Item
1. Financial Statements (Unaudited)
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
As
of
|
|
|
As
of
|
|
|
|
March
31, 2018
|
|
|
June
30, 2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
12,711,983
|
|
|
$
|
14,172,954
|
|
Accounts
receivable, net of allowance of $333,301 and $571,511
|
|
|
22,874,866
|
|
|
|
6,583,199
|
|
Accounts
receivable, net - related party
|
|
|
3,412,346
|
|
|
|
1,644,942
|
|
Revenues
in excess of billings
|
|
|
15,286,835
|
|
|
|
19,126,389
|
|
Revenues
in excess of billings - related party
|
|
|
153,135
|
|
|
|
80,705
|
|
Convertible
note receivable - related party
|
|
|
750,000
|
|
|
|
200,000
|
|
Other
current assets
|
|
|
3,104,916
|
|
|
|
2,463,886
|
|
Total
current assets
|
|
|
58,294,081
|
|
|
|
44,272,075
|
|
Restricted
cash
|
|
|
-
|
|
|
|
90,000
|
|
Revenues
in excess of billings, net - long term
|
|
|
1,752,554
|
|
|
|
5,173,538
|
|
Property
and equipment, net
|
|
|
17,526,227
|
|
|
|
20,370,703
|
|
Other
assets
|
|
|
3,279,468
|
|
|
|
3,211,295
|
|
Intangible
assets, net
|
|
|
13,533,620
|
|
|
|
17,043,151
|
|
Goodwill
|
|
|
9,516,568
|
|
|
|
9,516,568
|
|
Total
assets
|
|
$
|
103,902,518
|
|
|
$
|
99,677,330
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
7,765,645
|
|
|
$
|
6,880,194
|
|
Current
portion of loans and obligations under capitalized leases
|
|
|
9,099,822
|
|
|
|
10,222,795
|
|
Unearned
revenues
|
|
|
7,841,096
|
|
|
|
3,925,702
|
|
Common
stock to be issued
|
|
|
88,324
|
|
|
|
88,324
|
|
Total
current liabilities
|
|
|
24,794,887
|
|
|
|
21,117,015
|
|
Loans
and obligations under capitalized leases; less current maturities
|
|
|
296,211
|
|
|
|
366,762
|
|
Total
liabilities
|
|
|
25,091,098
|
|
|
|
21,483,777
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value; 500,000 shares authorized;
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $.01 par value; 14,500,000 shares authorized; 11,457,673 shares issued and 11,251,820 outstanding as of March 31, 2018
and 11,225,385 shares issued and 11,190,606 outstanding as of June 30, 2017
|
|
|
114,577
|
|
|
|
112,254
|
|
Additional
paid-in-capital
|
|
|
125,733,973
|
|
|
|
124,409,998
|
|
Treasury
stock (At cost, 205,853 shares and 34,779 shares as of March 31, 2018 and June 30, 2017, respectively)
|
|
|
(1,205,024
|
)
|
|
|
(454,310
|
)
|
Accumulated
deficit
|
|
|
(39,172,022
|
)
|
|
|
(42,301,390
|
)
|
Stock
subscription receivable
|
|
|
(221,000
|
)
|
|
|
(297,511
|
)
|
Other
comprehensive loss
|
|
|
(22,005,245
|
)
|
|
|
(18,074,570
|
)
|
Total
NetSol stockholders’ equity
|
|
|
63,245,259
|
|
|
|
63,394,471
|
|
Non-controlling
interest
|
|
|
15,566,161
|
|
|
|
14,799,082
|
|
Total
stockholders’ equity
|
|
|
78,811,420
|
|
|
|
78,193,553
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
103,902,518
|
|
|
$
|
99,677,330
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
For
the Three Months
|
|
|
For
the Nine Months
|
|
|
|
Ended
March 31,
|
|
|
Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
fees
|
|
$
|
2,648,870
|
|
|
$
|
5,730,222
|
|
|
$
|
3,210,868
|
|
|
$
|
14,953,574
|
|
Maintenance
fees
|
|
|
3,659,998
|
|
|
|
3,538,996
|
|
|
|
10,702,171
|
|
|
|
10,651,692
|
|
Services
|
|
|
9,345,210
|
|
|
|
6,669,309
|
|
|
|
25,450,138
|
|
|
|
18,844,602
|
|
License
fees - related party
|
|
|
-
|
|
|
|
-
|
|
|
|
261,513
|
|
|
|
246,957
|
|
Maintenance
fees - related party
|
|
|
105,325
|
|
|
|
51,698
|
|
|
|
309,539
|
|
|
|
233,674
|
|
Services
- related party
|
|
|
1,284,417
|
|
|
|
1,959,095
|
|
|
|
4,374,802
|
|
|
|
5,954,076
|
|
Total
net revenues
|
|
|
17,043,820
|
|
|
|
17,949,320
|
|
|
|
44,309,031
|
|
|
|
50,884,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and consultants
|
|
|
5,418,067
|
|
|
|
6,161,110
|
|
|
|
16,244,319
|
|
|
|
18,034,263
|
|
Travel
|
|
|
425,060
|
|
|
|
764,867
|
|
|
|
1,226,073
|
|
|
|
2,313,002
|
|
Depreciation
and amortization
|
|
|
1,127,077
|
|
|
|
1,340,188
|
|
|
|
3,468,293
|
|
|
|
3,989,824
|
|
Other
|
|
|
880,897
|
|
|
|
686,950
|
|
|
|
2,677,465
|
|
|
|
2,725,015
|
|
Total
cost of revenues
|
|
|
7,851,101
|
|
|
|
8,953,115
|
|
|
|
23,616,150
|
|
|
|
27,062,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
9,192,719
|
|
|
|
8,996,205
|
|
|
|
20,692,881
|
|
|
|
23,822,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
1,962,402
|
|
|
|
2,439,948
|
|
|
|
5,605,838
|
|
|
|
7,497,464
|
|
Depreciation
and amortization
|
|
|
231,308
|
|
|
|
284,642
|
|
|
|
699,966
|
|
|
|
825,224
|
|
General
and administrative
|
|
|
4,048,271
|
|
|
|
4,329,798
|
|
|
|
11,862,535
|
|
|
|
12,882,407
|
|
Research
and development cost
|
|
|
197,643
|
|
|
|
101,193
|
|
|
|
572,619
|
|
|
|
285,732
|
|
Total
operating expenses
|
|
|
6,439,624
|
|
|
|
7,155,581
|
|
|
|
18,740,958
|
|
|
|
21,490,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
2,753,095
|
|
|
|
1,840,624
|
|
|
|
1,951,923
|
|
|
|
2,331,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income and (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) on sale of assets
|
|
|
40,537
|
|
|
|
1,647
|
|
|
|
24,468
|
|
|
|
(33,095
|
)
|
Interest
expense
|
|
|
(102,522
|
)
|
|
|
(60,357
|
)
|
|
|
(330,268
|
)
|
|
|
(176,959
|
)
|
Interest
income
|
|
|
142,356
|
|
|
|
27,229
|
|
|
|
394,837
|
|
|
|
81,085
|
|
Gain
(loss) on foreign currency exchange transactions
|
|
|
2,550,394
|
|
|
|
390,897
|
|
|
|
5,304,723
|
|
|
|
(645,886
|
)
|
Share
of net loss from equity investment
|
|
|
(263,678
|
)
|
|
|
-
|
|
|
|
(534,576
|
)
|
|
|
-
|
|
Other
income (expense)
|
|
|
314
|
|
|
|
(219
|
)
|
|
|
15,924
|
|
|
|
28,164
|
|
Total
other income (expenses)
|
|
|
2,367,401
|
|
|
|
359,197
|
|
|
|
4,875,108
|
|
|
|
(746,691
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income before income taxes
|
|
|
5,120,496
|
|
|
|
2,199,821
|
|
|
|
6,827,031
|
|
|
|
1,584,953
|
|
Income
tax provision
|
|
|
(261,182
|
)
|
|
|
(61,604
|
)
|
|
|
(486,980
|
)
|
|
|
(440,363
|
)
|
Net
income
|
|
|
4,859,314
|
|
|
|
2,138,217
|
|
|
|
6,340,051
|
|
|
|
1,144,590
|
|
Non-controlling
interest
|
|
|
(1,994,869
|
)
|
|
|
(1,438,249
|
)
|
|
|
(3,210,683
|
)
|
|
|
(2,999,127
|
)
|
Net
income (loss) attributable to NetSol
|
|
$
|
2,864,445
|
|
|
$
|
699,968
|
|
|
$
|
3,129,368
|
|
|
$
|
(1,854,537
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.26
|
|
|
$
|
0.06
|
|
|
$
|
0.28
|
|
|
$
|
(0.17
|
)
|
Diluted
|
|
$
|
0.25
|
|
|
$
|
0.06
|
|
|
$
|
0.28
|
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,190,048
|
|
|
|
10,987,214
|
|
|
|
11,118,529
|
|
|
|
10,850,538
|
|
Diluted
|
|
|
11,268,842
|
|
|
|
11,121,620
|
|
|
|
11,152,365
|
|
|
|
10,850,538
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
|
|
For
the Three Months
|
|
|
For
the Nine Months
|
|
|
|
Ended
March 31,
|
|
|
Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
2,864,445
|
|
|
$
|
699,968
|
|
|
$
|
3,129,368
|
|
|
$
|
(1,854,537
|
)
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
(2,673,422
|
)
|
|
|
(240,245
|
)
|
|
|
(5,953,056
|
)
|
|
|
(91,008
|
)
|
Translation
adjustment attributable to non-controlling interest
|
|
|
944,207
|
|
|
|
71,144
|
|
|
|
2,022,381
|
|
|
|
24,006
|
|
Net
translation adjustment
|
|
|
(1,729,215
|
)
|
|
|
(169,101
|
)
|
|
|
(3,930,675
|
)
|
|
|
(67,002
|
)
|
Comprehensive
income (loss) attributable to NetSol
|
|
$
|
1,135,230
|
|
|
$
|
530,867
|
|
|
$
|
(801,307
|
)
|
|
$
|
(1,921,539
|
)
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
For
the Nine Months
|
|
|
|
Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
6,340,051
|
|
|
$
|
1,144,590
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
4,168,259
|
|
|
|
4,815,048
|
|
Provision
for bad debts
|
|
|
-
|
|
|
|
732
|
|
Share
of net loss from investment under equity method
|
|
|
534,576
|
|
|
|
-
|
|
(Gain)
loss on sale of assets
|
|
|
(24,468
|
)
|
|
|
33,095
|
|
Stock
based compensation
|
|
|
1,281,763
|
|
|
|
1,998,968
|
|
Fair
market value of warrants and stock options granted
|
|
|
-
|
|
|
|
26,956
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(17,848,921
|
)
|
|
|
(649,776
|
)
|
Accounts
receivable - related party
|
|
|
(2,634,063
|
)
|
|
|
405,009
|
|
Revenues
in excess of billing
|
|
|
5,904,161
|
|
|
|
(10,388,695
|
)
|
Revenues
in excess of billing - related party
|
|
|
(85,743
|
)
|
|
|
553,767
|
|
Other
current assets
|
|
|
(796,126
|
)
|
|
|
419,704
|
|
Accounts
payable and accrued expenses
|
|
|
1,139,509
|
|
|
|
337,890
|
|
Unearned
revenue
|
|
|
4,273,007
|
|
|
|
(715,880
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
2,252,005
|
|
|
|
(2,018,592
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(1,107,732
|
)
|
|
|
(1,315,922
|
)
|
Sales
of property and equipment
|
|
|
348,762
|
|
|
|
149,430
|
|
Convertible
note receivable - related party
|
|
|
(550,000
|
)
|
|
|
-
|
|
Investment
in WRLD3D
|
|
|
(50,000
|
)
|
|
|
(905,555
|
)
|
Purchase
of subsidiary shares from open market
|
|
|
(33,987
|
)
|
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(1,392,957
|
)
|
|
|
(2,072,047
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from the exercise of stock options and warrants
|
|
|
215,311
|
|
|
|
785,479
|
|
Proceeds
from exercise of subsidiary options
|
|
|
10,349
|
|
|
|
54,377
|
|
Restricted
cash
|
|
|
90,000
|
|
|
|
-
|
|
Purchase
of treasury stock
|
|
|
(750,714
|
)
|
|
|
(38,885
|
)
|
Dividend
paid by subsidiary to non-controlling interest
|
|
|
(417,853
|
)
|
|
|
(968,657
|
)
|
Proceeds
from bank loans
|
|
|
696,936
|
|
|
|
1,484,162
|
|
Payments
on capital lease obligations and loans - net
|
|
|
(961,901
|
)
|
|
|
(251,040
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(1,117,872
|
)
|
|
|
1,065,436
|
|
Effect
of exchange rate changes
|
|
|
(1,202,147
|
)
|
|
|
(82,209
|
)
|
Net
decrease in cash and cash equivalents
|
|
|
(1,460,971
|
)
|
|
|
(3,107,412
|
)
|
Cash
and cash equivalents at beginning of the period
|
|
|
14,172,954
|
|
|
|
11,557,527
|
|
Cash
and cash equivalents at end of period
|
|
$
|
12,711,983
|
|
|
$
|
8,450,115
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
|
|
For
the Nine Months
|
|
|
|
Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
SUPPLEMENTAL
DISCLOSURES:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
300,688
|
|
|
$
|
201,670
|
|
Taxes
|
|
$
|
388,549
|
|
|
$
|
215,424
|
|
|
|
|
|
|
|
|
|
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Provided
services for investment in WRLD3D
|
|
$
|
601,869
|
|
|
$
|
836,070
|
|
Assets
acquired under capital lease
|
|
$
|
304,533
|
|
|
$
|
466,528
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NETSOL
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 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, 2017. 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”)
NetSol
Technologies (GmbH) (“NTG”)
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”)
For
comparative purposes, prior year’s condensed consolidated financial statements have been reclassified to conform to report
classifications of the current period. Below is the table of reclassified amounts:
|
|
For
the Three Months
|
|
|
For
the Nine Months
|
|
|
|
Ended
March 31, 2017
|
|
|
Ended
March 31, 2017
|
|
|
|
Originally
reported
|
|
|
Reclassified
|
|
|
Originally
reported
|
|
|
Reclassified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
7,004,272
|
|
|
$
|
6,669,309
|
|
|
$
|
19,795,073
|
|
|
$
|
18,844,602
|
|
Services
- related party
|
|
|
1,624,132
|
|
|
|
1,959,095
|
|
|
|
5,003,605
|
|
|
|
5,954,076
|
|
|
|
$
|
8,628,404
|
|
|
$
|
8,628,404
|
|
|
$
|
24,798,678
|
|
|
$
|
24,798,678
|
|
NETSOL
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2018
(UNAUDITED)
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.
