss)/earnings per share:

Earnings/(loss) per share:

Weighted average common shares outstanding:

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CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

For the Three and Six Months Ended March 31, 2021

For the Three and Nine Months Ended June 30, 2021

Balance at September 30, 2020

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( 12,731,142 )

For the Three and Six Months Ended March 31, 2020

Share-based compensation

Stock options exercised

Balance at June 30, 2021

$ ( 12,487,555 )

For the Three and Nine Months Ended June 30, 2020

Balance at September 30, 2019

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Share-based compensation

( 1,371,614 )

Balance at March 31, 2020

( 12,773,440 )

Share-based compensation

Stock options exercised

Balance at June 30, 2020

$ ( 12,988,642 )

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

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended

For the Nine Months Ended June 30,

Operating Activities:

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$ ( 1,668,473 )

Adjustments to reconcile net

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

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

Share-based compensation

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Gain on forgiveness of note payable

Change in fair value of earn-out

consideration

Change in fair value of deferred

cash consideration

( 1,356,570 )

Change in fair value of earn-out consideration

Change in fair value of deferred cash consideration

Goodwill impairment

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Accounts receivable

Prepaid expenses and other current

Accounts payable and due to Forward

( 1,448,384 )

Prepaid expenses and other current assets

Accounts payable and due to Forward China

Deferred income

Operating lease liabilities

Accrued expenses

and other current liabilities

Net cash used

in operating activities

Net changes in operating lease liabilities

Accrued expenses and other current liabilities

Net cash used in operating activities

Investing Activities:

property and equipment

Net cash used

in investing activities

Purchases of property and equipment

Net cash used in investing activities

Financing Activities:

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Repayment of line of credit borrowings

( 1,150,000 )

( 1,200,000 )

Repayment of notes payable

Proceeds from note payable

Proceeds from stock options exercised

Repayments of finance leases

Payment of deferred

cash consideration

Net cash used

in financing activities

Payment of deferred cash consideration

Net cash (used in)/provided by financing activities

Net decrease in cash

( 1,319,978 )

Cash at beginning of period

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Supplemental Disclosures of Cash Flow Information:

Cash paid for interest

Cash paid for taxes

Supplemental Disclosures of Non-Cash Information:

assets recorded upon adoption of ASC 842

Lease liabilities

recorded upon adoption of ASC 842

Lease assets exchanged for lease liabilities

Lease assets recorded upon adoption of ASC 842

Lease liabilities recorded upon adoption of ASC 842

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

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Forward Industries, Inc.

(“Forward”, “we”

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

(“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.

As a result of the continued expansion of our design and 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

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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 this time.

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

to impact our results of operations in Fiscal 2021.

The business shutdowns resulting from the pandemic disrupted our supply chain and

the manufacture or shipment of our products and delayed the rollout of our retail products.

Additionally, demand for our design and development

services was reduced or delayed as a result of the pandemic as certain customers reduced discretionary spending.

While revenues for the

three and nine months ended June 30, 2021 increased as compared to the three and nine months ended June 30, 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 in part by the

These challenges were partially offset by a reduction in certain selling and travel related expenses.

Many government restrictions

have been relaxed and the economy has continued to open in more jurisdictions.

However, the emergence of new and transmittable variants

of COVID-19 could lead to a possible resurgence of the virus, particularly in populations with low vaccination rates and has resulted

in new restrictions in certain geographies and among certain businesses.

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

estimated at this time.

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

Refer to “Part II,

Item 1A —

Risk Factors”

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

Until the pandemic is under

control, we expect business conditions to remain challenging.

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 the pandemic is fully

controlled, we expect business conditions to remain challenging.

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

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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.

implemented cost-cutting initiatives and reduced executive pay and Board of Directors compensation for the three months ended June 30,

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

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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”).

“Forward”, “we”

or the “Company”

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

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

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

(“IPS”) and Kablooe, Inc.

“Forward”, “we” or the “Company” as used throughout this document are used to indicate Forward Industries,

and all of its subsidiaries.

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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.

Accordingly, our results of operations for the three and nine months ended June 30, 2021 include Kablooe’s results

of operations, while our results of operations for the three and nine months ended June 30, 2020 do not.

Key terms of the acquisition

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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.

For the nine months ended

June 30, 2021, the Company generated net income of $608,000,

which includes $ 1,357,000 of forgiveness

of note payable (see Note 12), and used $338,000 of cash flows in operating activities.

