UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

(Mark One)

 

[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2018

 

[  ] For the transition period from __________ to __________

 

Commission file number: 0-22773

 

NETSOL TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

 

NEVADA 95-4627685
(State or other Jurisdiction of (I.R.S.
Incorporation or Organization) Employer NO.)

 

23975 Park Sorrento, Suite 250, Calabasas, CA 91302
(Address of principal executive offices) (Zip Code)

(818) 222-9195 / (818) 222-9197
(Issuer’s telephone/facsimile numbers, including area code)

 

Indicate by check mark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes[X] No [  ]

 

Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

 

Large Accelerated Filer [  ] Accelerated Filer [  ]  
Non-Accelerated Filer [  ] Small Reporting Company[X]  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes [  ] No [X]

 

The issuer had 11,792,360 shares of its $.01 par value Common Stock and no Preferred Stock issued and outstanding as of November 9, 2018.

 

 
 

 

NETSOL TECHNOLOGIES, INC.

 

  Page No.
PART I. FINANCIAL INFORMATION  
Item 1. Financial Statements (Unaudited)  
Condensed Consolidated Balance Sheets as of September 30, 2018 and June 30, 2018 3
Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2018 and 2017 4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended September 30, 2018 and 2017 5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2018 and 2017 6
Notes to the Condensed Consolidated Financial Statements 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 36
Item 3. Quantitative and Qualitative Disclosures about Market Risk 50
Item 4. Controls and Procedures 50
   
PART II. OTHER INFORMATION  
Item 1. Legal Proceedings 51
Item 1A Risk Factors 51
Item 2. Unregistered Sales of Equity and Use of Proceeds 51
Item 3. Defaults Upon Senior Securities 51
Item 4. Mine Safety Disclosures 51
Item 5. Other Information 51
Item 6. Exhibits 51

 

Page 2
 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   As of
September 30, 2018
   As of
June 30, 2018
 
ASSETS          
Current assets:          
Cash and cash equivalents  $20,435,744   $22,088,853 
Accounts receivable, net of allowance of $600,833 and $610,061   7,487,381    12,775,461 
Accounts receivable, net - related party   3,039,320    3,374,272 
Revenues in excess of billings   13,335,529    14,285,778 
Revenues in excess of billings - related party   70,250    - 
Convertible note receivable - related party   2,881,500    2,123,500 
Other current assets   3,438,861    2,703,032 
Total current assets   50,688,585    57,350,896 
Revenues in excess of billings, net - long term   -    1,206,669 
Property and equipment, net   15,650,128    16,165,491 
Long term investment   2,958,692    3,217,162 
Other assets   54,936    70,299 
Intangible assets, net   11,465,925    12,247,196 
Goodwill   9,516,568    9,516,568 
Total assets  $90,334,834   $99,774,281 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable and accrued expenses  $7,153,778   $7,873,809 
Current portion of loans and obligations under capitalized leases   8,433,675    8,595,919 
Unearned revenues   4,913,731    5,949,581 
Common stock to be issued   88,324    88,324 
Total current liabilities   20,589,508    22,507,633 
Loans and obligations under capitalized leases; less current maturities   296,680    330,596 
Total liabilities   20,886,188    22,838,229 
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    117,085 
Additional paid-in-capital   126,918,319    126,479,147 
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)   (37,994,502)
Stock subscription receivable   (221,000)   (221,000)
Other comprehensive loss   (24,649,274)   (24,386,071)
Total NetSol stockholders’ equity   58,133,137    62,789,635 
Non-controlling interest   11,315,509    14,146,417 
Total stockholders’ equity   69,448,646    76,936,052 
Total liabilities and stockholders’ equity  $90,334,834   $99,774,281 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

Page 3
 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   For the Three Months 
   Ended September 30, 
   2018   2017 
Net Revenues:          
License fees  $5,956,113   $326,066 
Maintenance fees   3,638,327    3,473,725 
Services   6,418,634    7,017,737 
License fees - related party   -    44,408 
Maintenance fees - related party   101,349    102,963 
Services - related party   282,122    1,853,877 
Total net revenues   16,396,545    12,818,776 
           
Cost of revenues:          
Salaries and consultants   5,020,562    5,464,160 
Travel   1,151,997    513,112 
Depreciation and amortization   937,604    1,173,113 
Other   1,048,324    856,582 
Total cost of revenues   8,158,487    8,006,967 
           
Gross profit   8,238,058    4,811,809 
           
Operating expenses:          
Selling and marketing   1,701,326    1,711,296 
Depreciation and amortization   212,232    245,873 
General and administrative   4,406,720    3,787,558 
Research and development cost   318,155    185,085 
Total operating expenses   6,638,433    5,929,812 
           
Income (loss) from operations   1,599,625    (1,118,003)
           
Other income and (expenses)          
Gain (loss) on sale of assets   52,294    (7,130)
Interest expense   (99,434)   (118,071)
Interest income   248,964    136,911 
Gain on foreign currency exchange transactions   10,912    1,016,362 
Share of net loss from equity investment   (299,691)   (67,562)
Other income (expense)   5,379    1,099 
Total other income (expenses)   (81,576)   961,609 
           