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, 2018, and June 30, 2017, the Company had uninsured deposits related to cash deposits in
accounts maintained within foreign entities of approximately $11,569,182 and $11,564,343, 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, restricted cash,
accounts receivable, accounts payable and short-term debt, the carrying amounts approximate fair value due to their relatively
short maturities. The carrying amounts of the 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.
|
NETSOL
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2018
(UNAUDITED)
The
Company’s financial assets that are measured at fair value on a recurring basis as of March 31, 2018, are as follows:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
Assets
|
|
Revenues
in excess of billing - long term
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,752,554
|
|
|
$
|
1,752,554
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,752,554
|
|
|
$
|
1,752,554
|
|
The
Company’s financial assets that were measured at fair value on a recurring basis as of June 30, 2017, were as follows:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
Assets
|
|
Revenues
in excess of billing - long term
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,173,538
|
|
|
$
|
5,173,538
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,173,538
|
|
|
$
|
5,173,538
|
|
The
reconciliation from June 30, 2017 to March 31, 2018 is as follows:
|
|
Revenues
in excess of billing - long term
|
|
|
Fair
value discount
|
|
|
Total
|
|
Balance
at June 30, 2017
|
|
$
|
5,483,869
|
|
|
$
|
(310,331
|
)
|
|
$
|
5,173,538
|
|
Additions
|
|
|
2,432,244
|
|
|
$
|
(180,526
|
)
|
|
|
2,251,718
|
|
Transfers
to short term
|
|
|
(5,850,000
|
)
|
|
$
|
-
|
|
|
|
(5,850,000
|
)
|
Amortization
during the period
|
|
|
-
|
|
|
|
177,298
|
|
|
|
177,298
|
|
Balance
at March 31, 2018
|
|
$
|
2,066,113
|
|
|
$
|
(313,559
|
)
|
|
$
|
1,752,554
|
|
The
Company applied the discounted cash flow method to calculate the fair value and used NetSol PK’s weighted average borrowing
rate, ranging from 3.87% to 4.43%.
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 warrant and option derivatives are valued using the Black-Scholes model.
New
Accounting Pronouncements
Recent
Accounting Standards Adopted by the Company:
In
November 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) 2015-17,
Balance Sheet Classification of Deferred Taxes
(ASU 2015-17), which changes how deferred taxes are classified on the balance
sheet and is effective for financial statements issued for annual periods beginning after December 15, 2016, with early adoption
permitted. ASU 2015-17 requires all deferred tax assets and liabilities to be classified as non-current. The adoption of this
guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
In
March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
. The guidance simplifies
accounting for share-based payments, most notably by requiring all excess tax benefits and tax deficiencies to be recorded as
income tax benefits or expense in the income statement and by allowing entities to recognize forfeitures of awards when they occur.
This new guidance is effective for annual reporting periods beginning after December 15, 2016 and may be adopted prospectively
or retroactively. The adoption of this guidance did not have a material impact on the Company’s results of operations, financial
position or disclosures.
NETSOL
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2018
(UNAUDITED)
Accounting
Standards Recently Issued but Not Yet Adopted by the Company:
In
May 2014, the (“FASB”) issued ASU 2014-09,
Revenue from Contracts with Customers
, which provides a single
comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most
current revenue recognition guidance. The standard’s core principle is that a company will recognize revenue when it transfers
promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled
in exchange for those goods or services. In August 2015, the FASB deferred the effective date of the new revenue standard by one
year, which will make it effective for the Company in the first quarter of its fiscal year ending June 30, 2019. The Company is
currently in the process of evaluating the impact of adoption of this ASU on its consolidated financial statements.
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 is not expected to have a material impact on the Company’s
results of operations, financial position or disclosures.
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
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 is not expected to 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 Company
maintains restricted cash balances and will show restricted cash as part of cash and restricted cash equivalents in the statement
of cash flows.
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 Company does not expect the adoption to have any significant impact on its results of operations,
financial position or disclosures.
NETSOL
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2018
(UNAUDITED)
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
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 Company is currently evaluating the impact of the adoption of the new standard on its results of operations, financial
position or disclosures.
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.
NOTE
3 – 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.
NETSOL
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2018
(UNAUDITED)
The
components of basic and diluted earnings per share were as follows:
|
|
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
|
|
$
|
2,864,445
|
|
|
|
11,268,842
|
|
|
$
|
0.25
|
|
|
$
|
3,129,368
|
|
|
|
11,152,365
|
|
|
$
|
0.28
|
|
|
|
For
the three months ended
March 31, 2017
|
|
|
For
the nine months ended
March 31, 2017
|
|
|
|
Net Income
|
|
|
Shares
|
|
|
Per
Share
|
|
|
Net
Loss
|
|
|
Shares
|
|
|
Per
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) available to common shareholders
|
|
$
|
699,968
|
|
|
|
10,987,214
|
|
|
$
|
0.06
|
|
|
$
|
(1,854,537
|
)
|
|
|
10,850,538
|
|
|
$
|
(0.17
|
)
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
-
|
|
|
|
134,406
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted
income (loss) per share
|
|
$
|
699,968
|
|
|
|
11,121,620
|
|
|
$
|
0.06
|
|
|
$
|
(1,854,537
|
)
|
|
|
10,850,538
|
|
|
$
|
(0.17
|
)
|
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
|
|
|
For
the Nine Months
|
|
|
|
Ended
March 31,
|
|
|
Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
480,133
|
|
Share
Grants
|
|
|
243,684
|
|
|
|
542,361
|
|
|
|
243,684
|
|
|
|
542,361
|
|
|
|
|
243,684
|
|
|
|
542,361
|
|
|
|
243,684
|
|
|
|
1,022,494
|
|
NOTE
4 – 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 $22,005,245 and $18,074,570
as of March 31, 2018 and June 30, 2017, respectively. During the three and nine months ended March 31, 2018, comprehensive income
(loss) in the consolidated statements of comprehensive income (loss) included a translation loss attributable to NetSol of $1,729,215
and $3,930,675, respectively. During the three and nine months ended March 31, 2017, comprehensive income (loss) in the consolidated
statements of comprehensive income (loss) included a translation loss attributable to NetSol of $169,101 and $67,002, respectively.
NETSOL
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2018
(UNAUDITED)
NOTE
5 – 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 and nine months ended March 31, 2018, NetSol Innovation
provided services of $774,393 and $2,702,906, respectively. During the three and nine months ended March 31, 2017, NetSol Innovation
provided services of $1,446,749 and $4,403,368, respectively. Accounts receivable at March 31, 2018 and June 30, 2017 were $2,919,233
and $1,462,078, 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 and nine months ended March 31, 2018, NTE and VLS provided license, maintenance and services of $464,976
and $1,508,867, respectively. During the three and nine months ended March 31, 2017, NTE and VLS provided license, maintenance
and services of $229,081 and $1,080,868, respectively. Accounts receivable at March 31, 2018 and June 30, 2017 were $229,061 and
$133,218, respectively.
NOTE
6 – MAJOR CUSTOMERS
The
Company is a strategic business partner for Daimler Financial Services (which consists of a group of many companies in different
countries), which accounts for approximately 36.65% and 44.83% of revenue for the nine months ended March 31, 2018 and 2017, respectively.
The revenue from this customer is shown in the Asia – Pacific segment. Accounts receivable at March 31, 2018 and June 30,
2017, were $17,368,246 and $1,620,717, respectively. Revenues in excess of billing at March 31, 2018 was $10,686,363, which included
$1,752,554 shown as long term. Revenues in excess of billing at June 30, 2017 was $18,579,540, which included $5,173,538 shown
as long term.
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 $87,654,000) 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 $7,222,000) for years 1-5 and €8,350,000 (approximately
$10,309,000) 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 $9,506,000)
to be earned over the remaining life of the contract. The amended agreement provides for €7,000,000 (approximately $8,642,000)
to be paid in the current fiscal year with €100,000 (approximately $123,000) to be paid each year over the remaining seven
years.
NOTE
7 – CONVERTIBLE NOTE RECEIVABLE – RELATED PARTY
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 March 31, 2018, the Company had disbursed the full amount. 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 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 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.
|
NETSOL
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2018
(UNAUDITED)
NOTE
8 - OTHER CURRENT ASSETS
Other
current assets consisted of the following:
|
|
As
of
|
|
|
As
of
|
|
|
|
March 31, 2018
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
Prepaid
Expenses
|
|
$
|
721,110
|
|
|
$
|
597,687
|
|
Advance
Income Tax
|
|
|
986,589
|
|
|
|
1,052,935
|
|
Employee
Advances
|
|
|
115,699
|
|
|
|
128,100
|
|
Security
Deposits
|
|
|
89,900
|
|
|
|
103,255
|
|
Other
Receivables
|
|
|
485,112
|
|
|
|
252,590
|
|
Other
Receivables - related party
|
|
|
300,000
|
|
|
|
-
|
|
Other
Assets
|
|
|
406,506
|
|
|
|
329,319
|
|
Total
|
|
$
|
3,104,916
|
|
|
$
|
2,463,886
|
|
During
the quarter ended March 31, 2018, NetSol PK advanced $300,000 to WRLD3D, which is recorded as other receivables – related
party in other current assets.
NOTE
9 – REVENUES IN EXCESS OF BILLINGS – LONG TERM
Revenues
in excess of billings, net consisted of the following:
|
|
As
of
|
|
|
As
of
|
|
|
|
March
31, 2018
|
|
|
June
30, 2017
|
|
|
|
|
|
|
|
|
Revenues
in excess of billing - long term
|
|
$
|
2,066,113
|
|
|
$
|
5,483,869
|
|
Present
value discount
|
|
|
(313,559
|
)
|
|
|
(310,331
|
)
|
Net
Balance
|
|
$
|
1,752,554
|
|
|
$
|
5,173,538
|
|
Pursuant
to revenue recognition for contract accounting, the Company has recorded revenues in excess of billings long-term for amounts
billable after one year. During the three and nine months ended March 31, 2018, the Company accreted $66,304 and $177,298, respectively,
which is recorded in interest income for the period. The Company used the discounted cash flow method with interest rates ranging
from 3.87% to 4.43%.
NOTE
10 - PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
|
|
As
of
|
|
|
As
of
|
|
|
|
March
31, 2018
|
|
|
June
30, 2017
|
|
|
|
|
|
|
|
|
Office
Furniture and Equipment
|
|
$
|
3,844,617
|
|
|
$
|
3,755,710
|
|
Computer
Equipment
|
|
|
25,142,979
|
|
|
|
26,693,730
|
|
Assets
Under Capital Leases
|
|
|
1,571,110
|
|
|
|
1,965,650
|
|
Building
|
|
|
8,421,016
|
|
|
|
9,243,866
|
|
Land
|
|
|
2,199,399
|
|
|
|
2,428,626
|
|
Autos
|
|
|
1,312,148
|
|
|
|
1,270,339
|
|
Improvements
|
|
|
525,118
|
|
|
|
592,652
|
|
Subtotal
|
|
|
43,016,387
|
|
|
|
45,950,573
|
|
Accumulated
Depreciation
|
|
|
(25,490,160
|
)
|
|
|
(25,579,870
|
)
|
Property
and Equipment, Net
|
|
$
|
17,526,227
|
|
|
$
|
20,370,703
|
|
NETSOL
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2018
(UNAUDITED)
For
the three and nine months ended March 31, 2018, depreciation expense totaled $705,429 and $2,141,756, respectively. Of these amounts,
$474,121 and $1,441,790, respectively, are reflected in cost of revenues. For the three and nine months ended March 31, 2017,
depreciation expense totaled $930,712 and $2,732,693, respectively. Of these amounts, $646,070 and $1,907,469, respectively, are
reflected in cost of revenues.
Following
is a summary of fixed assets held under capital leases as of March 31, 2018 and June 30, 2017:
|
|
As
of
|
|
|
As
of
|
|
|
|
March
31, 2018
|
|
|
June
30, 2017
|
|
Computers
and Other Equipment
|
|
$
|
249,262
|
|
|
$
|
309,863
|
|
Furniture
and Fixtures
|
|
|
65,084
|
|
|
|
227,914
|
|
Vehicles
|
|
|
1,256,764
|
|
|
|
1,427,873
|
|
Total
|
|
|
1,571,110
|
|
|
|
1,965,650
|
|
Less:
Accumulated Depreciation - Net
|
|
|
(568,816
|
)
|
|
|
(711,622
|
)
|
|
|
$
|
1,002,294
|
|
|
$
|
1,254,028
|
|
NOTE
11 – OTHER LONG-TERM ASSETS
|
|
|
|
As
of
|
|
|
As
of
|
|
|
|
|
|
March 31, 2018
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
(1)
|
|
$
|
3,174,314
|
|
|
$
|
3,057,020
|
|
Long
Term Security Deposits
|
|
|
|
|
105,154
|
|
|
|
154,275
|
|
Total
|
|
|
|
$
|
3,279,468
|
|
|
$
|
3,211,295
|
|
|
(1)
|
Investment
in WRLD3D – Related party
|
On
March 2, 2016, 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, 2016. NetSol PK, a 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 unearned shares back to WRLD3D. As of March 31, 2018, the investment earned by NetSol PK is $2,597,778.
