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 March 31, 2019

 

(  ) 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

Incorporation or Organization)

  (I.R.S. 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 11,673,203 outstanding shares of its $.01 par value Common Stock and no Preferred Stock issued and outstanding as of May 10, 2019.

 

 

 

  
 

 

NETSOL TECHNOLOGIES, INC.

 

    Page No.
PART I. FINANCIAL INFORMATION    
Item 1. Financial Statements (Unaudited)   3
Condensed Consolidated Balance Sheets as of March 31, 2019 and June 30, 2018   3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2019 and 2018   4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended March 31, 2019 and 2018   5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2019 and 2018   6
Notes to the Condensed Consolidated Financial Statements   8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   39
Item 3. Quantitative and Qualitative Disclosures about Market Risk   58
Item 4. Controls and Procedures   58
     
PART II. OTHER INFORMATION    
Item 1. Legal Proceedings   59
Item 1A Risk Factors   59
Item 2. Unregistered Sales of Equity and Use of Proceeds   59
Item 3. Defaults Upon Senior Securities   59
Item 4. Mine Safety Disclosures   59
Item 5. Other Information   59
Item 6. Exhibits   59

 

 Page 2 
 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

  

As of March 31,

2019

  

As of June 30,

2018

 
ASSETS          
Current assets:          
Cash and cash equivalents  $17,014,590   $22,088,853 
Accounts receivable, net of allowance of $373,329 and $610,061   15,971,676    12,775,461 
Accounts receivable, net - related party   3,012,133    3,374,272 
Revenues in excess of billings   13,381,205    14,285,778 
Revenues in excess of billings - related party   61,822    - 
Convertible note receivable - related party   3,250,000    2,123,500 
Other current assets   3,593,057    2,703,032 
Total current assets   56,284,483    57,350,896 
Revenues in excess of billings, net - long term   -    1,206,669 
Property and equipment, net   14,374,262    16,165,491 
Long term investment   2,501,299    3,217,162 
Other assets   23,994    70,299 
Intangible assets, net   9,042,726    12,247,196 
Goodwill   9,516,568    9,516,568 
Total assets  $91,743,332   $99,774,281 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable and accrued expenses  $6,881,435   $7,873,809 
Current portion of loans and obligations under capitalized leases   8,111,332    8,595,919 
Unearned revenues   6,241,741    5,949,581 
Common stock to be issued   88,324    88,324 
Total current liabilities   21,322,832    22,507,633 
Loans and obligations under capitalized leases; less current maturities   716,563    330,596 
Total liabilities   22,039,395    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; 11,879,056 shares issued and 11,673,203 outstanding as of March 31, 2019 and 11,708,469 shares issued and 11,502,616 outstanding as of June 30, 2018   118,791    117,085 
Additional paid-in-capital   127,551,606    126,479,147 
Treasury stock (At cost, 205,853 shares and 205,853 shares as of March 31, 2019 and June 30, 2018, respectively)   (1,205,024)   (1,205,024)
Accumulated deficit   (38,704,519)   (37,994,502)
Stock subscription receivable   (221,000)   (221,000)
Other comprehensive loss   (28,474,832)   (24,386,071)
Total NetSol stockholders’ equity   59,065,022    62,789,635 
Non-controlling interest   10,638,915    14,146,417 
Total stockholders’ equity   69,703,937    76,936,052 
Total liabilities and stockholders’ equity  $91,743,332   $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 March 31,

  

For the Nine Months

Ended March 31,

 
   2019   2018   2019   2018 
Net Revenues:                    
License fees  $2,536,320   $2,648,870   $13,310,002   $3,210,868 
Maintenance fees   3,562,412    3,659,998    10,735,432    10,702,171 
Services   10,519,219    9,345,210    25,175,187    25,450,138 
License fees - related party   -    -    -    261,513 
Maintenance fees - related party   142,344    105,325    370,723    309,539 
Services - related party   366,760    1,284,417    934,883    4,374,802 
Total net revenues   17,127,055    17,043,820    50,526,227    44,309,031 
                     
Cost of revenues:                    
Salaries and consultants   4,833,611    5,418,067    14,351,227    16,244,319 
Travel   1,793,964    425,060    4,652,143    1,226,073 
Depreciation and amortization   874,654    1,127,077    2,692,306    3,468,293 
Other   1,067,506    880,897    3,176,602    2,677,465 
Total cost of revenues   8,569,735    7,851,101    24,872,278    23,616,150 
                     
