What changed in this filing

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Item 9A. Controls and Procedures

2022-12-16 compared with 2021-12-16 · 696 added, 938 removed, 590 unchanged (73% of the section changed)

1 unchanged sentence

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 Exchange Act.

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

10 unchanged sentences

over financial reporting as of September 30, 2022 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

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.

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.

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;

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with

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

(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,

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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

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 2022 that materially affected, or are reasonably likely to materially affect, our internal

6 unchanged sentences

AND CORPORATE GOVERNANCE

The information required

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.

The information required by this

item is incorporated by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders to be filed with the SEC

within 120 days of the fiscal year ended September 30, 2022.

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) under “Investors”,

"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 2022 Annual Meeting of Stockholders to be filed with

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

The information required by this

item is incorporated by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders to be filed with the SEC

within 120 days of the fiscal year ended September 30, 2022.

SECURITY OWNERSHIP OF CERTAIN

BENEFICIAL OWNERS AND MANAGEMENT

The information required

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

AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information required

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.

BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

The information required by this

item is incorporated by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders to be filed with the SEC

within 120 days of the fiscal year ended September 30, 2022.

CERTAIN RELATIONSHIPS AND

RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information required by this

item is incorporated by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders to be filed with the SEC

within 120 days of the fiscal year ended September 30, 2022.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required

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

The information required by this

item is incorporated by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders to be filed with the SEC

within 120 days of the fiscal year ended September 30, 2022.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Documents filed as part of the report.

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See the Exhibit Index.

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 authorized.

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 authorized.

December 16, 2022

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(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, 2022

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December 16, 2022

/s/ Howard Morgan

Howard Morgan

December 16, 2021

/s/ Sangita Shah

1 unchanged sentence

/s/ James Ziglar

December 16, 2022

/s/ Sharon Hrynkow

Sharon Hrynkow

EXHIBIT INDEX

Exhibit Description

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+

Purchase Agreement dated August 17, 2020 - Kablooe, Inc.+

Certificate of Incorporation

3 unchanged sentences

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)

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

Long Term Incentive Plan, as amended

6 unchanged sentences

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 *

of Employment Agreement dated January 18, 2018 – Paul Severino*+

of Employment Agreement dated May 26, 2021 - Paul Severino*$

Agreement dated May 16, 2018 - Terence Wise*$

Agreement between Forward Industries, Inc.

and Anthony Camarda, dated June 26, 2020*

Agreement dated June 26, 2020 – Anthony Camarda*$

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

2 unchanged sentences

Bank Modification Agreement dated September 28, 2018

Agreement dated March 1, 2022 - Justwise Group Ltd.

Consultancy Agreement dated September 1, 2022 - Justwise Group Ltd.

Employment Agreement dated

January 18, 2018 - Robert Wild*

Employment Agreement dated

August 17, 2020 - Tom KraMer*

of Subsidiaries

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______________________

* 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.;

* 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.

$ As previously disclosed, this executive officer has received an increase

to his annual Base Salary.

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.;

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

3 unchanged sentences

CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

of Independent Registered Public Accounting Firm

Consolidated Balance Sheets at September 30, 2022 and 2021

4 unchanged sentences

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING

The Board of Directors

and Shareholders of Forward Industries, Inc.

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.

We have audited the accompanying consolidated

balance sheets of Forward Industries, Inc.

and Subsidiaries (the “Company”) as of September 30, 2022 and 2021, 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, 2022 and 2021, 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

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 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.

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.

We conducted our audits in accordance with the

standards of the PCAOB.

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

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

The Company is not required to have, nor were we

engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding

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

internal control over financial reporting.

Accordingly, we express no such opinion.

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.

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 Matters

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 relate.

Assessment of Going Concern (Note 1 to the

Consolidated Financial Statements)

Significant judgment is exercised by the Company

in determining whether there is substantial doubt the Company will continue as a going concern.

Specifically, the Company’s 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 residual effects of the global pandemic, and inflation.

Given these factors, the related audit effort

in evaluating management’s judgments in determining the Company’s ability to continue as a going concern was challenging,

subjective, and complex and required a high degree of auditor judgment.

How our Audit Addressed the Critical Audit

Our principal audit procedures related to the

Company’s assessment of going concern 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 considering the appropriateness 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.

/s/ CohnReznick LLP

We have served

as the Company’s auditor since 2011.