Net income (loss) before income taxes   1,518,049    (156,394)
Income tax provision   (236,914)   (24,871)
Net income (loss)   1,281,135    (181,265)
Non-controlling interest   (318,546)   (188,233)
Net income (loss) attributable to NetSol  $962,589   $(369,498)
           
Net income (loss) per share:          
Net income (loss) per common share          
Basic  $0.08   $(0.03)
Diluted  $0.08   $(0.03)
           
Weighted average number of shares outstanding          
Basic   11,502,616    11,099,113 
Diluted   11,507,730    11,099,113 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

Page 4
 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)

 

   For the Three Months 
   Ended September 30, 
   2018   2017 
Net income (loss)  $962,589   $(369,498)
Other comprehensive income (loss):          
Translation adjustment   (464,076)   (825,744)
Translation adjustment attributable to non-controlling interest   200,873    237,165 
Net translation adjustment   (263,203)   (588,579)
Comprehensive income (loss) attributable to NetSol  $699,386   $(958,077)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

Page 5
 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

 

   For the Three Months 
   Ended September 30, 
   2018   2017 
Cash flows from operating activities:          
Net income (loss)  $1,281,135   $(181,265)
Adjustments to reconcile net income (loss) to net cash used in operating activities:          
Depreciation and amortization   1,149,836    1,418,986 
Share of net loss from investment under equity method   299,691    67,562 
(Gain) loss on sale of assets   (52,294)   7,130 
Stock based compensation   432,048    439,308 
Changes in operating assets and liabilities:          
Accounts receivable   5,136,381    (903,730)
Accounts receivable - related party   284,869    (1,251,994)
Revenues in excess of billing   (6,347,196)   (3,230,619)
Revenues in excess of billing - related party   (70,102)   (130)
Other current assets   (571,246)   (478,390)
Accounts payable and accrued expenses   (680,147)   231,645 
Unearned revenue   (1,202,420)   (270,743)
Net cash used in operating activities   (339,445)   (4,152,240)
           
Cash flows from investing activities:          
Purchases of property and equipment   (563,413)   (328,163)
Sales of property and equipment   184,032    116,023 
Convertible note receivable - related party   (758,000)   (500,000)
Net cash used in investing activities   (1,137,381)   (712,140)
           
Cash flows from financing activities:          
Proceeds from the exercise of stock options and warrants   -    162,385 
Proceeds from exercise of subsidiary options   2,650    - 
Purchase of treasury stock   -    (500,663)
Proceeds from bank loans   119,895    - 
Payments on capital lease obligations and loans - net   (179,237)   (148,707)
Net cash used in financing activities   (56,692)   (486,985)
Effect of exchange rate changes   (119,591)   (266,774)
Net decrease in cash and cash equivalents   (1,653,109)   (5,618,139)
Cash and cash equivalents at beginning of the period   22,088,853    14,172,954 
Cash and cash equivalents at end of period  $20,435,744   $8,554,815 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

Page 6
 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)

 

   For the Three Months 
   Ended September 30, 
   2018   2017 
SUPPLEMENTAL DISCLOSURES:          
Cash paid during the period for:          
Interest  $120,010   $97,547 
Taxes  $213,605   $20,961 
           
NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Provided services for investment in WRLD3D  $-   $268,300 
Assets acquired under capital lease  $144,801   $41,695 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

Page 7
 

  

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(UNAUDITED)

 

NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

 

The Company designs, develops, markets, and exports proprietary software products to customers in the automobile financing and leasing, banking, and financial services industries worldwide. The Company also provides system integration, consulting, and IT products and services in exchange for fees from customers.

 

The consolidated condensed interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

 

These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended June 30, 2018. The Company follows the same accounting policies in preparation of interim reports. Results of operations for the interim periods are not indicative of annual results.

 

The accompanying condensed consolidated financial statements include the accounts of NetSol Technologies, Inc. and subsidiaries (collectively, 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”)

 

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

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

 

NOTE 2 – ACCOUNTING POLICIES

 

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.

 

Page 8
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(UNAUDITED)

 

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

 

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 

 

Page 9
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(UNAUDITED)

 

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

 

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.

 

Page 10
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(UNAUDITED)

 

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.

 

Page 11
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(UNAUDITED)

 

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 

 

Page 12
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(UNAUDITED)

 

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 

 

Page 13
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(UNAUDITED)

 

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 

 

Page 14
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(UNAUDITED)

 

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 

 

Page 15
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(UNAUDITED)

 

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.

 

Page 16
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(UNAUDITED)

 

NOTE 3 – REVENUE RECOGNITION

 

The Company determines revenue recognition through the following steps:

 

Identification of the contract, or contracts, with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when, or as, the Company satisfies a performance obligation.

 

The Company records the amount of revenue and related costs by considering whether the entity is a principal (gross presentation) or an agent (net presentation) by evaluating the nature of its promise to the customer. Revenue is presented net of sales, value-added and other taxes collected from customers and remitted to government authorities.

 

The Company has two primary revenue streams: core revenue and non-core revenue.

