Annual report pursuant to Section 13 and 15(d)

Summary of Significant Accounting Policies (Policies)

v3.19.2
Summary of Significant Accounting Policies (Policies)
12 Months Ended
Jun. 30, 2019
Accounting Policies [Abstract]  
Principles of Consolidation

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company as follows:

 

Wholly owned Subsidiaries
NetSol Technologies Americas, Inc. (“NTA”)
NetSol Connect (Private), Ltd. (“Connect”)
NetSol Technologies Australia Pty Ltd. (“Australia”)
NetSol Technologies Europe Limited (“NTE”)
NTPK (Thailand) Co. Limited (“NTPK Thailand”)

NetSol Technologies (Beijing) Co. Ltd. (“NetSol Beijing”)

Ascent Europe Ltd. (“AEL”)

Virtual Lease Services Holdings Limited (“VLSH”)
Virtual Lease Services Limited (“VLS”)
Virtual Lease Services (Ireland) Limited (“VLSIL”)

 

Majority-owned Subsidiaries
NetSol Technologies, Ltd. (“NetSol PK”)
NetSol Innovation (Private) Limited (“NetSol Innovation”)
NetSol Technologies Thailand Limited (“NetSol Thai”)

 

The Company consolidates any variable interest entities of which it is the primary beneficiary. Equity investments through which the Company exercises significant influence over but does not control the investee and is not the primary beneficiary of the investee’s activities are accounted for using the equity method. Investments through which the Company is not able to exercise significant influence over the investee and which do not have readily determinable fair values are accounted for under the cost method. All material inter-company accounts have been eliminated in the consolidation.

Basis of Presentation

Basis of Presentation

 

The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).

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.

Cash and Cash Equivalents

Cash and Cash Equivalents

 

Cash and cash equivalents include all highly liquid debt instruments with original maturities of three months or less which are not securing any corporate obligations.

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 June 30, 2019 and 2018, the Company had uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $16,124,339 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.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are recorded at the invoiced amount and are non-interest bearing. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management regularly reviews the composition of accounts receivable and analyzes customer credit worthiness, customer concentrations, current economic trends and changes in customer payment patterns. Reserves are recorded primarily on a specific identification basis. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

Notes Receivable

Notes Receivable

 

Notes Receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income.

Revenues in Excess of Billings

Revenues in Excess of Billings

 

Revenues in excess of billings represent the total of the project to be billed to the customer for revenues recognized per US GAAP. As the customers are billed under the terms of their contract, the corresponding amount is transferred from this account to “Accounts Receivable.”

Investments

Investments

 

The Company uses the cost method to account for investments in businesses that are not publicly traded and for which the Company does not control or have the ability to exercise significant influence over operating and financial policies. In accordance with the cost method, these investments are recorded at lower of cost or fair value, as appropriate, and are classified as long-term.

 

Investments held by the Company in businesses that are not publicly traded and for which the Company has the ability to exercise significant influence over operating and financial management are accounted for under the equity method. In accordance with the equity method, these investments are originally recorded at cost and are adjusted for the Company’s proportionate share of earnings, losses and distributions. These investments are classified as long-term.

 

The Company assesses and records impairment losses when events and circumstances indicate the investments might be impaired. Gains and losses are recognized when realized and recorded in other income (expense) in the accompanying Consolidated Statements of Operations.

Property and Equipment

Property and Equipment

 

Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation is computed using various methods over the estimated useful lives of the assets, ranging from three to twenty years. Following is the summary of estimated useful lives of the assets:

 

Category   Estimated Useful Life
     
Computer equipment & software   3 to 5 Years
Office furniture and equipment   5 to 10 Years
Building   20 Years
Autos   5 Years
Assets under capital leases   3 to 10 Years
Improvements   5 to 10 Years

 

The Company capitalizes costs of materials, consultants, and payroll and payroll-related costs for employees incurred in developing internal-use computer software. These costs are included with “Computer equipment and software.”

Impairment of Long-Lived Assets

Impairment of Long-Lived Assets

 

The Company tests long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.