Melville, New

We have served as the Company’s auditor since

Melville, New York

December 16, 2022

FORWARD INDUSTRIES, INC.

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CONSOLIDATED BALANCE SHEETS

September 30,

Current assets:

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Current liabilities:

Line of credit

Note payable to Forward China

Accounts payable

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Deferred income

Current portion of notes payable

Current portion of finance lease liability

Current portion of earnout consideration

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Note payable to Forward China

Notes payable, less current portion

Operating lease liability, less current portion

Finance lease liability, less current portion

Earnout consideration, less current portion

Total other liabilities

Total liabilities

Commitments and contingencies

Commitments and contingencies (Note 11)

Shareholders' equity:

1 unchanged sentence

40,000,000 shares authorized;

10,061,185 and 9,883,851 shares issued and outstanding at September 30, 2021 and 2020, respectively

10,061,185 shares issued and outstanding at September 30, 2022 and 2021

Additional paid-in capital

4 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

FORWARD INDUSTRIES, INC.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Fiscal Years Ended September 30,

For the Fiscal Years Ended

September 30,

Revenues, net

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General and administrative expenses

Goodwill impairment

Loss from operations

3 unchanged sentences

Fair value adjustment of earnout consideration

Fair value adjustment of deferred cash consideration

Interest income

1 unchanged sentence

Other expense, net

Income/(loss) before income taxes

(Loss)/income before income taxes

( 1,375,697 )

Provision for income taxes

Net income/(loss)

Net (loss)/income

$ ( 1,378,251 )

Earnings/(loss) per share:

(Loss)/earnings 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

FORWARD INDUSTRIES, INC.

5 unchanged sentences

Share-based compensation

Stock options exercised

( 1,378,251 )

Balance at September 30, 2022

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Share-based compensation

Shares issued for Kablooe acquisition

Stock options exercised

( 1,775,281 )

Balance at September 30, 2021

$ ( 12,571,645 )

The accompanying notes are

an integral part of the consolidated financial statements.

The accompanying notes are an integral part of the consolidated financial

FORWARD INDUSTRIES, INC.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Fiscal Years Ended September 30,

For the Fiscal Years Ended

September 30,

Operating Activities:

Net income/(loss)

Net (loss)/income

$ ( 1,378,251 )

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

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

operating activities:

Share-based compensation

Depreciation and amortization

Bad debt expense/(recovery)

Bad debt expense

Gain on forgiveness of note payable

1 unchanged sentence

Change in fair value of earn-out consideration

Change in fair value of deferred cash consideration

Goodwill impairment

Impairment of investment

Changes in operating assets and liabilities:

1 unchanged sentence

( 1,664,868 )

( 1,738,473 )

Prepaid expenses and other current assets

3 unchanged sentences

Accrued expenses and other current liabilities

Net cash used in operating activities

Net cash provided by/(used in) operating activities

Investing Activities:

Purchases of property and equipment

Cash used in acquisition of Kablooe, Inc.

Cash acquired in acquisition of Kablooe, Inc.

Net cash used in investing activities

3 unchanged sentences

( 1,150,000 )

( 1,200,000 )

Repayment of notes payable

Proceeds from note payable

Repayment of note payable to Forward China

Proceeds from stock options exercised

Repayments of finance leases

Payment of deferred cash consideration

Net cash (used in)/provided by financing activities

Net decrease in cash

Net cash used in financing activities

Net increase/(decrease) in cash

( 1,514,262 )

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Supplemental Disclosures of Non-Cash Information:

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.

Operating lease assets obtained in exchange for operating lease liabilities

The accompanying notes are an integral part of the consolidated financial

FORWARD INDUSTRIES, INC.

3 unchanged sentences

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.

“we”, “our”, or the “Company”), is a global design, manufacturing, sourcing and distribution group

serving top tier medical and technology customers worldwide.

As a result of the continued expansion of our design development capabilities

through our wholly-owned subsidiaries, IPS and Kablooe, the Company is 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.

The Company’s design division

provides hardware and software product design and engineering services to customers predominantly located in the U.S.

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”).

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.

OEM distribution division sources and sells carrying cases and other accessories for medical monitoring and diagnostic kits as well as

a variety of other portable electronic and non-electronic devices to original equipment manufacturers (“OEM”s), or their contract

manufacturers worldwide, 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 retail distribution division sources and sells smart-enabled

furniture, hot tubs and various other products through various online retailer websites to customers predominantly located in the U.S.