The Company has an accumulated deficit

of $12,488,000 at

June 30, 2021.

We believe our existing cash balance and working capital will be sufficient to meet our liquidity needs through at least

September 30, 2022.

Our largest vendor is Forward China, a related entity, which is able to extend payment terms on outstanding liabilities

when necessary (see Note 9).

We can provide no assurances that any such extension

will be given if requested.

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

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

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Actual results could differ from those estimates and assumptions.

Throughout this document,

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

Revenue Recognition

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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;

(i) finished goods are shipped to our 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.

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 contract liabilities

of $ 139,000 , $ 75,000 and $ 0 at June 30, 2021, September 30, 2020 and September 30, 2019, respectively.

Design Segment

The Company applies the “cost

to cost”

and “right to invoice”

methods of revenue recognition to the contracts with customers in the design segment.

The Company applies the “cost

to cost” and “right to invoice” methods of revenue recognition to the contracts with customers in the design segment.

The design segment typically engages in two types of contracts:

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The Company recognizes revenue

over time on its time and material contracts utilizing a “right to invoice”

over time on its time and material contracts utilizing a “right to invoice” method.

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”

progress toward the completion of its performance obligations, or the “cost to cost” method.

Revenues from fixed price contracts

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has been completed and accepted.

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Recognized revenues that

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The design segment had contract assets of $ 939,000 , $ 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

June 30, 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 $ 305,000 , $ 410,000 and $ 220,000 at June 30, 2021, September 30, 2020 and

September 30, 2019, respectively.

Accounts Receivable

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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

At June 30, 2021, September 30, 2020 and September 30, 2019, the Company had allowances

for doubtful accounts of $ 249,000 , $ 249,000 and $ 159,000 , respectively, for the distribution segment and $ 861,000 , $ 347,000 and $ 2,033,000 ,

respectively, for the design segment.

At June 30, 2021, September 30, 2020 and September 30, 2019, the Company had net accounts receivable

of $ 5,282,000 , $ 4,243,000 and $ 4,618,000 , respectively, for the distribution segment and $ 2,402,000 , $ 3,359,000 , and $ 2,077,000 , respectively,

for the design segment.

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.

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

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

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

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Management evaluated

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

and concluded that there were no impairments of intangible assets during the nine months ended June 30, 2021 or 2020.

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company recognizes future

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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

At June 30, 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.

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income due to the existence of significant net operating loss carryforwards.

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

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

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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

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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.

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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.

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separately as such on the condensed consolidated balance sheets.

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Business Combinations

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especially with respect to intangible assets.

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Critical estimates in valuing

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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.

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

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In November 2019, the FASB

issued ASU 2019-08, “Compensation –

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

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

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In November 2019, the FASB

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

Credit Losses.”

ASU 2019-11 is

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

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financial statements.

August 2018, the FASB issued ASU 2018-15 “

Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)”

addressing customers’

accounting for implementation costs incurred in a cloud computing arrangement

August 2018, the FASB issued ASU 2018-15 “ Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)”

addressing customers’ accounting for implementation costs incurred in a cloud computing arrangement

that is a service contract, which requires customers to apply internal-use software guidance to determine the implementation costs that

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In December 2019, the FASB

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

Simplifying the Accounting for Income Taxes.”

This guidance removes certain

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.

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its condensed consolidated financial statements.

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 INTANGIBLE

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

for the three months ended June 30, 2021 and 2020, respectively, and $ 160,000 and $ 122,000 for the nine months ended June 30, 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:

September 30, 2020

Relationships

Intangible Assets

Relationships

June 30, 2021

September 30, 2020

Customer Relationships

Total Intangible Assets

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Net carrying amount

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:

At June 30, 2021, estimated

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

Estimated amortization expense

Remainder of Fiscal 2021

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.

In March 2020, the Company

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

Those triggering events included the reduction

in fair value of the IPS contingent 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 included discount rate, terminal growth rate, selection of peer group companies and control

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

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

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 March 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 June 30, 2021.

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

earnout consideration of $ 70,000 and $ 90,000 at June 30, 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 and in June 2021, it increased

this liability from $60,000 to $70,000 based on the estimated increase in fair value of earnout payments in future periods.