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).
|
NETSOL
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2018
(UNAUDITED)
During
the three and nine months ended March 31, 2018, NetSol PK provided services valued at $150,373 and $734,081, respectively. During
the three and nine months ended March 31, 2017, NetSol PK provided services valued at $334,963 and $950,471, respectively. This
revenue is recorded as services-related party. These services are recorded as accounts receivable until approved by WRLD3D after
which the shares are released from restriction. Accounts receivable at March 31, 2018 and June 30, 2017 were $264,052 and $49,646,
respectively. Revenues in excess of billing at March 31, 2018 and June 30, 2017 were $153,135 and $80,705, respectively. During
the three and nine months ended March 31, 2018, NetSol PK services valued at $48,191 and $601,869, respectively, were released
from restriction. During the three and nine months ended March 31, 2017, NetSol PK services valued at $286,449 and $836,070, respectively,
were released from restriction. Under the equity method of accounting, the Company recorded its share of net loss of $263,678
and $534,576 for the three and nine months ended March 31, 2018, respectively.
NOTE
12 - INTANGIBLE ASSETS
Intangible
assets consisted of the following:
|
|
As
of
|
|
|
As
of
|
|
|
|
March
31, 2018
|
|
|
June
30, 2017
|
|
|
|
|
|
|
|
|
Product
Licenses - Cost
|
|
$
|
47,244,997
|
|
|
$
|
47,244,997
|
|
Effect
of Translation Adjustment
|
|
|
(6,141,253
|
)
|
|
|
(3,134,488
|
)
|
Accumulated
Amortization
|
|
|
(27,570,124
|
)
|
|
|
(27,067,358
|
)
|
Net
Balance
|
|
$
|
13,533,620
|
|
|
$
|
17,043,151
|
|
(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 $13,533,620
will be amortized over the next 5.25 years. Amortization expense for the three and nine months ended March 31, 2018 was $652,956
and $2,026,503, respectively. Amortization expense for the three and nine months ended March 31, 2017 was $694,118 and $2,082,355,
respectively.
(B)
Future Amortization
Estimated
amortization expense of intangible assets over the next five years is as follows:
Year
ended:
|
|
|
|
March
31, 2019
|
|
$
|
2,516,328
|
|
March 31,
2020
|
|
|
2,516,328
|
|
March 31,
2021
|
|
|
2,516,328
|
|
March 31,
2022
|
|
|
2,516,328
|
|
March 31,
2023
|
|
|
2,516,328
|
|
Thereafter
|
|
|
951,980
|
|
|
|
$
|
13,533,620
|
|
NETSOL
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2018
(UNAUDITED)
NOTE
13 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses consisted of the following:
|
|
As
of
|
|
|
As
of
|
|
|
|
March
31, 2018
|
|
|
June
30, 2017
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
$
|
1,658,929
|
|
|
$
|
1,466,265
|
|
Accrued
Liabilities
|
|
|
5,260,927
|
|
|
|
4,498,958
|
|
Accrued
Payroll & Taxes
|
|
|
430,135
|
|
|
|
520,719
|
|
Taxes
Payable
|
|
|
249,906
|
|
|
|
174,485
|
|
Other
Payable
|
|
|
165,748
|
|
|
|
219,767
|
|
Total
|
|
$
|
7,765,645
|
|
|
$
|
6,880,194
|
|
NOTE
14 – DEBTS
Notes
payable and capital leases consisted of the following:
|
|
|
|
As
of March 31, 2018
|
|
|
|
|
|
|
|
|
Current
|
|
|
Long-Term
|
|
Name
|
|
|
|
Total
|
|
|
Maturities
|
|
|
Maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D&O
Insurance
|
|
(1)
|
|
$
|
128,415
|
|
|
$
|
128,415
|
|
|
$
|
-
|
|
Bank
Overdraft Facility
|
|
(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loan
Payable Bank - Export Refinance
|
|
(3)
|
|
|
4,325,634
|
|
|
|
4,325,634
|
|
|
|
-
|
|
Loan
Payable Bank - Running Finance
|
|
(4)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loan
Payable Bank - Export Refinance II
|
|
(5)
|
|
|
3,027,943
|
|
|
|
3,027,943
|
|
|
|
-
|
|
Loan
Payable Bank - Running Finance II
|
|
(6)
|
|
|
1,297,690
|
|
|
|
1,297,690
|
|
|
|
-
|
|
|
|
|
|
|
8,779,682
|
|
|
|
8,779,682
|
|
|
|
-
|
|
Subsidiary
Capital Leases
|
|
(7)
|
|
|
616,351
|
|
|
|
320,140
|
|
|
|
296,211
|
|
|
|
|
|
$
|
9,396,033
|
|
|
$
|
9,099,822
|
|
|
$
|
296,211
|
|
|
|
|
|
As
of June 30, 2017
|
|
|
|
|
|
|
|
|
Current
|
|
|
Long-Term
|
|
Name
|
|
|
|
Total
|
|
|
Maturities
|
|
|
Maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D&O
Insurance
|
|
(1)
|
|
$
|
87,485
|
|
|
$
|
87,485
|
|
|
$
|
-
|
|
Bank
Overdraft Facility
|
|
(2)
|
|
|
221,379
|
|
|
|
221,379
|
|
|
|
-
|
|
Loan
Payable Bank - Export Refinance
|
|
(3)
|
|
|
4,776,461
|
|
|
|
4,776,461
|
|
|
|
-
|
|
Loan
Payable Bank - Export Refinance II
|
|
(5)
|
|
|
1,910,585
|
|
|
|
1,910,585
|
|
|
|
-
|
|
Loan
Payable Bank - Running Finance II
|
|
(6)
|
|
|
2,865,877
|
|
|
|
2,865,877
|
|
|
|
-
|
|
|
|
|
|
|
9,861,787
|
|
|
|
9,861,787
|
|
|
|
-
|
|
Subsidiary
Capital Leases
|
|
(7)
|
|
|
727,770
|
|
|
|
361,008
|
|
|
|
366,762
|
|
|
|
|
|
$
|
10,589,557
|
|
|
$
|
10,222,795
|
|
|
$
|
366,762
|
|
(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 4.8% to 7.69% as of March 31,
2018 and June 30, 2017.
(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 $422,535. The annual interest rate was 4.75% as of March 31, 2018. Total outstanding balance
as of March 31, 2018 was £Nil. Interest expense for the three and nine months ended March 31, 2018, was $5,122 and $13,167,
respectively. Interest expense for the three and nine months ended March 31, 2017, was $4,501.
NETSOL
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2018
(UNAUDITED)
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 March 31, 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 $4,325,634 at March
31, 2018 and June 30, 2017. The interest rate for the loan was 3% at March 31, 2018 and June 30, 2017. Interest expense for the
three and nine months ended March 31, 2018 was $24,441 and $94,710, respectively. Interest expense for the three and nine months
ended March 31, 2017 was $28,012 and $85,604, respectively.
(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 $648,845, at March 31, 2018. NetSol PK used Rs. Nil or $Nil, at March 31, 2018.
The interest rate for the loan was 8.16% at March 31, 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 March 31, 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 $3,027,643
and Rs. 200,000,000 or $1,910,585, at March 31, 2018 and June 30, 2017, respectively. The interest rate for the loan was 3% at
March 31, 2018 and June 30, 2017. Interest expense for the three and nine months ended March 31, 2018 was $30,095 and $69,873,
respectively. Interest expense for three and nine months ended March 31, 2017, was $nil.
(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 $1,297,690 and Rs. 300,000,000 or $2,865,877, at March 31, 2018 and June 30,
2017, respectively. The interest rate for the loan was 8.14% and 8.13% at March 31, 2018 and June 30, 2017, respectively.
Interest expense for the three and nine months ended March 31, 2018 was $19,997 and $99,718, respectively. Interest expense for
the three and nine months ended March 31, 2017, was $nil.
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 March
31, 2018, NetSol PK was in compliance with these covenants.
(6)
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 and nine months ended March 31, 2018 and 2017.
Following
is the aggregate minimum future lease payments under capital leases as of March 31, 2018:
|
|
Amount
|
|
Minimum
Lease Payments
|
|
|
|
|
Due
FYE 3/31/19
|
|
$
|
354,639
|
|
Due
FYE 3/31/20
|
|
|
241,087
|
|
Due
FYE 3/31/21
|
|
|
66,911
|
|
Due
FYE 3/31/22
|
|
|
3,474
|
|
Total
Minimum Lease Payments
|
|
|
666,111
|
|
Interest
Expense relating to future periods
|
|
|
(49,760
|
)
|
Present
Value of minimum lease payments
|
|
|
616,351
|
|
Less:
Current portion
|
|
|
(320,140
|
)
|
Non-Current
portion
|
|
$
|
296,211
|
|
NETSOL
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2018
(UNAUDITED)
NOTE
15 - STOCKHOLDERS’ EQUITY
During
the nine months ended March 31, 2018, the Company issued 39,204 shares of common stock for services rendered by officers of the
Company. These shares were valued at the fair market value of $245,025.
During
the nine months ended March 31, 2018, the Company issued 9,699 shares of common stock for services rendered by the independent
members of the Board of Directors as part of their board compensation. These shares were valued at the fair market value of $55,080.
During
the nine months ended March 31, 2018, the Company issued 147,612 shares of its common stock to employees pursuant to the terms
of their employment agreements valued at $907,661.
During
the nine months ended March 31, 2018, the Company collected subscription receivable of $76,511 related to the exercise of stock
options in previous years.
During
the nine months ended March 31, 2018, the Company received $138,800 pursuant to a stock option agreement for the exercise of 35,773
shares of common stock at price of $3.88 per share.
During
the nine months ended March 31, 2018, the Company paid $750,714 to purchase 171,074 of shares of its common stock from the open
market at an average price of $4.39 per share.
NOTE
16 - INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN
Common
stock purchase options consisted of the following:
OPTIONS:
|
|
#
of shares
|
|
|
Weighted
Ave Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life (in years)
|
|
|
Aggregated
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
and exercisable, June 30, 2016
|
|
|
610,133
|
|
|
$
|
4.90
|
|
|
|
0.99
|
|
|
$
|
799,030
|
|
Granted
|
|
|
79,838
|
|
|
$
|
4.53
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(84,838
|
)
|
|
$
|
4.49
|
|
|
|
|
|
|
|
|
|
Expired
/ Cancelled
|
|
|
(130,000
|
)
|
|
$
|
7.50
|
|
|
|
|
|
|
|
|
|
Outstanding
and exercisable, June 30, 2017
|
|
|
475,133
|
|
|
$
|
4.20
|
|
|
|
1.05
|
|
|
$
|
8,413
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(35,773
|
)
|
|
$
|
3.88
|
|
|
|
|
|
|
|
|
|
Expired
/ Cancelled
|
|
|
(1,000
|
)
|
|
$
|
16.00
|
|
|
|
|
|
|
|
|
|
Outstanding
and exercisable, March 31, 2018
|
|
|
438,360
|
|
|
$
|
4.20
|
|
|
|
0.32
|
|
|
$
|
319,465
|
|
NETSOL
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2018
(UNAUDITED)
The
following table summarizes information about stock options outstanding and exercisable at March 31, 2018.
Exercise
Price
|
|
Number
Outstanding and Exercisable
|
|
|
Weighted
Average Remaining Contractual Life
|
|
|
Weighted
Ave Exercise Price
|
|
OPTIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3.88
|
|
|
384,898
|
|
|
|
0.25
|
|
|
$
|
3.88
|
|
$
|
6.50
|
|
|
53,462
|
|
|
|
0.85
|
|
|
$
|
6.50
|
|
Totals
|
|
|
438,360
|
|
|
|
0.32
|
|
|
$
|
4.20
|
|
The
following table summarizes stock grants awarded as compensation:
|
|
#
of shares
|
|
|
Weighted
Average Grant Date Fair Value ($)
|
|
|
|
|
|
|
|
|
Unvested,
June 30, 2016
|
|
|
630,228
|
|
|
$
|
6.07
|
|
Granted
|
|
|
222,146
|
|
|
$
|
5.92
|
|
Forfeited
/ Cancelled
|
|
|
(5,000
|
)
|
|
$
|
5.55
|
|
Vested
|
|
|
(427,175
|
)
|
|
$
|
5.90
|
|
Unvested,
June 30, 2017
|
|
|
420,199
|
|
|
$
|
6.07
|
|
Granted
|
|
|
20,000
|
|
|
$
|
4.25
|
|
Vested
|
|
|
(196,515
|
)
|
|
$
|
6.15
|
|
Unvested,
March 31, 2018
|
|
|
243,684
|
|
|
$
|
6.02
|
|
For
the three and nine months ended March 31, 2018, the Company recorded compensation expense of $448,221 and $1,281,751, respectively.
For the three and nine months ended March 31, 2017, the Company recorded compensation expense of $449,743 and $2,047,839, respectively.
The compensation expense related to the unvested stock grants as of March 31, 2018 was $1,368,687 which will be recognized during
the fiscal years 2018 through 2022.
NOTE
17 – TAXES
U.S.
