What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2021-12-16 compared with 2020-12-17 · 1124 added, 1215 removed, 404 unchanged (85% of the section changed)

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management carried

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

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

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

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

Management’s Report on Internal Control Over Financial

Our management is

responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under

the Exchange Act).

Our management, under the supervision and with the participation of our Principal Executive Officer and Principal

Financial Officer, evaluated the effectiveness of our internal control over financial reporting as of the end of the period covered

by this report.

In making this assessment, our management used the criteria set forth by the Committee of Sponsor Organizations

of the Treadway Commission (COSO) in Internal Control-Integrated Framework as issued in 2013.

Based on that evaluation, our management

concluded that our internal control over financial reporting as of September 30, 2020 was effective based on that criteria.

Our internal control

over financial reporting is a process designed under the supervision of our Principal Executive Officer and Principal Financial

Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements

for external reporting purposes in accordance with U.S.

Internal control over financial reporting includes those policies

and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions

and dispositions of our assets;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation

of financial statements in accordance with U.S.

GAAP, and that receipts and expenditures are being made only in accordance with

authorizations of our management and directors;

and (iii) provide reasonable assurance regarding prevention or timely detection

of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent

limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation

of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,

or that the degree of compliance with policies or procedures may deteriorate.

Our management carried out

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

disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act.

Based on their evaluation, our Principal Executive Officer

and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2021.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible

for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act).

Our management, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated

the effectiveness of our internal control over financial reporting as of the end of the period covered by this report.

In making this

assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)

in Internal Control-Integrated Framework as issued in 2013.

Based on that evaluation, our management concluded that our internal control

over financial reporting as of September 30, 2021 was effective based on that criteria.

Our internal control over

financial reporting is a process designed under the supervision of our Principal Executive Officer and Principal Financial Officer to

provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external

reporting purposes in accordance with U.S.

Internal control over financial reporting includes those policies and procedures that

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions

of our assets;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements

in accordance with U.S.

GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management

and directors;

and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition

of our assets that could have a material effect on the financial statements.

Because of its inherent limitations,

internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness

to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of

compliance with policies or procedures may deteriorate.

Changes in Internal Control

There were no changes

in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d)

of the Exchange Act during the fourth quarter of Fiscal 2020 that materially affected, or are reasonably likely to materially

affect, our internal control over financial reporting.

There were no changes in

our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange

Act during the fourth quarter of Fiscal 2021 that materially affected, or are reasonably likely to materially affect, our internal

control over financial reporting.

OTHER INFORMATION

DIRECTORS, EXECUTIVE

OFFICERS AND CORPORATE GOVERNANCE

DISCLOSURE REGARDING FOREIGN JURISDICTIONS

THAT PREVENT INSPECTIONS

Not Applicable.

DIRECTORS, EXECUTIVE OFFICERS

AND CORPORATE GOVERNANCE

The information required

by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed

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

Our Board has adopted a Code of Business Conduct

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

under "Corporate Governance."

We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment

to, or waiver from, a provision of our Code of Conduct and by posting such information on the website address and location specified

by this item is incorporated by reference to our Proxy Statement for the 2022 Annual Meeting of Stockholders to be filed with

the SEC within 120 days of the fiscal year ended September 30, 2021.

Our Board has adopted a Code of Business Conduct and Ethics

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

under "Corporate Governance." We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment

to, or waiver from, a provision of our Code of Conduct and by posting such information on the website address and location specified above.

EXECUTIVE COMPENSATION

The information required

by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed

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

SECURITY OWNERSHIP

OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

by this item is incorporated by reference to our Proxy Statement for the 2022 Annual Meeting of Stockholders to be filed with

the SEC within 120 days of the fiscal year ended September 30, 2021.

SECURITY OWNERSHIP OF CERTAIN

BENEFICIAL OWNERS AND MANAGEMENT

The information required

by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed

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

by this item is incorporated by reference to our Proxy Statement for the 2022 Annual Meeting of Stockholders to be filed with

the SEC within 120 days of the fiscal year ended September 30, 2021.

CERTAIN RELATIONSHIPS

1 unchanged sentence

The information required

by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed

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

PRINCIPAL ACCOUNTANT FEES

by this item is incorporated by reference to our Proxy Statement for the 2022 Annual Meeting of Stockholders to be filed with

the SEC within 120 days of the fiscal year ended September 30, 2021.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required

by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed

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

by this item is incorporated by reference to our Proxy Statement for the 2022 Annual Meeting of Stockholders to be filed with

the SEC within 120 days of the fiscal year ended September 30, 2021.

EXHIBITS AND FINANCIAL STATEMENT

7 unchanged sentences

Pursuant to the requirements of Section 13 or 15(d) of the Securities

Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly

Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

December 16, 2021

3 unchanged sentences

(Principal Executive Officer)

In accordance with the Securities Exchange

Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities

and on the dates indicated:

In accordance with the Securities Exchange Act of 1934, as amended,

this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

December 16, 2021

13 unchanged sentences

EXHIBIT INDEX

Incorporated by

Exhibit Description

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

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

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

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

and Tom KraMer dated August 17, 2020+

Restated Certificate of Incorporation

Certificate of Amendment of the Certificate of Incorporation, April 26, 2013

Certificate of Amendment of the Certificate of Incorporation, June 28, 2013

Third Amended and Restated Bylaws, as of May 28, 2014

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

Promissory Note dated January 18, 2018 –

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

Certificate of Incorporation

of Amendment of the Certificate of Incorporation, April 26, 2013

of Amendment of the Certificate of Incorporation, June 28, 2013

Amended and Restated Bylaws, as of May 28, 2014

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

Note dated January 18, 2018 – Forward Industries (Asia-Pacific) (as amended and restated)

Long Term Incentive Plan, as amended

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

Amendment No.

Equity Incentive Plan

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

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

Amendment No.

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

Amendment No.

3 to Buying Agency and Supply Agreement –

Forward Industries (Asia-Pacific) Corporation

Amendment No.

4 to Buying Agency and Supply Agreement –

Forward Industries (Asia-Pacific) Corporation

Amendment No.

5 to Buying Agency and Supply Agreement –

Forward Industries (Asia-Pacific) Corporation

Form of Employment Agreement dated January 18, 2018 +*

Employment Agreement dated May 16, 2018 - Terence Wise *

Employment Agreement between Forward Industries, Inc.

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

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

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

of Employment Agreement dated January 18, 2018+

Form of Employment Agreement dated May 26, 2021 *

Agreement dated May 16, 2018 - Terence Wise*

Agreement between Forward Industries, Inc.

and Anthony Camarda, dated June 26, 2020*

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

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

dated April 18, 2020

List of Subsidiaries

Consent of Independent Registered Public Accounting Firm

and Restated TD Bank Revolving Term Note dated September 28, 2018

Bank Modification Agreement dated September 28, 2018

of Subsidiaries

Independent Registered Public Accounting Firm

CEO Certifications

CFO Certification

CEO and CFO Certifications (906)

XBRL Instance Document

XBRL Taxonomy Extension Schema Document

XBRL Taxonomy Extension Calculation Linkbase Document

XBRL Taxonomy Extension Definition Linkbase Document

XBRL Taxonomy Extension Label Linkbase Document

XBRL Taxonomy Extension Presentation Linkbase Document

* Management compensatory agreement

or arrangement.

+ Certain schedules,

appendices and exhibits to this agreement have been omitted in accordance with Item 601 of Regulation S-K.

A copy of any omitted

schedule and/or exhibit will be furnished supplementally to the Securities and Exchange Commission staff upon request.

Certifications (906)

Inline XBRL Instance Document (the Instance Document

does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

Inline XBRL Taxonomy Extension Schema Document

Inline XBRL Taxonomy Extension Calculation Linkbase

Inline XBRL Taxonomy Extension Definition Linkbase Document

Inline XBRL Taxonomy Extension Label Linkbase Document

Inline XBRL Taxonomy Extension Presentation Linkbase

Cover Page Interactive Data File (formatted as Inline

XBRL and contained in Exhibit 101)

______________________

* Management compensatory agreement or

+ Certain schedules, appendices

and exhibits to this agreement have been omitted in accordance with Item 601 of Regulation S-K.

A copy of any omitted schedule and/or

exhibit will be furnished supplementally to the Securities and Exchange Commission staff upon request.