In connection with the acquisition

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

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

the placement in the fair value hierarchy and summarizes the changes in fair value of the earnout liability for the three and nine months

ended June 30, 2021:

Table of fair value liability measured on recurring basis

Fair value measurement at reporting date using

Quoted prices in active markets for identical assets

Significant other observable inputs

Significant unobservable inputs

Earnout consideration at September 30, 2020

Decrease in fair value of Kablooe earnout consideration

Earnout consideration at December 31, 2020

Change in fair value of Kablooe earnout consideration

Earnout consideration at March 31, 2021

Increase in fair value of Kablooe earnout consideration

Earnout consideration at June 30, 2021

During Fiscal 2019, the Company

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NOTE 5 SEGMENT

The Company has two reportable

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 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.

distributes a variety of other products, including smart-enabled furniture, through its retail

distribution network.

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:

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:

Segment operating income (loss)

For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

Revenues, net

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Total cost of sales

Loss from operations

Total loss from operations

Income/(loss) from operations

$ ( 125,000 )

$ ( 211,000 )

$ ( 996,000 )

$ ( 1,032,000 )

Total income/(loss) from operations

$ ( 175,000 )

$ ( 715,000 )

$ ( 1,871,000 )

Other expense/(income), net

$ ( 239,000 )

( 1,423,000 )

Total other expense/(income), net

$ ( 1,323,000 )

Net (loss)/income

Total net (loss)/income

$ ( 203,000 )

Net income/(loss)

$ ( 181,000 )

The following table presents total assets by operating

$ ( 246,000 )

$ ( 1,096,000 )

$ ( 793,000 )

Total net income/(loss)

$ ( 215,000 )

$ ( 1,668,000 )

The following table presents total assets by

operating segment:

Schedule of Operating Assets and Liabilities

September 30,

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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

1 unchanged sentence

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

5 unchanged sentences

Stock Options

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

options were granted during the three or nine months ended June 30, 2021.

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

3 unchanged sentences

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

only options granted during the nine months ended June 30, 2020, had a grant-date fair value of $ 0.58 per share.

the nine months ended June 30, 2021 and 2020, the Company issued 147,000 and 50,000 shares, respectively, of its common stock pursuant

to the exercise of stock options for aggregate cash proceeds of $ 234,000 and $ 32,000 , respectively, which had an aggregate intrinsic value

of $ 265,000 and $ 33,000 , respectively.

Company recognized compensation expense for stock option awards of $ 4,000 and $ 38,000 during the three months ended June 30, 2021 and

2020, respectively, and $ 66,000 and $ 107,000 during the nine months ended June 30, 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.

June 30, 2021, there was $ 7,000 of total unrecognized compensation cost related to nonvested stock option awards that is expected to be

recognized over a weighted average period of 0.9 years.

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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:

Schedule of Earnings Per Share, Basic and Diluted

For the Three Months Ended

For the Six Months Ended

Net (loss)/income

For the Nine Months Ended

Net income/(loss)

$ ( 215,000 )

3 unchanged sentences

Weighted average diluted shares outstanding

(Loss)/earnings per share

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Earnings/(loss) per share

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:

Schedule of antidilutive securities excluded

For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

Total potentially dilutive shares

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 CONCENTRATIONS

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.

For the three and nine months

ended June 30, 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:

Distribution Segment Revenues Concentration

Schedule of concentration percentages

For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

Design Segment Revenues Concentration

For the Three Months Ended

For the Six Months Ended

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended

Distribution Segment Accounts Receivable

1 unchanged sentence

September 30,

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Design Segment Accounts Receivable Concentration

4 unchanged sentences

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

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.

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.

1 unchanged sentence

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 $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.

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 $ 357,000 and $ 346,000 during the three months ended June 30, 2021 and 2020, respectively,

and $ 1,040,000 and $ 1,022,000 during the nine months ended June 30, 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

4 unchanged sentences

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

this agreement during the nine months ended June 30, 2021.

No commissions were recognized during the three months ended June 30, 2021

or the three or nine months ended June 30, 2020.

The Company had prepayments

to Forward China for inventory purchases of $ 137,000 and $ 107,000 at June 30, 2021 and September 30, 2020, respectively, which are included

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

Promissory Note

4 unchanged sentences

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,

The Company incurred and paid $ 32,000 for the three months ended June 30, 2021 and 2020 and $ 96,000 for the nine months ended June 30,

2021 and 2020 in interest expense associated with this note.