 

Core Revenue:

 

The Company generates its core revenue from the following sources: (1) software licenses, (2) services, which include implementation and consulting services, and (3) maintenance, which includes post contract support, of its enterprise software solutions for the lease and finance industry. The Company offers its software using the same underlying technology via two models: a traditional on-premises licensing model and a subscription model. The on-premises model involves the sale or license of software on a perpetual basis to customers who take possession of the software and install and maintain the software on their own hardware. Under the subscription delivery model, the Company provides access to its software on a hosted basis as a service and customers generally do not have the contractual right to take possession of the software.

 

Non-Core Revenue

 

The Company generates its non-core revenue by providing business process outsourcing (“BPO”), other IT services and internet services.

 

Performance Obligations

 

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under Topic 606. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied by transferring the promised good or service to the customer. The Company identifies and tracks the performance obligations at contract inception so that the Company can monitor and account for the performance obligations over the life of the contract.

 

The Company’s contracts which contain multiple performance obligations generally consist of the initial purchase of subscription or licenses and a professional services engagement. License purchases generally have multiple performance obligations as customers purchase maintenance and services in addition to the licenses. The Company’s single performance obligation arrangements are typically maintenance renewals, subscription renewals and services engagements.

 

For contracts with multiple performance obligations where the contracted price differs from the standalone selling price (“SSP”) for any distinct good or service, the Company may be required to allocate the contract’s transaction price to each performance obligation using its best estimate for the SSP.

 

Subscription

 

Subscription revenue is recognized ratably over the initial subscription period committed to by the customer commencing when the product is made available to the customer. The initial subscription period is typically 12 to 60 months. The Company generally invoices its customers in advance in quarterly or annual installments and typical payment terms provide that customers make payment within 30 days of invoice.

 

Page 17
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(UNAUDITED)

 

Software Licenses

 

Transfer of control for software is considered to have occurred upon delivery of the product to the customer. The Company’s typical payment terms tend to vary by region, but its standard payment terms are within 30 days of invoice.

 

Maintenance

 

Revenue from support services and product updates, referred to as maintenance revenue, is recognized ratably over the term of the maintenance period, which in most instances is one year. Software license updates provide customers with rights to unspecified software product updates, maintenance releases and patches released during the term of the support period on a when-and-if available basis. The Company’s customers purchase both product support and license updates when they acquire new software licenses. In addition, a majority of customers renew their support services contracts annually and typical payment terms provide that customers make payment within 30 days of invoice.

 

Professional Services

 

Revenue from professional services is typically comprised of implementation, development, data migration, training or other consulting services. Consulting services are generally sold on a time-and-materials or fixed fee basis and can include services ranging from software installation to data conversion and building non-complex interfaces to allow the software to operate in integrated environments. The Company recognizes revenue for time-and-materials arrangements as the services are performed. In fixed fee arrangements, revenue is recognized as services are performed as measured by costs incurred to date, compared to total estimated costs to complete the services project. Management applies judgment when estimating project status and the costs necessary to complete the services projects. A number of internal and external factors can affect these estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes. Services are generally invoiced upon milestones in the contract or upon consumption of the hourly resources and payments are typically due 30 days after invoice.

 

BPO and Internet Services

 

Revenue from BPO services is recognized based on the stage of completion which is measured by reference to labor hours incurred to date as a percentage of total estimated labor hours for each contract. Internet services are invoiced either monthly, quarterly or half yearly in advance to the customers and revenue is recognized ratably overtime on a monthly basis.

 

Disaggregated Revenue

 

The Company disaggregates revenue from contracts with customers by category — core and non-core, as it believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

 

Page 18
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(UNAUDITED)

 

The Company’s disaggregated revenue by category is as follows:

 

   For the Three Months 
   Ended September 30, 
   2018   2017 
Core:          
License  $5,956,113   $326,066 
Maintenance   3,638,327    3,473,725 
Services   4,970,273    5,958,266 
License - related party   -    44,408 
Maintenance fees - related party   101,349    102,963 
Services - related party   180,597    620,549 
Total core revenue, net   14,846,659    10,525,977 
           
Non-Core:          
Services   1,448,361    1,059,471 
Services - related party   101,525    1,233,328 
Total non-core revenue, net   1,549,886    2,292,799 
           
Total net revenue  $16,396,545   $12,818,776 

 

Significant Judgments

 

More judgments and estimates are required under Topic 606 than were required under Topic 605. Due to the complexity of certain contracts, the actual revenue recognition treatment required under Topic 606 for the Company’s arrangements may be dependent on contract-specific terms and may vary in some instances.

 

Judgment is required to determine the SSP for each distinct performance obligation. The Company rarely licenses or sells products on a stand-alone basis, so the Company is required to estimate the range of SSPs for each performance obligation. In instances where SSP is not directly observable because the Company does not sell the license, product or service separately, the Company determines the SSP using information that may include market conditions and other observable inputs. In making these judgments, the Company analyzes various factors, including its pricing methodology and consistency, size of the arrangement, length of term, customer demographics and overall market and economic conditions. Based on these results, the estimated SSP is set for each distinct product or service delivered to customers.

