| ACCOUNTING POLICIES | NOTE 2 ACCOUNTING
POLICIES Use of Estimates The preparation of
the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America 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 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
sales of approximately $221,000 and $305,000 from IPS to Forward have been eliminated in consolidation for Fiscal 2019 and Fiscal
2018, respectively. The Company
incurred a net loss of approximately $3.6 million for the fiscal year ended September 30, 2019 and generated negative cash
flow from operations of approximately $2.0 million. We believe our existing cash balance and working capital will be
sufficient to meet our liquidity needs at least through December 2020. 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, 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
revenues earned and expenses incurred directly by the operating segment, including cost of sales and selling, marketing, and general
and administrative costs (see Note 16 for more discussion on operating segments). 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.” The Company has two reporting units for purposes of evaluating goodwill impairment and perform our annual
goodwill impairment test on September 30 at the end of the fiscal year. 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. Management compared the fair value of the
reporting unit, the design segment which holds the goodwill, with its carrying value. Based on management’s evaluation,
there were no impairments to goodwill at September 30, 2019. Intangible Assets Intangible assets
include trademark and customer relationships, which were acquired as part of the acquisition of IPS in January 2018 (see Note 3
for details on intangible assets acquired as part of the acquisition) 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 evaluated and concluded that there were no impairments of intangible assets
at September 30, 2019. Cash and Cash Equivalents The Company considers
all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. There were
no cash equivalents at September 30, 2019 and 2018. 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, 2019 and 2018, there were deposits totaling approximately $2.8 million (which includes approximately $650,000 in
a foreign bank) and $4.1 million (which includes approximately $1.9 million 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 or their contract manufacturers. The Company performs periodic credit evaluations
of its customers including an evaluation of days outstanding, payment history, recent payment trends, and perceived creditworthiness,
and believes that adequate allowances for any uncollectible receivables are maintained. Credit terms to customers generally range
from net thirty (30) days to net one hundred twenty (120) days. At September 30, 2019, there were allowances for doubtful accounts
of approximately $159,000 and $2,033,000 relating to the Company’s distribution segment and design segment accounts receivable,
respectively. At September 30, 2018, the Company had allowances for doubtful accounts of approximately $0 and $126,000 related
to the Company’s distribution segment and design segment accounts receivable, respectively. The increase in allowance for
doubtful accounts for the design segment is primarily due to a full provision for bad debt on trade receivables for a major design
segment customer for approximately $1.6 million. The Company also has an investment in this customer (see Note 6). Inventories Inventories consist
primarily of finished goods and are stated at the lower of cost (determined by the first-in, first-out method) or net realizable
value. Based on management’s estimates, an allowance is made to reduce excess, obsolete, or otherwise un-saleable inventories
to net realizable value. The allowance is established through charges to cost of goods sold in the Company’s consolidated
statements of operations. As reserved inventory is disposed of, the Company charges off the associated allowance. In determining
the adequacy of the allowance, management’s estimates are based upon several factors, including analyses of inventory levels,
historical loss trends, sales history and projections of future sales demand. The Company’s estimates of the allowance may
change from time to time based on management’s assessments, and such changes could be material. At September 30, 2019 and
2018, there was no allowance for obsolete inventory. Property and Equipment Property and equipment
consist of furniture, fixtures, and equipment and leasehold improvements and are recorded at cost. Expenditures for major additions
and improvements are capitalized, and minor replacements, maintenance, and repairs are charged to expense as incurred. When property
and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated
useful lives of the related assets using the straight-line method. The estimated useful lives for furniture, fixtures and equipment
ranges from three to five years. Amortization of leasehold improvements is computed using the straight-line method over the shorter
of the remaining lease term or the estimated useful lives of the improvements. Leases The Company enters
into various lease agreements in conducting its business. At the inception of each lease, the Company evaluates the lease agreement
to determine whether the lease is an operating or capital lease. Leases may contain initial periods of free rent and/or periodic
escalations. When such items are included in a lease agreement, the Company records rent expense on a straight-line basis over
the initial term of a lease. The difference between the rent payment and the straight-line rent expense is recorded as a deferred
rent liability. The Company expenses any additional payments under its operating leases for taxes, insurance or other operating
expenses as incurred. 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 September 30, 2019, 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 material current book income tax provision was recorded in 2019 due to net loss
and the existence of significant net operating loss carryforwards, however, approximately $4,000 current year income tax refund
was recorded due to prior year AMT credits being partially refunded in the current year. 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; and (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 ASC 606, the
Company applies the “cost to cost” and “right to invoice” methods of revenue recognition to the contracts
with customers in the design segment. The 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 contracts that contain specific deliverables are recognized
when the performance obligation has been satisfied or the transfer of goods to the customer has been completed and accepted. Recognized revenues
that will not be billed until a later date, or contract assets, are recorded as an asset and classified as a component of accounts
receivable in the accompanying consolidated balance sheets. Contract assets at September 30, 2019 and 2018 were approximately
$611,000 and $0, respectively. Contracts where collections to date have exceeded recognized revenues, or contract liabilities,
are recorded as a liability and classified as a component of deferred income in the accompanying consolidated balance sheets.