The Company does not manufacture

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

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

In Fiscal 2022, the Company

generated a net loss of $ 1,378,000

and $ 1,535,000

of cash flows from operating activities.

Based on our forecasted cash flows, we believe our existing cash balance and working

capital will be sufficient to meet our liquidity needs through at least December 31, 2023.

Impact of COVID-19

The outbreak of the

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.

The effects of the COVID-19 pandemic

continue to impact the retail and OEM distribution segments of our business.

The increase in global consumer demand, coupled with the

global shipping container shortage, dramatically increased demand for both ocean freight and ground transportation.

These factors led

to a significant increase in freight costs, particularly from the Asia-Pacific region and most notably in Fiscal 2022.

Labor shortages

ports and in ground transportation services caused container ships to spend a significant amount of time waiting for goods to

be unloaded and to arrive at our warehouses.

These factors caused an increase in the demand for and cost of ground transportation and

delayed consumer availability for many of our products in Fiscal 2022.

The timing and extent of these COVID-19 related transportation

disruptions are still largely unknown but are expected to continue into Fiscal 2023.

The effects of the pandemic had

a lesser impact on the design segment of our business.

Rising inflation caused an increase in the cost of acquiring and retaining our

employees, particularly in the second half of Fiscal 2022.

The timing and extent of future inflation is difficult to predict, but we expect

these rising costs to continue into Fiscal 2023.

The effects of COVID-19 may further

impact our business in ways we cannot predict, and such impacts could be significant.

The current economic conditions may continue to

negatively impact our results of operations, cash flows and financial position in future periods as well as that of our customers, including

their ability to pay for our products and services and to choose to allocate their budgets to new or existing projects which may or may

not require our products and services.

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

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

FORWARD INDUSTRIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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;

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.

Until the effects of the pandemic

have fully receded, 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 and inventory levels;

aligning our design and development

schedules with demand in a proactive manner 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.

NOTE 2 ACCOUNTING POLICIES

19 unchanged sentences

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

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

1 unchanged sentence

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.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The OEM distribution segment sources and sells carrying cases and other accessories

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

recreational products, bar code scanners, GPS location devices, tablets and firearms) on a made-to-order basis that are customized to

fit the products sold by our OEM customers worldwide.

The retail distribution segment sources and sells smart-enabled furniture, hot tubs

and a variety of other products through various online retailer websites to customers predominantly located in the U.S.

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 to customers predominantly located in the U.S.

See Note 15 for more information

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.

The Company has two reporting units with goodwill (the IPS

and Kablooe operating segments) 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 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 amount, no impairment charge is recognized.

If the fair value of the reporting

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

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

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

unit is less than its carrying 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 unit.

Management evaluated and concluded there were no indications of impairment of goodwill in Fiscal 2022

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Intangible Assets

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.

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 and 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.

the recoverability of our intangible assets, we must make estimates and assumptions regarding future cash flows and other factors to determine

the fair value of the respective assets.

These estimates and assumptions could have a significant impact on whether an impairment charge

is recognized and the magnitude of any such charge.

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

These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined

with precision.

Changes in assumptions could significantly affect the estimates.

If these estimates

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

Management evaluated and concluded that there were no 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.

Historically, we have not

experienced any losses due to such cash concentrations.

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 impairments of intangible assets at September 30, 2022 or 2021.

The Company maintains cash deposits

in banks with financial institutions in the United States (that at times may exceed federally insured limits of $250,000 per financial

institution) and Switzerland.

At September 30, 2022 and 2021, there were deposits totaling $ 2,037,000 (which includes $ 467,000 in a foreign

bank) and $ 805,000 (which includes $ 436,000 in a foreign bank), respectively, held in excess of federally insured limits.

Historically,

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

Accounts Receivable

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.

Accounts receivable consist of unsecured trade accounts with customers

in amounts that have been invoiced ($ 7,861,000 and $ 8,864,000 at September 30, 2022 and 2021, respectively) and contract assets as described

further below under the heading “Revenue Recognition.” 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, 2022 and 2021, the Company had allowances for doubtful accounts

of $ 0 and $ 90,000 , respectively, for the OEM distribution segment, $ 20,000 and $ 0 , respectively, for the retail segment and $ 852,000 and

$ 706,000 , respectively, for the design segment.

The Company has agreements with

various retailers which contain different terms for trade discounts, promotional and other sales allowances.

At September 30, 2022, 2021

and 2020, the Company recorded accounts receivable allowances of $ 55,000 , $ 0 and $ 0 , respectively, for the retail distribution segment.

