Quarterly Report (10-q)

Datum : 13/02/2018 @ 18h52
Quelle : Edgar (US Regulatory)
Name : Netsol Technologies Inc. (NTWK)
Kurs : 5.85  0.0 (0.00%) @ 08h05
Netsol Technologies Inc. share price Chart

Quarterly Report (10-q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended December 31, 2017

 

[  ] For the transition period from __________ to __________

 

Commission file number: 0-22773

 

NETSOL TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

 

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

 

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

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

 

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

Yes [X] No [  ]

 

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

 

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

 

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

Yes [  ] No [X]

 

The issuer had 11,395,401 shares of its $.01 par value Common Stock and no Preferred Stock issued and outstanding as of February 10, 2018.

 

 

 

     

 

 

NETSOL TECHNOLOGIES, INC.

 

  Page No.
PART I. FINANCIAL INFORMATION  
Item 1. Financial Statements (Unaudited)  
Condensed Consolidated Balance Sheets as of December 31, 2017 and June 30, 2017 3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2017 and 2016 4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended December 31, 2017 and 2016 5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2017 and 2016 6
Notes to the Condensed Consolidated Financial Statements 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
Item 3. Quantitative and Qualitative Disclosures about Market Risk 45
Item 4. Controls and Procedures 46
   
PART II. OTHER INFORMATION  
Item 1. Legal Proceedings 47
Item 1A Risk Factors 47
Item 2. Unregistered Sales of Equity and Use of Proceeds 47
Item 3. Defaults Upon Senior Securities 47
Item 4. Mine Safety Disclosures 47
Item 5. Other Information 48
Item 6. Exhibits 48

 

Page 2

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

    As of December 31,     As of June 30,  
    2017     2017  
ASSETS                
Current assets:                
Cash and cash equivalents   $ 10,004,650     $ 14,172,954  
Accounts receivable, net of allowance of $347,413 and $571,511     19,106,677       6,583,199  
Accounts receivable, net - related party     2,582,403       1,644,942  
Revenues in excess of billings     16,094,026       19,126,389  
Revenues in excess of billings - related party     107,562       80,705  
Convertible note receivable - related party     750,000       200,000  
Other current assets     2,819,183       2,463,886  
Total current assets     51,464,501       44,272,075  
Restricted cash     90,000       90,000  
Revenues in excess of billings, net - long term     6,668,854       5,173,538  
Property and equipment, net     18,443,494       20,370,703  
Other assets     3,543,315       3,211,295  
Intangible assets, net     14,810,605       17,043,151  
Goodwill     9,516,568       9,516,568  
Total assets   $ 104,537,337     $ 99,677,330  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable and accrued expenses   $ 7,560,298     $ 6,880,194  
Current portion of loans and obligations under capitalized leases     10,133,100       10,222,795  
Unearned revenues     10,082,346       3,925,702  
Common stock to be issued     88,324       88,324  
Total current liabilities     27,864,068       21,117,015  
Loans and obligations under capitalized leases; less current maturities     250,883       366,762  
Total liabilities     28,114,951       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; 11,395,401 shares issued and 11,221,347 outstanding as of December 31, 2017 and 11,225,385 shares issued and 11,190,606 outstanding as of June 30, 2017     113,954       112,254  
Additional paid-in-capital     125,354,035       124,409,998  
Treasury stock (At cost, 174,054 shares and 34,779 shares as of December 31, 2017 and June 30, 2017, respectively)     (1,055,330 )     (454,310 )
Accumulated deficit     (42,036,467 )     (42,301,390 )
Stock subscription receivable     (221,000 )     (297,511 )
Other comprehensive loss     (20,276,030 )     (18,074,570 )
Total NetSol stockholders’ equity     61,879,162       63,394,471  
Non-controlling interest     14,543,224       14,799,082  
Total stockholders’ equity     76,422,386       78,193,553  
Total liabilities and stockholders’ equity   $ 104,537,337     $ 99,677,330  

 

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

 

Page 3

 

 

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

(UNAUDITED)

 

    For the Three Months     For the Six Months  
    Ended December 31,     Ended December 31,  
    2017     2016     2017     2016  
          Restated           Restated  
Net Revenues:                                
License fees   $ 235,932     $ 3,769,557     $ 561,998     $ 9,223,352  
Maintenance fees     3,568,448       3,588,899       7,042,173       7,112,696  
Services     9,087,191       6,619,158       16,104,928       12,175,293  
License fees - related party     217,105       -       261,513       246,957  
Maintenance fees - related party     101,251       51,345       204,214       181,976  
Services - related party     1,236,508       1,829,827       3,090,385       3,994,981  
Total net revenues     14,446,435       15,858,786       27,265,211       32,935,255  
                                 