Copies of this filing (including the

financial statements) and any of the exhibits referred to above will be furnished at no cost to our shareholders who make a written

request to Forward Industries, Inc.;

financial statements) and any of the exhibits referred to above will be furnished at no cost to our shareholders who make a written request

to Forward Industries, Inc.;

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

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Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of September 30, 2020 and 201 9

Consolidated Balance Sheets at September 30, 2021 and 2020

Consolidated Statements of Operations for the Years Ended September 30, 2021 and 2020

Consolidated Statements of Shareholders’

Equity for the Years Ended September 30, 2020 and 201 9

Consolidated Statements of Shareholders' Equity for the Years Ended September 30, 2021 and 2020

Consolidated Statements of Cash Flows for the Years Ended September 30, 2021 and 2020

Notes to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC

ACCOUNTING FIRM

Directors and Shareholders of Forward Industries, Inc.

and Subsidiaries

Opinion on the Financial

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

and Subsidiaries (the “Company”) as

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

equity and cash flows

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

In our opinion,

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

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

principles generally accepted in the United States of America.

Change in Accounting

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

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING

The Board of Directors

and Shareholders of Forward Industries, Inc.

Opinion on the Financial Statements

We have audited

the accompanying consolidated balance sheets of Forward Industries, Inc.

and Subsidiaries (the “Company”) as of September

30, 2021 and 2020, and the related consolidated statements of operations, shareholders’ equity and cash flows for the years then

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

In our opinion, the consolidated financial

statements present fairly, in all material respects, the financial position of the Company as of September 30, 2021 and 2020, and the

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

the United States of America.

Basis for Opinion

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

Our responsibility is to express an

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

We are a public accounting firm registered

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

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

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

and Exchange Commission and the PCAOB.

These consolidated

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

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

consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight

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

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

our audits in accordance with the standards of the PCAOB.

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

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

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

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

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

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

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

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

As part of our audits

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

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

Accordingly, we express no such opinion.

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

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

Such procedures included examining, on a test basis,

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

Our audits also included evaluating the

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

consolidated financial statements.

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

/s/ CohnReznick

served as the Company’s auditor since 2011.

Our audits included

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

and performing procedures that respond to those risks.

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

and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant

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

We believe that

our audits provide a reasonable basis for our opinion.

Critical Audit

The critical audit matter communicated

below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to

be communicated to the audit committee and that:

(i) related to accounts or disclosures that are material to the consolidated financial

statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of a critical audit matter

does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the

critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they

Assessment of Going Concern

identified the Company’s assessment of going concern as a critical audit matter.

Auditing the Company’s assessment of

going concern was complex and subjective due to the significant estimation and judgment used in forecasted cash flows.

Specifically,

the forecasted cash flows are sensitive to significant assumptions such as projected revenue and projected operating results, all of

which are affected by the expected future market or economic conditions, including the effects of the global pandemic.

the Company’s largest vendor and lender is a related entity, as disclosed in Note 14.

This related entity has a history of

extending payment terms to the Company, when necessary.

The primary procedures we performed

to address this critical matter included the following:

· Obtaining an understanding of and

evaluating the Company’s process to develop forecasted cash flows, including significant assumptions used in developing forecasted

cash flows as well as testing the completeness and accuracy of the underlying data used by the Company in its analyses.

· Evaluating the reasonableness of

the Company’s forecasted revenue, operating results, and cash flows by comparing those forecasts to underlying business strategies,

including customer relationships and the Company’s ability to obtain new customers, and to historical results.

In addition, we

performed sensitivity analyses related to the key inputs used in the Company’s forecasted cash flows, including evaluating whether

the changes in the assumptions would result in a material change in forecasted cash flows.

· Evaluating management’s ability

to accurately forecast future cash flows by comparing the Company’s historical forecasted sales, operating results and cash flow

forecasts to actual results.

· Obtaining written confirmation from

the related entity regarding extension of payment terms of the related promissory note payable.

/s/ CohnReznick LLP

We have served

as the Company’s auditor since 2011.

Melville, New

FORWARD INDUSTRIES, INC.

1 unchanged sentence

CONSOLIDATED BALANCE SHEETS

September 30,

Current assets:

Accounts receivable, net

Inventories, net

Prepaid expenses and other current assets

11 unchanged sentences

Current portion of notes payable

Current portion of capital leases payable

Current portion of deferred consideration

Current portion of finance lease liability

Current portion of earnout consideration

Current portion of operating lease liability

2 unchanged sentences

Other liabilities:

Note payable to Forward China

Notes payable, less current portion

Operating lease liability, less current portion

Capital lease liability, less current portion

Deferred rent

Deferred consideration, less current portion

Finance lease liability, less current portion

Earnout consideration, less current portion

Total other liabilities

11 unchanged sentences

Total liabilities and shareholders' equity

The accompanying

notes are an integral part of the consolidated financial statements.

The accompanying notes are

an integral part of the consolidated financial statements.

FORWARD INDUSTRIES, INC.

4 unchanged sentences

Cost of sales

Sales and marketing

General and administrative

Sales and marketing expenses

General and administrative expenses

Goodwill impairment

Loss from operations

Fair value adjustment of earn-out consideration

( 1,982,383 )

Gain on forgiveness of note payable

( 1,356,570 )

Fair value adjustment of earnout consideration

Fair value adjustment of deferred cash consideration

2 unchanged sentences

Other expense, net

Loss before income taxes

Provision for (benefit from) income taxes

Income/(loss) before income taxes

( 1,766,114 )

Provision for income taxes

Net income/(loss)

$ ( 1,775,281 )

Net loss per share:

Earnings/(loss) per share:

Weighted average common shares outstanding:

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

The accompanying notes are

an integral part of the consolidated financial statements.

FORWARD INDUSTRIES, INC.

5 unchanged sentences

Share-based compensation

Shares issued for Kablooe acquisition

Stock options exercised

5 unchanged sentences

Share-based compensation

Shares issued for Kablooe acquisition

Stock options exercised

( 1,775,281 )

Balance at September 30, 2020

$ ( 13,095,450 )

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

The accompanying notes are

an integral part of the consolidated financial statements.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

STATEMENTS OF CASH FLOWS

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Fiscal Years Ended September 30,

Operating Activities:

$ (1,775,281 )

Net income/(loss)

$ ( 1,775,281 )

Adjustments to reconcile net loss to net cash used in operating

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

Share-based compensation

Depreciation and amortization

Bad debt (recovery)/expense

Deferred rent

Bad debt expense/(recovery)

Gain on forgiveness of note payable

( 1,356,570 )

Change in fair value of earn-out consideration

1 unchanged sentence

Goodwill impairment

Fair value of cost method investment for services provided

Impairment of investment

1 unchanged sentence

Accounts receivable

( 1,664,868 )

Prepaid expenses and other current assets

1 unchanged sentence

Deferred income

Operating lease liabilities

Net changes in operating lease liabilities

Accrued expenses and other current liabilities

8 unchanged sentences

Repayment of line of credit borrowings

( 1,150,000 )

( 1,200,000 )

Repayment of notes payable

Proceeds from PPP loan

Cash proceeds from stock options exercised

Repayments of capital leases

Proceeds from note payable

Proceeds from stock options exercised

Repayments of finance leases

Payment of deferred cash consideration

Net cash provided by financing activities

Net cash (used in)/provided by financing activities

Net decrease in cash

( 1,514,262 )

Cash at beginning of year

4 unchanged sentences

Supplemental Disclosures of Non-Cash Information:

Lease assets recorded in accordance with

Lease liabilities recorded in accordance with ASC 842

Lease assets recorded

Lease liabilities recorded

Common stock issued in Kablooe acquisition

Fair value of Kablooe contingent earnout consideration

The accompanying

notes are an integral part of the consolidated financial statements.

The accompanying notes are

an integral part of the consolidated financial statements.

FORWARD INDUSTRIES, INC.

2 unchanged sentences

NOTE 1 OVERVIEW

Forward Industries,

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

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

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

of hardware and software product design and engineering services.

In addition to our existing design and distribution of

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

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

The Company’s

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

(or the contract manufacturing

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

together with their branded

product offerings or sell them through their retail distribution channels.

The Company’s OEM products include carrying cases

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

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

The Company’s OEM customers are located in:

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

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

Forward Industries, Inc.