In Fiscal 2019, the Company recorded

bad debt expense of $ 1,626,000 to fully reserve accounts receivable deemed uncollectible from a customer.

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 from this customer in Fiscal 2021, of which $ 89,000 was applied to past due interest

and penalties and recorded as interest income, and $ 12,000 was applied to principal and recorded as a recovery of bad debt expense as

a reduction of general and administrative expense.

No payments were received from this customer in Fiscal 2022.

FORWARD INDUSTRIES, INC.

5 unchanged sentences

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.

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, 2022 and 2021, the allowance for

slow-moving inventory, which relates entirely to our retail segment, was $ 535,000 and $ 50,000 , respectively.

Property and Equipment

9 unchanged sentences

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.

Lease assets and liabilities

are recognized at lease 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

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.

The Company recognizes future

2 unchanged sentences

At September 30, 2022, 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.

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

Accordingly, any deferred tax provision or benefit was

offset by an equal and opposite change to the valuation allowance.

Our income tax provision or benefit is generally not significant due

to the existence of significant net operating loss carryforwards.

Revenue Recognition

OEM Distribution Segment

The OEM distribution segment

recognizes revenue 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

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

If 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 OEM distribution segment had no contract liabilities at September

30, 2022, 2021 or 2020.

FORWARD INDUSTRIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Revenue Recognition

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.

Retail Distribution Segment

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.

sells products primarily through online websites operated by authorized third-party retailers.

Revenue is recognized when control (as

defined in ASC 606, “Revenue from Contracts with Customers”) of the related goods is transferred to the retailer, which generally

occurs upon shipment to the end customer.

Other than product delivery, the retail distribution segment does not typically have other deliverables

or performance obligations associated with its products.

Revenue is measured as the amount of consideration expected to be received in

exchange for the products provided, net of allowances taken by retailers for product returns and any taxes collected from customers that

will be remitted to governmental authorities.

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 , $ 0 and $ 75,000 at September 30, 2022, 2021 and 2020, respectively.

Design Segment

11 unchanged sentences

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

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 $ 609,000 , $ 693,000 , $ 649,000 at September 30,

2022, 2021 and 2020, 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.

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.

The design segment

had contract liabilities at of $ 439,000 , $ 188,000 , $ 410,000 at September 30, 2022, 2021 and 2020, respectively.

Shipping and Handling Fees

9 unchanged sentences

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.

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

in the accompanying consolidated statements of operations.

The approximate net losses from foreign currency transactions were $ 13,000

and $ 5,000 for Fiscal 2022 and 2021, respectively.

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

revenues from certain customers.

Fair Value Measurements

5 unchanged sentences

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

FORWARD INDUSTRIES, INC.

INDUSTRIES, INC.

AND SUBSIDIARIES

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

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

5 unchanged sentences

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

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).

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 8).

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

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.

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

5 unchanged sentences

available regarding the assets acquired and liabilities assumed.

Reclassifications

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 adopted this guidance in the

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

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In November 2019, the FASB

issued ASU 2019-08, “Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606)”

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

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

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

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

Recent Accounting Pronouncements

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

In December 2019, the FASB issued

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

Simplifying the Accounting for Income Taxes.” This guidance removes certain exceptions

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

GAAP by clarifying and amending existing guidance.

The effective date of the new guidance for public companies is for fiscal years beginning after December 15, 2020 and interim periods

within those fiscal years.

Early adoption is permitted.

The Company is currently evaluating the 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.

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

Design, the Company:

(i) paid $ 353,000 in cash;

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

(iii) agreed to pay up to an aggregate

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

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:

Total purchase consideration

Cash at closing (1)

Value of Forward's common stock (2)

Fair value of contingent earnout consideration

Total Purchase Consideration

_________________

Cash paid by Forward at closing.

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

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

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

The Company adopted this guidance in the first quarter of fiscal 2022 with no

material impact to its consolidated financial statements.

FORWARD INDUSTRIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Customer relationships (8 yr life)

Trademark (15 yr life)

Property and equipment

Total identifiable assets acquired

Accounts payable

Accrued liabilities

Deferred revenue

Total liabilities assumed

Net identifiable assets acquired

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.

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

ASSETS AND GOODWILL

NOTE 3 INTANGIBLE ASSETS

Intangible Assets

17 unchanged sentences

During Fiscal 2022 and Fiscal 2021, 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.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

assets of $ 213,000 , which is included in general and administrative expenses in the Company’s consolidated statements of operations.