Cost of revenues:                                
Salaries and consultants     5,362,092       5,979,804       10,826,252       11,873,153  
Travel     287,901       836,240       801,013       1,548,135  
Depreciation and amortization     1,168,103       1,318,764       2,341,216       2,649,636  
Other     939,986       1,065,727       1,796,568       2,038,065  
Total cost of revenues     7,758,082       9,200,535       15,765,049       18,108,989  
                                 
Gross profit     6,688,353       6,658,251       11,500,162       14,826,266  
                                 
Operating expenses:                                
Selling and marketing     1,932,140       2,713,478       3,643,436       5,057,516  
Depreciation and amortization     222,785       271,485       468,658       540,582  
Provision for bad debts     -       1,026       -       1,026  
General and administrative     4,026,706       3,932,387       7,814,264       8,551,583  
Research and development cost     189,891       91,607       374,976       184,539  
Total operating expenses     6,371,522       7,009,983       12,301,334       14,335,246  
                                 
Income from operations     316,831       (351,732 )     (801,172 )     491,020  
                                 
Other income and (expenses)                                
Loss on sale of assets     (8,939 )     (32,339 )     (16,069 )     (34,742 )
Interest expense     (109,675 )     (62,127 )     (227,746 )     (116,602 )
Interest income     115,570       23,416       252,481       53,856  
Gain (loss) on foreign currency exchange transactions     1,737,967       (621,887 )     2,754,329       (1,036,783 )
Share of net loss from equity investment     (203,336 )     -       (270,898 )     -  
Other income     14,511       6,823       15,610       28,383  
Total other income (expenses)     1,546,098       (686,114 )     2,507,707       (1,105,888 )
                                 
Net income (loss) before income taxes     1,862,929       (1,037,846 )     1,706,535       (614,868 )
Income tax provision     (200,927 )     (338,884 )     (225,798 )     (378,759 )
Net income (loss)     1,662,002       (1,376,730 )     1,480,737       (993,627 )
Non-controlling interest     (1,027,581 )     (791,664 )     (1,215,814 )     (1,560,878 )
Net income (loss) attributable to NetSol   $ 634,421     $ (2,168,394 )   $ 264,923     $ (2,554,505 )
                                 
Net income (loss) per share:                                
Net income (loss) per common share                                
Basic   $ 0.06     $ (0.20 )   $ 0.02     $ (0.24 )
Diluted   $ 0.06     $ (0.20 )   $ 0.02     $ (0.24 )
                                 
Weighted average number of shares outstanding                                
Basic     11,159,075       10,877,446       11,115,346       10,783,685  
Diluted     11,171,543       10,877,446       11,127,814       10,783,685  

 

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

 

Page 4

 

 

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

 

    For the Three Months   For the Six Months
    Ended December 31,   Ended December 31,
    2017   2016   2017   2016
        Restated       Restated
Net income (loss)   $ 634,421     $ (2,168,394 )   $ 264,923     $ (2,554,505 )
Other comprehensive income (loss):                                
Translation adjustment     (2,453,890 )     (944,837 )     (3,279,634 )     149,237  
Translation adjustment attributable to non-controlling interest     841,009       276,575       1,078,174       (47,138 )
Net translation adjustment     (1,612,881 )     (668,262 )     (2,201,460 )     102,099  
Comprehensive income (loss) attributable to NetSol   $ (978,460 )   $ (2,836,656 )   $ (1,936,537 )   $ (2,452,406 )

 

 

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

 

Page 5

 

 

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

 

    For the Six Months  
    Ended December 31,  
    2017     2016  
          Restated  
Cash flows from operating activities:                
Net income (loss)   $ 1,480,737     $ (993,627 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:                
Depreciation and amortization     2,809,874       3,190,218  
Provision for bad debts     -       1,026  
Share of net loss from investment under equity method     270,898       -  
Loss on sale of assets     16,069       34,742  
Stock based compensation     833,530       1,525,775  
Fair market value of warrants and stock options granted     -       21,804  
Changes in operating assets and liabilities:                
Accounts receivable     (13,231,059 )     3,678,110  
Accounts receivable - related party     (1,637,829 )     829,285  
Revenues in excess of billing     602,676       (7,592,495 )
Revenues in excess of billing - related party     (32,308 )     285,791  
Other current assets     (524,547 )     585,147  
Accounts payable and accrued expenses     887,824       334,241  
Unearned revenue     6,469,146       (1,830,619 )
Net cash provided by (used in) operating activities     (2,054,989 )     69,398  
                 
Cash flows from investing activities:                
Purchases of property and equipment     (543,123 )     (1,074,316 )
Sales of property and equipment     193,241       181,087  
Convertible note receivable - related party     (500,000 )     -  
Investment in WRLD3D     (50,000 )     (705,555 )
Net cash used in investing activities     (899,882 )     (1,598,784 )
                 