(“Forward”, “we”, “our”, or the “Company”), is a fully integrated design, development

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

Through its acquisitions of IPS and Kablooe,

the Company has expanded its ability to design and develop solutions for our existing multinational client base and expand beyond the

diabetic product line into a variety of industries with a full spectrum of hardware and software product design and engineering services.

In addition to our existing design and distribution of carry and protective solutions, primarily for handheld electronic devices, the

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

commercial and consumer industries.

The Company’s previous principal customer market has been original equipment manufacturers,

or “OEMs” (or the contract manufacturing firms of these OEM customers), that either package our products as accessories “in

box” together with their branded product offerings or sell them through their retail distribution channels.

The Company’s

OEM products include carrying cases and other accessories for medical monitoring and diagnostic kits and a variety of other portable electronic

and non-electronic products (such as sporting and recreational products, bar code scanners, smartphones, GPS location devices, tablets

and firearms).

The Company’s OEM customers are located in:

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

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

and (iii) the geographic area encompassing

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

The Company does not manufacture

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

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

As a result of

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

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

and outside the Company.

Within this report,

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

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

The Company does not manufacture any

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

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

As a result of the expansion

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

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

In Fiscal 2021, the

Company generated net income of $524,000 523,805

and negative cash flow from operations of $528,000

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

December 31, 2022.

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

liabilities when necessary (see Note 14).

We can provide no assurances that any such extension will be given if requested.

Impact of COVID-19

The outbreak of the

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

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

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

home for much of Fiscal 2020.

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

which caused a decline in revenue and gross profit.

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

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

Business shutdowns resulting from the pandemic

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

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

Additionally,

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

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

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

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

delayed at certain times.

COVID-19 virus continues to impact our results of operations.

While the most significant impact was 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.

The risk of collecting accounts receivable is also enhanced as a result of the economic impact of COVID-19.

While revenues for Fiscal 2021 increased as compared to Fiscal 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 pandemic.

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 I, Item 1A — Risk Factors” for a description of the material risks that the Company currently faces in

connection with COVID-19.

FORWARD INDUSTRIES, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The economy started

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

However, there continue to be areas with increased

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

The future impacts

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

It is possible that the pandemic,

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

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

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

The long-term

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

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

reflected in our financial results until future periods.

Refer to “Part I, Item 1A —

Risk Factors”

in this Annual

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

As a result of revenue

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

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

These events impacted

the carrying value of goodwill (see Note 4).

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

conditions to remain challenging.

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

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 factors that we can control:

closely managing and controlling our expenses;

aligning our design and development schedules with demand in a proactive

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

and pursuing further improvements in the

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

NOTE 2 ACCOUNTING

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

implemented cost-cutting initiatives including reducing executive pay and Board of Directors compensation for the three months ended

June 30, 2021.

See “Liquidity and Capital Resources” section of Item 7.

“Management’s Discussion and Analysis

of Financial Condition and Results of Operations” for further description of these cost-cutting measures.

NOTE 2 ACCOUNTING POLICIES

Use of Estimates

The preparation of

the Company’s 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 financial statements and the

reported amounts of revenues and expenses during the reporting periods.

The preparation of the Company’s

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 financial statements and the reported amounts of revenues and expenses during

the reporting periods.

Actual results could differ from those estimates and assumptions.

The worldwide spread

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

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

of time until the disease is contained.

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

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

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

or liabilities.

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

consolidated financial statements as soon as they become known.

Actual results could differ from those estimates and any such differences

may be material to our consolidated financial statements.

Within this report, certain dollar amounts and

percentages have been rounded to their approximate values.

The extent to which COVID-19

may impact our financial condition or results of operations is uncertain.

As of the date of issuance of this report, we are not aware

of any specific events or circumstances that would require us to update our estimates or judgments or adjust the carrying amount of our

assets or liabilities.

Basis of Presentation

4 unchanged sentences

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

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

The Company incurred

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

We believe our existing

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

The acquisition of Kablooe

took place in August 2020 and its results of operations have been included in our consolidated financial statements since the acquisition

Accordingly, our results of operations for Fiscal 2021 include Kablooe’s results of operations for 12 months, while our results

of operations for Fiscal 2020 include Kablooe’s results of operations for approximately six weeks.

Key terms of the acquisition

are described in Note 3.

Segment Reporting

The Company has three reportable

OEM distribution, retail distribution and design.

The OEM 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 directly

to OEMs or their contract manufacturers.

The retail distribution segment sources and sells smart-enabled furniture and a variety of other

products through agreements with various retailers, both in stores and through online retailer websites.

The design segment consists of

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

and software product design and engineering services.

See Note 16 for more information on segments.

FORWARD INDUSTRIES, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Segment Reporting

The Company has two

reportable segments:

distribution and design.

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

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

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

The design segment

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

spectrum of hardware and software product design and engineering services.

Organizing our business

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

Our chief operating decision maker

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

We measure the performance

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

Segment operating income or loss includes

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

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

The Company reviews

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

The Company has two reporting units with goodwill

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

of a triggering event.

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

than not to have occurred.

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

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

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

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

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

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

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

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

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

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

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

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

related to goodwill (See Note 4).

Intangible Assets

amount, 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 were acquired as part of the acquisitions of IPS in Fiscal 2018 and Kablooe

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

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

Our intangible assets

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

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

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

These estimates and assumptions could have a

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

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 its intangible assets.

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

at September 30, 2020.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Cash and Cash Equivalents

The Company considers

all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

no cash equivalents at September 30, 2020 and 2019.

The Company maintains its cash in bank and financial institution deposits in

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

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

Intangible assets include

trademarks and customer relationships, which were acquired as part of the acquisitions of IPS in Fiscal 2018 and Kablooe in Fiscal 2020

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

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 also 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 indications of impairment of intangible assets at September 30, 2021 or 2020.

The Company maintains its

cash in bank and financial institution deposits in the United States (that at times may exceed federally insured limits of $ 250,000

per financial institution) and Switzerland.

At September 30, 2021 and 2020, there were deposits totaling $ 805,000

(which includes $436,000 in a foreign bank) and $ 2,300,000

(which includes $770,000 in a foreign bank), respectively, held in excess of federally insured limits.

2 unchanged sentences

Accounts Receivable

Accounts receivable

consist of unsecured trade accounts with customers or their contract manufacturers.

The Company performs periodic credit evaluations

of its customers including an evaluation of days outstanding, payment history, recent payment trends, and perceived creditworthiness,

and believes that adequate allowances for any uncollectible receivables are maintained.

Credit terms to customers generally range

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

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

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

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

distribution segment and design segment accounts receivable, respectively.

The decrease in allowance for doubtful accounts for

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

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

Inventories consist

primarily of finished goods and are stated at the lower of cost (determined by the first-in, first-out method) or net realizable

Based on management’s estimates, an allowance is made to reduce excess, obsolete, or otherwise un-saleable inventories

to net realizable value.

The allowance is established through charges to cost of goods sold in the Company’s consolidated

statements of operations.

As reserved inventory is disposed of, the Company charges off the associated allowance.

In determining

the adequacy of the allowance, management’s estimates are based upon several factors, including analyses of inventory levels,

historical loss trends, sales history and projections of future sales demand.

The Company’s estimates of the allowance may

change from time to time based on management’s assessments, and such changes could be material.

At September 30, 2020 and

2019, there was no allowance for obsolete inventory.

Property and Equipment

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 consolidated balance sheets.

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 September 30, 2021, the Company had allowances for doubtful accounts of $ 90,000 and $ 706,000

related to its OEM distribution segment and design segment accounts receivable, respectively.

At September 30, 2020, the Company had allowances

for doubtful accounts of $ 249,000 and $ 347,000 related to its OEM distribution segment and design segment accounts receivable, respectively.

The Company did not have any allowance for doubtful accounts related to its retail distribution segment at September 30, 2021 or 2020.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Inventories consist primarily

of finished goods and are stated at the lower of cost (determined by the first-in, first-out method) or net realizable value.

management’s estimates, an allowance is made to reduce excess, obsolete, or otherwise unsellable inventories to net realizable value.

The allowance is established through charges to cost of sales in the Company’s consolidated statements of operations.

inventory is disposed, the Company charges off the associated allowance.

In determining the adequacy of the allowance, management’s

estimates are based upon several factors, including analyses of inventory levels, historical loss trends, sales history and projections

of future sales demand.

The Company’s estimates of the allowance may change from time to time based on management’s assessments,

and such changes could be material.