 

The most significant inputs involved in the Company’s revenue recognition policies are: The (1) stand-alone selling prices of the Company’s software license, and the (2) the method of recognizing revenue for installation/customization, and other services.

 

The stand-alone selling price of the licenses was measured primarily through an analysis of pricing that management evaluated when quoting prices to customers. Although the Company has no history of selling its software separately from maintenance and other services, the Company does have historical experience with amending contracts with customers to provide additional modules of its software or providing those modules at an optional price. This information guides the Company in assessing the stand-alone selling price of the Company’s software, since the Company can observe instances where a customer had a particular component of the Company’s software that was essentially priced separate from other goods and services that the Company delivered to that customer.

 

The Company recognized revenue from implementation and customization services using the percentage of estimated “man-days” that the work requires. The Company believes the level of effort to complete the services is best measured by the amount of time (measured as an employee working for one day on implementation/customization work) that is required to complete the implementation or customization work. The Company reviews its estimate of man-days required to complete implementation and customization services each reporting period.

 

Page 19
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(UNAUDITED)

 

Revenue is recognized over time for the Company’s subscription, maintenance and fixed fee professional services that are separate performance obligations. For the Company’s professional services, revenue is recognized over time, generally using costs incurred or hours expended to measure progress. Judgment is required in estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization, specification variances and testing requirement changes.

 

If a group of agreements are entered at or near the same time and so closely related that they are, in effect, part of a single arrangement, such agreements are deemed to be combined as one arrangement for revenue recognition purposes. The Company exercises significant judgment to evaluate the relevant facts and circumstances in determining whether agreements should be accounted for separately or as a single arrangement. The Company’s judgments about whether a group of contracts comprise a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved.

 

If a contract includes variable consideration, the Company exercises judgment in estimating the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer. When estimating variable consideration, the Company will consider all relevant facts and circumstances. Variable consideration will be estimated and included in the contract price only when it is probable that a significant reversal in the amount of revenue recognized will not occur.

 

Contract Balances

 

The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in receivables, contract assets (revenues in excess of billings), or contract liabilities (deferred revenue) on the Company’s Consolidated Balance Sheets. The Company records revenues in excess of billings when the Company has transferred goods or services but does not yet have the right to consideration. The Company records deferred revenue when the Company has received or has the right to receive consideration but has not yet transferred goods or services to the customer.

 

The revenues in excess of billings are transferred to receivables when the rights to consideration become unconditional, usually upon completion of a milestone.

 

The Company’s revenues in excess of billings and deferred revenue are as follows:

 

   As of   As of 
   September 30, 2018   July 1, 2018 
         
Revenues in excess of billings  $13,335,529   $6,956,966 
           
Deferred Revenue  $4,913,731   $6,167,755 

 

During the three months ended September 30, 2018, the Company recognized revenue of $2,169,839 that was included in the deferred revenue balance, as adjusted for Topic 606, at the beginning of the period. All other activity in deferred revenue is due to the timing of invoicing in relation to the timing of revenue recognition.

 

Page 20
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(UNAUDITED)

 

Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted but unsatisfied performance obligations were approximately $91,633,000 as of September 30, 2018, of which the Company estimates to recognize approximately $15,173,000 in revenue over the next 12 months and the remainder over an estimated 6.25 years thereafter. Actual revenue recognition depends in part on the timing of software modules installed at various customer sites. Accordingly, some factors that affect the Company’s revenue, such as the availability and demand for modules within customer geographic locations, is not entirely within the Company’s control. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, and not to facilitate financing arrangements.

 

Deferred Revenue

 

The Company typically invoices its customers for subscription and support fees in advance on a quarterly or annual basis, with payment due at the start of the subscription or support term. Unpaid invoice amounts for non-cancelable license and services starting in future periods are included in accounts receivable and deferred revenue.

 

Practical Expedients and Exemptions

 

There are several practical expedients and exemptions allowed under Topic 606 that impact timing of revenue recognition and the Company’s disclosures. Below is a list of practical expedients the Company applied in the adoption and application of Topic 606:

 

Application

 

● The Company does not evaluate a contract for a significant financing component if payment is expected within one year or less from the transfer of the promised items to the customer.

● The Company generally expenses sales commissions and sales agent fees when incurred when the amortization period would have been one year or less or the commissions are based on cashed received. These costs are recorded within sales and marketing expense in the Consolidated Statement of Operations.

● The Company does not disclose the value of unsatisfied performance obligations for contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed (applies to time-and-material engagements).

 

Modified Retrospective Transition Adjustments

 

● For contract modifications, the Company reflected the aggregate effect of all modifications that occurred prior to the adoption date when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to satisfied and unsatisfied performance obligations for the modified contract at transition.

 

Costs to Obtain a Contract

 

The Company does not have a material amount of costs to obtain a contract capitalized at any balance sheet date. In general, the Company incurs few direct incremental costs of obtaining new customer contracts. The Company rarely incurs incremental costs to review or otherwise enter into contractual arrangements with customers. In addition, the Company’s sales personnel receive fees that are referred to as commissions, but that are based on more than simply signing up new customers. The Company’s sales personnel are required to perform additional duties beyond new customer contract inception dates, including fulfilment duties and collections efforts.