Gross profit   8,557,320    9,192,719    25,653,949    20,692,881 
                     
Operating expenses:                    
Selling and marketing   1,864,990    1,962,402    5,614,619    5,605,838 
Depreciation and amortization   252,442    231,308    658,453    699,966 
General and administrative   3,833,209    4,048,271    12,241,988    11,862,535 
Research and development cost   513,770    197,643    1,256,577    572,619 
Total operating expenses   6,464,411    6,439,624    19,771,637    18,740,958 
                     
Income (loss) from operations   2,092,909    2,753,095    5,882,312    1,951,923 
                     
Other income and (expenses)                    
Gain (loss) on sale of assets   16,380    40,537    65,170    24,468 
Interest expense   (70,447)   (102,522)   (233,685)   (330,268)
Interest income   201,084    142,356    680,469    394,837 
Gain on foreign currency exchange transactions   47,218    2,550,394    2,594,885    5,304,723 
Share of net loss from equity investment   (245,389)   (263,678)   (843,373)   (534,576)
Other income   3,116    314    12,998    15,924 
Total other income (expenses)   (48,038)   2,367,401    2,276,464    4,875,108 
                     
Net income before income taxes   2,044,871    5,120,496    8,158,776    6,827,031 
Income tax provision   (275,476)   (261,182)   (777,262)   (486,980)
Net income   1,769,395    4,859,314    7,381,514    6,340,051 
Non-controlling interest   (501,835)   (1,994,869)   (2,295,736)   (3,210,683)
Net income attributable to NetSol  $1,267,560   $2,864,445  $5,085,778   $3,129,368 
                     
Net income (loss) per share:                    
Net income (loss) per common share                    
Basic  $0.11   $0.26   $0.44   $0.28 
Diluted  $0.11   $0.25   $0.44   $0.28 
                     
Weighted average number of shares outstanding                    
Basic   11,656,098    11,190,048   11,580,066    11,118,529 
Diluted   11,691,342    11,268,842   11,615,310    11,152,365 

 

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 March 31,

  

For the Nine Months

Ended March 31,

 
   2019   2018   2019   2018 
Net income  $1,267,560   $2,864,445   $5,085,778   $3,129,368 
Other comprehensive income (loss):                    
Translation adjustment   (128,387)   (2,673,422)   (6,376,953)   (5,953,056)
Translation adjustment attributable to non-controlling interest   100,366    944,207    2,288,192    2,022,381 
Net translation adjustment   (28,021)   (1,729,215)   (4,088,761)   (3,930,675)
Comprehensive loss attributable to NetSol  $1,239,539   $1,135,230   $997,017   $(801,307)

 

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 Nine Months
Ended March 31,
 
   2019   2018 
Cash flows from operating activities:          
Net income  $7,381,514   $6,340,051 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
Depreciation and amortization   3,350,759    4,168,259 
Share of net loss from investment under equity method   843,373    534,576 
Gain on sale of assets   (65,170)   (24,468)
Stock based compensation   980,682    1,281,763 
Fair market value of stock options   

43,612

    

-

 
Changes in operating assets and liabilities:          
Accounts receivable   (4,249,540)   (17,848,921)
Accounts receivable - related party   (461,435)   (2,634,063)
Revenues in excess of billing   (6,862,451)   5,904,161 
Revenues in excess of billing - related party   (97,359)   (85,743)
Other current assets   (1,189,909)   (796,126)
Accounts payable and accrued expenses   (540,615)   1,139,509 
Unearned revenue   611,157    4,273,007 
Net cash provided by (used in) operating activities   (255,382)   2,252,005 
           
Cash flows from investing activities:          
Purchases of property and equipment   (2,590,302)   (1,107,732)
Sales of property and equipment   1,005,214    348,762 
Convertible note receivable - related party   (1,126,500)   (550,000)
Investment in WRLD3D   -    (50,000)
Purchase of subsidiary shares from open market   -    (33,987)
Net cash used in investing activities   (2,711,588)   (1,392,957)
           
Cash flows from financing activities:          
Proceeds from the exercise of stock options and warrants   85,000    215,311 
Proceeds from exercise of subsidiary options   2,650    10,349 
Restricted cash   -    90,000 
Purchase of treasury stock   -    (750,714)
Dividend paid by subsidiary to non-controlling interest   (566,465)   (417,853)
Proceeds from bank loans   1,337,092    696,936 
Payments on capital lease obligations and loans - net   (298,610)   (961,901)
Net cash provided by (used in) financing activities   559,667    (1,117,872)
Effect of exchange rate changes   (2,666,960)   (1,202,147)
Net decrease in cash and cash equivalents   (5,074,263)   (1,460,971)
Cash and cash equivalents at beginning of the period   22,088,853    14,172,954 
Cash and cash equivalents at end of period  $17,014,590   $12,711,983 