At September 30, 2021 and 2020, the allowance for slow-moving inventory was $ 50,000 and $ 0 , respectively.

Property and Equipment

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

Expenditures for major additions

and improvements are capitalized, and minor replacements, maintenance, and repairs are charged to expense as incurred.

When property

and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any

resulting gain or loss is included in the results of operations for the respective period.

Depreciation is provided over the estimated

useful lives of the related assets using the straight-line method.

The estimated useful lives for furniture, fixtures and equipment

ranges from three to five years.

Amortization of leasehold improvements is computed using the straight-line method over the shorter

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

Property and equipment consist

of computer hardware and software, furniture, fixtures and equipment and are recorded at cost.

Expenditures for major additions and improvements

are capitalized, and minor replacements, maintenance, and repairs are charged to expense as incurred.

When property and equipment are

retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is

included in the results of operations for the respective period.

Depreciation is provided over the estimated useful lives of the related

assets using the straight-line method.

The estimated useful lives for all property and equipment ranges from three to five years.

The Company adopted Accounting

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

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

The practical

expedients applied under the new standard allow the Company to carry forward the historical lease classification and not reassess its

prior conclusions about lease identification or initial direct costs.

In accordance with this guidance, lease assets and liabilities are

recognized at commencement date based on the present value of lease payments over the lease term, using the Company’s incremental

borrowing rate commensurate with the lease term, since the Company’s lessors do not provide an implicit rate, nor is one readily

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

the Company will include the renewal option terms in determining the lease asset and lease liability.

Lease assets represent the Company’s

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

arising from the lease.

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

Operating lease assets

are shown as right of use assets and financing lease assets are a component of property and equipment on the consolidated balance sheets.

The current and long-term portions of operating and financing lease liabilities are shown separately as such on the consolidated balance

Upon adoption of ASC 842, the Company recognized right of use assets of $3,649,000 and corresponding lease liabilities of $3,729,000

pertaining to its operating leases on its consolidated balance sheets.

The Company recognizes 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 September 30, 2021, there was no change to our assessment that a full valuation allowance was required against all net deferred

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

Our income tax provision or benefit is generally not significant due to the existence of significant net operating loss carryforwards.

FORWARD INDUSTRIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company adopted

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

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

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

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

In accordance with this guidance, lease

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

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

an implicit rate, nor is one readily available.

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

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

and lease liability.

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

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

Lease expense for lease payments is recognized

on a straight-line basis over the lease term.

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

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

The current and long-term portions of operating and

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

Upon adoption of ASC 842, the Company

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

on its consolidated balance sheets.

The Company recognizes

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

was required against all net deferred tax assets.

Accordingly, any deferred tax provision or benefit was offset by an equal and

opposite change to the valuation allowance.

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

of significant net operating loss carryforwards.

Revenue Recognition

Distribution Segment

The Company adopted

ASC 606, “Revenue Recognition”

effective October 1, 2018.

In accordance with this guidance, the Company generally recognizes

revenue in its distribution segment when:

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

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

are no other deliverables or performance obligations;

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

of the goods has transferred.

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

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

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

OEM and Retail Distribution Segments

The Company generally recognizes

revenue in its OEM and retail distribution segments when:

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

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

(ii) there are no

other deliverables or performance obligations;

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

has transferred.

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

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

The retail distribution segment

had contract liabilities of $ 0 , $ 75,000 and $ 0 at September 30, 2021, 2020 and 2019, respectively.

The OEM distribution segment had no

contract liabilities at September 30, 2021, 2020 or 2019.

Design Segment

Under ASC 606, the

Company applies the “cost to cost”

and “right to invoice”

methods of revenue recognition to the contracts

with customers in the design segment.

The Company applies the “cost

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

The design segment typically engages in two types of contracts:

(i) time and material and

(ii) fixed price contracts.

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

to invoice”

Revenues from fixed price contracts that require performance of services that are not related to the

production of tangible assets are recognized by using cost inputs to measure progress toward the completion of its performance

obligations or the “cost to cost”

Revenues from 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, INC.

AND SUBSIDIARIES

NOTES TO 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 consolidated balance sheets.

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

respectively.

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

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

Contract liabilities

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

(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” 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” method.

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 consolidated balance sheets.

The design segment had contract assets of $ 693,000 , $ 649,000 and $ 611,000 at September

30, 2021, 2020 and 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 consolidated balance sheets.

segment had contract liabilities at of $ 188,000 , $ 410,000 and $ 220,000 at September 30, 2021, 2020 and 2019, respectively.

Shipping and Handling Fees

The Company includes

shipping and handling fees billed to customers in net revenues and the related transportation costs in cost of goods sold.

Foreign Currency Transactions

The Company includes shipping

and handling fees billed to customers in net revenues and the related transportation costs in cost of sales.

Foreign Currency Transactions

may generate receivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid.

in exchange rates between such foreign currency and the functional currency increase or decrease the expected amount of functional

currency cash flows upon settlement of the transaction.

These increases or decreases in expected functional currency cash flows

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

of operations.

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

September 30, 2020 and 2019, respectively.

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

revenues from certain customers.

The Company’s functional

currency is the U.S.

Foreign currency transactions may generate receivables or payables that are fixed in terms of the amount

of foreign currency that will be received or paid.

Fluctuations in exchange rates between such foreign currency and the functional currency

increase or decrease the expected amount of functional currency cash flows upon settlement of the transaction.

These increases or decreases

in expected functional currency cash flows are foreign currency transaction gains or losses that are included in other expense in the

accompanying consolidated statements of operations.

The approximate net losses from foreign currency transactions were $ 5,000 and $ 3,000

for Fiscal 2021 and 2020, respectively.

Such foreign currency transaction losses were primarily the result of euro denominated revenues

from certain customers.

Fair Value Measurements

We perform fair value

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

ASC 820 defines fair value

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

participants at the measurement date.

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

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

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

of nonperformance.

ASC 820 establishes

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

when measuring fair value.

An asset's or liability's categorization within the fair value hierarchy is based upon the lowest level

of input that is significant to the fair value measurement.

ASC 820 establishes three levels of inputs that may be used to measure

quoted prices in active markets for identical assets or liabilities;

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

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

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

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.

FORWARD INDUSTRIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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;

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

Share-Based Compensation Expense

The Company estimates

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

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

of its grantees, interest rates, and dividend yields.

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

experience, and other factors.

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

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

In the case of awards with multiple

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

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

The Company estimates the

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

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

interest rates, and dividend yields.

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

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

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

In the case of awards with multiple vesting periods, the Company

has elected to use the graded vesting attribution method, which recognizes compensation cost on a straight-line basis over each separately

vesting portion of the award as if the award was, in substance, multiple awards (see Note 9).

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

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.

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

R ecent Accounting Pronouncements

In August 2018, the

FASB issued ASU 2018-13 “Fair Value Measurement –

Disclosure Framework (Topic 820)”

to improve the disclosure

requirements on fair value measurements.

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

years, beginning after December 15, 2019.

Certain amounts in the accompanying

Fiscal 2020 financial statements have been reclassified to conform to the Fiscal 2021 presentation.

Accounting Pronouncements

In August 2018, the FASB

issued ASU 2018-13 “Fair Value Measurement – Disclosure Framework (Topic 820)” to improve the disclosure requirements

on fair value measurements.

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

after December 15, 2019.

Early adoption is permitted for any removed or modified disclosures.

The Company does

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

In November 2019,

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

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

accounted for under Topic 606.

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

within those fiscal years.

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

financial statements.

The Company adopted this guidance in the

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

FORWARD INDUSTRIES, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In November 2019,

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

Credit Losses.”

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

concurrently with the adoption of such earlier guidance.

This pronouncement is effective for the Company for fiscal years beginning

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

The Company is currently evaluating the effects of this

pronouncement on its consolidated financial statements.

August 2018, the FASB issued ASU 2018-15 “

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

350-40)”

addressing customers’

accounting for implementation costs incurred

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

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

Capitalized implementation costs are required to be

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

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

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 consolidated financial statements.

In November 2019, the FASB

issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” ASU 2019-11 is

an accounting pronouncement that provides clarity to and amends earlier guidance on this topic and would be effective concurrently with

the adoption of such earlier guidance.

This pronouncement is effective for the Company for fiscal years beginning after December 15, 2022

and interim periods within those fiscal years.