 

Page 21
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(UNAUDITED)

 

NOTE 4 – EARNINGS PER SHARE

 

Basic earnings per share are computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.

 

The components of basic and diluted earnings per share were as follows:

 

   For the three months ended September 30, 2018 
   Net Income   Shares   Per Share 
Basic income per share: Net income available to common shareholders  $962,589    11,502,616   $0.08 
Effect of dilutive securities Share grants   -    5,114    - 
Diluted income per share  $962,589    11,507,730   $0.08 

 

   For the three months ended September 30, 2017 
   Net Loss   Shares   Per Share 
             
Basic loss per share: Net loss available to common shareholders  $(369,498)   11,099,113   $(0.03)
Effect of dilutive securities Stock options   -    -    - 
Diluted loss per share  $(369,498)   11,099,113   $(0.03)

 

The following potential dilutive shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would be anti-dilutive.

 

   For the Three Months 
   Ended September 30, 
   2018   2017 
         
Stock Options   53,462    438,360 
Share Grants   -    348,228 
    53,462    786,588 

 

NOTE 5 – OTHER COMPREHENSIVE INCOME AND FOREIGN CURRENCY:

 

The accounts of NTE, VLSH and VLS use the British Pound; VLSIL and NTG use the Euro; NetSol PK, Connect, and NetSol Innovation use the Pakistan Rupee; NTPK Thailand and NetSol Thai use the Thai Baht; 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. Assets and liabilities are translated at the exchange rate on the balance sheet date, and operating results are translated at the average exchange rate throughout the period. Accumulated translation losses classified as an item of accumulated other comprehensive loss in the stockholders’ equity section of the consolidated balance sheet were $24,649,274 and $24,836,071 as of September 30, 2018 and June 30, 2018, respectively. During the three months ended September 30, 2018 and 2017, comprehensive income (loss) in the consolidated statements of comprehensive income (loss) included a translation loss attributable to NetSol of $263,203 and $558,579, respectively.

 

Page 22
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(UNAUDITED)

 

NOTE 6 – RELATED PARTY TRANSACTIONS

 

NetSol-Innovation

 

In November 2004, the Company entered into a joint venture with 1insurer, formerly Innovation Group, called NetSol-Innovation. NetSol-Innovation provides support services to 1insurer. During the three months ended September 30, 2018 and 2017, NetSol Innovation provided services of $67,286 and $1,131,756, respectively. Accounts receivable at September 30, 2018 and June 30, 2018 were $2,347,708 and $2,521,533, respectively.

 

Investec Asset Finance

 

In October 2011, NTE entered into an agreement with Investec Asset Finance to acquire VLS. NTE and VLS provide support services to Investec. During the three months ended September 30, 2018 and 2017, NTE and VLS provided license, maintenance and services of $153,340 and $601,192, respectively. Accounts receivable at September 30, 2018 and June 30, 2018 were $99,328 and $379,521, respectively.

 

NOTE 7 – MAJOR CUSTOMERS

 

The Company is a strategic business partner for Daimler Financial Services (which consists of a group of many companies in different countries). During the three months ended September 30, 2018, revenues earned from Daimler Financial Services were 28.8% of net revenues, consisting of license, maintenance and services revenue of $768,558, $672,562 and $3,275,284, respectively. During the three months ended September 30, 2017, revenues earned were 33.0% of net revenues, consisting of license, maintenance and services revenue of $Nil, $649,772 and $3,578,164, respectively. The revenue from this customer is shown in the Asia – Pacific segment.

 

Accounts receivable at September 30, 2018 and June 30, 2018, were $2,770,519 and $4,417,709, respectively. Revenues in excess of billings at September 30, 2018 and 2017 was $5,679,855 and $12,508,815, respectively. Included in this amount was $Nil and $1,206,669 shown as long term at September 30, 2018 and June 30, 2018, respectively.

 

On December 21, 2015, the Company entered into a 10-year contract with Daimler Financial Services to provide license, maintenance and services for 12 countries in the Asia Pacific Region. The implementation phase is expected to be over a five-year period with maintenance and support over 10 years. The contract is a fixed fee arrangement with total license and maintenance fees of approximately €71,000,000 (approximately $82,558,140) with services to be separately agreed upon and billed as they are performed. The customer will make fixed annual payments of €5,850,000 (approximately $6,802,326) for years 1-5 and €8,350,000 (approximately $9,709,302) for years 6-10. Under the terms of the contract, the customer has the right to withdraw from certain modules and terminate the agreement as to certain countries based on good cause or business reasons prior to the beginning of implementation.

 

On September 4, 2017, the Company amended the agreement which provided for an additional €7,700,000 (approximately $8,953,488) to be earned over the remaining life of the contract. The amended agreement provided for €7,000,000 (approximately $8,139,535) to be paid in the fiscal year 2018 with €100,000 (approximately $116,279) to be paid each year over the remaining seven years.

