| ACCOUNTING POLICIES | NOTE 2 ACCOUNTING
POLICIES Basis of Presentation The accompanying
condensed consolidated financial statements include the accounts of Forward Industries, Inc. and all of its subsidiaries: Forward
Industries (IN), Inc. (“Forward US”), Forward Industries (Switzerland) GmbH (“Forward Switzerland”), Forward
Industries UK Limited (“Forward UK”), Intelligent Product Solutions, Inc. (“IPS”) and Kablooe, Inc. (“Kablooe”).
The terms “Forward”, “we” or the “Company” as used throughout this document are used to indicate
Forward Industries, Inc. and all of its subsidiaries. All significant intercompany transactions and balances have been eliminated
in consolidation. The acquisition of
Kablooe took place in August 2020 and its results of operations have been included in our condensed consolidated financial statements
since the acquisition date. Accordingly, our results of operations for the three months ended December 31, 2020 include Kablooe’s
results of operations, while our results of operations for the three months ended December 31, 2019 do not. Key terms of the acquisition
are contained in our Form 10-K filed with the Securities and Exchange Commission on December 17, 2020. In the opinion of management,
the accompanying condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q reflect all normal
recurring adjustments necessary to present fairly the financial position and results of operations and cash flows for the interim
periods presented herein, but are not necessarily indicative of the results of operations for the year ending September 30, 2021.
These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial
statements included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2020, and with the disclosures and
risk factors presented therein. The September 30, 2020 condensed consolidated balance sheet has been derived from the audited consolidated
financial statements. Certain dollar amounts and percentages have been rounded to their approximate value. For the three months ended
December 31, 2020, the Company generated net income of $1,199,000, and used $511,000 of cash flow in operating activities. The
Company has an accumulated deficit of $11,896,000 at December 31, 2020. We believe our existing cash balance and working capital
will be sufficient to meet our liquidity needs at least through February 28, 2022. Accounting Estimates The preparation of the Company’s
condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of
America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements
and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates
and assumptions. Revenue Recognition Distribution Segment The Company generally recognizes
revenue in its distribution segment when: (i) finished goods are shipped to our distribution customers (in general, these conditions
occur at either point of shipment or point of destination, depending on the terms of sale, i.e., transfer of control); (ii) there
are no other deliverables or performance obligations; and (iii) there are no further obligations to the customer after title
to the goods has transferred. When the Company receives consideration before achieving the criteria previously mentioned, it records
a contract liability, which is classified as a component of deferred income in the accompanying condensed consolidated balance
sheets. The distribution segment had no contract liabilities at December 31, 2020. Contract liabilities at September 30, 2020 were
$75,000 for the distribution segment. Design Segment The Company applies the
“cost to cost” and “right to invoice” methods of revenue recognition to the contracts with customers in
the design segment. The design segment typically engages in two types of contracts: (i) time and material and (ii) fixed price
contracts. The Company recognizes revenue over time on its time and material contracts utilizing a “right to invoice”
method. Revenues from fixed price contracts that require performance of services that are not related to the production of tangible
assets are recognized by using cost inputs to measure progress toward the completion of its performance obligations, or the “cost
to cost” method. Revenues from fixed price contracts that contain specific deliverables are recognized when the performance
obligation has been satisfied or the transfer of goods to the customer has been completed and accepted. Recognized revenues that
will not be billed until a later date, or contract assets, are recorded as an asset and classified as a component of accounts receivable
in the accompanying condensed consolidated balance sheets. Contract assets at December 31, 2020 and September 30, 2020 were $805,000
and $649,000, respectively. Contracts where collections to date have exceeded recognized revenues, or contract liabilities, are
recorded as a liability and classified as a component of deferred income in the accompanying condensed consolidated balance sheets.
Contract liabilities at December 31, 2020 and September 30, 2020 were $170,000 and $410,000, respectively, for the design segment. Goodwill Goodwill represents the
future economic benefits of assets acquired in a business combination that are not individually identified or separately recognized.