Cash flows from financing activities:                
Proceeds from the exercise of stock options and warrants     215,311       429,452  
Proceeds from exercise of subsidiary options     7,755       18,089  
Purchase of treasury stock     (601,020 )     (38,885 )
Dividend paid by subsidiary to non-controlling interest     (417,853 )     (968,657 )
Proceeds from bank loans     708,457       -  
Payments on capital lease obligations and loans - net     (361,814 )     (69,998 )
Net cash used in financing activities     (449,164 )     (629,999 )
Effect of exchange rate changes     (764,269 )     107,241  
Net decrease in cash and cash equivalents     (4,168,304 )     (2,052,144 )
Cash and cash equivalents, beginning of the period     14,172,954       11,557,527  
Cash and cash equivalents, end of period   $ 10,004,650     $ 9,505,383  

 

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

 

Page 6

 

 

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

 

    For the Six Months  
    Ended December 31,  
    2017     2016  
SUPPLEMENTAL DISCLOSURES:                
Cash paid during the period for:                
Interest   $ 189,769     $ 123,682  
Taxes   $ 226,098     $ 77,414  
                 
NON-CASH INVESTING AND FINANCING ACTIVITIES:                
Provided services for investment in WRLD3D   $ 553,678     $ 549,621  
Assets acquired under capital lease   $ 113,220     $ -  

 

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

 

Page 7

 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(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 Six Months  
    Ended December 31, 2016     Ended December 31, 2016  
    Originally reported     Reclassified     Originally reported     Reclassified  
                         
Net Revenues:                                
Services   $ 6,984,084     $ 6,619,158     $ 12,790,801     $ 12,175,293  
Services - related party     1,464,901       1,829,827       3,379,473       3,994,981  
    $ 8,448,985     $ 8,448,985     $ 16,170,274     $ 16,170,274  
                                 
Operating expenses:                                
Provision for bad debts   $ -     $ 1,026     $ -     $ 1,026  
General and administrative     3,933,413       3,932,387       8,552,609       8,551,583  
    $ 3,933,413     $ 3,933,413     $ 8,552,609     $ 8,552,609  

 

Page 8

 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(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 December 31, 2017, and June 30, 2017, the Company had uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $8,463,863 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.

 

Page 9

 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

 

The Company’s financial assets that are measured at fair value on a recurring basis as of December 31, 2017, are as follows:

 

    Level 1     Level 2     Level 3     Total Assets  
Revenue in excess of billing - long term   $ -     $ -     $ 6,668,854     $ 6,668,854  
Total   $ -     $ -     $ 6,668,854     $ 6,668,854  

 

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  
Revenue 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 December 31, 2017 is as follows:

 

    Revenue in excess of billing - long term     Fair value discount     Total  
Balance at June 30, 2017   $ 5,483,869     $ (310,331 )   $ 5,173,538  
Additions     1,469,379     $ (85,057 )     1,384,322  
Amortization during the period     -       110,994       110,994  
Balance at December 31, 2017   $ 6,953,248     $ (284,394 )   $ 6,668,854  

 

The Company applied the discounted cash flow method to calculate the fair value and used NetSol PK’s weighted average borrowing rate, ranging from 3.93% 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 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.

 

Page 10

 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

 

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

 

In May 2014, the (“FASB”) issued Accounting Standards Update (“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 No. 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 Accounting Standards Update No. 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 No. 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 Consolidated Financial Statements.

 

In January 2017, the FASB issued ASU No. 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.

 

Page 11

 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

 

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as a modification. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new standard will be effective prospectively for the Company for the fiscal year beginning July 1, 2018. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.

 

In July 2017, the FASB issued ASU No. 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, warrants, and stock awards.

 

Page 12

 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

 

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

 

    For the three months ended
December 31, 2017
    For the six months ended
December 31, 2017
 
    Net Income     Shares     Per Share     Net Income     Shares     Per Share  
Basic income per share:                                                
Net income available to common shareholders   $ 634,421       11,159,075     $ 0.06     $ 264,923       11,115,346     $ 0.02  
Effect of dilutive securities                                                
Stock options     -       12,468       -       -       12,468       -  
Diluted income per share   $ 634,421       11,171,543     $ 0.06     $ 264,923       11,127,814     $ 0.02  

 

      For the three months ended
December 31, 2016
    For the six months ended
December 31, 2016
 
    Net Loss     Shares     Per Share     Net Loss     Shares     Per Share  
    Restated           Restated     Restated           Restated  
Basic loss per share:                                                
Net loss available to common shareholders   $ (2,168,394 )     10,877,446     $ (0.20 )   $ (2,554,505 )     10,783,685     $ (0.24 )
Effect of dilutive securities                                                
Stock options     -       -       -       -       -       -  
Diluted loss per share   $ (2,168,394 )     10,877,446     $ (0.20 )   $ (2,554,505 )     10,783,685     $ (0.24 )