Tax Reform
On
December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act
(the “Tax Act”). The Tax Act significantly revises the future ongoing U.S. corporate income tax by, among other things,
lowering U. S. corporate income tax rates and implementing a territorial tax system. As the Company has a June 30 fiscal year-end,
the lower corporate income tax rate will be phased in, resulting in a U.S. statutory federal rate of approximately 28% for our
fiscal year ending June 30, 2018, and 21% for subsequent fiscal years.
There
are also certain transitional impacts of the Tax Act. As part of the transition to the new territorial tax system, the Tax Act
imposes a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries. As of December 31,
2017, the provisional undistributed earnings of foreign subsidiaries were $22.8 million which the Company anticipates being able
to offset fully with net operating loss carry forwards. In addition, the modified territorial tax system includes a new anti-deferral
provision, referred to as global intangible low taxed income (“GILTI”), which subjects certain foreign income to current
U.S. tax.
NETSOL
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2018
(UNAUDITED)
The
changes included in the Tax Act are broad and complex. The final transition impacts of the Tax Act may differ from the above estimate,
possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address
questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in
response to the Tax Act, or any updates or changes to estimates the company has utilized to calculate the transition impacts,
including impacts from changes to current year earnings estimates and foreign exchange rates of foreign subsidiaries.
In
December 2017, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 118, “Income
Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”), which provides guidance on accounting
for the tax effects of the Tax Reform Act. Under SAB 118, companies are able to record a reasonable estimate of the impacts of
the Tax Reform Act if one is able to be determined and report it as a provisional amount during the measurement period. The measurement
period is not to extend beyond one year from the enactment date. Impacts of the Tax Reform Act that a company is not able to make
a reasonable estimate for should not be recorded until a reasonable estimate can be made during the measurement period.
We
currently anticipate finalizing and recording any resulting adjustments by the end of our current fiscal year ending June 30,
2018.
NOTE
18 – CONTINGENCIES
On
April 7, 2017, Conister Bank Limited filed a complaint in the High Court of Justice Chancery Division, as claim no. HC-2017-001045
against our subsidiary, Virtual Lease Services Limited (“VLS”). The complaint alleges that VLS was in willful default
of their agreements with Conister Bank Limited by failing to fulfill its obligations under the agreements with Conister. The complaint
was settled and dismissed on March 19, 2018, for £300,000 (approximately $421,000) of which insurance covered £209,000
(approximately $293,000).
NOTE
19 – OPERATING SEGMENTS
The
Company has identified three segments for its products and services; North America, Europe and Asia-Pacific. Our reportable segments
are business units located in different global regions. Each business unit provides similar products and services; license fees
for leasing and asset-based software, related maintenance fees, and implementation and IT consulting services. Separate management
of each segment is required because each business unit is subject to different operational issues and strategies due to their
particular regional location. The Company accounts for intra-company sales and expenses as if the sales or expenses were to third
parties and eliminates them in the consolidation.
The
following table presents a summary of identifiable assets as of March 31, 2018 and June 30, 2017:
|
|
As
of
March 31, 2018
|
|
|
As
of
June 30, 2017
|
|
Identifiable
assets:
|
|
|
|
|
|
|
Corporate
headquarters
|
|
$
|
3,034,938
|
|
|
$
|
2,922,514
|
|
North
America
|
|
|
5,237,144
|
|
|
|
6,717,366
|
|
Europe
|
|
|
6,860,909
|
|
|
|
6,056,514
|
|
Asia
- Pacific
|
|
|
88,769,527
|
|
|
|
83,980,936
|
|
Consolidated
|
|
$
|
103,902,518
|
|
|
$
|
99,677,330
|
|
The
following table presents a summary of investment under equity method as of March 31, 2018 and June 30, 2017:
|
|
As
of
March 31, 2018
|
|
|
As
of
June 30, 2017
|
|
Investment
in WRLD3D:
|
|
|
|
|
|
|
Corporate
headquarters
|
|
$
|
957,929
|
|
|
$
|
1,111,111
|
|
Asia
- Pacific
|
|
|
2,216,385
|
|
|
|
1,945,909
|
|
Consolidated
|
|
$
|
3,174,314
|
|
|
$
|
3,057,020
|
|
NETSOL
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2018
(UNAUDITED)
The
following table presents a summary of operating information for the three and nine months ended March 31:
|
|
For
the Three Months
|
|
|
For
the Nine Months
|
|
|
|
Ended
March 31,
|
|
|
Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from unaffiliated customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
998,403
|
|
|
$
|
1,111,897
|
|
|
$
|
3,134,113
|
|
|
$
|
4,467,325
|
|
Europe
|
|
|
1,764,651
|
|
|
|
1,579,486
|
|
|
|
4,873,688
|
|
|
|
3,133,101
|
|
Asia
- Pacific
|
|
|
12,891,024
|
|
|
|
13,247,144
|
|
|
|
31,355,376
|
|
|
|
35,898,971
|
|
|
|
|
15,654,078
|
|
|
|
15,938,527
|
|
|
|
39,363,177
|
|
|
|
43,499,397
|
|
Revenue
from affiliated customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
464,976
|
|
|
|
229,081
|
|
|
|
1,508,867
|
|
|
|
2,031,339
|
|
Asia
- Pacific
|
|
|
924,766
|
|
|
|
1,781,712
|
|
|
|
3,436,987
|
|
|
|
5,353,839
|
|
|
|
|
1,389,742
|
|
|
|
2,010,793
|
|
|
|
4,945,854
|
|
|
|
7,385,178
|
|
Consolidated
|
|
$
|
17,043,820
|
|
|
$
|
17,949,320
|
|
|
$
|
44,309,031
|
|
|
$
|
50,884,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
137,864
|
|
|
$
|
112,419
|
|
|
$
|
379,567
|
|
|
$
|
343,599
|
|
Asia
- Pacific
|
|
|
338,201
|
|
|
|
292,839
|
|
|
|
1,483,569
|
|
|
|
2,215,393
|
|
Eliminated
|
|
$
|
476,065
|
|
|
$
|
405,258
|
|
|
$
|
1,863,136
|
|
|
$
|
2,558,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) after taxes and before non-controlling interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
headquarters
|
|
$
|
(529,048
|
)
|
|
$
|
(1,147,068
|
)
|
|
$
|
(2,825,689
|
)
|
|
$
|
(3,326,500
|
)
|
North
America
|
|
|
(11,777
|
)
|
|
|
(302,353
|
)
|
|
|
(242,229
|
)
|
|
|
(569,170
|
)
|
Europe
|
|
|
265,831
|
|
|
|
(199,215
|
)
|
|
|
545,876
|
|
|
|
(1,492,986
|
)
|
Asia
- Pacific
|
|
|
5,134,308
|
|
|
|
3,786,853
|
|
|
|
8,862,093
|
|
|
|
6,533,246
|
|
Consolidated
|
|
$
|
4,859,314
|
|
|
$
|
2,138,217
|
|
|
$
|
6,340,051
|
|
|
$
|
1,144,590
|
|
The
following table presents a summary of capital expenditures for the nine months ended March 31:
|
|
For
the Nine Months
|
|
|
|
Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
3,556
|
|
|
$
|
41,340
|
|
Europe
|
|
|
254,548
|
|
|
|
422,024
|
|
Asia
- Pacific
|
|
|
849,628
|
|
|
|
852,558
|
|
Consolidated
|
|
$
|
1,107,732
|
|
|
$
|
1,315,922
|
|
NETSOL
TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2018
(UNAUDITED)
NOTE
20 – NON-CONTROLLING INTEREST IN SUBSIDIARY
The
Company had non-controlling interests in several of its subsidiaries. The balance of non-controlling interest was as follows:
SUBSIDIARY
|
|
Non-Controlling
Interest %
|
|
|
Non-Controlling
Interest at
March 31, 2018
|
|
|
|
|
|
|
|
|
NetSol
PK
|
|
|
33.79
|
%
|
|
$
|
13,181,663
|
|
NetSol-Innovation
|
|
|
49.90
|
%
|
|
|
1,850,342
|
|
VLS,
VLSH & VLSIL Combined
|
|
|
49.00
|
%
|
|
|
534,232
|
|
NetSol
Thai
|
|
|
0.006
|
%
|
|
|
(76
|
)
|
Total
|
|
|
|
|
|
$
|
15,566,161
|
|
SUBSIDIARY
|
|
Non-Controlling
Interest %
|
|
|
Non-Controlling
Interest at
June 30, 2017
|
|
|
|
|
|
|
|
|
NetSol
PK
|
|
|
33.80
|
%
|
|
$
|
12,887,938
|
|
NetSol-Innovation
|
|
|
49.90
|
%
|
|
|
1,599,734
|
|
VLS,
VLHS & VLSIL Combined
|
|
|
49.00
|
%
|
|
|
311,502
|
|
NetSol
Thai
|
|
|
0.006
|
%
|
|
|
(92
|
)
|
Total
|
|
|
|
|
|
$
|
14,799,082
|
|
NetSol
PK
During
the nine months ended March 31, 2018, employees of NetSol PK exercised 67,000 options of common stock and NetSol PK received cash
of $10,349. The Company purchased 55,500 shares of common stock of NetSol PK from the open market for $33,987. Due to the exercise
of options and the shares purchase, the non-controlling interest decreased from 33.80% to 33.79%.
During
the nine months ended March 31, 2018, NetSol PK paid a cash dividend of $1,234,991.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
following discussion is intended to assist in an understanding of the Company’s financial position and results of operations
for the three and nine months ended March 31, 2018. The following discussion should be read in conjunction with the information
included within our Annual Report on Form 10-K for the year ended June 30, 2017, and the Condensed Consolidated Financial Statements
and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
Forward-Looking
Information
This
report contains certain forward-looking statements and information relating to the Company that is based on the beliefs of its
management as well as assumptions made by and information currently available to its management. When used in this report, the
words “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”,
and similar expressions as they relate to the Company or its management, are intended to identify forward-looking statements.
These statements reflect management’s current view of the Company with respect to future events and are subject to certain
risks, uncertainties and assumptions. Should any of these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those described in this report as anticipated, estimated or expected.
The Company’s realization of its business aims could be materially and adversely affected by any technical or other problems
in, or difficulties with, planned funding and technologies, third party technologies which render the Company’s technologies
obsolete, the unavailability of required third party technology licenses on commercially reasonable terms, the loss of key research
and development personnel, the inability or failure to recruit and retain qualified research and development personnel, or the
adoption of technology standards which are different from technologies around which the Company’s business ultimately is
built. The Company does not intend to update these forward-looking statements.
Business
Overview
NetSol
Technologies, Inc. (NasdaqCM: NTWK) is a worldwide provider of IT and enterprise software solutions. We believe that our solutions
constitute mission critical applications for clients, as they encapsulate end-to-end business processes, facilitating faster processing
and increased transactions.
The
Company’s primary source of revenue is the licensing, customization, enhancement and maintenance of its suite of financial
applications under the brand name NFS™ (NetSol Financial Suite) and NFS Ascent
TM
for leading businesses in the
global lease and finance industry.
NetSol’s
clients include Dow-Jones 30 Industrials and Fortune 500 manufacturers and financial institutions, global vehicle manufacturers,
and enterprise technology providers, all of which are serviced by NetSol delivery locations around the globe.
Founded
in 1997, NetSol is headquartered in Calabasas, California. While the Company follows a global strategy for sales and delivery
of its portfolio of solutions and services, it continues to maintain regional offices in the following locations:
|
●
|
North
America
|
Los
Angeles Area
|
|
●
|
Europe
|
London
Metropolitan area
|
|
●
|
Asia
Pacific
|
Lahore,
Karachi, Bangkok, Beijing, Jakarta and Sydney
|
NetSol’s
offerings include its flagship global solution, NFS™. A robust suite of five software applications, it is an end-to-end
solution for the lease and finance industry covering the complete leasing and financing cycle, starting from quotation origination
through end of contract transactions. The five software applications under NFS™ have been designed and developed for a highly
flexible setting and are capable of dealing with multinational, multi-company, multi-asset, multi-lingual, multi-distributor and
multi-manufacturer environments. Each application is a complete system in itself and can be used independently to address specific
sub-domains of the leasing/financing cycle. When used together, they fully automate the entire leasing/financing cycle for any
size company, including those with multi-billion-dollar portfolios.
NFS
Ascent™
NFS
Ascent™ is the Company’s next-generation platform, offering a technologically advanced solution for the auto and equipment
finance and leasing industry. NFS Ascent’s™ architecture and user interfaces were designed based on the Company’s
collective experience with global Fortune 500 companies over the past 30 years. The platform’s framework allows auto captive
and asset finance companies to rapidly transform legacy driven technology into a state-of-the-art IT and business process environment.
At the core of the NFS Ascent™ platform is a lease accounting and contract processing engine, which allows for an array
of interest calculation methods, as well as robust accounting of multibillion dollar lease portfolios under various generally
accepted accounting principles (GAAP), as well as international financial reporting standards (IFRS). NFS Ascent™, with
its distributed and clustered deployment across parallel application and high-volume data servers, enables finance companies to
process voluminous data in a hyper speed environment. NFS Ascent™ has been developed using the latest tools and technologies
and its n-tier SOA architecture allows the system to greatly improve a myriad of areas including, but not limited to, scalability,
performance, fault tolerance and security.
NFS
Digital
NetSol
launched NFS digital in 2014. It enables a sales force for the finance and leasing company across different channels such as point
of sale, field investigation and auditing, and allows end customers to access their contract details through a self-service mobile
application. NFS digital includes mAccount, mPOS, mDealer, mAuditor, and Mobile Field Investigator (mFI).