 

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 Nine Months

Ended March 31,

 
   2019   2018 
SUPPLEMENTAL DISCLOSURES:          
Cash paid during the period for:          
Interest  $256,528   $300,688 
Taxes  $673,712   $388,549 
           
NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Provided services for investment in WRLD3D  $-   $601,869 
Assets acquired under capital lease  $66,256   $304,533 

 

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

MARCH 31, 2019

(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

MARCH 31, 2019

(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 March 31, 2019, and June 30, 2018, the Company had uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $15,525,141 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 March 31, 2019.

 

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

MARCH 31, 2019

(UNAUDITED)

 

The reconciliation from June 30, 2018 to March 31, 2019 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 March 31, 2019  $-   $-   $- 

 

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

MARCH 31, 2019

(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 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.

 

 Page 11 
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

(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

June 30, 2018

  

Topic 606

Adjustments

  

As of

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 

 

 Page 12 
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

(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 March 31, 2019:

 

   As reported under Topic 606       Balances under Prior GAAP 
  March 31, 2019   Adjustments   March 31, 2019 
ASSETS            
Current assets:               
Cash and cash equivalents  $17,014,590        $17,014,590 
Accounts receivable, net of allowance of $373,329 and $610,061   15,971,676         15,971,676 
Accounts receivable, net - related party   3,012,133         3,012,133 
Revenues in excess of billings   13,381,205    7,964,871    21,346,076 
Revenues in excess of billings - related party   61,822         61,822 
Convertible note receivable - related party   3,250,000         3,250,000 
Other current assets   3,593,057         3,593,057 
Total current assets   56,284,483    7,964,871    64,249,354 
Revenues in excess of billings, net - long term   -    1,370,111    1,370,111 
Property and equipment, net   14,374,262         14,374,262 
Long term investment   2,501,299         2,501,299 
Other assets   23,994         23,994 
Intangible assets, net   9,042,726         9,042,726 
Goodwill   9,516,568         9,516,568 
Total assets  $91,743,332   $9,334,982   $101,078,314 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY               
Current liabilities:               
Accounts payable and accrued expenses  $6,881,435        $6,881,435 
Current portion of loans and obligations under capitalized leases   8,111,332         8,111,332 
Unearned revenues   6,241,741    (1,013,469)   5,228,272 
Common stock to be issued   88,324         88,324 
Total current liabilities   21,322,832    (1,013,469)   20,309,363 
Loans and obligations under capitalized leases; less current maturities   716,563         716,563 
Total liabilities   22,039,395    (1,013,469)   21,025,926 
Commitments and contingencies               
Stockholders’ equity:               
Preferred stock, $.01 par value; 500,000 shares authorized;   -    -    - 
Common stock, $.01 par value; 14,500,000 shares authorized; 11,879,056 shares issued and 11,673,203 outstanding as of March 31, 2019 and 11,708,469 shares issued and 11,502,616 outstanding as of June 30, 2018   118,791         118,791 
Additional paid-in-capital   127,551,606         127,551,606 
Treasury stock (At cost, 205,853 shares and 205,853 shares as of March 31, 2019 and June 30, 2018, respectively)   (1,205,024)        (1,205,024)
Accumulated deficit   (38,704,519)   6,851,550    (31,852,969)
Stock subscription receivable   (221,000)        (221,000)
Other comprehensive loss   (28,474,832)        (28,474,832)
Total NetSol stockholders’ equity   59,065,022    6,851,550    65,916,572 
Non-controlling interest   10,638,915    3,496,901    14,135,816 
Total stockholders’ equity   69,703,937    10,348,451    80,052,388 
Total liabilities and stockholders’ equity  $91,743,332   $9,334,982   $101,078,314 

 

 Page 13 
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

(UNAUDITED)

 

The following table summarizes the effects of adopting Topic 606 on the Company’s Condensed Consolidated Statement of Income for the three and nine months ended March 31, 2019:

 

  

For the Three Months Ended

March 31, 2019

  

For the Nine Months Ended

March 31, 2019

 
  

As reported

under

Topic 606

   Adjustments  

Under prior

GAAP

  