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

FORWARD INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Related Party Sales

The Company’s design

A member of the Company’s

Audit, Governance and Compensation Committees of its Board of Directors is also a member of the Board of Directors of a company to whom

the Company’s distribution division sold products.

The Company recognized revenue of $ 63,000 from the sale of such products during

the three and nine months ended June 30, 2021.

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.

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 $ 0 and $ 44,000 for the three and nine months ended June 30, 2020, respectively.

There were no sales to this customer for the three or nine months ended June 30, 2021.

Related Party Activity

4 unchanged sentences

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.

recognized revenues from the sale of Koble products of $ 413,000 and $ 752,000 during the three and nine months ended June 30, 2021, respectively.

NOTE 10 LEGAL

6 unchanged sentences

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 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.

At June 30, 2021, there were no such

actions or proceedings, either individually or in the aggregate, that, if decided adversely to the Company’s interests, it believes

would be material to its business.

The Company, specifically

IPS, has a $ 1,300,000 revolving line of credit with a bank which was renewed at the discretion of the lender in May 2021.

credit has a maturity date of May 31, 2022 , is guaranteed by the Company and is secured by all of IPS’ assets.

The interest rate

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

The effective interest rate was 4.0 % at both June 30,

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 June 30, 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.

FORWARD INDUSTRIES, INC.

4 unchanged sentences

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.

of note payable on the condensed consolidated statement of operations for the nine months ended June 30, 2021.

There is a six-year period

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

In connection with the acquisition

1 unchanged sentence

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.

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.

The outstanding balance at June 30, 2021 and September 30, 2020 was $ 29,000 and $ 156,000 , respectively.

NOTE 13 MOONI

On January 29, 2019, the

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

and its owner.

9 unchanged sentences

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.

fee of $ 78,000 and $ 0 , respectively, at June 30, 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.

of the cost for the three and nine months ended June 30, 2021 of $ 33,000 and $ 100,000 , respectively, and for the three and nine months

ended June 30, 2020 of $ 33,000 and $ 100,000 , 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 $ 150,000 and $ 455,000 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 three and nine months ended June 30, 2021, respectively, and $ 127,000 and $ 382,000 for the three and nine months ended June 30, 2020,

respectively, and is recorded in sales and marketing and general and administrative expenses on the condensed consolidated statements

of operations.

The Company leases certain

1 unchanged sentence

The net book value of assets under finance leases

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

was $ 16,000 and $ 23,000 at June 30, 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.

Payments under this operating lease commence

July 1, 2021 and 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.

1 unchanged sentence

Additional information related

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

September 30,

Weighted Average Remaining Lease Term (Yrs):

Operating leases

Finance leases

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

information related to operating and finance leases

Average Remaining Lease Term (Yrs):

Weighted Average Discount Rate:

Operating leases

Finance leases

At March 31, 2021, future

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

Operating Leases

Finance Leases

June 30, 2021, future minimum payments under non-cancellable operating and finance leases were as follows:

of future minimum payments under operating & financial leases

Remainder of Fiscal 2021

Total future minimum lease payments

Less imputed interest

Present value of lease liabilities

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

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.

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,

expectations regarding the impact of the pandemic on our business,

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

expectations regarding revenues,

plans regarding the repayment of debt, and

beliefs regarding our capital

as well as other statements regarding our future

operations, financial condition and prospects and business strategies.

Forward-looking statements can be identified by words such as “anticipates,”

“intends,”

“plans,”

“seeks,”

“believes,”

“estimates,”

“expects,”

“predicts,”

“projects,”

“will be”

and “will continue”

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, 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 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”

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 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)

Distribution Segment

Distribution segment

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 $1,280,000 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

Goodwill impairment

Operating loss

Other (income)/expense, net

Net income/(loss)

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 $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)

Diabetic products

Other products

Total net revenues

Net Revenues for the 2020 Period

(amounts in thousands)

Diabetic products

Other products

Total net revenues

Diabetic Product Revenues

Our distribution segment

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

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

as a custom accessory for the OEM’s

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

Revenues from diabetic products

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:

Increase (Decrease)

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

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 $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 $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)

Increase (Decrease)

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 $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 $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 $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 $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 $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

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 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 $1,392,000 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 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 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 Period and the 2020 Period of $38,000 and $27,000, respectively, resulted from purchases of property and equipment.

Financing Activities

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.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

Total future minimum lease

imputed interest

( 1,266,000 )

Present value of lease

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