 

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 Six Months  
    Ended December 31,     Ended December 31,  
    2017     2016     2017     2016  
                         
Stock Options     -       480,133       -       480,133  
Warrants     -       11,075       -       11,075  
Share Grants     285,956       629,258       285,956       629,258  
      285,956       1,120,466       285,956       1,120,466  

 

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 $20,276,030 and $18,074,570 as of December 31, 2017 and June 30, 2017, respectively. During the three and six months ended December 31, 2017, comprehensive income (loss) in the consolidated statements of comprehensive income (loss) included a translation loss attributable to NetSol of $1,612,881 and $2,201,460, respectively. During the three and six months ended December 31, 2016, comprehensive income (loss) in the consolidated statements of operations included a translation loss of $668,262 and translation income of $102,099, respectively.

 

Page 13

 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(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 six months ended December 31, 2017, NetSol Innovation provided services of $796,757 and $1,928,513, respectively. During the three and six months ended December 31, 2016, NetSol-Innovation provided services of $1,401,144 and $2,956,619, respectively. Accounts receivable at December 31, 2017 and June 30, 2017 were $2,429,771 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 six months ended December 31, 2017, NTE and VLS provided license, maintenance and services of $442,699 and $1,043,891, respectively. During the three and six months ended December 31, 2016, NTE and VLS provided license, maintenance and services of $115,102 and $851,787, respectively. Accounts receivable at December 31, 2017 and June 30, 2017 were $113,310 and $133,218, respectively.

 

WRLD3D

 

On May 31, 2017, Faizaan Ghauri, son of CEO Najeeb Ghauri, and an employee of the Company was appointed CEO of WRLD3D, Inc. (“WRLD3D”) a non-public company. On March 2, 2016, the Company purchased a 4.9% interest in WRLD3D for $1,111,111 and the Company’s subsidiary NetSol PK 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. See Note 7 and Note 11.

 

G-FORCE

 

Najeeb Ghauri, CEO and Chairman of the Board, and Naeem Ghauri, Director, have a financial interest in G-Force, LLC, which purchased a 4.9% investment in WRLD3D, Inc. for $1,111,111. See Note 11 “Other Long-Term Assets”

 

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 35.90% and 41.54% of revenue for the six months ended December 31, 2017 and 2016, respectively. The revenue from this customer is shown in the Asia – Pacific segment. Accounts receivable at December 31, 2017 and June 30, 2017, were $12,761,829 and $1,620,717, respectively. Revenue in excess of billing at December 31, 2017 was $16,674,348, which included $6,668,854 shown as long term. Revenue 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 $85,054,591) 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 $7,008,019) for years 1-5 and €8,350,000 (approximately $10,002,899) 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 $9,277,108) to be earned over the remaining life of the contract. The amended agreement provides for €7,000,000 (approximately $8,433,735) to be paid in the current fiscal year with €100,000 (approximately $120,482) to be paid each year over the remaining seven years.

 

Page 14

 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

 

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 December 31, 2017, 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.

 

NOTE 8 - OTHER CURRENT ASSETS

 

Other current assets consisted of the following:

 

    As of December 31,     As of June 30,  
    2017     2017  
             
Prepaid Expenses   $ 660,417     $ 597,687  
Advance Income Tax     979,296       1,052,935  
Employee Advances     114,147       128,100  
Security Deposits     84,934       103,255  
Other Receivables     648,237       252,590  
Other Assets     332,152       329,319  
Total   $ 2,819,183     $ 2,463,886  

 

NOTE 9 – REVENUE IN EXCESS OF BILLINGS – LONG TERM

 

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

 

    As of December 31,     As of June 30,  
    2017     2017  
Revenue in excess of billing - long term   $ 6,953,248     $ 5,483,869  
Present value discount     (284,394 )     (310,331 )
Net Balance   $ 6,668,854     $ 5,173,538  

 

Pursuant to revenue recognition for contract accounting, the Company has recorded revenue in excess of billings long-term for amounts billable after one year. During the three and six months ended December 31, 2017, the Company accreted $59,272 and $110, 994, respectively, which is recorded in interest income. The Company used the discounted cash flow method with interest rates ranging from 3.93% to 4.43%.

