| ACCOUNTING POLICIES | NOTE 2 ACCOUNTING POLICIES
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 financial statements
and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates
and assumptions. Basis of Presentation The accompanying
condensed consolidated financial statements include the accounts of Forward Industries, Inc. and its wholly-owned subsidiaries
(Forward US, Forward Switzerland, Forward UK and IPS). All significant intercompany transactions and balances have been eliminated
in consolidation. Intercompany revenues of approximately $201,000 for the three months ended December 31, 2018 related to design
and marketing work performed by IPS for Forward has been eliminated in consolidation. Segment Reporting Operating
segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated
by a chief operating decision maker, or Forward management, in deciding how to allocate resources and in assessing performance.
As a result of the acquisition of IPS in January 2018, management conducts business through two distinct operating segments, which
are also our reportable segments: distribution and design Organizing
our business through two operating segments allows us to align our resources and manage the operations. Our management team regularly
reviews operating segment revenue and operating income (loss) when assessing financial results of operating segments and allocating
resources. We measure
the performance of our operating segments based upon operating segment revenue and operating income (loss). Segment operating income
(loss) includes revenue and expenses incurred directly by the operating segment, including cost of sales and selling, marketing,
and general and administrative costs. Goodwill Goodwill
is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not
individually identified and separately recognized. Goodwill was recognized as a result of the acquisition of IPS in January 2018. Goodwill
is reviewed for impairment at least annually, and when triggering events occur, in accordance with the provisions of Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, “Intangibles
– Goodwill and Other.” We have two reporting units for purposes of evaluating goodwill impairment and perform our annual
goodwill impairment test on September 30th at end of the fiscal year. We have the option to perform a qualitative assessment to
determine if an impairment is more likely than not to have occurred. If we 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 performing the two-step impairment test
for the reporting unit is unnecessary. If we cannot support such a conclusion or do not elect to perform the qualitative assessment,
then the first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of the
reporting unit with its carrying amount, including goodwill. If the fair
value of the reporting unit exceeds its carrying value, then the second step of the impairment test (measurement) does not need
to be performed. If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment
exists for the reporting unit and the entity will recognize a goodwill impairment charge for the amount by which the carrying amount
exceeds the reporting unit’s fair value. A significant amount of judgment is required in performing goodwill impairment tests.
Management deemed there were no triggering events or impairments to Goodwill at December 31, 2018. Intangible assets Intangible
assets include trademark and customer relationships, which were acquired as part of the acquisition of IPS in January 2018 and
are recorded based on the estimated fair value in purchase price allocation. The intangible assets are amortized over their estimated
useful lives, which are periodically evaluated for reasonableness. Our intangible
assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. In assessing the recoverability of our intangible assets, we must make estimates and assumptions regarding
future cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions could
have a significant impact on whether an impairment charge is recognized and also the magnitude of any such charge. Fair value estimates
are made at a specific point in time, based on relevant information. These estimates are subjective in nature and involve uncertainties
and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly
affect the estimates. If these estimates or material related assumptions change in the future, we may be required to record impairment
charges related to its intangible assets. Management reviewed the values of intangible assets and determined there was no event
or change in circumstances to give rise to an impairment charge for intangible assets at December 31, 2018. 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. As of December 31, 2018, there was no change to our assessment that a full valuation
allowance was required against all net deferred tax assets. Accordingly, any deferred tax provision or benefit was offset by an
equal and opposite change to the valuation allowance. No current book income tax provision was recorded against book net income
due to the existence of significant net operating loss carryforwards. 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); (ii) there
are no other deliverables; (iii) there are no further obligations to the customer after the title of the goods has transferred.
The Company defers revenue when it receives consideration before achieving the criteria previously mentioned. Design Segment Under the new ASC 606 standard, 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 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. Revenue from contracts that contain specific deliverables are recognized when the performance obligation has been satisfied
or the transfer of goods to the customer has been completed and accepted. 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. There were no Contract assets at December 31,
2018 and September 30, 2018. 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, 2018 and September 30, 2018 were approximately $86,000 and $125,000, respectively. Reclassifications We have reclassified
approximately $107,000 of deferred revenue from the change in accrued expenses and other current liabilities to the change in deferred
income within the changes in operating assets and liabilities of the condensed consolidated statements of cash flows in the accompanying
fiscal 2018 condensed consolidated financial statements to conform to the fiscal 2019 presentation. These reclassifications did
not affect operating cash flows, total current liabilities, net income or accumulated deficit. Share-Based Compensation Expense The Company recognizes employee and director share-based compensation
in its condensed consolidated statements of operations and comprehensive income (loss) at the grant date fair value of stock options
and other equity based compensation. The determination of stock option grant date fair value is estimated 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. 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 6 - Share-Based Compensation. In addition, the Company recognizes
share-based compensation to non-employees based upon the fair value, using the Black-Scholes option pricing model, determined at
the deemed measurement dates over the related contract service period. Recent Accounting Pronouncements In May 2014,
the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,”
(“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition”
(“ASC 605”) and most industry-specific guidance throughout ASC 605. ASU 2014-09 establishes principles for recognizing
revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received
in exchange for those goods or services. The guidance in ASU 2014-09 was revised in July 2015 to be effective for interim periods