LeasePak
In
North America, NTA has and continues to develop the LeasePak CMS product. LeasePak streamlines the lease management lifecycle,
enabling superior lease and loan portfolio management, flexible financial products (lease or loan terms) and sophisticated financial
analysis and management to reducing operating costs and improve profits. It is scalable from a basic offering to a collection
of highly specialized add on modules for systems, portfolios and accrual methods for virtually all sizes and varying complexity
of operations. It is part of the vehicle leasing infrastructure at leading Fortune 500 banks and manufacturers, as well as for
some of the industry’s leading independent lessors. It handles every aspect of the lease or loan lifecycle, including credit
application origination, credit adjudication, pricing, documentation, booking, payments, customer service, collections, midterm
adjustments, and end-of-term options and asset disposition. It is also integrated with important partners in the asset-finance
ecosystem, such as Vertex Series O.
LeasePak-SaaS
NTA
also offers the LeasePak Software-as-a-Service (“SaaS”) business line, which provides high performance with a reduced
total cost of ownership. SaaS offers a proven deployment option whereby customers only require access to the internet to use the
software. With an elastic cloud price, revenue stream predictability and improved return on investment for customers, management
believes that its SaaS customers will experience the performance, the reliability and the speed usually associated with a highly
scalable private cloud. LeasePak-SaaS targets small and mid-sized leasing and finance companies.
LeaseSoft
In
addition to offering NFS Ascent™ to the European market, NTE has some regional offerings, including LeaseSoft and LoanSoft.
LeaseSoft is a full lifecycle lease and finance system aimed predominantly at the UK funder market, including modules to support
web portals and an electronic data interchange manager to facilitate integration between funders and introducers. LoanSoft is
similar to LeaseSoft, but optimized for the consumer loan market.
Highlights
Listed
below are a few of NetSol’s major successes achieved in the nine months ended March 31, 2018:
|
●
|
We
amended the 12 country
NFS
Ascent™ contract securing €7.7 million
Euros (approximately $9.5 million) in future revenues in addition to what was previously projected from the customer. The
revenue will be recognized over the contract term as the support services are performed.
|
|
●
|
Pursuant
to the 12 country
NFS
Ascent™ contract, we successfully implemented the
Loan Origination System and the Wholesale Financial System in Thailand and Korea, respectively.
|
|
●
|
Pursuant
to the 12 country
NFS
Ascent™ contract, we delivered the first major release
of NFS Ascent™ to China.
|
|
●
|
An
increase in software modification requests from some of our existing customers spread across the various regions contributed
reasonably to the revenues for the quarter. A trend which is believed will be continued in the following quarters.
|
|
●
|
We
signed a chargeable proof of concept agreement with one of the oldest and largest banks in Australia. The proof of concept
project will add to our revenues and assist us in making further progress in the selection process for our NFS Ascent™
product.
|
|
●
|
Mizhou
Balimore, a Japanese bank in Indonesia, went live with the first phase of its NFS Ascent™ digital solution.
|
|
●
|
Our
existing customer, an auto finance company of a leading bank in Indonesia, kicked off its leasing project. We believe that
this is likely to help increase revenues in the following quarters. This kick off has further strengthened
our relationship with this Indonesian business partner paving the way for further success in the market. Additionally, all
the branches of the same business partner successfully went live with NFS Ascent™ during the first quarter of the current
fiscal year culminating into a maturing and long-standing delivery commitment.
|
|
●
|
We
signed a new agreement to deploy our mobility applications with an existing customer valued at approximately $3 million.
|
|
●
|
A
current Chinese customer purchased $1 million of additional licenses due to the increase in its business.
|
|
●
|
NFS
Ascent™ and Ascent Digital continue to generate interest across all major regions and industries as some significant
new prospects have come through the pipeline, further strengthening projections and forecasts. Revenue could also be boosted
as customization requests grow in addition to new business volume.
|
|
●
|
The
launch of “innovation lab” to explore and focus on new technologies such as blockchain, artificial intelligence,
and big data to complement our core business.
|
Our
success, in the near term, will depend, in large part, on the Company’s ability to continue to grow revenues and improve
profits, adequately capitalize for growth in various markets and verticals, make progress in the North American and European markets
and, continue to streamline sales and marketing efforts in every market we operate. However, management’s outlook for the
continuing operations, which has been consolidated and has been streamlined, remains optimistic.
Management
has identified the following material trends affecting NetSol.
Positive
trends:
|
●
|
Improving
U.S. economy generally, and particularly auto and banking markets.
|
|
●
|
According
to Automotive World December 2017 publication, global demand for light weight trucks is expected to reach an all-time high
in 2018.
|
|
●
|
Total
industry sales of more than 20 million vehicles annually by 2018, according to John Murphy, an analyst for Bank of America
Merrill Lynch annual industry outlook.
|
|
●
|
Robust
Chinese markets as asset based leasing and finance sector are far from maturity levels.
|
|
●
|
The
inflation rate in Pakistan reached a low of 3.25% in March 2018.
|
|
●
|
China
investment or CPEC (China Pakistan Economic Corridor) has exceeded $50 billion from originally $46 billion in Pakistan on
energy and infrastructure projects.
|
|
●
|
New
emerging markets and IT destinations in Thailand, Malaysia, Indonesia, China and Australia.
|
|
●
|
Continued
interest from Fortune 500 multinational auto captives and global companies in NetSol Ascent™.
|
|
●
|
Continuing
interest from existing clients in the NFS™ legacy systems in emerging and developing markets.
|
|
●
|
Growing
demand and traction for upgrading to NFS Ascent™ by existing tier one auto captive clients.
|
|
●
|
Increased
visits to NTPK by senior executives of existing clients and potential new customers.
|
Negative
trends:
|
●
|
Continued
Global terrorism and extremism threats in European countries.
|
|
●
|
Geopolitical
unrest in the Middle East and potential terrorism and the disruption risk it creates.
|
|
●
|
Restricted
liquidity and financial burden due to tighter internal processes and limited budgets might cause delays in the receivables
from some clients.
|
|
●
|
The
threats of conflict between in the Middle Eastern countries could potentially create volatility in oil prices, causing readjustments
of corporate budgets and consumer spending slowing global auto sales.
|
|
●
|
Industry
trend towards autonomous cars and its effect on the automotive industry.
|
CHANGES
IN FINANCIAL CONDITION
Quarter
Ended March 31, 2018 Compared to the Quarter Ended March 31, 2017
The
following table sets forth the items in our unaudited condensed consolidated statement of operations for the quarter ended March
31, 2018 and 2017 as a percentage of revenues.
|
|
For
the Three Months
|
|
|
|
Ended
March 31,
|
|
|
|
2018
|
|
|
%
|
|
|
2017
|
|
|
%
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
fees
|
|
$
|
2,648,870
|
|
|
|
15.54
|
%
|
|
$
|
5,730,222
|
|
|
|
31.92
|
%
|
Maintenance
fees
|
|
|
3,659,998
|
|
|
|
21.47
|
%
|
|
|
3,538,996
|
|
|
|
19.72
|
%
|
Services
|
|
|
9,345,210
|
|
|
|
54.83
|
%
|
|
|
6,669,309
|
|
|
|
37.16
|
%
|
Maintenance
fees - related party
|
|
|
105,325
|
|
|
|
0.62
|
%
|
|
|
51,698
|
|
|
|
0.29
|
%
|
Services
- related party
|
|
|
1,284,417
|
|
|
|
7.54
|
%
|
|
|
1,959,095
|
|
|
|
10.91
|
%
|
Total
net revenues
|
|
|
17,043,820
|
|
|
|
100.00
|
%
|
|
|
17,949,320
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and consultants
|
|
|
5,418,067
|
|
|
|
31.79
|
%
|
|
|
6,161,110
|
|
|
|
34.33
|
%
|
Travel
|
|
|
425,060
|
|
|
|
2.49
|
%
|
|
|
764,867
|
|
|
|
4.26
|
%
|
Depreciation
and amortization
|
|
|
1,127,077
|
|
|
|
6.61
|
%
|
|
|
1,340,188
|
|
|
|
7.47
|
%
|
Other
|
|
|
880,897
|
|
|
|
5.17
|
%
|
|
|
686,950
|
|
|
|
3.83
|
%
|
Total
cost of revenues
|
|
|
7,851,101
|
|
|
|
46.06
|
%
|
|
|
8,953,115
|
|
|
|
49.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
9,192,719
|
|
|
|
53.94
|
%
|
|
|
8,996,205
|
|
|
|
50.12
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
1,962,402
|
|
|
|
11.51
|
%
|
|
|
2,439,948
|
|
|
|
13.59
|
%
|
Depreciation
and amortization
|
|
|
231,308
|
|
|
|
1.36
|
%
|
|
|
284,642
|
|
|
|
1.59
|
%
|
General
and administrative
|
|
|
4,048,271
|
|
|
|
23.75
|
%
|
|
|
4,329,798
|
|
|
|
24.12
|
%
|
Research
and development cost
|
|
|
197,643
|
|
|
|
1.16
|
%
|
|
|
101,193
|
|
|
|
0.56
|
%
|
Total
operating expenses
|
|
|
6,439,624
|
|
|
|
37.78
|
%
|
|
|
7,155,581
|
|
|
|
39.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
2,753,095
|
|
|
|
16.15
|
%
|
|
|
1,840,624
|
|
|
|
10.25
|
%
|
Other
income and (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of assets
|
|
|
40,537
|
|
|
|
0.24
|
%
|
|
|
1,647
|
|
|
|
0.01
|
%
|
Interest
expense
|
|
|
(102,522
|
)
|
|
|
-0.60
|
%
|
|
|
(60,357
|
)
|
|
|
-0.34
|
%
|
Interest
income
|
|
|
142,356
|
|
|
|
0.84
|
%
|
|
|
27,229
|
|
|
|
0.15
|
%
|
Gain
(loss) on foreign currency exchange transactions
|
|
|
2,550,394
|
|
|
|
14.96
|
%
|
|
|
390,897
|
|
|
|
2.18
|
%
|
Share
of net loss from equity investment
|
|
|
(263,678
|
)
|
|
|
-1.55
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
Other
income
|
|
|
314
|
|
|
|
0.00
|
%
|
|
|
(219
|
)
|
|
|
0.00
|
%
|
Total
other income (expenses)
|
|
|
2,367,401
|
|
|
|
13.89
|
%
|
|
|
359,197
|
|
|
|
2.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) before income taxes
|
|
|
5,120,496
|
|
|
|
30.04
|
%
|
|
|
2,199,821
|
|
|
|
12.26
|
%
|
Income
tax provision
|
|
|
(261,182
|
)
|
|
|
-1.53
|
%
|
|
|
(61,604
|
)
|
|
|
-0.34
|
%
|
Net
income (loss)
|
|
|
4,859,314
|
|
|
|
28.51
|
%
|
|
|
2,138,217
|
|
|
|
11.91
|
%
|
Non-controlling
interest
|
|
|
(1,994,869
|
)
|
|
|
-11.70
|
%
|
|
|
(1,438,249
|
)
|
|
|
-8.01
|
%
|
Net
income (loss) attributable to NetSol
|
|
$
|
2,864,445
|
|
|
|
16.81
|
%
|
|
$
|
699,968
|
|
|
|
3.90
|
%
|
A
significant portion of our business is conducted in currencies other than the U.S. dollar. We operate in several geographical
regions as described in Note 19 “Operating Segments” within the Notes to the Condensed Consolidated Financial Statements.
Weakening of the value of the U.S. dollar compared to foreign currency exchange rates generally has the effect of increasing our
revenues but also increasing our expenses denominated in currencies other than the U.S. dollar. Similarly, strengthening of the
U.S. dollar compared to foreign currency exchange rates generally has the effect of reducing our revenues but also reducing our
expenses denominated in currencies other than the U.S. dollar. We plan our business accordingly by deploying additional resources
to areas of expansion, while continuing to monitor our overall expenditures given the economic uncertainties of our target markets.
In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency
fluctuations, we compare the changes in results from one period to another period using constant currency. In order to calculate
our constant currency results, we apply the current period results to the prior period foreign currency exchange rates. In the
table below, we present the change based on actual results in reported currency and in constant currency.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable
|
|
|
Favorable
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unfavorable)
|
|
|
(Unfavorable)
|
|
|
Favorable
|
|
|
|
For
the Three Months
|
|
|
Change
in
|
|
|
Change due to
|
|
|
(Unfavorable)
|
|
|
|
Ended
March 31,
|
|
|
Constant
|
|
|
Currency
|
|
|
Change
as
|
|
|
|
2018
|
|
|
%
|
|
|
2017
|
|
|
%
|
|
|
Currency
|
|
|
Fluctuation
|
|
|
Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Revenues:
|
|
|
17,043,820
|
|
|
|
100.00
|
%
|
|
|
17,949,320
|
|
|
|
100.00
|
%
|
|
|
(425,759
|
)
|
|
|
(479,741
|
)
|
|
|
(905,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
7,851,101
|
|
|
|
46.06
|
%
|
|
|
8,953,115
|
|
|
|
49.88
|
%
|
|
|
864,576
|
|
|
|
237,438
|
|
|
|
1,102,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
9,192,719
|
|
|
|
53.94
|
%
|
|
|
8,996,205
|
|
|
|
50.12
|
%
|
|
|
438,817
|
|
|
|
(242,303
|
)
|
|
|
196,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
6,439,624
|
|
|
|
37.78
|
%
|
|
|
7,155,581
|
|
|
|
39.87
|
%
|
|
|
169,300
|
|
|
|
546,657
|
|
|
|
715,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
2,753,095
|
|
|
|
16.15
|
%
|
|
|
1,840,624
|
|
|
|
10.25
|
%
|
|
|
608,117
|
|
|
|
304,354
|
|
|
|
912,471
|
|
Net
revenues for the quarter ended March 31, 2018 and 2017 are broken out among the segments as follows:
|
|
2018
|
|
|
2017
|
|
|
|
Revenue
|
|
|
%
|
|
|
Revenue
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
|
998,403
|
|
|
|
5.86
|
%
|
|
|
1,111,897
|
|
|
|
6.19
|
%
|
Europe
|
|
|
2,229,627
|
|
|
|
13.08
|
%
|
|
|
1,808,567
|
|
|
|
10.08
|
%
|
Asia-Pacific
|
|
|
13,815,790
|
|
|
|
81.06
|
%
|
|
|
15,028,856
|
|
|
|
83.73
|
%
|
Total
|
|
$
|
17,043,820
|
|
|
|
100.00
|
%
|
|
$
|
17,949,320
|
|
|
|
100.00
|
%
|
Revenues
License
fees
License
fees for the three months ended March 31, 2018 were $2,648,870 compared to $5,730,222 for the three months ended March 31, 2017,
reflecting a decrease of $3,081,352 with a change in constant currency of $2,914,611. The decrease in license revenue for the
fiscal three months ended March 31, 2018 compared to 2017 is primarily due to the decrease of license revenue recognized for the
12 country NFS Ascent™ contract offset by new license sales of approximately $1,400,000 and $1,200,000 for our legacy products
and our mobility products, respectively.