 

Page 15

 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

 

NOTE 10 - PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

    As of December 31,     As of June 30,  
    2017     2017  
             
Office Furniture and Equipment   $ 3,908,883     $ 3,755,710  
Computer Equipment     25,788,684       26,693,730  
Assets Under Capital Leases     1,522,708       1,965,650  
Building     8,794,381       9,243,866  
Land     2,299,047       2,428,626  
Autos     1,287,043       1,270,339  
Improvements     534,900       592,652  
Subtotal     44,135,646       45,950,573  
Accumulated Depreciation     (25,692,152 )     (25,579,870 )
Property and Equipment, Net   $ 18,443,494     $ 20,370,703  

 

For the three and six months ended December 31, 2017, depreciation expense totaled $707,668 and $1,436,327, respectively. Of these amounts, $484,883 and $967,669, respectively, are reflected in cost of revenues. For the three and six months ended December 31, 2016, depreciation expense totaled $902,678 and $1,801,981, respectively. Of these amounts, $631,193 and $1,261,399, respectively, are reflected in cost of revenues.

 

Following is a summary of fixed assets held under capital leases as of December 31, 2017 and June 30, 2017:

 

    As of December 31,     As of June 30,  
    2017     2017  
Computers and Other Equipment   $ 236,518     $ 309,863  
Furniture and Fixtures     65,084       227,914  
Vehicles     1,221,106       1,427,873  
Total     1,522,708       1,965,650  
Less: Accumulated Depreciation - Net     (568,087 )     (711,622 )
    $ 954,621     $ 1,254,028  

 

NOTE 11 – OTHER LONG TERM ASSETS

 

        As of December 31,     As of June 30,  
        2017     2017  
                 
Investment   (1)   $ 3,389,801     $ 3,057,020  
Long Term Security Deposits         153,514       154,275  
Total       $ 3,543,315     $ 3,211,295  

 

(1) Investment in WRLD3D

 

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, the subsidiary of the Company, purchased a 12.2% investment in WRLD3D, for $2,777,778 which will be earned over future periods by providing IT and enterprise software solutions. Per the agreement, NetSol PK is to provide a minimum of $200,000 of services in each three-month period and the entire balance is required to be provided within three years of the date of the agreement. If NetSol PK fails to provide the future services, it may be required to forfeit the unearned shares back to WRLD3D. As of December 31, the investment earned by NetSol PK is $2,549,587.

 

Page 16

 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

 

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

 

  The warrants are exercisable into shares of the “Next Round Preferred”, only if and when the Next Round Preferred is issued by WRLD3D in a “Qualified Financing”.
  The warrants expire on March 2, 2020.
  “Next Round Preferred” is defined as occurring if WRLD3D’s preferred stock (or securities convertible into preferred stock) are issued in a Qualified Financing that occurs after March 2, 2016.
  “Qualified Financing” is defined as financing with total proceeds of at least $2 million.
  The total number of common stock shares to be issued is equal to $1,250,000 divided by the per share price of the Next Round Preferred.
  The exercise price of the warrants is equal to the greater of

 

  a) 70% of the per share price of the Next Round Preferred sold in a Qualified Financing, or
     
  b) 25,000,000 divided by the total number of shares of common stock outstanding immediately prior to the Qualified Financing (on a fully-diluted basis, excluding the number of common stock shares issuable upon the exercise of any given warrant).

 

The Company had originally accounted for the investment under the cost method. On May 31, 2017, the Company determined that it met the significant influence criteria since the newly appointed CEO of WRLD3D is the son of the CEO, Najeeb Ghauri, and also an employee of the Company; therefore, the Company changed the accounting treatment from the cost method to the equity method.

 

During the three and six months ended December 31, 2017, NetSol PK provided services valued at $315,408 and $583,708, respectively. During the three and six months ended December 31, 2016, NetSol PK provided services valued at $300,963 and $549,621, 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 December 31, 2017 and June 30, 2017 were $39,322 and $49,646, respectively. Revenue in excess of billing at December 31, 2017 and June 30, 2017 were $107,562 and $80,705, respectively. During the three and six months ended December 31, 2017, NetSol PK services valued at $285,378 and $553,678, respectively, were released from restriction. During the three and six months ended December 31, 2016, NetSol PK services valued at $300,963 and $549,621, respectively, were released from restriction. Under the equity method of accounting, the Company recorded its share of net loss of $203,336 and $270,898 for the three and six months ended December 31, 2017, respectively.

 

NOTE 12 - INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

 

    As of December 31,     As of June 30,  
    2017     2017  
             
Product Licenses - Cost   $ 47,244,997     $ 47,244,997  
Effect of Translation Adjustment     (4,850,984 )     (3,134,488 )
Accumulated Amortization     (27,583,408 )     (27,067,358 )
Net Balance   $ 14,810,605     $ 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 $14,810,605 will be amortized over the next 5.5 years. Amortization expense for the three and six months ended December 31, 2017 was $683,220 and $1,373,547, respectively. Amortization expense for the three and six months ended December 31, 2016 was $687,571 and $1,388,237, respectively.