At September 30, 2022, estimated

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

Estimated future amortization

Estimated amortization expense

Goodwill represents the future

5 unchanged sentences

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.

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.

NOTE 5 PROPERTY

AND EQUIPMENT

Property and equipment and related accumulated

depreciation and amortization are summarized in the table below:

Schedule of property, plant and

INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 PROPERTY AND

Property and equipment and related accumulated depreciation

and amortization are summarized in the table below:

Schedule of property and equipment

September 30,

2 unchanged sentences

Property and equipment, cost

accumulated depreciation and amortization

Less accumulated depreciation and amortization

Property and equipment, net

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

for Fiscal 2021 and Fiscal 2020, respectively.

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

Quoted prices in active markets for identical assets

Significant other observable inputs

Significant unobservable inputs

Balance at September 30, 2019

Increase in fair value of IPS deferred cash consideration

Decrease in the fair value of IPS earnout consideration

Payout of IPS deferred cash consideration

Fair value of Kablooe 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

Depreciation expense was $ 96,000 and $ 115,000 for

Fiscal 2022 and Fiscal 2021, respectively.

NOTE 5 FAIR VALUE MEASUREMENTS

The earnout consideration of

$ 70,000 at September 30, 2022 and

2021 represents the fair value of the contingent earnout consideration related to the acquisition of Kablooe, which provides annual contingent

earnout payments based on results of operations through August 2025.

The current and non-current portions of this liability are shown

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

The fair value of the earnout liability

is measured on a recurring basis at each reporting date using a Black-Scholes valuation model with the following inputs and assumptions,

which are categorized within level three of the fair value hierarchy:

Fair value assumptions

3 unchanged sentences

Dividend yield

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.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Quoted prices in active markets for identical assets

Significant other observable inputs

Significant unobservable inputs

September 30, 2019

Impairment of cost method investment

September 30, 2020

NOTE 7 ACCRUED

EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities

at September 30, 2021 and 2020 are as follows:

In Fiscal 2022, there were no

changes to the total fair value of this earnout liability.

In 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.

NOTE 6 ACCRUED EXPENSES

AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities at

September 30, 2022 and 2021 are as follows:

Schedule of accrued expenses and other accrued liabilities

September 30,

Accrued commissions/bonuses

Paid time off

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.

FORWARD INDUSTRIES, INC.

INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Initially, no separate Rights

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

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

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

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

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

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.

NOTE 7 SHAREHOLDERS’

“Blank Check” Preferred Stock

The Company is authorized

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

1 unchanged sentence

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.

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, 2022 or 2021.

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.

At September 30, 2022, 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, 2022, 76,000 of these warrants have a remaining life of 0.9 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 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).

In Fiscal 2021, the Company issued

177,000 shares of its common stock pursuant to the exercise of stock options (see Note 8).

SHARE-BASED COMPENSATION

13 unchanged sentences

At September 30, 2022,

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

FORWARD INDUSTRIES, INC.

there were 1,014,000 shares of common stock available for grants under the 2021 Plan.

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.

Upon approval

of the 2021 Plan, no additional awards were granted under the 2011 Plan, which expired according to its terms in March 2021.

INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The Company utilizes the simplified

method to develop an estimate of the expected term of “plain vanilla” 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 fair value of option awards

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

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

The Company utilizes the simplified method

to develop an estimate of the expected term of “plain vanilla” 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 Company accounts for forfeitures in the period they occur.

4 unchanged sentences

Expected volatility

68.8 % - 78.6 %

Risk free interest rate

1 unchanged sentence

Expected dividends

The Company made no grants

of stock options or other equity awards in Fiscal 2021.

The Company made no grants of

stock options or other equity awards in Fiscal 2021.

In Fiscal 2022, 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.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 .

· Options to current and former non-employee directors

to purchase an aggregate of 297,000 shares of its common stock.

The options were granted throughout Fiscal 2022, expire five to ten years

from the date of grant, 145,000 vested immediately, 129,000 vest one year from the date of grant and 23,000 were forfeited prior to vesting.

These options had an aggregate grant date fair value of $ 245,000 , which is being recognized ratably over the vesting period.

· Options to an employee to purchase 27,000 shares

of its common stock.

These options were granted in January and July of 2022, 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

2022 had a weighted average grant date fair value of $ 0.82 per share.