Intangible Assets

Intangible Assets

 

Intangible assets consist of product licenses, renewals, enhancements, copyrights, trademarks, trade names, and customer lists. Intangible assets with finite lives are amortized over the estimated useful life and are evaluated for impairment at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company assesses recoverability by determining whether the carrying value of such assets will be recovered through the discounted expected future cash flows. If the future discounted cash flows are less than the carrying amount of these assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets.

Software Development Costs

Software Development Costs

 

Costs incurred to internally develop computer software products or to enhance an existing product are recorded as research and development costs and expensed when incurred until technological feasibility for the respective product is established. Thereafter, all software development costs are capitalized and reported at the lower of unamortized cost or net realizable value. Capitalization ceases when the product or enhancement is available for general release to customers.

 

The Company makes on-going evaluations of the recoverability of its capitalized software projects by comparing the amount capitalized for each product to the estimated present value of expected future net income from the product. If such evaluations indicate that the unamortized software development costs exceed the present value of expected future net income, the Company writes off the amount which the unamortized software development costs exceed such present value. Capitalized and purchased computer software development costs are being amortized ratably based on the projected revenue associated with the related software or on a straight-line basis.

Research and Development Costs

Research and Development Costs

 

Research and development expenses are comprised of salaries, benefits and overhead expenses of employees involved in software product enhancement and development, cost of outside contractors engaged to perform quality assurance, software product enhancement and development (if any). Development costs are expensed as incurred.

Goodwill

Goodwill

 

Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination. Goodwill is reviewed for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the carrying amount of goodwill may be impaired. The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value including goodwill. If the fair value of the reporting unit exceeds its carrying value, step two 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 enterprise must perform step two of the impairment test. Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.

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, restricted cash, 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 notes receivable and 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.

 

Our financial assets that are measured at fair value on a recurring basis as of June 30, 2019 are as follows:

 

    Level 1     Level 2     Level 3     Total Assets  
Revenues in excess of billing - long term   $ -     $ -     $ 1,281,492     $ 1,281,492  
Total   $ -     $ -     $ 1,281,492     $ 1,281,492  

 

Our financial assets that are measured at fair value on a recurring basis as of June 30, 2018, are 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 June 30, 2019 is as follows:

 

    Revenues in excess of billing - long term     Fair value discount     Total  
Balance at June 30, 2017   $ 5,483,869     $ (310,331 )   $ 5,173,538  
Additions     2,432,244       (180,526 )     2,251,718  
Transfers to short term     (6,470,868 )     -       (6,470,868 )
Amortization during the period     -       252,281       252,281  
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 )
Additions     1,380,631       (99,139 )     1,281,492  
Balance at June 30, 2019   $ 1,380,631     $ (99,139 )   $ 1,281,492  

 

The Company used the discounted cash flow method with interest rates ranging from 3.87% to 4.43% during the years ended June 30, 2019 and 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.

Unearned Revenue

Unearned Revenue

 

Unearned revenue represents billings in excess of revenue earned on contracts and are recognized on a pro-rata basis over the life of the contract. Unearned revenue was $5,977,736 and $5,949,581 as of June 30, 2019 and 2018, respectively.

Cost of Revenues

Cost of Revenues

 

Cost of revenues includes salaries and benefits for technical employees, consultant costs, amortization of capitalized computer software development costs, depreciation of computer and equipment, travel costs, and indirect costs such as rent and insurance.

Advertising Costs

Advertising Costs

 

The Company expenses the cost of advertising as incurred. Advertising costs for the years ended June 30, 2019 and 2018 were $282,354 and $176,019, respectively.

Share-Based Compensation

Share-Based Compensation

 

The Company records stock compensation in accordance with ASC 718, Compensation – Stock Compensation. ASC 718 requires companies to measure compensation cost for stock employee compensation at fair value at the grant date and recognize the expense over the employee’s requisite service period. The Company recognizes forfeitures as they occur. The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.

Income Taxes

Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.