The Company’s goodwill resulted from its acquisitions of IPS in January 2018 and Kablooe in August 2020. The Company reviews goodwill
for impairment at least annually, or more often if triggering events occur. The Company has two reporting units with goodwill (IPS
and Kablooe) and we perform our annual goodwill impairment test on September 30, the end of the fiscal year, or upon the occurrence
of a triggering event. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely
than not to have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of
a reporting unit is less than its carrying amount, then the Company would not need to perform the impairment test for the reporting
unit. If the Company cannot support such a conclusion or does not elect to perform the qualitative assessment, then the Company
will compare the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting
unit exceeds its carrying value, no impairment charge is recognized. If the fair value of the reporting unit is less than its carrying
value, an impairment charge will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair
value. A significant amount of judgment is required in performing goodwill impairment tests including estimating the fair value
of a reporting unit and the implied fair value of goodwill. Based on management’s evaluation, there were no impairments to
goodwill at September 30, 2020 and there were no triggering events leading to an interim impairment analysis at December 31, 2020. Intangible Assets Intangible assets include
trademarks and customer relationships, which resulted from the acquisitions of IPS in Fiscal 2018 and Kablooe in Fiscal 2020 and
are recorded based on their estimated fair value determined in conjunction with the purchase price allocations. These intangible
assets are amortized over their estimated useful lives, which are periodically evaluated for reasonableness. Our intangible assets are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
In assessing the recoverability of our intangible assets, we must make estimates and assumptions regarding future cash flows and
other factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact
on whether an impairment charge is recognized and the magnitude of any such charge. Fair value estimates are made at a specific
point in time, based on relevant information. These estimates are subjective in nature and involve uncertainties and matters of
significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the
estimates. If these estimates or material related assumptions change in the future, we may be required to record impairment charges
related to our intangible assets. Management evaluated and concluded that there were no impairments of intangible assets at December
31, 2020. Income Taxes The Company recognizes future
tax benefits and liabilities measured at enacted rates attributable to temporary differences between financial statement and income
tax bases of assets and liabilities and to net tax operating loss carryforwards to the extent that realization of these benefits
is more likely than not. At December 31, 2020, there was no change to our assessment that a full valuation allowance was required
against all net deferred tax assets as it is not probable that such deferred tax assets will be realized. Accordingly, any deferred
tax provision or benefit was offset by an equal and opposite change to the valuation allowance. No current book income tax provision
was recorded against book net income due to the existence of significant net operating loss carryforwards. During the three
months ended December 31, 2020, the Company’s application for forgiveness of debt was submitted and approved for their
loan received as part of the Payroll Protection Program (“PPP loan”) pursuant to the U.S. Coronavirus Aid,
Relief, and Economic Security Act (“CARES Act”). The aggregate loan principal amount forgiven was $1,357,000. The
total amount forgiven will not be recognized as taxable income pursuant to the CARES Act. Pursuant to the Consolidated
Appropriations Act, 2021, which was enacted by Congress and signed into law by the President on December 27, 2020, all
expenses utilizing funds from PPP loans will be deductible against taxable income. Fair Value Measurements We perform fair value measurements
in accordance with the guidance provided by ASC 820, “Fair Value Measurement.” ASC 820 defines fair value as the price
that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at their
fair values, we consider the principal or most advantageous market in which we would transact and consider assumptions that market
participants would use when pricing the assets or liabilities, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 820 establishes a fair
value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. An asset's or liability's categorization within the fair value hierarchy is based upon the lowest level of
input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure
fair value:
· Level 1: quoted prices in active markets for identical assets or liabilities;
· Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or
· Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities. Leases L ease
assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term, using
the Company’s incremental borrowing rate commensurate with the lease term, since the Company’s lessors do not provide
an implicit rate, nor is one readily available. The Company has certain leases that may include an option to renew and when it
is reasonably probable to exercise such option, the Company will include the renewal option terms in determining the lease asset
and lease liability. Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities
represent the Company’s obligation to make lease payments arising from the lease. Lease expense for lease payments is recognized
on a straight-line basis over the lease term. Operating lease assets are shown as right of use assets and finance lease assets
are a component of property and equipment on the condensed consolidated balance sheets. The current and long-term portions of operating
and finance lease liabilities are shown separately as such on the condensed consolidated balance sheets. Business Combinations The Company allocates the
fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated
fair values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded
as goodwill. When determining the fair values of assets acquired and liabilities assumed, the Company makes significant estimates
and assumptions, especially with respect to intangible assets. Critical estimates in valuing
certain intangible assets include, but are not limited to, future expected cash flows from customer relationships and developed technology,
discount rates and terminal values. Our estimate of fair value is based upon assumptions believed to be reasonable, but actual
results may differ from estimates. Other estimates associated with the accounting for acquisitions may change as additional information
becomes available regarding the assets acquired and liabilities assumed. Recent Accounting Pronouncements In August 2018, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASU”) 2018-13, “Fair
Value Measurement - Disclosure Framework (Topic 820)” 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 condensed consolidated financial statements. In November 2019, the FASB
issued ASU 2019-08, “Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic
606)” to provide guidance for share-based payment awards granted to a customer in conjunction with selling goods or services
accounted for under Topic 606. The pronouncement is effective for fiscal years beginning after December 15, 2019 and interim periods
within those fiscal years. The Company adopted this guidance in the first quarter of Fiscal 2021 with no material impact to its
condensed consolidated financial statements. In November 2019, the FASB
issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” ASU 2019-11
is an accounting pronouncement that provides clarity to and amends earlier guidance on this topic and would be effective concurrently
with the adoption of such earlier guidance. This pronouncement is effective for fiscal years beginning after December 15, 2022
and interim periods within those fiscal years. The Company is currently evaluating the effects of this pronouncement on its condensed
consolidated financial statements. In
August 2018, the FASB issued ASU 2018-15 “ addressing customers’ accounting for implementation costs incurred
in a cloud computing arrangement that is a service contract, which requires customers to apply internal-use software guidance
to determine the implementation costs that are able to be capitalized. Capitalized implementation costs are required to be
amortized over the term of the arrangement, beginning when the cloud computing arrangement is ready for its intended use. The
effective date of the new guidance for public companies is for fiscal years beginning after December 15, 2019 and
interim periods within those fiscal years. Early adoption is permitted. The Company adopted this guidance in the first
quarter of Fiscal 2021 with no material impact to its condensed consolidated financial statements. In December 2019, the FASB
issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This guidance removes certain
exceptions to the general principles in Topic 740 and provides consistent application of U.S. GAAP by clarifying and amending existing
guidance. The effective date of the new guidance for public companies is for fiscal years beginning after December 15, 2020
and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the timing of adoption
and impact of the updated guidance on its condensed consolidated financial statements. |