Contract liabilities at September 30, 2019 and 2018 were approximately $220,000 and $125,000, respectively. Shipping and Handling Fees The Company includes
shipping and handling fees billed to customers in net revenues and the related transportation costs in cost of goods sold. Foreign Currency Transactions Foreign currency transactions
may generate receivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid. Fluctuations
in exchange rates between such foreign currency and the functional currency increase or decrease the expected amount of functional
currency cash flows upon settlement of the transaction. These increases or decreases in expected functional currency cash flows
are foreign currency transaction gains or losses that are included in “other income (expense)” in the accompanying
consolidated statements of operations. The approximate net losses from foreign currency transactions were approximately $14,000
and $10,000 for the fiscal years ended September 30, 2019 and 2018, respectively. Such foreign currency transaction losses were
primarily the result of Euro denominated revenues from certain customers. Fair Value Measurements We perform fair value
measurements in accordance with the guidance provided by ASC 820. 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. Reclassifications Certain amounts in
the accompanying fiscal 2018 financial statements have been reclassified to conform to the fiscal 2019 presentation. Share-Based Compensation Expense The Company recognizes
employee and director share-based compensation in its consolidated statements of operations 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 9 - 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. 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. R ecent 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 during the 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 now recognizes 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 are recognized by using
cost inputs to measure progress toward the completion of its performance obligations. This method is similar to the method formerly
applied to certain of the Company’s contracts covered by the previous 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
adopted ASU 2016-02 effective October 1, 2019 and upon adoption of Topic 842 the Company expects recognition of additional assets
and corresponding liabilities pertaining to its operating leases on its consolidated balance sheets. The Company expects the adoption
will result in an increase in other assets and an increase in other liabilities of approximately $3.7 million. The Company does
not expect the adoption of the new standard to have a significant impact on its consolidated statements of operations and cash
flows. 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 consolidated financial statements. In the first quarter
of 2019, the Company adopted FASB ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than
Inventory” (“ASU 2016-16”), 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 adoption of ASU 2016-16 did not have an impact to the
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 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 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 (Topic 718),” (“ASU 2018-07”). ASU 2018-07
is intended to reduce cost and complexity and to improve financial reporting for nonemployee share-based payments. Currently, the
accounting requirements for nonemployee and employee share-based payment transactions are significantly different. ASU 2018-07
expands the scope of Topic 718, Compensation — Stock Compensation (which currently only includes share-based payments to
employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based
payments to nonemployees and employees will be substantially aligned. This ASU supersedes Subtopic 505-50, “Equity —
Equity-Based Payments to Nonemployees.” The amendments in this ASU are effective for fiscal years beginning after December
15, 2018, and interim periods within that fiscal year. Early adoption is permitted, but no earlier than a company’s adoption
date of Topic 606, Revenue from Contracts with Customers. The Company early adopted ASU 2018-07 effective October 1, 2019. The
adoption of ASU 2018-07 did not have a material impact on the Company’s 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. In November 2019,
the FASB issued ASU 2019-08, “Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers
(Topic 606).” ASU 2019-08 is an accounting pronouncement which expands the scope of ASC Topic 718 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 is currently evaluating the effects of this pronouncement on our consolidated financial statements along with the effects
of ASU 2018-07 noted above. 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 amends ASU 2016-13, “Financial Instruments –
Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU 2019-11 amendment provides
clarity and improves the codification to ASU 2016-03. The pronouncement would be effective concurrently with the adoption of
ASU 2016-03. The pronouncement is effective for fiscal years beginning after December 15, 2019 and interim periods within
those fiscal years. The Company is currently evaluating the effects of this pronouncement on our consolidated financial
statements. |