 

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Applicable interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statements of operations.

Foreign Currency Translation

Foreign Currency Translation

 

The Company transacts business in various foreign currencies. The accounts of NetSol UK, NTE, AEL, VLSH and VLS use the British Pound; VLSIL uses the Euro; NetSol PK, Connect, Omni and NetSol Innovation use Pakistan Rupees; NTPK Thailand and NetSol Thai use Thai Baht; NetSol Australia uses the Australian dollar; and NetSol Beijing uses the Chinese Yuan as the functional currencies. NetSol Technologies, Inc., and its subsidiary, NTA, use the U.S. dollar as the functional currency. Consequently, revenues and expenses of operations outside the United States are translated into U.S. Dollars using average exchange rates while assets and liabilities of operations outside the United States are translated into U.S. Dollars using exchange rates at the balance sheet date. The effects of foreign currency translation adjustments are recorded to other comprehensive income. Accumulated translation losses classified as an item of accumulated other comprehensive loss in the stockholders’ equity section of the consolidated balance sheets were $33,125,006 and $24,386,071 as of June 30, 2019 and 2018, respectively. During the years ended June 30, 2019 and 2018, comprehensive income (loss) in the consolidated statements of operations included NetSol’s share of translation loss of $8,738,935 and $6,311,501, respectively.

 

Net foreign exchange transaction gains (losses) included in non-operating income (expense) in the accompanying consolidated statements of operations were gains of $6,345,859 and $5,010,383 for the years ended June 30, 2019 and 2018, respectively.

Statement of Cash Flows

Statement of Cash Flows

 

The Company’s cash flows from operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheet.

Segment Reporting

Segment Reporting

 

The Company defines operating segments as components about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performances. The Company allocates its resources and assesses the performance of its sales activities based on the geographic locations of its subsidiaries. (See Note 21 “Segment Information and Geographic Areas”)

Recent Accounting Standards Adopted by the Company

Recent Accounting Standards Adopted by the Company:

 

In August 2018, the Securities and Exchange Commission issued Release No. 33-10532 that amends and clarifies certain financial reporting requirements. The principal change to the Company’s financial reporting is the inclusion of the annual disclosure requirement of changes in stockholders’ equity in Rule 3-04 of Regulation S-X to interim periods. The Company adopted this new rule beginning the quarter ended September 30, 2018.

 

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  
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 June 30, 2019:

 

    As reported under
Topic 606
          Balances under
Prior GAAP
 
    June 30, 2019     Adjustments     June 30, 2019  
ASSETS                        
Current assets:                        
Cash and cash equivalents   $ 17,366,364             $ 17,366,364  
Accounts receivable, net of allowance of $192,786 and $610,061     12,332,714               12,332,714  
Accounts receivable, net of allowance of $166,075 and $0 - related party     3,266,600               3,266,600  
Revenues in excess of billings, net of allowance of $194,684 and $0     14,719,047       9,324,173       24,043,220  
Revenues in excess of billings - related party     110,827               110,827  
Convertible note receivable - related party     3,650,000               3,650,000  
Other current assets     3,146,264               3,146,264  
Total current assets     54,591,816       9,324,173       63,915,989  
Revenues in excess of billings, net - long term     1,281,492       1,383,585       2,665,077  
Property and equipment, net     12,096,855               12,096,855  
Long term investment     2,653,769               2,653,769  
Other assets     23,569               23,569  
Intangible assets, net     7,332,950               7,332,950  
Goodwill     9,516,568               9,516,568  
Total assets   $ 87,497,019     $ 10,707,758     $ 98,204,777  
                         