Early adoption is permitted.

The Company does not expect the

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

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

Simplifying the Accounting for Income Taxes.”

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

GAAP by clarifying and amending existing guidance.

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

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

Early adoption is

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

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

financial statements.

In August 2018, the FASB

issued ASU 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)” addressing customers’

accounting for implementation costs incurred in a cloud computing arrangement that is a service contract, which requires customers to

apply internal-use software guidance to determine the implementation costs that are able to be capitalized.

Capitalized implementation

costs are required to be amortized over the term of the arrangement, beginning when the cloud computing arrangement is ready for its intended

The effective date of the new guidance for public companies is for fiscal years beginning after December 15, 2019 and interim

periods within those fiscal years.

Early adoption is permitted.

The Company adopted this guidance in the first quarter of Fiscal 2021

with no material impact to its 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

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 effects of this pronouncement

on its consolidated financial statements.

NOTE 3 ACQUISITION

On August 17, 2020, in order to further

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

(a newly formed wholly-owned

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

(“Kablooe

Design”) and its sole shareholder.

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

clients include leading brands in medical devices.

On August 17, 2020, in order

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

(a newly formed

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

(“Kablooe Design”) and its sole shareholder.

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

whose clients include leading brands in medical devices.

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

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(iii) agreed to pay up to an aggregate

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

a five-year period;

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

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

the earnings milestones (as defined in the Agreement).

Additionally, in conjunction with this acquisition, the Company entered

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

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

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

fifth anniversaries of the acquisition based on his continued employment with Kablooe and the achievement of the earnings milestones (as

defined in the Agreement).

Additionally, in conjunction with this acquisition, the Company entered into a five-year employment agreement

with Kablooe’s Chief Executive Officer and agreed to pay him a salary of $250,000 per year.

At the date of acquisition,

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

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

The acquisition date fair value of consideration transferred consisted

of the following:

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

performance of Kablooe over a five-year period.

The acquisition date fair value of consideration transferred consisted of the following:

Total purchase consideration

Cash at closing (1)

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Fair value of contingent earnout consideration

Total Purchase Consideration

_________________

Cash paid by Forward at closing.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table

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

The following table summarizes

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

Assets acquired and liabilities assumed

Accounts receivable

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Net assets acquired

In relation to our

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

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

of operations.

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

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

In relation to our acquisition

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

These costs were expensed

as incurred and included as a component of general and administrative expenses on the consolidated statement of operations.

results of operations have been included in the consolidated financial statements since the acquisition date.

Our consolidated statement

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

NOTE 4 INTANGIBLE

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Intangible Assets

The Company’s

intangible assets consist of the following:

The Company’s intangible

assets consist of the following:

Schedule of intangible assets

September 30, 2021

7 unchanged sentences

Net carrying amount

The Company’s intangible

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

design segment of our business.

Intangible assets are amortized over their expected useful lives of 15 years for the trademarks and

8 years for the customer relationships.

During Fiscal 2021 and Fiscal 2020, the Company recorded amortization expense related to intangible

assets of $ 212,000 and $ 167,000 , respectively, which is included in general and administrative expenses in the Company’s consolidated

statements of operations.

FORWARD INDUSTRIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company’s

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

and are amortized over their expected useful lives.

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

relationships.

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

During Fiscal 2020 and Fiscal 2019, the

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

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

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

is as follows:

Years Ending September 30,

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

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

Goodwill is not deductible for tax purposes.

During Fiscal 2020,

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

Those triggering events included

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

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

Based on these factors, we concluded that it was more

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

The Company then calculated

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

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

At September 30, 2021, estimated

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

Estimated future amortization

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 the acquisitions of Kablooe and IPS in Fiscal 2020 and Fiscal 2018, respectively.

The goodwill associated with

the IPS acquisition is not deductible for tax purposes, but the goodwill associated with the Kablooe acquisition is deductible for tax

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

During Fiscal 2020, the Company

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

Those triggering events included the reduction

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

for the later part of Fiscal 2020 and future periods.

Based on these factors, 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.

We concluded the IPS reporting

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

The Company concluded the IPS reporting

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

The Company performed the annual goodwill impairment test for Fiscal 2021 and determined there was no impairment.

Below is the rollforward

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

Design Segment

Balance at September 30, 2019

Acquisition of Kablooe

IPS goodwill impairment

Balance September 30, 2020

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 PROPERTY

1 unchanged sentence

Property and equipment and related accumulated

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

Computer software

depreciation and amortization are summarized in the table below:

Schedule of property, plant and

September 30,

Computer hardware and software

Furniture and fixtures

1 unchanged sentence

accumulated depreciation and amortization

and equipment, net

Property and equipment, net

Depreciation expense was $ 115,000 and $ 105,000

for Fiscal 2021 and Fiscal 2020, respectively.

VALUE MEASUREMENTS

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

to the acquisition of Kablooe.

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

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

The deferred consideration of $834,000 on our consolidated

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

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

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

in the Stock Purchase Agreement.

The following table presents the placement

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

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 FAIR VALUE

The earnout consideration

of $ 70,000 and $ 90,000 at September 30, 2021 and 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 consolidated balance sheets at September 30, 2021 and 2020.

During Fiscal 2021, the Company reduced this liability from $ 90,000

to $ 70,000 based on changes in the expected likelihood of Kablooe reaching the specified earnings targets.

The IPS earnout consideration

was adjusted down to $ 0 in Fiscal 2020 due to the low likelihood of IPS reaching the underlying earnings targets.

The following table presents

the placement in the fair value hierarchy and summarizes the change in fair value of the earn-out consideration for Fiscal 2021 and Fiscal

Schedule of fair value liability measured on recurring basis

Fair value measurement at reporting date using

2 unchanged sentences

Significant unobservable inputs

September 30, 2018

Increase in fair value of IPS deferred cash consideration

Increase in fair value of IPS earn-out consideration

September 30, 2019

Balance at September 30, 2019

Increase in fair value of IPS deferred cash consideration

1 unchanged sentence

Payout of IPS deferred cash consideration

Fair value of Kablooe contingent earnout consideration

Fair value of Kablooe earnout consideration

Balance at September 30, 2020

Decrease in fair value of Kablooe earnout consideration

Balance at September 30, 2021

The fair value of the Kablooe

contingent earn-out consideration is measured on a recurring basis at each reporting date.

The following inputs and assumptions were

used in the Black-Scholes valuation model to estimate the fair value of the Kablooe earn-out consideration at September 30, 2021 and

Fair value assumptions

September 30,

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following

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

at September 30, 2020:

Risk-free interest rate

1 unchanged sentence

Dividend yield

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

compensation for product design services provided by the Company.

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

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

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

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

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

as a Level 2 valuation.

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

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

The transaction is between related parties,

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

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

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

On January 21, 2020,

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

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

Beginning on April

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

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

Interest accrues at a rate of 8% per annum.

Since no payments were received through

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

In the fourth quarter

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

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

of general and administrative expense.

During Fiscal 2020,

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

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

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

at September 30, 2020.

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

of operations.

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 Fiscal 2019, the Company

recorded bad debt expense of $ 1,626,000

to fully reserve accounts receivable deemed uncollectible from the same customer in which it is invested.

In Fiscal 2020, the Company

converted the amount outstanding from this customer into a non-negotiable secured promissory note with interest that accrues at a rate

of 8% per annum and reclassified the related allowance for doubtful account s to an allowance on

the note receivable.

The Company received $ 101,000 and $ 134,000 from this customer in Fiscal 2021 and Fiscal 2020, respectively, of which

$ 89,000 and $ 61,000 , respectively, was applied to past due interest and penalties and recorded as interest income, and $ 12,000 and $ 73,000 ,

respectively, was applied to principal and recorded as a recovery of bad debt expense as a reduction of general and administrative expense.

FORWARD INDUSTRIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

during Fiscal 2020 and Fiscal 2019:

During Fiscal 2020, as a

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

is invested, including its inability to generate revenue, management concluded the investment was also impaired and it recorded an impairment

charge of $ 327,000 to fully reserve the investment on the Company’s consolidated balance sheet at September 30, 2020.

The impairment

charge is included in general and administrative expenses on the consolidated statement of operations for Fiscal 2020.