 

Page 17

 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

 

(B) Future Amortization

 

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

 

Year ended:      
December 31, 2018   $ 2,630,334  
December 31, 2019     2,630,334  
December 31, 2020     2,630,334  
December 31, 2021     2,630,334  
December 31, 2022     2,630,334  
Thereafter     1,658,935  
    $ 14,810,605  

 

NOTE 13 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following:

 

    As of December 31,     As of June 30,  
    2017     2017  
             
Accounts Payable   $ 1,639,112     $ 1,466,265  
Accrued Liabilities     5,086,258       4,498,958  
Accrued Payroll & Taxes     488,491       520,719  
Taxes Payable     167,994       174,485  
Other Payable     178,443       219,767  
Total   $ 7,560,298     $ 6,880,194  

 

Page 18

 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

 

NOTE 14 – DEBTS

 

Notes payable and capital leases consisted of the following:

 

        As of December 31, 2017  
              Current     Long-Term  
Name       Total     Maturities     Maturities  
                       
D&O Insurance   (1)   $ 105,023     $ 105,023     $ -  
Bank Overdraft Facility   (2)     -       -       -  
Loan Payable Bank - Export Refinance   (3)     4,521,613       4,521,613       -  
Loan Payable Bank - Running Finance   (4)     678,217       678,217       -  
Loan Payable Bank - Export Refinance II   (5)     3,165,130       3,165,130       -  
Loan Payable Bank - Running Finance II   (6)     1,356,484       1,356,484       -  
          9,826,467       9,826,467       -  
Subsidiary Capital Leases   (7)     557,516       306,633       250,883  
        $ 10,383,983     $ 10,133,100     $ 250,883  

 

        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, Errors and Omissions (“E&O”) liability insurance and some account payables, 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 December 31, 2017 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 $405,405. The annual interest rate was 4.75% as of December 31, 2017. Total outstanding balance as of December 31, 2017 was £Nil. Interest expense for three and six months ended December 31, 2017, was $5,991 and $8,045, respectively. Interest expense for three and six months ended December 31, 2016, was $nil.

 

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 December 31, 2017, 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 $4,521,613 at December 31, 2017 and June 30, 2017. The interest rate for the loans was 3% at December 31, 2017 and June 30, 2017. Interest expense for the three and six months ended December 31, 2017 was $35,533 and $71,431, respectively. Interest expense for the three and six months ended December 31, 2016 was $28,527 and $57,592, 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 $678,242, at December 31, 2017. NetSol PK used Rs. 74,997,233 or $678,217, at December 31, 2017. The interest rate for the loans was 8.16% at December 31, 2017.

 

Page 19

 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

 

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 December 31, 2017, 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 $3,165,130 and Rs. 200,000,000 or $1,910,585, at December 31, 2017 and June 30, 2017, respectively. The interest rate for the loans was 3% at December 31, 2017 and June 30, 2017. Interest expense for the three and six months ended December 31, 2017 was $17,656 and $39,778, respectively. Interest expense for three and six months ended December 31, 2016, 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 $1,356,484 and Rs. 300,000,000 or $2,865,877, at December 31, 2017 and June 30, 2017, respectively. The interest rate for the loans was 8.13% at December 31, 2017 and June 30, 2017, respectively. Interest expense for the three and six months ended December 31, 2017 was $35,626 and $79,721, respectively. Interest expense for three and six months ended December 31, 2016, 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 December 31, 2017, 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 ended December 31, 2017 and 2016.

 

Following is the aggregate minimum future lease payments under capital leases as of December 31, 2017:

 

    Amount  
Minimum Lease Payments        
Due FYE 12/31/18   $ 336,546  
Due FYE 12/31/19     220,855  
Due FYE 12/31/20     36,412  
Due FYE 12/31/21     5,182  
Due FYE 12/31/22     -  
Total Minimum Lease Payments     598,995  
Interest Expense relating to future periods     (41,479 )
Present Value of minimum lease payments     557,516  
Less: Current portion     (306,633 )
Non-Current portion   $ 250,883  

 

NOTE 15 - STOCKHOLDERS’ EQUITY

 

During the six months ended December 31, 2017, the Company issued 26,136 shares of common stock for services rendered by officers of the Company. These shares were valued at the fair market value of $163,350.

 

During the six months ended December 31, 2017, 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 six months ended December 31, 2017, the Company issued 98,408 shares of its common stock to employees pursuant to the terms of their employment agreements valued at $605,107.

 

Page 20

 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

 

During the six months ended December 31, 2017, the Company collected subscription receivable of $76,511 related to the exercise of stock options in previous years.

 

During the six months ended December 31, 2017, the Company received $138,800 pursuant to a stock option agreement for the exercise of 35,773 shares of common stock at a price of $3.88 per share.

 

During the six months ended December 31, 2017, the Company paid $601,020 to purchase 139,275 of shares of its common stock from the open market at an average price of $4.32 per share.