As reported under

Topic 606

   Adjustments  

 

Under prior

GAAP

 
                         
Net Revenues:                              
License fees  $2,536,320   $175,507   $2,711,827   $13,310,002   $175,507   $13,485,509 
Maintenance fees   3,562,412    232,110    3,794,522    10,735,432    589,466    11,324,898 
Services   10,519,219         10,519,219    25,175,187    -    25,175,187 
Maintenance fees - related party   142,344         142,344    370,723    -    370,723 
Services - related party   366,760         366,760    934,883    -    934,883 
Total net revenues   17,127,055    407,617    17,534,672    50,526,227    764,973    51,291,200 
                               
Cost of revenues:                              
Salaries and consultants   4,833,611         4,833,611    14,351,227    -    14,351,227 
Travel   1,793,964         1,793,964    4,652,143    -    4,652,143 
Depreciation and amortization   874,654         874,654    2,692,306    -    2,692,306 
Other   1,067,506         1,067,506    3,176,602    -    3,176,602 
Total cost of revenues   8,569,735    -    8,569,735    24,872,278    -    24,872,278 
                               
Gross profit   8,557,320    407,617    8,964,937    25,653,949    764,973    26,418,922 
                               
Operating expenses:                              
Selling and marketing   1,864,990         1,864,990    5,614,619    -    5,614,619 
Depreciation and amortization   252,442         252,442    658,453    -    658,453 
General and administrative   3,833,209         3,833,209    12,241,988    -    12,241,988 
Research and development cost   513,770         513,770    1,256,577    -    1,256,577 
Total operating expenses   6,464,411    -    6,464,411    19,771,637    -    19,771,637 
                               
Income from operations   2,092,909    407,617    2,500,526    5,882,312    764,973    6,647,285 
                               
Other income and (expenses)                              
Gain (loss) on sale of assets   16,380         16,380    65,170    -    65,170 
Interest expense   (70,447)        (70,447)   (233,685)   -    (233,685)
Interest income   201,084    13,474    214,558    680,469    163,442    843,911 
Gain on foreign currency exchange transactions   47,218    (73,088)   (25,870)   2,594,885    666,381    3,261,266 
Share of net loss from equity investment   (245,389)        (245,389)   (843,373)   -    (843,373)
Other income   3,116         3,116    12,998    -    12,998 
Total other income (expenses)   (48,038)   (59,614)   (107,652)   2,276,464    829,823    3,106,287 
                               
Net income before income taxes   2,044,871    348,003    2,392,874    8,158,776    1,594,796    9,753,572 
Income tax provision   (275,476)        (275,476)   (777,262)   -    (777,262)
Net income   1,769,395    348,003    2,117,398    7,381,514    1,594,796    8,976,310 
Non-controlling interest   (501,835)   (117,625)   (619,460)   (2,295,736)   (539,041)   (2,834,777)
Net income attributable to NetSol  $1,267,560   $230,378   $1,497,938   $5,085,778   $1,055,755   $6,141,533 
                               
Net income per share:                              
Net income per common share                              
Basic  $0.11   $0.02   $0.13   $0.44   $0.09   $0.53 
Diluted  $0.11   $0.02   $0.13   $0.44   $0.09   $0.53 
                               
Weighted average number of shares outstanding                              
Basic   11,656,098    11,656,098    11,656,098    11,580,066    11,580,066    11,580,066 
Diluted   11,691,342    11,691,342    11,691,342    11,615,310    11,615,310    11,615,310 

 

 Page 14 
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

(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 March 31, 2019:

 

  

For the Nine Months Ended

March 31, 2019

 
   As reported under       Under prior 
   Topic 606   Adjustments   GAAP 
Cash flows from operating activities:               
Net income  $7,381,514   $1,594,796   $8,976,310 
Adjustments to reconcile net income
to net cash provided by operating activities:
               
Depreciation and amortization   3,350,759         3,350,759 
Share of net loss from investment under equity method   843,373         843,373 
Loss on sale of assets   (65,170)        (65,170)
Stock based compensation   980,682         980,682 

Fair market value of stock options

   43,612         43,612 
Changes in operating assets and liabilities:             - 
Accounts receivable   (4,249,540)        (4,249,540)
Accounts receivable - related party   (461,435)        (461,435)
Revenues in excess of billing   (6,862,451)   (799,501)   (7,661,952)
Revenues in excess of billing - related party   (97,359)        (97,359)
Other current assets   (1,189,909)        (1,189,909)
Accounts payable and accrued expenses   (540,615)        (540,615)
Unearned revenue   611,157    (795,295)   (184,138)
Net cash used in operating activities   (255,382)   -    (255,382)
                