 

NOTE 8 – CONVERTIBLE NOTE RECEIVABLE – RELATED PARTY

 

Convertible Note Receivable - May 25, 2017

 

The Company entered into an agreement with WRLD3D, whereby the Company was issued a Convertible Promissory Note (the “Convertible Note”) which was fully executed on May 25, 2017. The maximum principal amount of the Convertible Note is $750,000, and as of June 30, 2018, the Company had disbursed $750,000. The Convertible Note bears interest at 5% per annum and all unpaid interest and principal is due and payable upon the Company’s request on or after February 1, 2018. The Company has a security interest in all of WRLD3D’s personal property, inventory, equipment, general intangibles, financial assets, investment property, securities, deposit accounts, and the proceeds thereof.

 

Page 23
 

 

The Convertible Note is convertible upon the occurrence of the following events:

 

  1. Upon a qualified financing which is an equity financing of at least $2,000,000.
  2. Optionally, upon an equity financing less than $2,000,000.
  3. Optionally after the maturity date.
  4. Upon a change of control.

 

The Convertible Note is convertible into Series BB Preferred shares at the lesser of (i) the price paid per share for the equity security by the investors in the qualified financing and (ii) $0.6788 per share (adjusted for any stock dividends, combinations, splits, recapitalizations or the like with respect to WRLD3D’s Series BB Preferred Stock after the date of the Convertible Note).

 

The Company has accrued interest of $44,552 at September 30, 2018 which is included in “Other current assets”.

 

Convertible Note Receivable – February 9, 2018

 

The Company’s subsidiary NetSol Thai entered into an agreement with WRLD3D, whereby NetSol Thai was issued a Convertible Promissory Note (the “Thai Convertible Note”) which was fully executed on February 9, 2018. The maximum principal amount of the Thai Convertible Note is $2,500,000, and as of September 30, 2018, NetSol Thai had disbursed $2,131,500. The Thai Convertible Note bears interest at 10% per annum and all unpaid interest and principal is due and payable upon request on or after March 31, 2019. The Company has a security interest in all of WRLD3D’s personal property, inventory, equipment, general intangibles, financial assets, investment property, securities, deposit accounts, and the proceeds thereof.

 

The Thai Convertible Note is convertible upon the occurrence of the following events:

 

  1. Conversion upon a qualified financing which is an equity financing of at least $1,000,000.
  2. Optional conversion upon an equity financing less than $1,000,000.
  3. Optional conversion after the maturity date.
  4. Change of control.

 

If the Company converts the Thai Convertible Note upon the occurrence of a financing, then the conversion price will be equal to the product of: (A) the price paid per share for the equity securities by the investors multiplied by (B) 70%.

 

If the Company converts the Thai Convertible Note either as an optional conversion after the maturity date or due to a change of control, then the conversion price is equal to $0.6788 per share (adjusted for any stock dividends, combinations, splits, recapitalizations or the like with respect to WRLD3D’s Series BB Preferred Stock after the date of the Thai Convertible Note).

 

The Company has accrued interest of $68,121 at September 30, 2018 which is included in “Other current assets.

 

NOTE 9 - OTHER CURRENT ASSETS

 

Other current assets consisted of the following:

 

   As of   As of 
   September 30, 2018   June 30, 2018 
         
Prepaid Expenses  $                         767,104   $662,431 
Advance Income Tax   930,906    838,799 
Employee Advances   176,371    48,096 
Security Deposits   102,490    85,249 
Other Receivables   594,648    497,632 
Other Assets   867,342    570,825 
Total  $3,438,861   $2,703,032 

 

Page 24
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(UNAUDITED)

 

NOTE 10 – REVENUES IN EXCESS OF BILLINGS – LONG TERM

 

Revenues in excess of billings, net consisted of the following:

 

   As of   As of 
   September 30, 2018   June 30, 2018 
         
Revenues in excess of billing - long term  $-   $1,445,245 
Present value discount   -    (238,576)
Net Balance  $-   $1,206,669 

 

Pursuant to revenue recognition for contract accounting, the Company had recorded revenues in excess of billings long-term for amounts billable after one year. During the three months ended September 30, 2017, the Company accreted $51,722, which was recorded in interest income for that period. The Company used the discounted cash flow method with interest rates ranging from 3.87% to 4.43%.

 

NOTE 11 - PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

   As of   As of 
   September 30, 2018   June 30, 2018 
         
Office Furniture and Equipment  $3,490,984   $3,496,653 
Computer Equipment   23,527,408    23,708,034 
Assets Under Capital Leases   1,524,146    1,479,976 
Building   7,882,598    8,005,351 
Land   2,055,701    2,088,463 
Autos   1,006,504    1,053,749 
Improvements   158,815    324,023 
Subtotal   39,646,156    40,156,249 
Accumulated Depreciation   (23,996,028)   (23,990,758)
Property and Equipment, Net  $15,650,128   $16,165,491 

 

For the three months ended September 30, 2018 and 2017, depreciation expense totaled $564,128 and $728,659, respectively. Of these amounts, $351,896 and $482,786, respectively, are reflected in cost of revenues.