LIABILITIES AND STOCKHOLDERS’ EQUITY                        
Current liabilities:                        
Accounts payable and accrued expenses   $ 7,476,560             $ 7,476,560  
Current portion of loans and obligations under capitalized leases     6,905,597               6,905,597  
Unearned revenues     5,977,736       (908,100 )     5,069,636  
Common stock to be issued     88,324               88,324  
Total current liabilities     20,448,217       (908,100 )     19,540,117  
Loans and obligations under capitalized leases; less current maturities     564,572               564,572  
Total liabilities     21,012,789       (908,100 )     20,104,689  
Commitments and contingencies                        
Stockholders’ equity:                        
Preferred stock, $.01 par value; 500,000 shares authorized;     -       -       -  
Common stock, $.01 par value; 14,500,000 shares authorized; 11,911,742 shares issued and 11,664,239 outstanding as of June 30, 2019 and 11,708,469 shares issued and 11,502,616 outstanding as of June 30, 2018     119,117               119,117  
Additional paid-in-capital     127,737,999               127,737,999  
Treasury stock (At cost, 247,503 shares and 205,853 shares as of June 30, 2019 and June 30, 2018, respectively)     (1,455,969 )             (1,455,969 )
Accumulated deficit     (35,206,898 )     7,690,573       (27,516,325 )
Stock subscription receivable     -               -  
Other comprehensive loss     (33,125,006 )             (33,125,006 )
Total NetSol stockholders’ equity     58,069,243       7,690,573       65,759,816  
Non-controlling interest     8,414,987       3,925,285       12,340,272  
Total stockholders’ equity     66,484,230       11,615,858       78,100,088  
Total liabilities and stockholders’ equity   $ 87,497,019     $ 10,707,758     $ 98,204,777  

 

The following table summarizes the effects of adopting Topic 606 on the Company’s Consolidated Statement of Income for the year ended June 30, 2019:

 

    For the Year  
    Ended June 30, 2019  
    As reported under           Under prior  
    Topic 606     Adjustments     GAAP  
                   
Net Revenues:                        
License fees   $ 16,768,749     $ 357,259     $ 17,126,008  
Maintenance fees     15,010,171       587,194       15,597,365  
Services     34,185,992       -       34,185,992  
License fees - related party     -       -       -  
Maintenance fees - related party     511,242       -       511,242  
Services - related party     1,343,029       -       1,343,029  
Total net revenues     67,819,183       944,453       68,763,636  
                         
Cost of revenues:                        
Salaries and consultants     19,253,364       -       19,253,364  
Travel     6,527,868       -       6,527,868  
Depreciation and amortization     3,525,857       -       3,525,857  
Other     4,066,443       -       4,066,443  
Total cost of revenues     33,373,532       -       33,373,532  
                         
Gross profit     34,445,651       944,453       35,390,104  
                         
Operating expenses:                        
Selling and marketing     7,831,758       -       7,831,758  
Depreciation and amortization     897,800       -       897,800  
General and administrative     16,916,953       -       16,916,953  
Research and development cost     1,971,228       -       1,971,228  
Total operating expenses     27,617,739       -       27,617,739  
                         
Income from operations     6,827,912       944,453       7,772,365  
                         
Other income and (expenses)                        
Gain (loss) on sale of assets     81,455       -       81,455  
Interest expense     (311,798 )     -       (311,798 )
Interest income     955,061       176,916       1,131,977  
Gain on foreign currency exchange transactions     6,345,859       1,740,834      

8,086,693

 
Share of net loss from equity investment     (841,845 )     -       (841,845 )
Other income     18,680       -       18,680  
Total other income (expenses)     6,247,412       1,917,750      

8,165,162

 
                         
Net income before income taxes     13,075,324       2,862,203       15,937,527  
Income tax provision     (1,057,784 )     -       (1,057,784 )
Net income     12,017,540       2,862,203       14,879,743  
Non-controlling interest     (3,434,141 )     (967,425 )     (4,401,566 )
Net income attributable to NetSol   $ 8,583,399     $ 1,894,778     $ 10,478,177  
                         
Net income per share:                        
Net income per common share                        
Basic   $ 0.74     $ 0.16     $ 0.90  
Diluted   $ 0.74     $ 0.16     $ 0.90  
                         
Weighted average number of shares outstanding                        
Basic     11,599,290       11,599,290       11,599,290  
Diluted     11,621,990       11,621,990       11,621,990  