 

NOTE 16 - INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN

 

Common stock purchase options and warrants 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, December 31, 2017     438,360     $ 4.20       0.57     $ 319,465  

 

The following table summarizes information about stock options and warrants outstanding and exercisable at December 31, 2017.

 

Exercise Price     Number Outstanding and Exercisable     Weighted Average Remaining Contractual Life     Weighted Ave Exercise Price  
OPTIONS:                    
                     
$ 3.88       384,898       0.49     $ 3.88  
$ 6.50       53,462       1.10     $ 6.50  
Totals       438,360       0.57     $ 4.20  

 

Page 21

 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

 

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  
Vested     (134,243 )   $ 6.13  
Unvested, December 31, 2017     285,956     $ 6.18  

 

For the three and six months ended December 31, 2017, the Company recorded compensation expense of $405,721 and $833,530, respectively. For the three and six months ended December 31, 2016, the Company recorded compensation expense of $682,640 and $1,547,579, respectively. The compensation expense related to the unvested stock grants as of December 31, 2017 was $1,731,908 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.

 

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.

 

Page 22

 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

 

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 alleges damages in excess of £200,000 (approximately $270,270). VLS has responded to the complaint and its expenses are currently covered by available insurance. VLS denies all claims and intends to vigorously defend the action.

 

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 December 31, 2017 and June 30, 2017:

 

    As of December 31,     As of June 30,  
    2017     2017  
Identifiable assets:                
Corporate headquarters   $ 3,308,334     $ 2,922,514  
North America     5,513,464       6,717,366  
Europe     6,590,233       6,056,514  
Asia - Pacific     89,125,306       83,980,936  
Consolidated   $ 104,537,337     $ 99,677,330  

 

The following table presents a summary of investment under equity method as of December 31, 2017 and June 30, 2017:

 

    As of December 31,     As of June 30,  
    2017     2017  
Investment in WRLD3D:                
Corporate headquarters   $ 1,033,486     $ 1,111,111  
Asia - Pacific     2,356,315       1,945,909  
Consolidated   $ 3,389,801     $ 3,057,020  

 

Page 23

 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

 

The following table presents a summary of operating information for the three and six months ended December 31:

 

    For the Three Months     For the Six Months  
    Ended December 31,     Ended December 31,  
    2017     2016     2017     2016  
          Restated           Restated  
Revenues from unaffiliated customers:                                
North America   $ 1,287,638     $ 1,513,997     $ 2,135,710     $ 3,355,428  
Europe     1,661,213       1,298,037       3,109,037       1,888,578  
Asia - Pacific     10,258,128       11,530,506       18,464,352       23,267,335  
      13,206,979       14,342,540       23,709,099       28,511,341  
Revenue from affiliated customers                                
Europe     442,699       115,102       1,043,891       1,467,295  
Asia - Pacific     796,757       1,401,144       2,512,221       2,956,619  
      1,239,456       1,516,246       3,556,112       4,423,914  
Consolidated   $ 14,446,435     $ 15,858,786     $ 27,265,211     $ 32,935,255  
                                 
Intercompany revenue                                
Europe   $ 139,228     $ 95,053     $ 241,703     $ 231,180  
Asia - Pacific     768,431       1,462,603       1,145,368       1,922,554  
Eliminated   $ 907,659     $ 1,557,656     $ 1,387,071     $ 2,153,734  
                                 
Net income (loss) after taxes and before non-controlling interest:                                
Corporate headquarters   $ (1,258,717 )   $ (1,190,559 )   $ (2,296,641 )   $ (2,179,432 )
North America     65,194       (71,134 )     (230,452 )     (266,817 )
Europe     180,655       (698,364 )     280,045       (1,293,771 )
Asia - Pacific     2,674,870       583,327       3,727,785       2,746,393  
Consolidated   $ 1,662,002     $ (1,376,730 )   $ 1,480,737     $ (993,627 )

 

 

The following table presents a summary of capital expenditures for the six months ended December 31:

 

    For the Six Months  
    Ended December 31,  
    2017     2016  
Capital expenditures:                
North America   $ -     $ 41,275  
Europe     123,335       273,794  
Asia - Pacific     419,788       759,247  
Consolidated   $ 543,123     $ 1,074,316  

 

Page 24

 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(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
December 31, 2017
 
             
NetSol PK     33.83 %   $ 12,386,620  
NetSol-Innovation     49.90 %     1,749,551  
VLS, VLSH & VLSIL Combined     49.00 %     407,132  
NetSol Thai     0.006 %     (79 )
Total           $ 14,543,224  

 

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 six months ended December 31, 2017, employees of NetSol PK exercised 50,000 of options of common stock pursuant to employees exercising stock options and NetSol PK received cash of $7,755 resulting in an increase in non-controlling interest from 33.80% to 33.83%.