 

Following is a summary of fixed assets held under capital leases as of September 30, 2018 and June 30, 2018:

 

   As of   As of 
   September 30, 2018   June 30, 2018 
Computers and Other Equipment  $275,770   $228,581 
Furniture and Fixtures   65,084    65,084 
Vehicles   1,183,292    1,186,311 
Total   1,524,146    1,479,976 
Less: Accumulated Depreciation - Net   (526,498)   (477,620)
   $997,648   $1,002,356 

 

Page 25
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(UNAUDITED)

 

NOTE 12 – LONG TERM INVESTMENT

 

On March 2, 2017, the Company purchased a 4.9% interest in WRLD3D, a non-public company, for $1,111,111. The Company paid $555,556 at the initial closing and $555,555 on September 1, 2017. NetSol PK, the subsidiary of the Company, purchased a 12.2% investment in WRLD3D, for $2,777,778 which will be earned over future periods by providing IT and enterprise software solutions. Per the agreement, NetSol PK is to provide a minimum of $200,000 of services in each three-month period and the entire balance is required to be provided within three years of the date of the agreement. If NetSol PK fails to provide the future services, it may be required to forfeit the shares back to WRLD3D. As of June 30, 2018, the investment earned by NetSol PK is $2,777,778.

 

In connection with the investment, the Company and NetSol PK received a warrant to purchase preferred stock of WRLD3D which included the following key terms and features:

 

  The warrants are exercisable into shares of the “Next Round Preferred”, only if and when the Next Round Preferred is issued by WRLD3D in a “Qualified Financing”.
     
  The warrants expire on March 2, 2020.
     
  “Next Round Preferred” is defined as occurring if WRLD3D’s preferred stock (or securities convertible into preferred stock) are issued in a Qualified Financing that occurs after March 2, 2016.
     
  “Qualified Financing” is defined as financing with total proceeds of at least $2 million.
     
  The total number of common stock shares to be issued is equal to $1,250,000 divided by the per share price of the Next Round Preferred.
     
  The exercise price of the warrants is equal to the greater of
     
      a) 70% of the per share price of the Next Round Preferred sold in a Qualified Financing, or
         
      b) 25,000,000 divided by the total number of shares of common stock outstanding immediately prior to the Qualified Financing (on a fully-diluted basis, excluding the number of common stock shares issuable upon the exercise of any given warrant).

 

The Company determined that it met the significant influence criteria since the CEO of WRLD3D is the son of the CEO, Najeeb Ghauri, and also an employee of the Company; therefore, the Company accounts for the investment using equity method of accounting.

 

During the three months ended September 30, 2018 and 2017, NetSol PK provided services valued at $162,845 and $268,300, respectively, which is recorded as services-related party. Accounts receivable at September 30, 2018 and June 30, 2018 were $592,284 and $473,218, respectively. Revenue in excess of billing at September 30, 2018 and June 30, 2018 were $70,250 and $Nil, respectively.

 

Under the equity method of accounting, the Company recorded its share of net loss of $299,691 and $67,562 for the three months ended September 30, 2018 and 2017, respectively.

 

Page 26
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(UNAUDITED)

 

NOTE 13 - INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

 

  

As of

September 30, 2018

  

As of

June 30, 2018

 
         
Product Licenses - Cost  $47,244,997   $47,244,997 
Effect of Translation Adjustment   (8,345,651)   (7,857,270)
Accumulated Amortization   (27,433,421)   (27,140,531)
Net Balance  $11,465,925   $12,247,196 

 

(A) Product Licenses

 

Product licenses include internally developed original license issues, renewals, enhancements, copyrights, trademarks, and trade names. Product licenses are amortized on a straight-line basis over their respective lives, and the unamortized amount of $11,465,925 will be amortized over the next 5 years. Amortization expense for the three months ended September 30, 2018 and 2017 was $585,708 and $690,327, respectively.

 

(B) Future Amortization

 

Estimated amortization expense of intangible assets over the next five years is as follows:

 

Year ended:     
September 30, 2018   $2,351,923 
September 30, 2020    2,351,923 
September 30, 2021    2,351,923 
September 30, 2022    2,351,923 
September 30, 2023    2,058,233 
    $11,465,925 

 

NOTE 14 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following:

 

   As of   As of 
   September 30, 2018   June 30, 2018 
         
Accounts Payable  $1,563,851   $1,665,865 
Accrued Liabilities   4,815,986    5,505,312 
Accrued Payroll & Taxes   364,373    302,640 
Taxes Payable   267,012    233,959 
Other Payable   142,556    166,033 
Total  $7,153,778   $7,873,809 

 

Page 27
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(UNAUDITED)

 

NOTE 15 – DEBTS

 

Notes payable and capital leases consisted of the following:

       As of September 30, 2018 
           Current   Long-Term 
Name      Total   Maturities   Maturities 
                 
D&O Insurance   (1)  $22,475   $22,475   $- 
Bank Overdraft Facility   (2)   -    -    - 
Loan Payable Bank - Export Refinance   (3)   4,043,018    4,043,018    - 
Loan Payable Bank - Running Finance   (4)   -    -    - 
Loan Payable Bank - Export Refinance II   (5)   2,830,112    2,830,112    - 
Loan Payable Bank - Running Finance II   (6)   1,212,905    1,212,905    - 
         8,108,510    8,108,510    - 
Subsidiary Capital Leases   (7)   621,845    325,165    296,680 
        $8,730,355   $8,433,675   $296,680 