The following table presents

the placement in the fair value hierarchy and summarizes the change in fair value of the cost method investment during Fiscal 2020:

Schedule of changes in fair value of the cost method investment

Fair value measurement at reporting date using

8 unchanged sentences

Accrued expenses and other current liabilities

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

at September 30, 2021 and 2020 are as follows:

Schedule of accrued expenses and other accrued liabilities

September 30,

Paid time off

Other payroll related costs

NOTE 8 SHAREHOLDERS’

Other payroll-related liabilities

NOTE 8 SHAREHOLDERS’

Anti-Takeover Provisions

Shareholder Rights Plan

On April 26, 2013,

the Board of Directors (the "Board") adopted a Shareholder Rights Plan, as set forth in the Rights Agreement between

the Company and American Stock Transfer & Trust Company, LLC, as Rights Agent.

Pursuant to the Rights Agreement, the Board

declared a dividend distribution of one Right (a "Right") for each outstanding share of Company Common Stock, par value

$0.01 per share (the "Common Stock") to shareholders of record at the close of business on May 6, 2013, which date will

be the record date, and for each share of Common Stock issued (including shares distributed from treasury) by the Company thereafter

and prior to the Distribution Date (as described below and defined in the Rights Agreement).

Each Right entitles the registered

holder, subject to the terms of the Rights Agreement, to purchase from the Company one one-thousandth of a share of Series A Participating

Preferred Stock, $0.01 par value per share (the "Series A Preferred Stock"), at an exercise price of $4.00 per one one-thousandth

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

On April 26, 2013, the Board

of Directors (the "Board") adopted a Shareholder Rights Plan, as set forth in the Rights Agreement between the Company and American

Stock Transfer & Trust Company, LLC, as Rights Agent.

Pursuant to the Rights Agreement, the Board declared a dividend distribution

of one Right (a "Right") for each outstanding share of Company Common Stock, par value $0.01 per share (the "Common Stock")

to shareholders of record at the close of business on May 6, 2013, which date will be the record date, and for each share of Common Stock

issued (including shares distributed from treasury) by the Company thereafter and prior to the Distribution Date (as described below and

defined in the Rights Agreement).

Each Right entitles the registered holder, subject to the terms of the Rights Agreement, to purchase

from the Company one one-thousandth of a share of Series A Participating Preferred Stock, $0.01 par value per share (the "Series

A Preferred Stock"), at an exercise price of $4.00 per one one-thousandth of a share of Series A Preferred Stock, subject to adjustment.

FORWARD INDUSTRIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Initially, no separate

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

Common Stock.

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

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

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

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

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

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

Stock then outstanding.

“Blank Check”

Preferred Stock

Initially, no separate Rights

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

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

on the distribution date (the "Distribution Date"), which will occur on the earlier of (i) the 10th business day (or such later

date as may be determined by the Board) after the public announcement that an Acquiring Person (as defined in the Rights Agreement) has

acquired beneficial ownership of 20% or more of the Common Stock then outstanding;

or (ii) the 10th business day (or such later date as

may be determined by the Board) after a person or group announces a tender or exchange offer that would result in a person or group of

affiliated and associated persons beneficially owning 20% or more of the Common Stock then outstanding.

“Blank Check” Preferred Stock

The Company is authorized

to issue up to 4,000,000 shares of "blank check"

preferred stock.

The Board has the authority and discretion, without

shareholder approval, to issue preferred stock in one or more series for any consideration it deems appropriate, and to fix the

relative rights and preferences thereof including their redemption, dividend and conversion rights.

Of these shares, 100,000 shares

have been authorized as the Series A Participating Preferred Stock.

There were no shares of preferred stock outstanding at September

30, 2020 and 2019.

At September 30, 2020,

the Company had 151,335 warrants outstanding and exercisable.

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

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

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

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

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

to issue up to 4,000,000 shares of "blank check" preferred stock.

The Board has the authority and discretion, without shareholder

approval, to issue preferred stock in one or more series for any consideration it deems appropriate, and to fix the relative rights and

preferences thereof including their redemption, dividend and conversion rights.

Of these shares, 100,000 shares have been authorized

as the Series A Participating Preferred Stock.

There were no shares of preferred stock issued or outstanding at September 30, 2021 or

At September 30, 2021, the

Company had 151,000 warrants outstanding and exercisable.

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

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

At September 30, 2021, 76,000 of these warrants have a remaining life of 2.3

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

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

Other Activity

In Fiscal 2020, the

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

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

In Fiscal 2020, the Company

issued 300,000 shares of its common stock in connection with the Kablooe acquisition (see Note 3) and in Fiscal 2021 and Fiscal 2020,

issued 177,000 and 50,000 shares, respectively, of its common stock pursuant to the exercise of stock options (see Note 9).

SHARE-BASED COMPENSATION

2011 Long Term Incentive Plan

In March 2011, shareholders

of the Company approved the 2011 Long Term Incentive Plan (the "2011 Plan"), which originally authorized 850,000 shares

of common stock for grants of various types of equity awards to officers, directors, employees, consultants, and independent contractors.

On February 13, 2018, the shareholders of the Company approved an amendment to the 2011 Plan to increase the aggregate number of

shares of the Company's common stock authorized for issuance under the 2011 Plan by 1,000,000 shares of common stock, from 850,000

shares of common stock to 1,850,000 shares of common stock.

Forfeited awards are eligible for re-grant under the 2011 Plan.

exercise prices of stock options granted may not be less than the fair market value of the common stock as quoted at the close

on the Nasdaq Stock Market on the grant date.

The Compensation Committee administers the 2011 Plan.

Options generally expire five

to ten years after the date of grant.

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

was 291,000 as of September 30, 2020.

2021 Equity Incentive Plan

In 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 10 years.

At September 30, 2021,

there were 1,291,000 shares of common stock available for grants of equity awards under the 2021 Plan.

FORWARD INDUSTRIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2007 Equity Incentive Plan

The 2007 Equity Incentive

Plan (the "2007 Plan"), which was approved by shareholders of the Company in May 2007, and, as amended in February 2010,

expired in accordance with its terms in May 2017.

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

September 30, 2020.

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

as quoted at the close on the Nasdaq Stock Market on the grant date.

There are no unvested restricted stock awards related to the

The Compensation Committee administers the 2007 Plan.

Options generally expire ten years after the date of grant.

2011 Long Term Incentive Plan

In March 2011, shareholders

of the Company approved the 2011 Plan, which originally authorized 850,000 shares of common stock for grants of various types of equity

awards to officers, directors, employees, consultants, and independent contractors.

In February 2018, the shareholders of the Company

approved an amendment to the 2011 Plan to increase the aggregate number of shares of the Company's common stock authorized for issuance

under the 2011 Plan by 1,000,000 shares of common stock, from 850,000 shares of common stock to 1,850,000 shares of common stock.

awards were eligible for re-grant under the 2011 Plan.

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

value of the common stock as quoted at the close on the Nasdaq Stock Market on the grant date.

The Compensation Committee administered

the 2011 Plan.

Options generally expire five to ten years after the date of grant.

Upon approval of the 2021 Plan, no additional awards

were granted under the 2011 Plan, which expired according to its terms in March 2021.

Stock Options

The fair value of

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

following table.

The fair value of each option

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

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

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

option grants.

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

with the expected term of the award.

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

Treasury zero-coupon

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

The Company historically has not paid any dividends

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

The estimated annual forfeiture

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

The forfeiture rate will

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

estimate, when it is material.

The Company utilizes the simplified

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

The expected volatility used is based

on the historical price of the Company’s stock over the most recent period commensurate with the expected term of the award.

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

Treasury zero-coupon issues with a remaining term equivalent to the

award’s expected term.

The Company historically has not paid any dividends on its common stock and had no intention to do so on

the date the share-based awards were granted.

The Company accounts for forfeitures in the period they occur.

In applying the Black-Scholes

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

Assumptions used for options

Expected term (years)

1 unchanged sentence

Risk free interest rate

0.15 %- 1.39 %

Expected dividends

Estimated annual forfeiture rate

Fiscal 2020, the Company made the following option grants:

Options to non-employee directors to purchase an aggregate

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

The options were granted in February 2020, vest

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

which is being recognized ratably over the vesting period.

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

price of $1.40 per share.

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

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

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

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

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

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In Fiscal 2019, the

Company made the following option grants:

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

at an exercise price of $1.54 per share.

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

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

the vesting period.

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

an exercise price of $1.54 per share.

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

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

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

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

respectively, in its consolidated statements of operations.