Maintenance
fees
Maintenance
fees for the three months ended March 31, 2018 were $3,659,998 compared to $3,538,996 for the three months ended March 31, 2017
reflecting an increase of $121,002 with a change in constant currency of $145,167. Maintenance fees begin once a customer has
“gone live” with our product. The increase was due to the fluctuation in usage of active users. We anticipate maintenance
fees to gradually increase as we implement both our NFS legacy product and NFS Ascent™.
Maintenance
fees – related party
Maintenance
fees from related party for the three months ended March 31, 2018 were $105,325 compared to $51,698 for the three months ended
March 31, 2017 reflecting an increase of $53,627 with a change in constant currency of $43,190. The increase was due to the fluctuation
in usage of active users.
Services
Services
income for the three months ended March 31, 2018 was $9,345,210 compared to $6,669,309 for the three months ended March 31, 2017
reflecting an increase of $2,675,901 with a change in constant currency of $2,954,472. The services revenue increase was due to
an increase in services revenue associated with new implementations and change requests. Services revenue is derived from services
provided to both current customers as well as services provided to new customers as part of the implementation process.
Services
– related party
Services
income from related party for the three months ended March 31, 2018 was $1,284,417 compared to $1,959,095 for the three months
ended March 31, 2017 reflecting a decrease of $674,678 with a change in constant currency of $653,977. The decrease in related
party service revenue is due to a decrease in revenue from our joint venture with 1insurer.
Gross
Profit
The
gross profit was $9,192,719, for the three months ended March 31, 2018 as compared with $8,996,205 for the three months ended
March 31, 2017. This is an increase of $196,514 with an increase in constant currency of $438,817. The gross profit percentage
for the three months ended March 31, 2018 increased to 53.94% from 50.12% for the three months ended March 31, 2017. The
cost of sales was $7,851,101 for the three months ended March 31, 2018 compared to $8,953,115 for the three months ended March
31, 2017 for a decrease of $1,102,014 and on a constant currency basis a decrease of $864,576. As a percentage of sales, cost
of sales decreased from 49.88% for the three months ended March 31, 2017 to 46.06% for the three months ended March 31, 2018.
Salaries
and consultant fees decreased by $743,043 from $6,161,110 for the three months ended March 31, 2017 to $5,418,067 for the three
months ended March 31, 2018 and on a constant currency basis decreased $568,807. The decrease in salaries and consultant fees
is due to the right sizing of technical employees at key locations including Pakistan, Thailand, China, UK and North America.
As a percentage of sales, salaries and consultant expense decreased from 34.33% for the three months ended March 31, 2017 to 31.79%
for the three months ended March 31, 2018.
Depreciation
and amortization expense decreased to $1,127,077 compared to $1,340,188 for the three months ended March 31, 2017 or a decrease
of $213,111 and on a constant currency basis a decrease of $143,596. Depreciation and amortization expense decreased as some products
became fully amortized.
Operating
Expenses
Operating
expenses were $6,439,624 for the three months ended March 31, 2018 compared to $7,155,581, for the three months ended March 31,
2017 for a decrease of 10.01% or $715,957 and on a constant currency basis a decrease of 2.37% or $169,300. As a percentage of
sales, it decreased from 39.87% to 37.78%. The decrease in operating expenses was primarily due to decreases in selling and marketing
expenses, professional services, general and administrative expenses and depreciation.
Selling
and marketing expenses decreased by $477,546 or 19.57% and on a constant currency basis a decrease of $45,387 or 1.86%. The decrease
in selling and marketing expenses is due to reduction in staff, decrease in our salaries and commissions, travel expenses, and
business development costs to market and sell NFS Ascent™ globally.
General
and administrative expenses were $4,048,271 for the three months ended March 31, 2018 compared to $4,329,798 at March 31, 2017
or a decrease of $281,527 or 6.50% and on a constant currency basis a decrease of $176,589 or 4.08%. During the three months ended
March 31, 2018, salaries increased by approximately $230,665 or $236,537 on a constant currency basis due to the annual raises,
offset by a decrease in professional services of $175,233 or $180,818 on a constant currency basis and other general and administrative
expenses of approximately $336,959 or $232,308 on a constant currency basis.
Income
from Operations
Income
from operations was $2,753,095 for the three months ended March 31, 2018 compared to $1,840,624 for the three months ended March
31, 2017. This represents an increase of $912,471 with an increase of $608,117 on a constant currency basis for the three months
ended March 31, 2018 compared with the three months ended March 31, 2017. As a percentage of sales, income from operations was
16.15% for the three months ended March 31, 2018 compared to 10.25% for the three months ended March 31, 2017.
Other
income and expense
Other
income was $2,367,401 for the three months ended March 31, 2018 compared with $359,197 for the three months ended March 31, 2017.
This represents an increase of $2,008,204 with an increase of $2,131,878 on a constant currency basis. The increase is primarily
due to the foreign currency exchange transactions. The majority of the contracts with NetSol PK are either in U.S. dollars or
Euros; therefore, the currency fluctuations will lead to foreign currency exchange gains or losses depending on the value of the
Pakistan Rupee (“PKR”) compared to the U.S. dollar and the Euro. In December 2017, Pakistan’s central bank withdrew
its support of the PKR, which caused the PKR to drop in value. During the three months ended March 31, 2018, we recognized a gain
of $2,550,394 in foreign currency exchange transactions compared to $390,897 for the three months ended March 31, 2017. During
the three months ended March 31, 2018, the value of the U.S. dollar and the Euro increased 4.5% and 7.54%, respectively, compared
to the PKR. During the three months ended March 31, 2017, the value of the U.S. dollar and the Euro increased 0.4% and 1.9%, respectively,
compared to the PKR.
Non-controlling
Interest
For
the three months ended March 31, 2018 and 2017, the net income attributable to non-controlling interest was $1,994,869 and $1,438,249,
respectively. The increase in non-controlling interest is primarily due to the increase in net income of NetSol PK offset by a
decrease in net income of NetSol Innovation.
Net
Income / Loss attributable to NetSol
Net
income was $2,864,445 for the three months ended March 31, 2018 compared $699,968 for the three months ended March 31, 2017. This
is an increase of $2,164,477 with an increase of $1,872,983 on a constant currency basis, compared to the prior year. For the
three months ended March 31, 2018, net income per share was $0.26 and $0.25 for basic and diluted shares, respectively, compared
to $0.06 for basic and diluted shares for the three months ended March 31, 2017.
Nine
Months Ended March 31, 2018 Compared to the Nine Months Ended March 31, 2017
The
following table sets forth the items in our unaudited condensed consolidated statement of operations for the nine months ended
March 31, 2018 and 2017 as a percentage of revenues.
|
|
For
the Nine Months
|
|
|
|
Ended
March 31,
|
|
|
|
2018
|
|
|
%
|
|
|
2017
|
|
|
%
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
fees
|
|
$
|
3,210,868
|
|
|
|
7.25
|
%
|
|
$
|
14,953,574
|
|
|
|
29.39
|
%
|
Maintenance
fees
|
|
|
10,702,171
|
|
|
|
24.15
|
%
|
|
|
10,651,692
|
|
|
|
20.93
|
%
|
Services
|
|
|
25,450,138
|
|
|
|
57.44
|
%
|
|
|
18,844,602
|
|
|
|
37.03
|
%
|
License
fees - related party
|
|
|
261,513
|
|
|
|
0.59
|
%
|
|
|
246,957
|
|
|
|
0.49
|
%
|
Maintenance
fees - related party
|
|
|
309,539
|
|
|
|
0.70
|
%
|
|
|
233,674
|
|
|
|
0.46
|
%
|
Services
- related party
|
|
|
4,374,802
|
|
|
|
9.87
|
%
|
|
|
5,954,076
|
|
|
|
11.70
|
%
|
Total
net revenues
|
|
|
44,309,031
|
|
|
|
100.00
|
%
|
|
|
50,884,575
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and consultants
|
|
|
16,244,319
|
|
|
|
36.66
|
%
|
|
|
18,034,263
|
|
|
|
35.44
|
%
|
Travel
|
|
|
1,226,073
|
|
|
|
2.77
|
%
|
|
|
2,313,002
|
|
|
|
4.55
|
%
|
Depreciation
and amortization
|
|
|
3,468,293
|
|
|
|
7.83
|
%
|
|
|
3,989,824
|
|
|
|
7.84
|
%
|
Other
|
|
|
2,677,465
|
|
|
|
6.04
|
%
|
|
|
2,725,015
|
|
|
|
5.36
|
%
|
Total
cost of revenues
|
|
|
23,616,150
|
|
|
|
53.30
|
%
|
|
|
27,062,104
|
|
|
|
53.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
20,692,881
|
|
|
|
46.70
|
%
|
|
|
23,822,471
|
|
|
|
46.82
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
5,605,838
|
|
|
|
12.65
|
%
|
|
|
7,497,464
|
|
|
|
14.73
|
%
|
Depreciation
and amortization
|
|
|
699,966
|
|
|
|
1.58
|
%
|
|
|
825,224
|
|
|
|
1.62
|
%
|
General
and administrative
|
|
|
11,862,535
|
|
|
|
26.77
|
%
|
|
|
12,882,407
|
|
|
|
25.32
|
%
|
Research
and development cost
|
|
|
572,619
|
|
|
|
1.29
|
%
|
|
|
285,732
|
|
|
|
0.56
|
%
|
Total
operating expenses
|
|
|
18,740,958
|
|
|
|
42.30
|
%
|
|
|
21,490,827
|
|
|
|
42.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
1,951,923
|
|
|
|
4.41
|
%
|
|
|
2,331,644
|
|
|
|
4.58
|
%
|
Other
income and (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) on sale of assets
|
|
|
24,468
|
|
|
|
0.06
|
%
|
|
|
(33,095
|
)
|
|
|
-0.07
|
%
|
Interest
expense
|
|
|
(330,268
|
)
|
|
|
-0.75
|
%
|
|
|
(176,959
|
)
|
|
|
-0.35
|
%
|
Interest
income
|
|
|
394,837
|
|
|
|
0.89
|
%
|
|
|
81,085
|
|
|
|
0.16
|
%
|
Gain
(loss) on foreign currency exchange transactions
|
|
|
5,304,723
|
|
|
|
11.97
|
%
|
|
|
(645,886
|
)
|
|
|
-1.27
|
%
|
Share
of net loss from equity investment
|
|
|
(534,576
|
)
|
|
|
-1.21
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
Other
income
|
|
|
15,924
|
|
|
|
0.04
|
%
|
|
|
28,164
|
|
|
|
0.06
|
%
|
Total
other income (expenses)
|
|
|
4,875,108
|
|
|
|
11.00
|
%
|
|
|
(746,691
|
)
|
|
|
-1.47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income before income taxes
|
|
|
6,827,031
|
|
|
|
15.41
|
%
|
|
|
1,584,953
|
|
|
|
3.11
|
%
|
Income
tax provision
|
|
|
(486,980
|
)
|
|
|
-1.10
|
%
|
|
|
(440,363
|
)
|
|
|
-0.87
|
%
|
Net
income
|
|
|
6,340,051
|
|
|
|
14.31
|
%
|
|
|
1,144,590
|
|
|
|
2.25
|
%
|
Non-controlling
interest
|
|
|
(3,210,683
|
)
|
|
|
-7.25
|
%
|
|
|
(2,999,127
|
)
|
|
|
-5.89
|
%
|
Net
income (loss) attributable to NetSol
|
|
$
|
3,129,368
|
|
|
|
7.06
|
%
|
|
$
|
(1,854,537
|
)
|
|
|
-3.64
|
%
|
A
significant portion of our business is conducted in currencies other than the U.S. dollar. We operate in several geographical
regions as described in Note 19 “Operating Segments” within the Notes to the Condensed Consolidated Financial Statements.
Weakening of the value of the U.S. dollar compared to foreign currency exchange rates generally has the effect of increasing our
revenues but also increasing our expenses denominated in currencies other than the U.S. dollar. Similarly, strengthening of the
U.S. dollar compared to foreign currency exchange rates generally has the effect of reducing our revenues but also reducing our
expenses denominated in currencies other than the U.S. dollar. We plan our business accordingly by deploying additional resources
to areas of expansion, while continuing to monitor our overall expenditures given the economic uncertainties of our target markets.