 

 

 

       As of June 30, 2018 
           Current   Long-Term 
Name      Total   Maturities   Maturities 
                 
D&O Insurance   (1)  $69,578   $69,578   $- 
Bank Overdraft Facility   (2)   -    -    - 
Loan Payable Bank - Export Refinance   (3)   4,107,451    4,107,451    - 
Loan Payable Bank - Running Finance   (4)   -    -    - 
Loan Payable Bank - Export Refinance II   (5)   2,875,216    2,875,216    - 
Loan Payable Bank - Running Finance II   (6)   1,232,235    1,232,235    - 
         8,284,480    8,284,480    - 
Subsidiary Capital Leases   (7)   642,035    311,439    330,596 
        $8,926,515   $8,595,919   $330,596 

 

(1) The Company finances Directors’ and Officers’ (“D&O”) liability insurance and Errors and Omissions (“E&O”) liability insurance, for which the D&O and E&O balances are renewed on an annual basis and, as such, are recorded in current maturities. The interest rate on these financings were ranging from 5.25% to 6.48% as of September 30, 2018 and June 30, 2018.

 

(2) The Company’s subsidiary, NTE, has an overdraft facility with HSBC Bank plc whereby the bank would cover any overdrafts up to £300,000, or approximately $389,610. The annual interest rate was 5.12% as of September 30, 2018. Total outstanding balance as of September 30, 2018 was £Nil. Interest expense for the three months ended September 30, 2018 and 2017 was $Nil and $2,054, respectively.

 

This overdraft facility requires that the aggregate amount of invoiced trade debtors (net of provisions for bad and doubtful debts and excluding intra-group debtors) of NTE, not exceeding 90 days old, will not be less than an amount equal to 200% of the facility. As of September 30, 2018, NTE was in compliance with this covenant.

 

(3) The Company’s subsidiary, NetSol PK, has an export refinance facility with Askari Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every six months. Total facility amount is Rs. 500,000,000 or $4,043,018 at September 30, 2018 and June 30, 2018. The interest rate for the loan was 3% at September 30, 2018 and June 30, 2018. Interest expense for the three months ended September 30, 2018 and 2017 was $30,508 and $35,898, respectively.

 

Page 28
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(UNAUDITED)

 

(4) The Company’s subsidiary, NetSol PK, has a running finance facility with Askari Bank Limited, secured by NetSol PK’s assets. Total facility amount is Rs. 75,000,000 or $606,453, at September 30, 2018. NetSol PK used Rs. Nil or $Nil, at September 30, 2018. The interest rate for the loan was 10.32% at September 30, 2018.

 

This facility requires NetSol PK to maintain a long-term debt equity ratio of 60:40 and the current ratio of 1:1. As of September 30, 2018, NetSol PK was in compliance with this covenant.

 

(5) The Company’s subsidiary, NetSol PK, has an export refinance facility with Samba Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every six months. Total facility amount is Rs. 350,000,000 or $2,830,112 and Rs. 350,000,000 or $2,875,216, at September 30, 2018 and June 30, 2018, respectively. The interest rate for the loan was 3% at September 30, 2018 and June 30, 2018. Interest expense for the three months ended September 30, 2018 and 2017 was $29,260 and $22,122, respectively.

 

(6) The Company’s subsidiary, NetSol PK, has a running finance facility with Samba Bank Limited, secured by NetSol PK’s assets. Total facility amount is Rs. 150,000,000 or $1,212,905 and Rs. 150,000,000 or $1,232,235, at September 30, 2018 and June 30, 2018, respectively. The interest rate for the loan was 8.43% and 8.14% at September 30, 2018 and June 30, 2018, respectively. Interest expense for the three months ended September 30, 2018 was $25,718 and $44,095, respectively.

 

During the tenure of loan, the facilities from Samba Bank Limited require NetSol PK to maintain at a minimum a current ratio of 1:1, an interest coverage ratio of 4 times, a leverage ratio of 2 times, and a debt service coverage ratio of 4 times. As of September 30, 2018, NetSol PK was in compliance with these covenants.

 

(7) The Company leases various fixed assets under capital lease arrangements expiring in various years through 2022. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are secured by the assets themselves. Depreciation of assets under capital leases is included in depreciation expense for the three months ended September 30, 2018 and 2017.

 

Following is the aggregate minimum future lease payments under capital leases as of September 30, 2018:

 

     
   Amount 
Minimum Lease Payments     
Due FYE 9/30/19  $323,855 
Due FYE 9/30/20   255,483 
Due FYE 9/30/21   105,029 
Due FYE 9/30/22   470 
Total Minimum Lease Payments   684,837 
Interest Expense relating to future periods   (62,992)
Present Value of minimum lease payments   621,845 
Less: Current portion   (325,165)
Non-Current portion  $296,680 

 

Page 29
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS</