Source: https://ir.netsoltech.com/quarterly-reports/content/0001493152-17-012668/form10-q.htm?TB_iframe=true&height=auto&width=auto&preload=false
Timestamp: 2020-07-07 09:03:07
Document Index: 209250160

Matched Legal Cases: ['arty 1', 'arty 5', 'arty 682', 'arty 246', 'arty 130', 'arty 1', 'arty 121', 'arty 93', 'arty 44', 'arty 102', 'arty 1']

( ) For the transition period from __________ to __________
The issuer had 11,333,129 shares of its $.01 par value Common Stock and no Preferred Stock issued and outstanding as of November 6, 2017.
Condensed Consolidated Balance Sheets as of September 30, 2017 and June 30, 2017 3
Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2017 and 2016 4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended September 30, 2017 and 2016 5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2017 and 2016 6
Item 2. Unregistered Sales of Equity and Use of Proceeds 40
Common stock, $.01 par value; 14,500,000 shares authorized; 11,333,129 shares issued and 11,186,570 outstanding as of September 30, 2017 and 11,225,385 shares issued and 11,190,606 outstanding as of June 30, 2017 113,331 112,254
Treasury stock (At cost, 146,559 shares and 34,779 shares as of September 30, 2017 and June 30, 2017, respectively) (954,973 ) (454,310 )
Total NetSol stockholders’ equity 62,537,424 63,394,471
Total stockholders’ equity 77,287,574 78,193,553
Total liabilities and stockholders’ equity $ 98,479,963 $ 99,677,330
Income (loss) from operations (1,118,003 ) 842,752
Net loss attributable to NetSol $ (369,498 ) $ (386,111 )
Net income (loss) $ (369,498 ) $ (386,111 )
Translation adjustment (825,744 ) 1,094,074
Translation adjustment attributable to non-controlling interest 237,165 (323,713 )
Net translation adjustment (588,579 ) 770,361
Comprehensive income (loss) attributable to NetSol $ (958,077 ) $ 384,250
Stock issued for services 427,809 865,456
Accounts payable and accrued expenses 243,144 (780,569 )
Net cash provided by (used in) financing activities (486,985 ) 241,757
Interest $ 97,547 $ 83,672
Taxes $ 20,961 $ 17,351
Provided services for investment in WRLD3D $ 268,300 $ 248,658
Assets acquired under capital lease $ 41,695 $ -
Ended September, 30 2016
Originally reported Reclassified
Services $ 5,806,717 $ 5,556,135
Services - related party 1,914,572 2,165,154
$ 7,721,289 $ 7,721,289
Selling and marketing $ 2,411,136 $ 2,344,038
General and administrative 4,552,098 4,619,196
$ 6,963,234 $ 6,963,234
Corporate headquarters $ (1,562,419 ) $ (1,629,517 )
Asia - Pacific 1,777,918 1,845,016
$ 215,499 $ 215,499
Cash includes cash on hand and demand deposits in accounts maintained within the United States as well as in foreign countries. Certain financial instruments, which subject the Company to concentration of credit risk, consist of cash and restricted cash. The Company maintains balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for the banks located in the United States. Balances at financial institutions within certain foreign countries are not covered by insurance. As of September 30, 2017, and June 30, 2017, the Company had uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $6,768,138 and $11,564,343, respectively. The Company has not experienced any losses in such accounts.
The Company’s financial assets that are measured at fair value on a recurring basis as of September 30, 2017, are as follows:
Revenue in excess of billing - long term $ - $ - $ 5,225,260 $ 5,225,260
Total $ - $ - $ 5,225,260 $ 5,225,260
The reconciliation from June 30, 2017 to September 30, 2017 is as follows:
Revenue in excess
of billing - long term Fair value
Amortization during the period - 51,722 51,722
Balance at September 30, 2017 $ 5,483,869 $ (258,609 ) $ 5,225,260
The Company applied the discounted cash flow method to calculate the fair value and used NetSol PK’s weighted average borrowing rate, which was 3.96%.
Stock Options 438,360 610,133
Warrants - 11,075
Share Grants 348,228 670,346
786,588 1,291,554
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 $18,663,149 and $18,074,570 as of September 30, 2017 and June 30, 2017, respectively. During the three months ended September 30, 2017 and 2016, comprehensive income (loss) in the consolidated statements of comprehensive income (loss) included a translation loss attributable to NetSol of $588,579 and translation income of $770,361, respectively.