The Company recognized compensation expense for stock option awards

of $ 201,000 and $ 69,000 during Fiscal 2022 and Fiscal 2021, respectively, which was recorded as a component of general and administrative

expenses in its consolidated statements of operations.

No options were exercised during

During Fiscal 2021, the Company issued 177,000 shares of its common stock pursuant to the exercise of stock options for aggregate

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

At September 30, 2022, there

1 unchanged sentence

average period of 0.6 years.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes

8 unchanged sentences

The following table summarizes

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

the Company’s consolidated provision for U.S.

federal, state and foreign taxes on income:

Schedule of income tax provision

Total deferred income tax expense

Deferred Income Tax Expense (Benefit)

Change in valuation allowance

Income tax provision/(benefit)

Income tax provision

FORWARD INDUSTRIES, INC.

19 unchanged sentences

Intangible assets

481 Election (IPS)

Total deferred tax liabilities

5 unchanged sentences

for income taxes which includes net expense of $3,000 and $0 in Fiscal 2022 and 2021, 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.

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,

the Company had available net NOLs for U.S.

federal income tax purposes of $ 7,220,000

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

$ 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 ,

The Fiscal 2022 expense of $3,000

is for state income tax expenses in states where net operating loss carryforwards (“NOLs”) were not available.

At September 30, 2022, the Company

had available net NOLs for U.S.

federal income tax purposes of $ 6,940,000 and NOLs for state income tax purposes of $ 978,000 .

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 of $ 1,680,000 with respect to U.S.

federal income taxes and $ 40,000 with respect to state income taxes.

In addition, at September

30, 2022, the Company had available NOLs for foreign income tax purposes of $ 1,569,000 , resulting in a deferred tax asset of $ 283,000 ,

expiring through 2028.

2 unchanged sentences

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

therefore, in accordance with U.S.

in accordance with U.S.

GAAP, no provision for U.S.

federal and state income taxes would result.

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

federal or state income taxes would result.

In Fiscal 2022, Forward Switzerland had

a net loss for tax purposes of $ 45,000 and Forward UK had net income for tax purposes of $ 150,000 .

At September 30, 2022, 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

11 unchanged sentences

its income tax expense and increase after-tax income.

The significant elements

contributing to the difference between the U.S.

FORWARD INDUSTRIES,

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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:

6 unchanged sentences

Change in valuation allowance

State income taxes

Permanent differences

2 unchanged sentences

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.

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

Pursuant to the

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

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

At September 30, 2022 and 2021,

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.

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

All fiscal years prior to the fiscal year ended September 30, 2019 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

NOTE 10 EARNINGS PER SHARE

Basic earnings per share data

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

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

during each period.

1 unchanged sentence

computed using the treasury stock method.

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A reconciliation of basic

and diluted earnings/loss per share is as follows:

Schedule of earnings (loss)

A reconciliation of basic and diluted earnings/loss per share is as follows:

Schedule of earnings (loss) per share

For the Fiscal Years Ended

September 30,

Net income/(loss)

Net (loss)/income

$ ( 1,378,000 )

2 unchanged sentences

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

(Loss)/earnings per share:

FORWARD INDUSTRIES,

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 2022 because their inclusion would have been anti-dilutive:

Schedule of anti dilutive securities excluded

Total potentially dilutive shares

NOTE 12 COMMITMENTS AND

CONTINGENCIES

NOTE 11 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

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

3 unchanged sentences

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.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

$77,000 at September 30, 2022) 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

The initial term of the bank

7 unchanged sentences

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 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.

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

At September 30, 2022, 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.

FORWARD INDUSTRIES,

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 LEASES

The Company’s operating

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

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

Total operating lease expense in Fiscal 2022 was $ 631,000 ,

1 unchanged sentence

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.

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.

Cash paid for amounts included in operating lease liabilities in Fiscal 2022 and Fiscal 2021, which have been included in cash flows from

operating activities, was $ 601,000 and $ 489,000 , 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 leases are as follows:

At September 30, 2022, the Company’s

operating leases had a weighted average remaining lease term of 8.4 years and a weighted average discount rate of 5.7 %.

Future minimum payments under non-cancellable operating

leases are as follows:

Schedule of Future Minimum Rental Payments for Operating Leases

2 unchanged sentences

( 1,003,000 )

FORWARD INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 RELATED PARTY

NOTE 13 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 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

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.

5 unchanged sentences

The Company recorded service fees to Forward China of $ 1,398,000

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