 

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 year ended June 30, 2019:

 

    For the Year  
    Ended June 30, 2019  
    As reported under           Under prior  
    Topic 606     Adjustments     GAAP  
Cash flows from operating activities:                        
Net income   $ 12,017,540     $ 2,862,203     $ 14,879,743  
Adjustments to reconcile net income to net cash provided by operating activities:                        
Depreciation and amortization     4,423,657               4,423,657  
Provision for bad debts     474,516               474,516  
Share of net loss from investment under equity method     841,845               841,845  
Loss on sale of assets     (80,470 )             (80,470 )
Stock based compensation     1,131,013               1,131,013  
Fair market value of stock options     43,612               43,612  
Accounts receivable     (1,836,962 )             (1,836,962 )
Accounts receivable - related party     (977,445 )             (977,445 )
Revenues in excess of billing     (10,764,428 )     (2,172,277 )     (12,936,705 )
Revenues in excess of billing - related party     (122,810 )             (122,810 )
Other current assets     (861,128 )             (861,128 )
Accounts payable and accrued expenses    

(47,819

)            

(47,819

)
Unearned revenue     692,089       (689,926 )     2,163  
Net cash provided by operating activities    

4,933,210

      -      

4,933,210

 
                         
Cash flows from investing activities:                        
Purchases of property and equipment     (2,726,558 )             (2,726,558 )
Sales of property and equipment     1,170,878               1,170,878  
Convertible note receivable - related party     (1,526,500 )             (1,526,500 )
Investment in associates     (250,000 )             (250,000 )
Purchase of subsidiary shares from open market     (317,500 )             (317,500 )
Net cash used in investing activities     (3,649,680 )     -       (3,649,680 )
                         
Cash flows from financing activities:                        
Proceeds from the exercise of stock options and warrants     85,000               85,000  
Proceeds from exercise of subsidiary options     2,650               2,650  
Purchase of treasury stock     (250,945 )             (250,945 )
Dividend paid by subsidiary to non-controlling interest     (566,465 )             (566,465 )
Proceeds from bank loans     1,227,158               1,227,158  
Payments on capital lease obligations and loans - net     (480,231 )             (480,231 )
Net cash provided by financing activities     17,167       -       17,167  
Effect of exchange rate changes     (6,023,186 )             (6,023,186 )
Net decrease in cash and cash equivalents     (4,722,489 )     -       (4,722,489 )
Cash and cash equivalents at beginning of the period     22,088,853               22,088,853  
Cash and cash equivalents at end of period   $ 17,366,364     $ -     $ 17,366,364  
Accounting Standards Recently Issued but Not Yet Adopted by the Company

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 its lease portfolio; assessing system needs to support adoption of the new lease standard; and analyzing procedural changes, including updating our lease accounting policy as needed to reflect the new requirements of this standard. The Company continues to evaluate the impact that these changes in methodology will have on its financial condition, results of operations and disclosures.

 

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.

 

In February 2018, the FASB issued ASU 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this ASU also require certain disclosures about stranded tax effects. The amendments in this ASU should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently in the process of evaluating the impact of adoption of this standard on its consolidated financial statements.

 

In June 2018, the FASB issued ASU 2018-07 “Compensation — Stock compensation — Improvements to Nonemployee Share-Based Payment Accounting”. This update aims to simplify the accounting for share-based payments awarded to non-employees for goods or services acquired. The update specifies that the measurement date is the grant date and that awards are required to be measured at fair value. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently in the process of evaluating the impact of adoption of this standard on its consolidated financial statements.

 

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement,” which is designed to improve the effectiveness of disclosures by removing, modifying and adding disclosures related to fair value measurements. The update is effective for the Company on July 1, 2020, with early adoption permitted. The Company is currently assessing the impact this update will have on its consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The amendments in this update are effective for the Company on July 1, 2020, with early adoption permitted. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is in the process of assessing the impact of the amendments in this update but does not expect it to have a material impact on the Company’s consolidated financial statements.

 

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