During Fiscal 2020,

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

share for aggregate cash proceeds of $32,000.

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

No options were exercised

in Fiscal 2019.

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

over a weighted average period of 0.6 years.

The following table

summarizes stock option activity during Fiscal 2020:

Outstanding, September 30, 2019

Outstanding, September 30, 2020

Exercisable, September 30, 2020

Options outstanding

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

The Company made no grants

of stock options or other equity awards in Fiscal 2021.

In Fiscal 2020, the Company made the following option grants:

Options to non-employee directors to purchase an aggregate of 248,019 shares of its common stock at an exercise price of $ 1.13 per share.

The options were granted in February 2020, 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.

Options to its Chief Executive Officer to purchase 180,395 shares of its common stock at an exercise price of $ 1.40 per share.

These options were granted in September 2020, vested immediately, expire five years from the date of grant and had an aggregate grant date fair value of $ 100,000 , which was fully recognized on the date of grant.

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

These options were granted in August 2020, vest ratably over two years , expire five years from the date of grant and had an aggregate grant date fair value of $ 20,000 , which is being recognized ratably over the vesting period.

The options granted

during Fiscal 2020 had a weighted average grant date fair value of $ 0.58

The Company recognized compensation expense for stock option awards of $ 69,000

and $ 245,000

during Fiscal 2021 and Fiscal 2020, respectively, in its consolidated statements of operations.

FORWARD INDUSTRIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restricted Stock Awards

The Company recognized

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

statements of operations.

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

stock awards.

During Fiscal 2021 and 2020,

respectively, the Company issued 177,000 and 50,000 shares of its common stock pursuant to the exercise of stock options for aggregate

cash proceeds of $ 268,000 and $ 32,000 , which had an aggregate intrinsic value of $ 306,000 and $ 33,000 .

At September 30, 2021, there

was $ 4,000 of unrecognized compensation cost related to nonvested stock option awards that is expected to be recognized over a weighted

average period of 0.9 years.

The following table summarizes

stock option activity during Fiscal 2021:

Schedule of stock option activity

Outstanding at September 30, 2020

Outstanding at September 30, 2021

Exercisable at September 30, 2021

Options outstanding at September

30, 2021 have an exercise price between $ 1.13 and $ 1.67 per share.

NOTE 10 INCOME TAXES

The following table

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

The following table summarizes

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

federal, state and foreign taxes on income:

Schedule of income tax provision

Total deferred income tax expense

Change in valuation allowance

4 unchanged sentences

The deferred tax provision/(benefit)

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

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

The Company’s deferred tax

assets and liabilities are comprised of the following:

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

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

The Company’s deferred tax assets and liabilities

are comprised of the following:

Schedule of deferred income taxes

September 30,

1 unchanged sentence

Net operating losses

Capital loss carryforwards

Share-based compensation

Alternative minimum and other tax credits

Excess tax over book basis in inventory

Reserves and other allowances

Deferred rent

Accrued compensation

Accrued expenses

Charitable contributions

Interest expense limitation

Total deferred tax assets

5 unchanged sentences

Valuation allowance

( 2,586,000 )

( 1,887,000 )

Net deferred tax assets

For Fiscal 2020

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

of $4,000 in Fiscal 2019.

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

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

The $4,000 tax benefit

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

The Company recorded a provision

for income taxes which includes net expense of $0 and $9,000 in Fiscal 2021 and 2020, respectively.

The Fiscal 2020 net expense of $9,000

includes state income tax expenses of $13,000, partially offset by a $4,000 refund of the remaining unused balance of alternative minimum

tax (“AMT”) credits.

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

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

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

The CARES Act now allows corporations to immediately claim

unused AMT credits on their current year tax return.

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

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

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The tax code in turn provided for a refund

of the tax credits that existed on December 31, 2017 at a 50% rate in tax years 2018, 2019 and 2020, with any remaining credits being

fully refundable in 2021.

The CARES Act allowed corporations to immediately claim unused AMT credits on their 2019 tax return.

tax expense was the result of taxable income in states where net operating loss carryforwards (“NOLs”) were not available.

At September 30, 2021,

1 unchanged sentence

federal income tax purposes of $ 7,220,000

NOLs generated prior to 2018 expire beginning

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

The NOLs result in a deferred tax asset with respect

and NOLs for state income tax purposes of $1,000,000 .

NOLs generated prior to 2018 expire beginning in 2031 while NOLs generated after

2018 have an indefinite carryforward period.

The NOLs result in a deferred tax asset with respect to U.S.

federal income taxes of

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

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

The Company has capital loss carryovers

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

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

Undistributed

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

$ 1,790,000 .

In addition, at September 30, 2021, the Company had available NOLs for foreign income tax purposes of $ 1,427,000 ,

resulting in a deferred tax asset of $ 260,000 ,

expiring through 2024.

Total net deferred tax assets, before valuation allowance, were $2,586,000 and $1,887,000 at September 30,

2021 and 2020, respectively.

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

therefore, in accordance with U.S.

no provision for U.S.

GAAP, no provision for U.S.

federal and state income taxes would result.

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

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

At September 30, 2020,

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

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

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

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

federal income taxes in the event the Company

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

be permanently reinvested and for which no U.S.

In Fiscal 2021, Forward

Switzerland had a net loss for tax purposes of $ 25,000

and Forward UK had net income for tax purposes of $ 10,000 .

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At September 30, 2021, as

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

of all factors, including, among others, projections of future taxable income, current year NOL utilization and the extent of the Company's

cumulative losses in recent years, the Company determined that, on a more likely than not basis, it would not be able to use remaining

deferred tax assets, except with respect to the U.S.

federal income taxes in the event the Company elects to effect repatriation of certain

foreign source income of Forward Switzerland, which income is currently considered to be permanently reinvested and for which no U.S.

tax liability has been accrued.

Accordingly, the Company has determined to maintain

a full valuation allowance against its net deferred tax assets.

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

and $2,666,000, respectively.

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

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

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

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

At September 30, 2021 and 2020, the valuation allowance was $2,586,000 and $1,887,000, respectively.

In the future, the utilization

of the Company's NOLs may be subject to certain change of control limitations.

If the Company determines that it will be able to use some

or all of its deferred tax assets in a future reporting period, the adjustment to reduce or eliminate the valuation allowance would reduce

its income tax expense and increase after-tax income.

The significant elements

contributing to the difference between the U.S.

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

Reconciliation of effective tax rate

federal statutory rate

1 unchanged sentence

Foreign rate differential

Change in tax credits

Tax return to provision adjustments

Effect of state tax rate change

Capital loss - expiration

Change in valuation allowance

2 unchanged sentences

Effective tax rate

In December 2020, the Company

received approval of its application for forgiveness of its note payable related to the Paycheck Protection Program (the “PPP loan”)

in the aggregate principal amount of $ 1,357,000 , which will not be recognized as taxable income pursuant to the CARES Act.

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.

At September 30, 2021 and

2020, the Company had not accrued any interest or penalties related to uncertain tax positions.

It is the Company's policy to recognize

interest and/or penalties, if any, related to income tax matters in income tax expense in the consolidated statements of operations.

the periods presented in the accompanying consolidated statements of operations, no material income tax related interest or penalties

were assessed or recorded.

All fiscal years prior to the fiscal year ended September 30, 2018 are closed to federal and state examination.

NOTE 11 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 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.

FORWARD INDUSTRIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In November 2020,

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

deductible expenses incurred when a taxpayer receives a PPP loan.

This ruling states the taxpayer may not deduct those expenses

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

covered loan.

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

this difference as a permanent item.

At September 30, 2020

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

It is the Company's policy

to recognize interest and/or penalties, if any, related to income tax matters in income tax expense in the consolidated statements

of operations.

For the periods presented in the accompanying consolidated statements of operations, no material income tax related

interest or penalties were assessed or recorded.

All fiscal years prior to the fiscal year ended September 30, 2017 are closed

to federal and state examination.

NOTE 11 LOSS PER

Basic loss per share

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

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

shares outstanding during each period.

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

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

The following securities were excluded from the calculation

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

A reconciliation of basic

and diluted earnings/loss per share is as follows:

Schedule of earnings (loss)

For the Fiscal Years Ended

September 30,

Net income/(loss)

$ ( 1,775,000 )

Weighted average common shares outstanding

Dilutive common share equivalents

Weighted average dilutive shares outstanding

Earnings/(loss) per share:

There were no

anti-dilutive securities excluded from the calculation of diluted earnings per share in Fiscal 2021.