 

During the six months ended December 31, 2017, NetSol PK paid a cash dividend of $1,234,991.

 

NOTE 21 – RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

 

During the preparation of the Company’s Form 10-Q for the nine months ended March 31, 2017, misstatements were identified in the previous financial statements relating to the recording of revenue in the proper period. The restated financial statements for the periods affected were disclosed in Note 19 of the Notes to Condensed Consolidated Financial Statement contained in the Company’s Form 10-Q for the nine months ended March 31, 2017.

 

On December 21, 2015, the Company signed a 10-year contract for a 12-country installation of its NFS Ascent product which included a perpetual license, continued maintenance on the existing product and then maintenance on NFS Ascent upon installation. The Company did not appropriately apply the percentage-of-completion method for this arrangement in accordance with ASC 605-35. As a result, for quarter ended September 30, 2016, license revenue was understated by $1,953,935 and for the quarter ended December 31, 2016, license revenue was overstated by $1,580,529.

 

The Company charges maintenance revenue on the license value plus any additional customization that the customer may require. For one customer, the Company did not increase the maintenance fee for the additional customization that was performed during the year. This resulted in an understatement of maintenance revenue of $120,976 for the quarter ended September 30, 2016 and an overstatement of maintenance revenue of $198,797 for the quarter ended December 31, 2016.

 

The following tables present the restated financial statements for the three and six months ended December 31, 2016.

 

Page 25

 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

 

    Balance Sheet  
    As of December 31, 2016  
      As Originally       Amount of          
    Presented       Restatement       As Restated  
ASSETS                        
Current assets:                        
Cash and cash equivalents   $ 9,505,383             $ 9,505,383  
Accounts receivable, net of allowance of $495,760 and $492,498     5,840,490               5,840,490  
Accounts receivable, net - related party     4,303,380               4,303,380  
Revenues in excess of billings     17,646,488       373,406       18,019,894  
Revenues in excess of billings - related party     469,030               469,030  
Other current assets     2,904,650               2,904,650  
Total current assets     40,669,421       373,406       41,042,827  
Restricted cash     90,000               90,000  
Property and equipment, net     21,873,277               21,873,277  
Other assets     2,054,938               2,054,938  
Intangible assets, net     18,423,439               18,423,439  
Goodwill     9,516,568               9,516,568  
Total assets   $ 92,627,643     $ 373,406     $ 93,001,049  
                         
LIABILITIES AND STOCKHOLDERS’ EQUITY                        
Current liabilities:                        
Accounts payable and accrued expenses   $ 7,373,097             $ 7,373,097  
Current portion of loans and obligations under capitalized leases     4,368,930               4,368,930  
Unearned revenues     2,806,804       77,821       2,884,625  
Common stock to be issued     88,324               88,324  
Total current liabilities     14,637,155       77,821       14,714,976  
Long term loans and obligations under capitalized leases; less current maturities     501,554               501,554  
Total liabilities     15,138,709       77,821       15,216,530  
Commitments and contingencies                        
Stockholders’ equity:                        
Preferred stock, $.01 par value; 500,000 shares authorized;     -       -       -  
Common stock, $.01 par value; 14,500,000 shares authorized;                        
10,993,054 shares issued and 10,958,275 outstanding as of December 31, 2016 and 10,713,372 shares issued and 10,686,093 outstanding as of June 30, 2016     109,931               109,931  
Additional paid-in-capital     123,019,215               123,019,215  
Treasury stock (34,779 shares and 27,279 shares)     (454,310 )             (454,310 )
Accumulated deficit     (40,074,755 )     196,890       (39,877,865 )
Stock subscription receivable     (450,220 )             (450,220 )
Other comprehensive loss     (18,628,395 )             (18,628,395 )
Total NetSol stockholders’ equity     63,521,466       196,890       63,718,356  
Non-controlling interest     13,967,468       98,695       14,066,163  
Total stockholders’ equity     77,488,934       295,585       77,784,519  
Total liabilities and stockholders’ equity   $ 92,627,643     $ 373,406     $ 93,001,049  

 

Page 26

 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

 

    For the Three Months     For the Six Months  
    Ended December 31, 2016     Ended December 31, 2016  
    As Originally     Amount of           As Originally     Amount of        
    Presented     Restatement     As Restated     Presented     Restatement     As Restated  
Net Revenues:                                                
License fees   $ 5,350,086     $ (1,580,529 )   $ 3,769,557     $ 8,849,946     $ 373,406     $ 9,223,352  
Maintenance fees     3,787,696       (198,797 )     3,588,899       7,190,517       (77,821 )     7,112,696  
Services     6,984,084               6,984,084       12,790,801               12,790,801