In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency
fluctuations, we compare the changes in results from one period to another period using constant currency. In order to calculate
our constant currency results, we apply the current period results to the prior period foreign currency exchange rates. In the
table below, we present the change based on actual results in reported currency and in constant currency.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable
|
|
|
Favorable
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unfavorable)
|
|
|
(Unfavorable)
|
|
|
Favorable
|
|
|
|
For
the Nine Months
|
|
|
|
|
|
Change
in
|
|
|
Change due to
|
|
|
(Unfavorable)
|
|
|
|
Ended
March 31,
|
|
|
|
|
|
Constant
|
|
|
Currency
|
|
|
Change
as
|
|
|
|
2018
|
|
|
%
|
|
|
2017
|
|
|
%
|
|
|
Currency
|
|
|
Fluctuation
|
|
|
Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Revenues:
|
|
|
44,309,031
|
|
|
|
100.00
|
%
|
|
|
50,884,575
|
|
|
|
100.00
|
%
|
|
|
(6,076,003
|
)
|
|
|
(499,541
|
)
|
|
|
(6,575,544
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
23,616,150
|
|
|
|
53.30
|
%
|
|
|
27,062,104
|
|
|
|
53.18
|
%
|
|
|
3,134,346
|
|
|
|
311,608
|
|
|
|
3,445,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
20,692,881
|
|
|
|
46.70
|
%
|
|
|
23,822,471
|
|
|
|
46.82
|
%
|
|
|
(2,941,657
|
)
|
|
|
(187,933
|
)
|
|
|
(3,129,590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
18,740,958
|
|
|
|
42.30
|
%
|
|
|
21,490,827
|
|
|
|
42.23
|
%
|
|
|
2,267,248
|
|
|
|
482,621
|
|
|
|
2,749,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
1,951,923
|
|
|
|
4.41
|
%
|
|
|
2,331,644
|
|
|
|
4.58
|
%
|
|
|
(674,409
|
)
|
|
|
294,688
|
|
|
|
(379,721
|
)
|
Net
revenues for the nine months ended March 31, 2018 and 2017 are broken out among the segments as follows:
|
|
2018
|
|
|
2017
|
|
|
|
Revenue
|
|
|
%
|
|
|
Revenue
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
3,134,113
|
|
|
|
7.07
|
%
|
|
$
|
4,467,325
|
|
|
|
8.78
|
%
|
Europe
|
|
|
6,382,555
|
|
|
|
14.40
|
%
|
|
|
5,164,440
|
|
|
|
10.15
|
%
|
Asia-Pacific
|
|
|
34,792,363
|
|
|
|
78.52
|
%
|
|
|
41,252,810
|
|
|
|
81.07
|
%
|
Total
|
|
$
|
44,309,031
|
|
|
|
100.00
|
%
|
|
$
|
50,884,575
|
|
|
|
100.00
|
%
|
Revenues
License
fees
License
fees for the nine months ended March 31, 2018 were $3,210,868 compared to $14,953,574 for the nine months ended March 31, 2017,
reflecting a decrease of $11,742,706 with a change in constant currency of $11,597,815. The decrease in license revenue for the
fiscal nine months ended March 31, 2018 compared to 2017 is primarily due to the decrease of license revenue recognized for the
12 country NFS Ascent™ contract offset by new license sales of approximately $2,000,000 and $1,200,000 for our legacy products
and our mobility products, respectively.
License
fees – related party
License
fees from related party for the nine months ended March 31, 2018 were $261,513 compared to $246,957 for the nine months ended
March 31, 2017 reflecting an increase of $14,556 with a change in constant currency of $7,851.
Maintenance
fees
Maintenance
fees for the nine months ended March 31, 2018 were $10,702,171 compared to $10,651,692 for the nine months ended March 31, 2017
reflecting an increase of $50,479 with a change in constant currency of $64,915. Maintenance fees begin once a customer has “gone
live” with our product. The increase was due to the fluctuation in usage of active users. We anticipate maintenance fees
to gradually increase as we implement both our NFS legacy product and NFS Ascent™.
Maintenance
fees – related party
Maintenance
fees from related party for the nine months ended March 31, 2018 were $309,539 compared to $233,674 for the nine months ended
March 31, 2017 reflecting an increase of $75,865 with a change in constant currency of $60,192. The increase was due to the fluctuation
in usage of active users.
Services
Services
income for the nine months ended March 31, 2018 was $25,450,138 compared to $18,844,602 for the nine months ended March 31, 2017
reflecting an increase of $6,605,536 with a change in constant currency of $6,941,815. The services revenue increase was due to
an increase in services revenue associated with new implementations and change requests. Services revenue is derived from services
provided to both current customers as well as services provided to new customers as part of the implementation process.
Services
– related party
Services
income from related party for the nine months ended March 31, 2018 was $4,374,802 compared to $5,954,076 for the nine months ended
March 31, 2017 reflecting a decrease of $1,579,274 with a change in constant currency of $1,552,961. The decrease in related party
service revenue is due to a decrease in revenue from our joint venture with 1insurer.
Gross
Profit
The
gross profit was $20,692,881, for the nine months ended March 31, 2018 as compared with $23,822,471 for the nine months ended
March 31, 2017. This is a decrease of $3,129,590 with a change in constant currency of $2,941,657. The gross profit percentage
for the nine months ended March 31, 2018 decreased to 46.70% from 46.82% for the nine months ended March 31, 2017. The cost of
sales was $23,616,150 for the nine months ended March 31, 2018 compared to $27,062,104 for the nine months ended March 31, 2017
for a decrease of $3,445,954 and on a constant currency basis a decrease of $3,134,346. As a percentage of sales, cost of sales
increased from 53.18% for the nine months ended March 31, 2017 to 53.30% for the nine months ended March 31, 2018.
Salaries
and consultant fees decreased by $1,789,944 from $18,034,263 for the nine months ended March 31, 2017 to $16,244,319 for the nine
months ended March 31, 2018 and on a constant currency basis decreased $1,541,008. The decrease in salaries and consultant fees
is due to the right sizing of technical employees at key locations including Pakistan, Thailand, China, UK and North America.
As a percentage of sales, salaries and consultant expense increased from 35.44% for the nine months ended March 31, 2017 to 36.66%
for the nine months ended March 31, 2018.
Depreciation
and amortization expense decreased to $3,468,293 compared to $3,989,824 for the nine months ended March 31, 2017 or a decrease
of $521,531 and on a constant currency basis a decrease of $427,379. Depreciation and amortization expense decreased as some products
became fully amortized.
Operating
Expenses
Operating
expenses were $18,740,958 for the nine months ended March 31, 2018 compared to $21,490,827, for the nine months ended March 31,
2017 for a decrease of 12.80% or $2,749,869 and on a constant currency basis a decrease of 10.55% or $2,267,248. As a percentage
of sales, it increased from 42.23% to 42.30%. The decrease in operating expenses was primarily due to decreases in selling and
marketing expenses, salaries and wages and depreciation.
Selling
and marketing expenses decreased by $1,891,626 or 25.23% and on a constant currency basis a decrease of $1,491,024 or 19.89%.
The decrease in selling and marketing expenses is due to reduction in staff, decrease in our salaries and commissions, travel
expenses, and business development costs to market and sell NFS Ascent™ globally.
General
and administrative expenses were $11,862,535 for the nine months ended March 31, 2018 compared to $12,882,407 at March 31, 2017
or a decrease of $1,019,872 or 7.92% and on a constant currency basis a decrease of $945,325 or 7.34%. During the nine months
ended March 31, 2018, salaries decreased by $821,691 or $806,610 on a constant currency basis due to the decrease in the number
of employees, minimal annual raises, less issue of share grants and options. Other general and administrative expenses decreased
by $88,603 or $19,877 on a constant currency basis and professional services decreased by $109,578 or $118,838 on constant currency
bases.
Income
from Operations
Income
from operations was $1,951,923 for the nine months ended March 31, 2018 compared to income of $2,331,644 for the nine months ended
March 31, 2017. This represents a decrease of $379,721 with a decrease of $674,409 on a constant currency basis for the nine months
ended March 31, 2018 compared with the nine months ended March 31, 2017. As a percentage of sales, income from operations was
4.41% for the nine months ended March 31, 2018 compared to 4.58% for the nine months ended March 31, 2017.
Other
Income and Expense
Other
income was $4,875,108 for the nine months ended March 31, 2018 compared with a loss of $746,691 for the nine months ended March
31, 2017. This represents an increase of $5,621,799 with an increase of $5,778,863 on a constant currency basis. The increase
is primarily due to the foreign currency exchange transactions. The majority of the contracts with NetSol PK are either in U.S.
dollars or Euros; therefore, the currency fluctuations will lead to foreign currency exchange gains or losses depending on the
value of the PKR compared to the U.S. dollar and the Euro. In December 2017, Pakistan’s central bank withdrew its support
of the PKR, which caused the PKR to drop in value. During the nine months ended March 31, 2018, we recognized a gain of $5,304,723
in foreign currency exchange transactions compared to a loss of $645,886 for the nine months ended March 31, 2017. During the
nine months ended March 31, 2018, the value of the U.S. dollar and the Euro increased 10.42% and 19.13%, respectively, compared
to the PKR. During the nine months ended March 31, 2017, the value of the U.S. dollar and the Euro decreased 0.14% and 4.55%,
respectively, compared to the PKR.
Non-controlling
Interest
For
the nine months ended March 31, 2018 and 2017, the net income attributable to non-controlling interest was $3,210,683 and $2,999,127,
respectively. The increase in non-controlling interest is primarily due to the increase in net income of NetSol PK offset by a
decrease in net income of NetSol Innovation.
Net
Income / Loss attributable to NetSol
Net
income was $3,129,368 for the nine months ended March 31, 2018 compared to a loss of $1,854,537 for the nine months ended March
31, 2017. This is an increase of $4,983,905 with an increase of $4,730,820 on a constant currency basis, compared to the prior
year. For the nine months ended March 31, 2018, net income per share was $0.28 for basic and diluted shares compared to a loss
of $0.17 for basic and diluted shares for the nine months ended March 31, 2017.
Non-GAAP
Financial Measures
Regulation
S-K Item 10(e), “Use of Non-GAAP Financial Measures in Commission Filings,” defines and prescribes the conditions
for use of non-GAAP financial information. Our measures of adjusted EBITDA and adjusted EBITDA per basic and diluted share meet
the definition of a non-GAAP financial measure.
We
define the non-GAAP measures as follows:
|
●
|
EBITDA
is GAAP net income or loss before net interest expense, income tax expense, depreciation and amortization.
|
|
●
|
Non-GAAP
adjusted EBITDA is EBITDA less stock-based compensation expense.
|
|
●
|
Adjusted
EBITDA per basic and diluted share – Adjusted EBITDA allocated to common stock divided by the weighted average shares
outstanding and diluted shares outstanding.
|
We
use non-GAAP measures internally to evaluate the business and believe that presenting non-GAAP measures provides useful information
to investors regarding the underlying business trends and performance of our ongoing operations as well as useful metrics for
monitoring our performance and evaluating it against industry peers. The non-GAAP financial measures presented should be used
in addition to, and in conjunction with, results presented in accordance with GAAP, and should not be relied upon to the exclusion
of GAAP financial measures. Management strongly encourages investors to review our consolidated financial statements in their
entirety and not to rely on any single financial measure in evaluating the Company.
The
non-GAAP measures reflect adjustments based on the following items:
EBITDA
:
We report EBITDA as a non-GAAP metric by excluding the effect of net interest expense, income tax expense, depreciation and amortization
from net income or loss because doing so makes internal comparisons to our historical operating results more consistent. In addition,
we believe providing an EBITDA calculation is a more useful comparison of our operating results to the operating results of our
peers.
Stock-based
compensation expense
: We have excluded the effect of stock-based compensation expense from the non-GAAP adjusted EBITDA and
non-GAAP adjusted EBITDA per basic and diluted share calculations. Although stock-based compensation expense is calculated in
accordance with current GAAP and constitutes an ongoing and recurring expense, such expense is excluded from non-GAAP results
because it is not an expense which generally requires cash settlement by NetSol, and therefore is not used by us to assess the
profitability of our operations. We also believe the exclusion of stock-based compensation expense provides a more useful comparison
of our operating results to the operating results of our peers.
Non-controlling
interest
: We add back the non-controlling interest in calculating gross adjusted EBITDA and then subtract out the income taxes,
depreciation and amortization and net interest expense attributable to the non-controlling interest to arrive at a net adjusted
EBITDA.
Our
reconciliation of the non-GAAP financial measures of adjusted EBITDA and non-GAAP earnings per basic and diluted share to the
most comparable GAAP measures for the three and nine months ended March 31, 2018 and 2017 are as follows:
|
|
Three
Months
|
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
Nine
Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March
31, 2018
|
|
|
March
31, 2017
|
|
|
March
31, 2018
|
|
|
March
31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (loss) before preferred dividend, per GAAP
|
|
$
|
2,864,445
|
|
|
$
|
699,968
|
|
|
$
|
3,129,368
|
|
|
$
|
(1,854,537
|
)
|
Non-controlling
interest
|
|
|
1,994,869
|
|
|
|
1,438,249
|
|
|
|
3,210,683
|
|
|
|
2,999,127
|
|
Income
taxes
|
|
|
261,182
|
|
|
|
61,604
|
|
|
|
486,980
|
|
|
|
440,363
|
|
Depreciation
and amortization
|
|
|
1,358,385
|
|
|
|
1,624,830
|
|
|
|
4,168,259
|
|
|
|
4,815,048
|
|
Interest
expense
|
|
|
102,522
|
|
|
|
60,357
|
|
|
|
330,268
|
|
|
|
176,959
|
|
Interest
(income)
|
|
|
(142,356
|
)
|
|
|
(27,229
|
)
|
|
|
(394,837
|
)
|
|
|
(81,085
|
)
|
EBITDA
|
|
$
|
6,439,047
|
|
|
$
|
3,857,779
|
|
|
$
|
10,930,721
|
|
|
$
|
6,495,875
|
|
Add
back:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
stock-based compensation
|
|
|
448,233
|
|
|
|
478,345
|
|
|
|
1,281,763
|
|
|
|
2,025,924
|
|
Adjusted
EBITDA, gross
|
|
$
|
6,887,280
|
|
|
$
|
4,336,124
|
|
|
$
|
12,212,484
|
|
|
$
|
8,521,799
|
|
Less
non-controlling interest (a)
|
|
|
(2,540,702
|
)
|
|
|
(2,317,246
|
)
|
|
|
(4,804,869
|
)
|
|
|
(5,501,218
|
)
|
Adjusted
EBITDA, net
|
|
$
|
4,346,578
|
|
|
$
|
2,018,878
|
|
|
$
|
7,407,615
|
|
|
$
|
3,020,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,190,048
|
|
|
|
10,987,214
|
|
|
|
11,118,529
|
|
|
|
10,850,538
|
|
Diluted
|
|
|
11,268,842
|
|
|
|
11,121,620
|
|
|
|
11,152,365
|
|
|
|
10,984,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
adjusted EBITDA
|
|
$
|
0.39
|
|
|
$
|
0.18
|
|
|
$
|
0.67
|
|
|
$
|
0.28
|
|
Diluted
adjusted EBITDA
|
|
$
|
0.39
|
|
|
$
|
0.18
|
|
|
$
|
0.66
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)The
reconciliation of adjusted EBITDA of non-controlling interest to net income attributable to non-controlling interest is as
follows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income attributable to non-controlling interest
|
|
$
|
1,994,869
|
|
|
$
|
1,438,249
|
|
|
$
|
3,210,683
|
|
|
$
|
2,999,127
|
|
Income
Taxes
|
|
|
65,798
|
|
|
|
36,569
|
|
|
|
106,221
|
|
|
|
74,350
|
|
Depreciation
and amortization
|
|
|
449,828
|
|
|
|
790,065
|
|
|
|
1,382,148
|
|
|
|
2,346,603
|
|
Interest
expense
|
|
|
31,865
|
|
|
|
9,416
|
|
|
|
105,400
|
|
|
|
40,749
|
|
Interest
(income)
|
|
|
(43,702
|
)
|
|
|
(31,715
|
)
|
|
|
(125,777
|
)
|
|
|
(83,112
|
)
|
EBITDA
|
|
$
|
2,498,658
|
|
|
$
|
2,242,584
|
|
|
$
|
4,678,675
|
|
|
$
|
5,377,717
|
|
Add
back:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
stock-based compensation
|
|
|
42,044
|
|
|
|
74,662
|
|
|
|
126,194
|
|
|
|
123,501
|
|
Adjusted
EBITDA of non-controlling interest
|
|
$
|
2,540,702
|
|
|
$
|
2,317,246
|
|
|
$
|
4,804,869
|
|
|
$
|
5,501,218
|
|
LIQUIDITY
AND CAPITAL RESOURCES
Our
cash position was $12,711,983 at March 31, 2018, compared to $14,172,954 at June 30, 2017.
Net
cash provided by operating activities was $2,252,005 for the nine months ended March 31, 2018 compared to net cash used in operating
activities of $2,018,592 for the nine months ended March 31, 2017. At March 31, 2018, we had current assets of $58,294,081 and
current liabilities of $24,794,887. We had accounts receivable of $26,287,212 at March 31, 2018 compared to $8,228,141 at June
30, 2017. The increase in accounts receivable includes $4,313,306 due to billing for the code split per the amended DFS contract.
We had revenues in excess of billings of $17,192,524 at March 31, 2018 compared to $24,380,632 at June 30, 2017 of which
$1,752,554 and $5,173,538 is shown as long term as of March 31, 2018 and June 30, 2017, respectively.
The
long-term portion is discounted by $313,559 and $310,331 at March 31, 2018 and June 30, 2017, respectively, using the discounted
cash flow method with interest rates ranging from 3.87% to 4.43% which is NetSol PK’s weighted average borrowing rate. During
the nine months ended March 31, 2018, our revenues in excess of billings were reclassified to accounts receivable pursuant to
billing requirements detailed in each contract. The combined totals for accounts receivable and revenues in excess of billings
increased by $10,870,963 from $32,608,773 at June 30, 2017 to $43,479,736 at March 31, 2018. The increase is due to recognition
of revenue according to progress of contracts and billing for the amended DFS contract. Accounts payable and accrued expenses,
and current portions of loans and lease obligations amounted to $7,765,645 and $9,099,822, respectively at March 31, 2018. Accounts
payable and accrued expenses, and current portions of loans and lease obligations amounted to $6,880,194 and $10,222,795, respectively
at June 30, 2017.
The
average days sales outstanding for the nine months ended March 31, 2018 and 2017 were 274 and 165 days, respectively, for each
period. The days sales outstanding have been calculated by taking into consideration the average combined balances of accounts
receivable and revenues in excess of billings.
Net
cash used in investing activities was $1,392,957 for the nine months ended March 31, 2018, compared to $2,072,047 for the nine
months ended March 31, 2017. We had purchases of property and equipment of $1,107,732 compared to $1,315,922 for the nine months
ended March 31, 2017. For the nine months ended March 31, 2018, we invested $550,000 in a short-term convertible note receivable
from WRLD3D. For the nine months ended March 31, 2018, we invested $50,000 in WRLD3D compared to $905,555 for the nine months
ended March 31, 2017.
Net
cash used in financing activities was $1,117,872 for the nine months ended March 31, 2018, compared to $1,065,436 provided
by financing activities for the nine months ended March 31, 2017. The nine months ended March 31, 2018 included the cash inflow
of $215,311 from the exercising of stock options compared to $785,479 for the same period last year. During the nine months ended
March 31, 2018, we purchased 171,074 shares of our common stock from the open market for $750,714 compared to 7,500 shares of
common stock for $38,885 for the same period last year. The nine months ended March 31, 2018 included the cash inflow of $696,936
from bank proceeds compared to $1,484,162 for the same period last year. During the nine months ended March 31, 2018, we had net
payments for bank loans and capital leases of $961,901 compared to $251,040 for the nine months ended March 31, 2017. We are operating
in various geographical regions of the world through our various subsidiaries. Those subsidiaries have financial arrangements
from various financial institutions to meet both their short and long-term funding requirements. These loans will become due at
different maturity dates as described in Note 14 of the financial statements. We are in compliance with the covenants of the financial
arrangements and there is no default, which may lead to early payment of these obligations. We anticipate paying back all these
obligations on their respective due dates from its own sources.
We
typically fund the cash requirements for our operations in the U.S. through our license, services, and maintenance agreements,
intercompany charges for corporate services, and through the exercise of options and warrants. As of March 31, 2018, we had approximately
$12.7 million of cash, cash equivalents and marketable securities of which approximately $11.6 million is held by our foreign
subsidiaries. As of June 30, 2017, we had approximately $14.2 million of cash, cash equivalents and marketable securities of which
approximately $11.6 million is held by our foreign subsidiaries. The Tax Act, which was passed on December 22, 2017, imposes a
one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries. As of December 31, 2017, the
provisional undistributed earnings of foreign subsidiaries were $22.8 million which we anticipate being able to offset fully with
net operating loss carry forwards.
We
remain open to strategic relationships that would provide value added benefits. The focus will remain on continuously improving
cash reserves internally and reduced reliance on external capital raise.
As
a growing company, we have on-going capital expenditure needs based on our short term and long-term business plans. Although our
requirements for capital expenses vary from time to time, for the next 12 months, we anticipate needing $2 million for APAC, U.S.
and Europe new business development activities and infrastructure enhancements, which we expect to provide from current operations.
While
there is no guarantee that any of these methods will result in raising sufficient funds to meet our capital needs or that even
if available will be on terms acceptable to us, we will be very cautious and prudent about any new capital raise given the global
market uncertainties. However, we are very conscious of the dilutive effect and price pressures in raising equity-based capital.
Financial
Covenants
Our
UK based subsidiary, NTE, has an approved overdraft facility of £300,000 ($422,535) which 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. The Pakistani subsidiary, NetSol PK has an approved
facility for export refinance from Askari Bank Limited amounting to Rupees 500 million ($4,325,634) and a running finance facility
of Rupees 75 million ($648,845) which requires NetSol PK to maintain a long-term debt equity ratio of 60:40 and the current ratio
of 1:1. NetSol PK also has an approved export refinance facility of Rs. 350 million ($3,027,643) and a running finance facility
of Rs. 150 million ($1,297,690) from Samba Bank Limited. During the tenure of loan, these two facilities 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 the date of this report, we are in compliance with the financial covenants associated with our borrowings. The maturity dates
of the borrowings of respective subsidiaries may accelerate if they do not comply with these covenants. In case of any change
in control in subsidiaries, they may have to repay their respective credit facilities.
CRITICAL
ACCOUNTING POLICIES
Our
financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United
States (“U.S. GAAP”). Preparing financial statements requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s
application of accounting policies. Critical accounting policies for us include revenue recognition and multiple element arrangements,
intangible assets, software development costs, and goodwill.
REVENUE
RECOGNITION
The
Company derives revenues from the following sources: (1) software licenses, (2) services, which include implementation and consulting
services, and (3) maintenance, which includes post contract support.
The
Company recognizes revenue from license contracts without major customization when a non-cancelable, non-contingent license agreement
has been signed, delivery of the software has occurred, the fee is fixed or determinable, and collectability is probable. Delivery
is considered to have occurred upon electronic transfer of the license key that provides immediate availability of the product
to the purchaser. Determining whether and when some of these criteria have been satisfied often involves assumptions and judgments
that can have a significant impact on the timing and amount of revenue the Company reports.
If
an arrangement does not qualify for separate accounting of the software license and consulting transactions, then new software
license revenue is generally recognized together with the consulting services based on contract accounting using either the percentage-of-completion
or completed contract method. Contract accounting is applied to any arrangements: (1) that include milestones or customer specific
acceptance criteria that may affect collection of the software license fees; (2) where services include significant modification
or customization of the software; (3) where significant consulting services are provided for in the software license contract
without additional charge or are substantially discounted; or (4) where the software license payment is tied to the performance
of consulting services.
Revenue
from consulting services is recognized as the services are performed for time-and-materials contracts. Revenue from training and
development services is recognized as the services are performed.
Revenue
from maintenance agreements is recognized ratably over the term of the maintenance agreement, typically one year.
Multiple
Element Arrangements
The
Company may enter into multiple element revenue arrangements in which a customer may purchase a number of different combinations
of software licenses, consulting services, maintenance and support, as well as training and development.
Vendor
specific objective evidence (“VSOE”) of fair value for each element is based on the price for which the element is
sold separately. The Company determines the VSOE of fair value of each element based on historical evidence of the Company’s
stand-alone sales of these elements to third-parties or from the stated renewal rate for the elements contained in the initial
software license arrangement. When VSOE of fair value does not exist for any undelivered element, revenue is deferred until the
earlier of the point at which such VSOE of fair value exists or until all elements of the arrangement have been delivered. The
only exception to this guidance is when the only undelivered element is maintenance and support or other services, then the entire
arrangement fee is recognized ratably over the performance period.
INTANGIBLE
ASSETS
Intangible
assets consist of product licenses, renewals, enhancements, copyrights, trademarks, trade names, and customer lists. Intangible
assets with finite lives are amortized over the estimated useful life and are evaluated for impairment at least on an annual basis
and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We assess recoverability
by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows.
If the future undiscounted cash flows are less than the carrying amount of these assets, we recognize an impairment loss based
on the excess of the carrying amount over the fair value of the assets.
SOFTWARE
DEVELOPMENT COSTS
Costs
incurred to internally develop computer software products or to enhance an existing product are recorded as research and development
costs and expensed when incurred until technological feasibility for the respective product is established. Thereafter, all software
development costs are capitalized and reported at the lower of unamortized cost or net realizable value. Capitalization ceases
when the product or enhancement is available for general release to customers.
The
Company makes on-going evaluations of the recoverability of its capitalized software projects by comparing the amount capitalized
for each product to the estimated net realizable value of the product. If such evaluations indicate that the unamortized software
development costs exceed the net realizable value, the Company writes off the amount which the unamortized software development
costs exceed net realizable value. Capitalized and purchased computer software development costs are being amortized ratably based
on the projected revenue associated with the related software or on a straight-line basis.
STOCK-BASED
COMPENSATION
Our
stock-based compensation expense is estimated at the grant date based on the award’s fair value as calculated by the Black-Scholes-Merton
(BSM) option pricing model and is recognized as expense over the requisite service period. The BSM model requires various highly
judgmental assumptions including expected volatility and expected term. If any of the assumptions used in the BSM model changes
significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.
In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to
vest. We estimate the forfeiture rate based on historical experience and our expectations regarding future pre-vesting termination
behavior of employees. To the extent our actual forfeiture rate is different from our estimate; stock-based compensation expense
is adjusted accordingly.
GOODWILL
Goodwill
represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase businesses
combination. Goodwill is reviewed for impairment on an annual basis, or more frequently if events or changes in circumstances
indicate that the carrying amount of goodwill may be impaired. The goodwill impairment test is a two-step test. Under the first
step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the
reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise
must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of
the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value
of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation.
The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting
unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value,
step two does not need to be performed.
RECENT
ACCOUNTING PRONOUNCEMENTS
For
information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial
statements, see Note 2 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report.