The following securities

were excluded from the calculation of diluted earnings per share in Fiscal 2020 because their inclusion would have been anti-dilutive:

Schedule of antidilutive securities excluded

Total potentially dilutive shares

NOTE 12 COMMITMENTS

AND CONTINGENCIES

NOTE 12 COMMITMENTS AND

CONTINGENCIES

Guarantee Obligation

In February 2010,

Forward Switzerland and its European logistics provider (freight forwarding and customs agent) entered into a Representation Agreement

(the “Representation Agreement”) whereby, among other things, the European logistics provider agreed to act as Forward

Switzerland's fiscal representative in The Netherlands for the purpose of providing services in connection with any value added

As part of this agreement, Forward Switzerland agreed to provide an undertaking (in the form of a bank letter of guarantee)

to the logistics provider with respect to any value added tax liability arising in The Netherlands that the logistics provider

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

In February 2010,

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

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

pursuant to the bank letter of guarantee.

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

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

(ii) the logistics provider

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

(iii) Forward

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

upon its demand;

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

Under the Representation Agreement,

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

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

the Representation Agreement but asserted by The Netherlands after expiration.

In February 2010, Forward

Switzerland and its European logistics provider (freight forwarding and customs agent) entered into a Representation Agreement (the “Representation

Agreement”) whereby, among other things, the European logistics provider agreed to act as Forward Switzerland's fiscal representative

in The Netherlands for the purpose of providing services in connection with any value added tax matters.

As part of this agreement, Forward

Switzerland agreed to provide an undertaking (in the form of a bank letter of guarantee) to the logistics provider with respect to any

value added tax liability arising in The Netherlands that the logistics provider is required to pay to Dutch tax authorities on its behalf.

In February 2010, Forward

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

approximately $87,000 at September 30, 2021) paid by such bank to the logistics provider in order to satisfy such undertaking pursuant

to the bank letter of guarantee.

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

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

(ii) the logistics provider asserts that it has

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

(iii) Forward Switzerland or the Company

on its behalf fails or refuses to remit the amount of value added tax due to the logistics provider upon its demand;

and (iv) the logistics

provider makes a drawing under the bank letter of guarantee.

Under the Representation Agreement, Forward Switzerland agreed that the letter

of guarantee would remain available for drawing for three years following the date that its relationship terminates with the logistics

provider to satisfy any value added tax liability arising prior to expiration of the Representation Agreement but asserted by The Netherlands

after expiration.

FORWARD INDUSTRIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The initial term of

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

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

the renewal date.

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

adjusted annually.

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

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

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

At September 30, 2020, the Company had not incurred a liability in connection

with this guarantee.

The initial term of the bank

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

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

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

In consideration

of the issuance of the letter of guarantee, Forward Switzerland has granted the Swiss bank a security interest in all of its assets on

deposit with, held by, or credited to Forward Switzerland’s accounts with, the Swiss bank (approximately $436,000 at September 30,

At September 30, 2021, the Company had not incurred a liability in connection with this guarantee.

Legal Proceedings

On August 21, 2020,

IPS was named a third-party defendant in a patent dispute claim currently pending in the U.S.

District Court for the Eastern District

The complaint, which contains no specific amount of monetary damages, asserts that certain intellectual property was

misappropriated by IPS and one of its former employees.

IPS denies the allegations, believes the action is without merit

and intends to vigorously defend it.

The Company received permission from the District Court to file a motion to dismiss

the complaint and filed such motion on December 14, 2020.

From time to time,

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

At September 30, 2020,

there were no such actions or proceedings, either individually or in the aggregate, that, if decided adversely to its interests,

the Company believes would be material to its business.

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.

In October 2021, the Court ruled that the misappropriation claim was invalid.

The remaining

allegation is that IPS breached a non-disclosure agreement with a party to the case.

IPS denies the allegations, believes the action is

without merit and intends to vigorously defend it.

The Company has filed a motion to dismiss.

From time to time, the Company

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

At September 30, 2021, there were no

such actions or proceedings, either individually or in the aggregate, that, if decided adversely to its interests, the Company believes

would be material to its business.

NOTE 13 LEASES

On October 1, 2019, the Company adopted

the updated guidance on leases using the modified retrospective transition method.

Results for Fiscal 2020 are presented under

the updated guidance, while Fiscal 2019 is reported in accordance with historical lease accounting guidance.

The Company’s

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

Total operating lease expense was $562,000

in Fiscal 2020 and total rent expense was $473,000 in Fiscal 2019.

These expenses are recorded in general and administrative expenses

on the consolidated statements of operations.

The Company leases

certain computer equipment through finance lease agreements expiring through July 2024.

Amortization expense related to assets

under finance leases was $42,000 for Fiscal 2020.

Interest expense related to assets under finance leases was $3,000 for Fiscal

The following is a summary of computer equipment held under capital leases:

September 30,

Accumulated depreciation

Net book value

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At September 30, 2020,

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

Weighted Average Remaining Lease Term:

Operating Leases

Finance Leases

Weighted Average Discount Rate:

Operating Leases

Finance Leases

The Company’s operating

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

Total operating lease expense in Fiscal 2021 was $ 611,000 ,

of which $55,000 was recorded in sales and marketing expenses and $556,000 was recorded in general and administrative expenses on the

consolidated statements of operations.

Total operating lease expense in Fiscal 2020 was $ 562,000 , of which $7,000 was recorded in sales

and marketing expenses and $555,000 was recorded in general and administrative expenses on the consolidated statements of operations.

Cash paid for amounts included in operating lease liabilities in Fiscal 2021 and Fiscal 2020, which have been included in cash flows from

operating activities, was $ 489,000 and $ 495,000 , respectively.

The Company leases certain

computer equipment through finance lease agreements expiring through July 2022.

The net book value of assets under finance leases was

$ 14,000 and $ 23,000 at September 30, 2021 and 2020, respectively.

The remaining finance lease liability at September 30, 2021 was $ 2,000

and due to immateriality, no additional disclosures are made for finance leases.

At September 30, 2021, the

Company’s operating leases had a weighted average remaining lease term of 9.3 years and a weighted average discount rate of 5.7 %.

Future minimum payments under non-cancellable

operating and finance leases are as follows:

Fiscal Years Ended September 30,

Operating Leases

Finance Leases

operating leases are as follows:

Schedule of Future Minimum Rental Payments for Operating Leases

Total future minimum lease payments

Less imputed interest

NOTE 14 RELATED

PARTY TRANSACTIONS

Buying Agency and Supply Agreement

The Company has a

Buying Agency and Supply Agreement (the “Supply Agreement”) with Forward China.

The Supply Agreement provides that,

upon the terms and subject to the conditions set forth therein, Forward China will act as the Company’s exclusive buying

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 22, 2023.

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

addition, Jenny P.

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

The Company recorded service fees to Forward China of $1,363,000 and $1,398,000 during Fiscal 2020 and Fiscal 2019, respectively,

which are included as a component of cost of sales when revenue is recognized on sales of the related products.

( 1,213,000 )

FORWARD INDUSTRIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On August 14, 2018,

the Company entered into a formal agreement, confluent with the Supply Agreement noted above, to address the potential impact of

customers sourcing directly from Forward China.

Although unlikely, customers may be introduced directly or indirectly by the Company

to Forward China.

In the event a customer determines to bypass the services of the Company and do business directly with Forward

China, Forward China has agreed to pay a commission of 50% of the net revenue generated from the products or services sold to the

customer after deduction of direct costs.

No commissions have been received per this agreement during Fiscal 2020 or Fiscal 2019.

At September 30, 2020,

the Company made $107,000 in prepayments to Forward China for inventory purchases, which is included in prepaid expenses and other

current assets on the consolidated balance sheet.

NOTE 14 RELATED PARTY

Buying Agency and Supply Agreement

The Company has a Buying

Agency and Supply Agreement (the “Supply Agreement”) with Forward China.

The Supply Agreement provides that, upon the terms

and subject to the conditions set forth therein, Forward China will act as the Company’s exclusive buying 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 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.

The Company recorded service fees to Forward China of $ 1,404,000

and $ 1,363,000 during Fiscal 2021 and Fiscal 2020, respectively, which are included as a component of cost of sales upon sales of the

What changed 10-K

Item 9A. Controls and Procedures