beginning on or after December 15, 2017 and should be applied on a transitional basis either retrospectively to each prior reporting
period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial
application. In 2016, FASB issued additional ASUs that clarify the implementation guidance on principal versus agent considerations
(ASU 2016-08), on identifying performance obligations and licensing (ASU 2016-10), and on narrow-scope improvements and practical
expedients (ASU 2016-12) as well as on the revenue recognition criteria and other technical corrections (ASU 2016-20). These new
standards became effective first quarter of fiscal 2019 and were adopted using the modified retrospective method. The Company has
performed a review of ASU 2014-09 as compared to its previous accounting policies for our products and services revenues and did
not identify any material impact to revenue. Therefore, there was no adjustment to retained earnings for a cumulative effect. Effective
October 1, 2018, the Company adopted ASC 606 and has elected the modified retrospective method on existing contracts at the date
of adoption. The Company has implemented the necessary changes to such business processes, controls and systems to effectively
review and account for the new contracts under this standard. Revenues
recognized from the distribution segment under ASC 606 are consistent with previous revenue recognition standards under ASC 605,
whereby revenue is typically recognized at either the point of shipment or point of destination, depending on the terms of the
sale. Regarding,
the Company’s design segment, the Company has evaluated the changes from adopting this new standard on its financial reporting,
disclosures and its various revenue streams. The Company will recognize revenue over time on its time and material contracts utilizing
a “right to invoice” method which is similar to previous revenue recognition standards under ASC 605. Revenues from
fixed-price type contracts that require performance of services that are not related to the production of tangible assets will
be recognized by using cost inputs to measure progress toward the completion of its performance obligations. This method is similar
to the method currently applied to certain of the Company’s contracts covered by current revenue recognition standards under
ASC 605. In some cases, contracts contain an arrangement of specific deliverables or production of prototypes, or a distinct performance
obligation, and the Company allocates the transaction price to the performance obligation on a relative standalone selling price
basis. In February
2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which will require lessees to report most leases as assets
and liabilities on the balance sheet, while lessor accounting will remain substantially unchanged. This ASU requires a modified
retrospective transition approach for existing leases, whereby the new rules will be applied to the earliest year presented. The
new standard is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted. The Company
is currently evaluating the potential impact of adopting this guidance on its condensed consolidated financial statements. In August
2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments,” providing additional guidance on several cash flow classification issues, with the goal of the update to reduce
the current and potential future diversity in practice. The amendments in this update are effective for fiscal years beginning
after December 15, 2017, and interim periods within those fiscal years. The Company early adopted ASU No. 2016-15 and the adoption
did not have any impact on the Company’s condensed consolidated financial statements. In October
2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,”
which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when
the transfer occurs. The Company adopted the ASU No. 2016-16 in the first quarter of Fiscal 2019 and the adoption did not have
any impact on the Company’s condensed consolidated financial statements due to the Company’s maintenance of a full
valuation allowance on the Company’s net deferred tax asset. In January
2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.”
ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating the requirement to compare the implied fair value
of goodwill with its carrying amount as part of step two of the goodwill impairment test referenced in ASC 350, “Intangibles
- Goodwill and Other (“ASC 350”).” As a result, an entity should perform its annual, or interim, goodwill impairment
test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the
amount by which the carrying amount exceeds the reporting unit’s fair value. However, the impairment loss recognized should
not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual reporting periods
beginning after December 15, 2019, including any interim impairment tests within those annual periods, with early application permitted
for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted ASU 2017-04
in the first quarter of Fiscal 2019 and the adoption did not have any impact on the Company’s condensed consolidated financial
statements. In May 2017,
the FASB issued ASU No. 2017-09, “Scope of Modification Accounting”, to provide guidance on which changes to the terms
or conditions of a share-based payment award require an entity to apply modification accounting. The Company adopted ASU No. 2017-09
in the first quarter of Fiscal 2019 and the adoption did not have any impact on the Company’s condensed consolidated financial
statements. In March 2018, the FASB issued ASU 2018-05, “Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant
to SEC Staff Accounting Bulletin No. 118.” The ASU adds various Securities and Exchange Commission (“SEC”) paragraphs
pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications
of the Tax Cuts and Jobs Act (“SAB 118”)”, which was effective immediately. The SEC issued SAB 118 to address
concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects
of the Tax Cuts and Jobs Act in the period of enactment. SAB 118 allows disclosure that determination of some or all of the income
tax effects from the Tax Cuts and Jobs Act may be incomplete by the due date of the financial statements and, if possible, provide
a reasonable estimate. The Company has accounted for the tax effects of the Tax Cuts and Jobs Act under the guidance of SAB 118. In June 2018,
the FASB issued ASU 2018-07, “Compensation - Stock Compensation.” ASU 2018-07 is an accounting pronouncement which
expands the scope of ASC Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees.
The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15,
2018, with early adoption permitted. We are currently in the process of evaluating the effects of this pronouncement on our condensed
consolidated financial statements. In August
2018, the FASB issued ASU 2018-13, “Fair Value Measurement - Disclosure Framework (Topic 820).” The updated guidance
improves 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 is currently assessing the timing and impact of adopting the updated provisions. Business Combinations The Company
allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired
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. The Company
recognizes the purchase of assets and the assumption of liabilities as an asset acquisition, if the transaction does not constitute
a business combination. The excess of the fair value of the purchase price is allocated on a relative fair value basis to the identifiable
assets and liabilities. No goodwill is recorded in an asset acquisition. 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. |