Cash flows from investing activities:               
Purchases of property and equipment   (2,590,302)        (2,590,302)
Sales of property and equipment   1,005,214         1,005,214 
Convertible note receivable - related party   (1,126,500)        (1,126,500)
Net cash used in investing activities   (2,711,588)   -    (2,711,588)
                
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 
Dividend paid by subsidiary to non-controlling interest   (566,465)        (566,465)
Proceeds from bank loans   1,337,092         1,337,092 
Payments on capital lease obligations and loans - net   (298,610)        (298,610)
Net cash provided by financing activities   559,667    -    559,667 
Effect of exchange rate changes   (2,666,960)        (2,666,960)
Net increase in cash and cash equivalents   (5,074,263)   -    (5,074,263)
Cash and cash equivalents at beginning of the period   22,088,853         22,088,853 
Cash and cash equivalents at end of period  $17,014,590   $-   $17,014,590 

 

 Page 15 
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

(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 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 March 2018, FASB issued ASU No. 2018-05, “Income Taxes (Topic 740).” This ASU was issued to provide guidance on the income tax accounting implications of the Tax Act and allows for entities to report provisional amounts for specific income tax effects of the Tax Act for which the accounting under ASC Topic 740 was not yet complete, but a reasonable estimate could be determined. A measurement period of one year is allowed to complete the accounting effects under ASC Topic 740 and revise any previous estimates reported. Any provisional amounts or subsequent adjustments included in an entity’s financial statements during the measurement period should be included in income from continuing operations as an adjustment to tax expense in the reporting period the amounts are determined.

 

 Page 16 
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

(UNAUDITED)

 

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.

 

 Page 17 
 

 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

(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 18 
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

(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 19 
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

(UNAUDITED)

 

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

 

   For the Three Months Ended March 31,   For the Nine Months Ended March 31, 
   2019   2018   2019   2018 
                 
Core:                    
License  $2,536,320   $2,648,870   $13,310,002   $3,210,868 
Maintenance   3,562,412    3,659,998    10,735,432    10,702,171 
Services   9,069,468    7,810,118    20,841,207    21,497,937 
License - related party   -    -    -    261,513 
Maintenance fees - related party   142,344    105,325    370,723    309,539 
Services - related party   236,422    349,637    658,666    1,289,587 
Total core revenue, net   15,546,966    14,573,948    45,916,030    37,271,615 
                     
Non-Core:                    
Services   1,449,751    1,535,092    4,333,980    3,952,201 
Services - related party   130,338    934,780    276,217    3,085,215 
Total non-core revenue, net   1,580,089    2,469,872    4,610,197    7,037,416 
                     
Total net revenue  $17,127,055   $17,043,820   $50,526,227   $44,309,031 

 

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 20 
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

(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 
   March 31, 2019   July 1, 2018 
         
Revenues in excess of billings  $13,381,205   $6,956,966 
           
Deferred Revenue  $6,241,741   $6,167,755 

 

During the three and nine months ended March 31, 2019, the Company recognized revenue of $1,758,521 and $5,422,772, respectively, which 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 21 
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

(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 $76,692,255 as of March 31, 2019, of which the Company estimates to recognize approximately $13,185,913 in revenue over the next 12 months and the remainder over an estimated 6 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 22 
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

(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 March 31, 2019   For the nine months ended March 31, 2019 
   Net Income   Shares   Per Share   Net Income   Shares   Per Share 
Basic income per share:                        
Net income available to common shareholders  $1,267,560    11,656,098   $0.11   $5,085,778    11,580,066   $0.44 
Effect of dilutive securities                              
Stock options   -    4,948    -    -    4,948    - 
Share grants   -    30,296    -    -    30,296    - 
Diluted income per share  $1,267,560    11,691,342   $0.11   $5,085,778    11,615,310   $0.44 

 

   For the three months ended March 31, 2018   For the nine months ended March 31, 2018 
   Net Income   Shares   Per Share   Net Income   Shares   Per Share 
Basic income per share:                              
Net income available to common shareholders  $2,864,445    11,190,048   $0.26   $3,129,368    11,118,529   $0.28 
Effect of dilutive securities                              
Stock options   -    78,794    -    -    33,836    - 
Diluted income per share  $