Quarterly report pursuant to Section 13 or 15(d)

Accounting Policies (Policies)

v3.10.0.1
Accounting Policies (Policies)
3 Months Ended
Sep. 30, 2018
Accounting Policies [Abstract]  
Use of Estimates

Use of Estimates

 

The preparation of 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The areas requiring significant estimates are provision for doubtful accounts, provision for taxation, useful life of depreciable assets, useful life of intangible assets, contingencies, and estimated contract costs. The estimates and underlying assumptions are reviewed on an ongoing basis. Actual results could differ from those estimates.

Concentration of Credit Risk

Concentration of Credit Risk

 

Cash includes cash on hand and demand deposits in accounts maintained within the United States as well as in foreign countries. Certain financial instruments, which subject the Company to concentration of credit risk, consist of cash and restricted cash. The Company maintains balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for the banks located in the United States. Balances at financial institutions within certain foreign countries are not covered by insurance. As of September 30, 2018, and June 30, 2018, the Company had uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $19,253,434 and $20,933,224, respectively. The Company has not experienced any losses in such accounts.

 

The Company’s operations are carried out globally. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments of each country and by the general state of the country’s economy. The Company’s operations in each foreign country are subject to specific considerations and significant risks not typically associated with companies in economically developed nations. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

 

The Company applies the provisions of ASC 820-10, “Fair Value Measurements and Disclosures.” ASC 820-10 defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. For certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and short-term debt, the carrying amounts approximate fair value due to their relatively short maturities. The carrying amounts of the convertible note receivable and the long-term debt approximate their fair values based on current interest rates for instruments with similar characteristics.

 

The three levels of valuation hierarchy are defined as follows:

 

Level 1: Valuations consist of unadjusted quoted prices in active markets for identical assets and liabilities and has the highest priority.
   
Level 2: Valuations rely on quoted prices in markets that are not active or observable inputs over the full term of the asset or liability.
   
Level 3: Valuations are based on prices or third party or internal valuation models that require inputs that are significant to the fair value measurement and are less observable and thus have the lowest priority.

 

The Company does not have any financial assets that are measured at fair value on a recurring basis as of September 30, 2018.

 

The Company’s financial assets that were measured at fair value on a recurring basis as of June 30, 2018, were as follows:

 

    Level 1     Level 2     Level 3     Total Assets  
Revenues in excess of billing - long term   $ -     $ -     $ 1,206,669     $ 1,206,669  
Total   $ -     $ -     $ 1,206,669     $ 1,206,669  

 

The reconciliation from June 30, 2018 to September 30, 2018 is as follows:

 

    Revenues in excess
of billing - long term
    Fair value
discount
    Total  
Balance at June 30, 2018   $ 1,445,245     $ (238,576 )   $ 1,206,669  
Effect of ASC 606 adoption     (1,445,245 )     238,576       (1,206,669 )
Balance at September 30, 2018   $ -     $ -     $ -  

 

Management analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity” and ASC 815, “Derivatives and Hedging.” Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments. In addition, the fair values of freestanding derivative instruments such as warrants and option derivatives are valued using the Black-Scholes model.

New Accounting Pronouncements

New Accounting Pronouncements

 

Recent Accounting Standards Adopted by the Company:

 

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which requires equity investments that are not accounted for under the equity method of accounting to be measured at fair value with changes recognized in net income and updates certain presentation and disclosure requirements. ASU 2016-01 is effective beginning after December 15, 2017. The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.

 

In August 2016, the FASB issued ASU 2016-15, Clarification of Certain Cash Receipts and Cash Payments, which eliminates the diversity in practice related to the classification of certain cash receipts and payments in the statement of cash flows, by adding or clarifying guidance on eight specific cash flow issues. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The amendments in this update should be applied retrospectively to all periods presented, unless deemed impracticable, in which case, prospective application is permitted. The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.

 

On November 17, 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. It is intended to reduce diversity in the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. The new standard requires that restricted cash and restricted cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Earlier adoption is permitted. The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.

 

In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, which clarifies and provides a more robust framework to use in determining when a set of assets and activities is a business. The amendments in this update should be applied prospectively on or after the effective date. This update is effective for annual periods beginning after December 15, 2017, and interim periods within those periods. Early adoption is permitted for acquisition or deconsolidation transactions occurring before the issuance date or effective date and only when the transactions have not been reported in issued or made available for issuance financial statements. The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.

 

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as a modification. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new standard will be effective prospectively for the Company for the fiscal year beginning July 1, 2018. Early adoption is permitted. The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605) and Subtopic 985-605 Software - Revenue Recognition. Topic 605 and Subtopic 985-605 are collectively referred to as “Topic 605” or “prior GAAP.” Under Topic 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, Topic 606 requires enhanced disclosures, including disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

 

The Company adopted Topic 606 on the first day of fiscal 2019 using the modified retrospective transition method. Under this method, the Company evaluated contracts that were in effect at the beginning of fiscal 2019 as if those contracts had been accounted for under Topic 606. The Company did not evaluate individual modifications for those periods prior to the adoption date, but the aggregate effect of all modifications as of the adoption date and such effects are provided below. Under the modified retrospective transition method, periods prior to the adoption date were not adjusted and continue to be reported in accordance with historical, pre-Topic 606 accounting. A cumulative catch-up adjustment was recorded to beginning accumulated deficit to reflect the impact of all existing arrangements under Topic 606.

 

As a result of adopting ASC 606, the Company recorded a net decrease of $5,795,795 to opening accumulated deficit and $2,957,860 to non-controlling interest as of July 1, 2018 as a cumulative catch-up adjustment for all open contracts as of the date of adoption. The most significant drivers of this adjustment related to the allocation of revenue to certain performance obligations on a stand-alone selling price basis. Specifically, contracts with one customer were required to be aggregated under the guidance of ASC 606, resulting in additional revenue allocated to the maintenance services under these contracts. Under the guidance of ASC 605, the Company had recognized one of these contracts as a stand-alone and separate contract with this customer, which resulted in additional revenue allocated to the license and services that had previously been delivered to this customer.

  

The following table presents the cumulative effect adjustments, net of income tax effects, to beginning consolidated balance sheet accounts for the new accounting standards adopted by the Company on the first day of fiscal 2019:

 

    As of     Topic 606     As of  
    June 30, 2018     Adjustments     July 1, 2018  
ASSETS                        
Current assets:                        
Cash and cash equivalents   $ 22,088,853             $ 22,088,853  
Accounts receivable, net of allowance of $610,061 and $571,511     12,775,461               12,775,461  
Accounts receivable, net - related party     3,374,272               3,374,272  
Revenues in excess of billings     14,285,778       (7,328,812 )     6,956,966  
Revenues in excess of billings - related party     -               -  
Convertible note receivable - related party     2,123,500               2,123,500  
Other current assets     2,703,032               2,703,032  
Total current assets     57,350,896       (7,328,812 )     50,022,084  
Revenues in excess of billings, net - long term     1,206,669       (1,206,669 )     -  
Property and equipment, net     16,165,491               16,165,491  
Long term investment     3,217,162               3,217,162  
Other assets     70,299               70,299  
Intangible assets, net     12,247,196               12,247,196  
Goodwill     9,516,568               9,516,568  
Total assets   $ 99,774,281     $ (8,535,481 )   $ 91,238,800  
                         
LIABILITIES AND STOCKHOLDERS’ EQUITY                        
Current liabilities:                        
Accounts payable and accrued expenses   $ 7,873,809             $ 7,873,809  
Current portion of loans and obligations under capitalized leases     8,595,919               8,595,919  
Unearned revenues     5,949,581       218,174       6,167,755  
Common stock to be issued     88,324               88,324  
Total current liabilities     22,507,633       218,174       22,725,807  
Loans and obligations under capitalized leases; less current maturities     330,596               330,596  
Total liabilities     22,838,229       218,174       23,056,403  
Commitments and contingencies                        
Stockholders’ equity:                        
Preferred stock, $.01 par value; 500,000 shares authorized;     -       -       -  
Common stock, $.01 par value; 14,500,000 shares authorized; 11,708,469 shares issued and 11,502,616 outstanding as of June 30, 2018 and 11,225,385 shares issued and 11,190,606 outstanding as of June 30, 2017     117,085               117,085  
Additional paid-in-capital     126,479,147               126,479,147  
Treasury stock (At cost, 205,853 shares and 34,779 shares as of June 30, 2018 and June 30, 2017, respectively)     (1,205,024 )             (1,205,024 )
Accumulated deficit     (37,994,502 )     (5,795,795 )     (43,790,297 )
Stock subscription receivable     (221,000 )             (221,000 )
Other comprehensive loss     (24,386,071 )             (24,386,071 )
Total NetSol stockholders’ equity     62,789,635       (5,795,795 )     56,993,840  
Non-controlling interest     14,146,417       (2,957,860 )     11,188,557  
Total stockholders’ equity     76,936,052       (8,753,655 )     68,182,397  
Total liabilities and stockholders’ equity   $ 99,774,281     $ (8,535,481 )   $ 91,238,800  

  

The following table presents the cumulative effect adjustments, net of income tax effects, to beginning consolidated balance sheet accounts for the new accounting standards adopted by the Company as of September 30, 2018:

 

    As reported under
Topic 606
          Balances under
Prior GAAP
 
    September 30, 2018     Adjustments     September 30, 2018  
ASSETS                        
Current assets:                        
Cash and cash equivalents   $ 20,435,744             $ 20,435,744  
Accounts receivable, net of allowance of $600,833 and $610,061     7,487,381               7,487,381  
Accounts receivable, net - related party     3,039,320               3,039,320  
Revenues in excess of billings     13,335,529       7,458,067       20,793,596  
Revenues in excess of billings - related party     70,250               70,250  
Convertible note receivable - related party     2,881,500               2,881,500  
Other current assets     3,438,861               3,438,861  
Total current assets     50,688,585       7,458,067       58,146,652  
Revenues in excess of billings, net - long term     -       1,281,652       1,281,652  
Property and equipment, net     15,650,128               15,650,128  
Long term investment     2,958,692               2,958,692  
Other assets     54,936               54,936  
Intangible assets, net     11,465,925               11,465,925  
Goodwill     9,516,568               9,516,568  
Total assets   $ 90,334,834     $ 8,739,719     $ 99,074,553  
                         
LIABILITIES AND STOCKHOLDERS’ EQUITY                        
Current liabilities:                        
Accounts payable and accrued expenses   $ 7,153,778             $ 7,153,778  
Current portion of loans and obligations under capitalized leases     8,433,675               8,433,675  
Unearned revenues     4,913,731       (289,099 )     4,624,632  
Common stock to be issued     88,324               88,324  
Total current liabilities     20,589,508       (289,099 )     20,300,409  
Loans and obligations under capitalized leases; less current maturities     296,680               296,680  
Total liabilities     20,886,188       (289,099 )     20,597,089  
Commitments and contingencies                        
Stockholders’ equity:                        
Preferred stock, $.01 par value; 500,000 shares authorized;     -       -       -  
Common stock, $.01 par value; 14,500,000 shares authorized; 11,782,360 shares issued and 11,576,507 outstanding as of September 30, 2018 and 11,708,469 shares issued and 11,502,616 outstanding as of June 30, 2018     117,824               117,824  
Additional paid-in-capital     126,918,319               126,918,319  
Treasury stock (At cost, 205,853 shares and 205,853 shares as of September 30, 2018 and June 30, 2018, respectively)     (1,205,024 )             (1,205,024 )
Accumulated deficit     (42,827,708 )     5,977,953       (36,849,755 )
Stock subscription receivable     (221,000 )             (221,000 )
Other comprehensive loss     (24,649,274 )             (24,649,274 )
Total NetSol stockholders’ equity     58,133,137       5,977,953       64,111,090  
Non-controlling interest     11,315,509       3,050,865       14,366,374  
Total stockholders’ equity     69,448,646       9,028,818       78,477,464  
Total liabilities and stockholders’ equity   $ 90,334,834     $ 8,739,719     $ 99,074,553  

 

The following table summarizes the effects of adopting Topic 606 on the Company’s Condensed Consolidated Statement of Income for the three months ended September 30, 2018:

 

    For the Three Months  
    Ended September 30, 2018  
    As reported under           Under prior  
    Topic 606     Adjustments     GAAP  
                   
Net Revenues:                        
License fees   $ 5,956,113             $ 5,956,113  
Maintenance fees     3,638,327       146,477       3,784,804  
Services     6,418,634               6,418,634  
License fees - related party     -               -  
Maintenance fees - related party     101,349               101,349  
Services - related party     282,122               282,122  
                         
Total net revenues     16,396,545       146,477       16,543,022  
                         
Cost of revenues:                        
Salaries and consultants     5,020,562               5,020,562  
Travel     1,151,997               1,151,997  
Depreciation and amortization     937,604               937,604  
Other     1,048,324               1,048,324  
Total cost of revenues     8,158,487       -       8,158,487  
                         
Gross profit     8,238,058       146,477       8,384,535  
                         
Operating expenses:                        
Selling and marketing     1,701,326               1,701,326  
Depreciation and amortization     212,232               212,232  
General and administrative     4,406,720               4,406,720  
Research and development cost     318,155               318,155  
Total operating expenses     6,638,433       -       6,638,433  
                         
Income (loss) from operations     1,599,625       146,477       1,746,102  
                         
Other income and (expenses)                        
Gain (loss) on sale of assets     52,294               52,294  
Interest expense     (99,434 )             (99,434 )
Interest income     248,964       74,983       323,947  
Gain on foreign currency exchange transactions     10,912       53,703       64,615  
Share of net loss from equity investment     (299,691 )             (299,691 )
Other income (expense)     5,379               5,379  
Total other income (expenses)     (81,576 )     128,686       47,110  
                         
Net income (loss) before income taxes     1,518,049       275,163       1,793,212  
Income tax provision     (236,914 )             (236,914 )
Net income (loss)     1,281,135       275,163       1,556,298  
Non-controlling interest     (318,546 )     (93,005 )     (411,551 )
Net income (loss) attributable to NetSol   $ 962,589     $ 182,158     $ 1,144,747  
                         
Net income (loss) per share:                        
Net income (loss) per common share                        
Basic   $ 0.08     $ 0.02     $ 0.10  
Diluted   $ 0.08     $ 0.02     $ 0.10  
                         
Weighted average number of shares outstanding                        
Basic     11,502,616       11,502,616       11,502,616  
Diluted     11,507,730       11,507,730       11,507,730  

  

The following table summarizes the effects of adopting Topic 606 on the financial statement line items of the Company’s Consolidated Statement of Cash Flows for the three months ended September 30, 2018:

 

    For the Three Months  
    Ended September 30, 2018  
    As reported under           Under prior  
    Topic 606     Adjustments     GAAP  
Cash flows from operating activities:                        
Net income (loss)   $ 1,281,135     $ 275,163     $ 1,556,298  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:                        
Depreciation and amortization     1,149,836               1,149,836  
Share of net loss from investment under equity method     299,691               299,691  
(Gain) loss on sale of assets     (52,294 )             (52,294 )
Stock based compensation     432,048               432,048  
Changes in operating assets and liabilities:                     -  
Accounts receivable     5,136,381               5,136,381  
Accounts receivable - related party     284,869               284,869  
Revenues in excess of billing     (6,347,196 )     (204,238 )     (6,551,434 )
Revenues in excess of billing - related party     (70,102 )             (70,102 )
Other current assets     (571,246 )             (571,246 )
Accounts payable and accrued expenses     (680,147 )             (680,147 )
Unearned revenue     (1,202,420 )     (70,925 )     (1,273,345 )
Net cash used in operating activities     (339,445 )     -       (339,445 )
                         
Cash flows from investing activities:                        
Purchases of property and equipment     (563,413 )             (563,413 )
Sales of property and equipment     184,032               184,032  
Convertible note receivable - related party     (758,000 )             (758,000 )
Net cash used in investing activities     (1,137,381 )     -       (1,137,381 )
                         
Cash flows from financing activities:                        
Proceeds from the exercise of stock options and warrants     -               -  
Proceeds from exercise of subsidiary options     2,650               2,650  
Purchase of treasury stock     -               -  
Proceeds from bank loans     119,895               119,895  
Payments on capital lease obligations and loans - net     (179,237 )             (179,237 )
Net cash provided by (used in) financing activities     (56,692 )     -       (56,692 )
Effect of exchange rate changes     (119,591 )             (119,591 )
Net increase in cash and cash equivalents     (1,653,109 )     -       (1,653,109 )
Cash and cash equivalents at beginning of the period     22,088,853               22,088,853  
Cash and cash equivalents at end of period   $ 20,435,744     $ -     $ 20,435,744  

 

Accounting Standards Recently Issued but Not Yet Adopted by the Company:

 

In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize right-of-use assets and lease liabilities, for all leases, with the exception of short-term leases, at the commencement date of each lease. This ASU requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. This ASU is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods. Early adoption is permitted. The amendments of this update should be applied using a modified retrospective approach, which requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. Under the new standard, goodwill impairment would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. This ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods. Early adoption is permitted for interim or annual goodwill impairment test performed on testing dates after January 1, 2017. The Company will apply this guidance to applicable impairment tests after the adoption date.

 

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The ASU was issued to address the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. The ASU, among other things, eliminates the need to consider the effects of down round features when analyzing convertible debt, warrants and other financing instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The amendments are effective for fiscal years beginning after December 15, 2018, and should be applied retrospectively. Early adoption is permitted, including adoption in an interim period. The Company is currently in the process of evaluating the impact of the adoption of this standard on its consolidated financial statements.

 

All other newly issued accounting pronouncements not yet effective have been deemed either immaterial or not applicable.