In November 2004, the Company entered into a joint venture with 1insurer, formerly Innovation Group, called NetSol-Innovation. NetSol-Innovation provides support services to 1insurer. During the three months ended September 30, 2017 and 2016, NetSol Innovation provided services of $1,131,756 and $1,555,475, respectively. Accounts receivable at September 30, 2017 and June 30, 2017 were $2,212,132 and $1,462,078, respectively.
In October 2011, NTE entered into an agreement with Investec Asset Finance to acquire VLS. NTE and VLS provide support services to Investec. During the three months ended September 30, 2017 and 2016, NTE and VLS provided license, maintenance and services of $601,192 and $736,685, respectively. Accounts receivable at September 30, 2017 and June 30, 2017 were $350,310 and $133,218, respectively.
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 32.98% and 41.11% of revenue, and 1insurer accounts for approximately 8.83% and 9.11% of revenue for the three months ended September 30, 2017 and 2016, respectively. The revenue from these two customers is shown in the Asia – Pacific segment. Accounts receivable at September 30, 2017 for these customers were $1,682,073 and $2,212,132, respectively. Accounts receivable at June 30, 2017 for these customers were $1,620,717 and $1,462,078, respectively. Revenue in excess of billing at September 30, 2017 for these customers was $22,290,975 and $nil, respectively, which included $5,225,260 shown as long term. Revenue in excess of billing at June 30, 2017 for these customers was $18,579,540 and $nil, respectively, 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 $83,529,000) 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 $6,882,000) for years 1-5 and €8,350,000 (approximately $9,824,000) 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.
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 September 30, 2017, the Company had disbursed $700,000. The Convertible Note bears interest at 5% per annum and all unpaid interest and principal is due and payable upon the Company’s request on or after February 1, 2018. The 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:
Subsequent to September 30, 2017, the Company loaned an additional $50,000 to WRLD3D pursuant to the Convertible Promissory Note agreement.
Prepaid Expenses $ 725,959 $ 597,687
Advance Income Tax 1,101,323 1,052,935
Employee Advances 153,456 128,100
Security Deposits 88,173 103,255
Other Receivables 515,197 252,590
Other Assets 356,491 329,319
Total $ 2,940,599 $ 2,463,886
Revenue in excess of billing - long term $ 5,483,869 $ 5,483,869
Present value discount (258,609 ) (310,331 )
Net Balance $ 5,225,260 $ 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 months ended September 30, 2017, the Company accreted $51,722 which is recorded in interest income for the period. The Company used the discounted cash flow method with an interest rate of 3.96%.
Office Furniture and Equipment $ 3,882,351 $ 3,755,710
Computer Equipment 26,647,891 26,693,730
Assets Under Capital Leases 1,577,465 1,965,650
Building 9,164,885 9,243,866
Land 2,397,930 2,428,626
Autos 1,483,206 1,270,339
Improvements 587,033 592,652
Subtotal 45,740,761 45,950,573
Accumulated Depreciation (26,094,169 ) (25,579,870 )
Property and Equipment, Net $ 19,646,592 $ 20,370,703
For the three months ended September 30, 2017 and 2016, depreciation expense totaled $728,659 and $899,303, respectively. Of these amounts, $482,786 and $630,206, respectively, are reflected in cost of revenues.
Following is a summary of fixed assets held under capital leases as of September 30, 2017 and June 30, 2017:
Computers and Other Equipment $ 232,497 $ 309,863
Furniture and Fixtures 145,258 227,914
Vehicles 1,199,710 1,427,873
Total 1,577,465 1,965,650
Less: Accumulated Depreciation - Net (549,043 ) (711,622 )
$ 1,028,422 $ 1,254,028
Investment (1) $ 3,257,759 $ 3,057,020
Long Term Security Deposits 142,659 154,275
Total $ 3,400,418 $ 3,211,295
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 shares back to WRLD3D. As of September 30, the investment earned by NetSol PK is $2,214,209.
During the three months ended September 30, 2017 and 2016, NetSol PK provided services valued at $268,300 and $250,582, respectively, which 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 September 30, 2017 and June 30, 2017 were $49,120 and $49,646, respectively. Revenue in excess of billing at September 30, 2017 and June 30, 2017 were $80,057 and $80,705, respectively. During the three months ended September 30, 2017 and 2016, NetSol PK services valued at $268,300 and $248,658, respectively, were released from restriction.
Effect of Translation Adjustment (3,501,449 ) (3,134,488 )
Accumulated Amortization (27,603,627 ) (27,067,358 )
Net Balance $ 16,139,921 $ 17,043,151
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 $16,139,921 will be amortized over the next 5.75 years. Amortization expense for the three months ended September 30, 2017 and 2016 was $690,327 and $700,666, respectively.
September 30, 2018 $ 2,743,467
September 30, 2019 2,743,467
September 30, 2020 2,743,467
September 30, 2021 2,743,467
September 30, 2022 2,743,467
Thereafter 2,422,586
$ 16,139,921
Accounts Payable $ 1,466,806 $ 1,466,265
Accrued Liabilities 4,865,906 4,498,958
Accrued Payroll & Taxes 447,549 520,719
Taxes Payable 176,619 174,485
Other Payable 166,268 219,767
Total $ 7,123,148 $ 6,880,194
D&O Insurance (1 ) $ 31,153 $ 31,153 $ -
Bank Overdraft Facility (2 ) 216,442 216,442 -
Loan Payable Bank - Export Refinance (3 ) 4,716,090 4,716,090 -
Loan Payable Bank - Export Refinance II (4 ) 3,301,265 3,301,265 -
Loan Payable Bank - Running Finance (5 ) 1,414,827 1,414,827 -
9,679,777 9,679,777 -
Subsidiary Capital Leases (6 ) 644,549 336,920 307,629
$ 10,324,326 $ 10,016,697 $ 307,629
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 (4 ) 1,910,585 1,910,585 -
Loan Payable Bank - Running Finance (5 ) 2,865,877 2,865,877 -
Subsidiary Capital Leases (6 ) 727,770 361,008 366,762
(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 September 30, 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 $400,000. The annual interest rate was 4.75% as of September 30, 2017. Total outstanding balance as of September 30, 2017 was £162,332 or approximately $216,442. Interest expense for three months ended September 30, 2017 and 2016, was $2,054 and $Nil, respectively.
This overdraft facility requires that the aggregate amount of invoiced trade debtors (net of provisions for bad and doubtful debts and excluding intra-group debtors) of NTE, not exceeding 90 days old, will not be less than an amount equal to 200% of the facility. As of September 30, 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 $4,716,090 at September 30, 2017 and June 30, 2017. The interest rate for the loans was 3% at September 30, 2017 and June 30, 2017. Interest expense for the three months ended September 30, 2017 and 2016 was $35,898 and $29,065, respectively.
This facility requires NetSol PK to maintain a long-term debt equity ratio of 60:40 and the current ratio of 1:1. As of September 30, 2017, NetSol PK was in compliance with this covenant.
(4) 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 $3,301,265 and Rs. 200,000,000 or $1,910,585, at September 30, 2017 and June 30, 2017, respectively. The interest rate for the loans was 3% at September 30, 2017 and June 30, 2017. Interest expense for the three months ended September 30, 2017 and 2016 was $22,122 and $Nil, respectively.
(5) 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 $1,414,827 and Rs. 300,000,000 or $2,865,877, at September 30, 2017 and June 30, 2017, respectively. The interest rate for the loans was 8.13% at September 30, 2017 and June 30, 2017. Interest expense for the three months ended September 30, 20147 and 2016 was $44,095 and $Nil, respectively.
During the tenure of loan, the facilities from Samba Bank Limited require NetSol PK to maintain at a minimum a current ratio of 1:1, an interest coverage ratio of 4 times, a leverage ratio of 2 times, and a debt service coverage ratio of 4 times. As of September 30, 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 September 30, 2017 and 2016.
Following is the aggregate minimum future lease payments under capital leases as of September 30, 2017:
Due FYE 9/30/18 $ 372,280
Due FYE 9/30/19 262,626
Due FYE 9/30/20 53,872
Due FYE 9/30/21 6,486
Due FYE 9/30/22 541
Total Minimum Lease Payments 695,805
Interest Expense relating to future periods (51,256 )
Present Value of minimum lease payments 644,549
Less: Current portion (336,920 )
Non-Current portion $ 307,629
During the three months ended September 30, 2017, the Company issued 13,068 shares of common stock for services rendered by officers of the Company. These shares were valued at the fair market value of $81,675.
During the three months ended September 30, 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 three months ended September 30, 2017, the Company issued 49,204 shares of its common stock to employees pursuant to the terms of their employment agreements valued at $302,553.
During the three months ended September 30, 2017, the Company collected subscription receivable of $23,585 related to the exercise of stock options in previous years.
During the three months ended September 30, 2017, 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 three months ended September 30, 2017, the Company purchased 111,780 of shares of its common stock from open market at an average price of $4.48 per share.
# of shares Weighted Ave
Outstanding and exercisable, September 30, 2017 438,360 $ 4.20 0.81 $ -
The following table summarizes information about stock options and warrants outstanding and exercisable at September 30, 2017.
$ 3.88 384,898 0.74 $ 3.88
$ 6.50 53,462 1.35 $ 6.50
Totals 438,360 0.81 $ 4.20
Date Fair Value ($)
Vested (71,971 ) $ 5.90
Unvested, September 30, 2017 348,228 $ 6.16
For the three months ended September 30, 2017 and 2016, the Company recorded compensation expense of $427,809 and $865,456, respectively. The compensation expense related to the unvested stock grants as of September 30, 2017 was $2,137,629 which will be recognized during the fiscal years 2018 through 2022.
NOTE 17 – 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 $266,667). 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 18 – OPERATING SEGMENTS
The following table presents a summary of identifiable assets as of September 30, 2017 and June 30, 2017:
Corporate headquarters $ 3,398,876 $ 2,922,514
North America 5,736,535 6,717,366
Europe 5,922,323 6,056,514
Asia - Pacific 83,422,229 83,980,936
Consolidated $ 98,479,963 $ 99,677,330
The following table presents a summary of investment under equity method as of September 30, 2017 and June 30, 2017:
Corporate headquarters $ 1,091,752 $ 1,111,111
Asia - Pacific 2,166,007 1,945,909
Consolidated $ 3,257,759 $ 3,057,020
The following table presents a summary of operating information for the three months ended September 30:
North America $ 848,072 $ 1,841,431
Europe 1,447,824 1,206,049
Asia - Pacific 8,789,932 11,736,829
11,085,828 14,784,309
Europe 601,192 736,685
Asia - Pacific 1,131,756 1,555,475
1,732,948 2,292,160
Consolidated $ 12,818,776 $ 17,076,469
Europe $ 102,475 $ 136,127
Asia - Pacific 376,937 459,951
Eliminated $ 479,412 $ 596,078
Corporate headquarters $ (1,037,924 ) $ (1,629,517 )
North America (295,646 ) 267,892
Europe 99,390 (100,288 )
Asia - Pacific 1,052,915 1,845,016
Consolidated $ (181,265 ) $ 383,103
The following table presents a summary of capital expenditures for the three months ended September 30:
North America $ - $ 4,103
Europe 76,809 195,180
Asia - Pacific 251,354 355,590
Consolidated $ 328,163 $ 554,873
NOTE 19 – NON-CONTROLLING INTEREST IN SUBSIDIARY
NetSol PK 33.80 % $ 12,708,487
NetSol-Innovation 49.90 % 1,734,427
VLS, VLSH & VLSIL Combined 49.00 % 307,320
NetSol Thai 0.006 % (84 )
Total $ 14,750,150
NOTE 20 – RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The following tables present the restated financial statements for the quarter ended September 30, 2016.
As Originally Presented Amount of Restatement As Restated
Cash and cash equivalents $ 11,156,437 $ 11,156,437
Accounts receivable, net of allowance of $500,853 and $492,498 7,142,255 7,142,255
Accounts receivable, net - related party 5,384,573 5,384,573
Revenues in excess of billings 13,358,858 2,074,911 15,433,769
Revenues in excess of billings - related party 682,049 682,049
Other current assets 3,192,425 3,192,425
Total current assets 40,916,597 2,074,911 42,991,508
Property and equipment, net 22,612,752 22,612,752
Other assets 1,604,731 1,604,731
Intangible assets, net 19,326,259 19,326,259
Total assets $ 94,066,907 $ 2,074,911 $ 96,141,818
Accounts payable and accrued expenses $ 6,389,128 $ 6,389,128
Current portion of loans and obligations under capitalized leases 4,408,173 4,408,173
Unearned revenues 4,419,692 4,419,692
Total current liabilities 15,305,317 - 15,305,317
Long term loans and obligations under capitalized leases; less current maturities 539,859 539,859
Total liabilities 15,845,176 - 15,845,176
Common stock, $.01 par value; 14,500,000 shares authorized; 10,882,281 shares issued and 10,855,002 outstanding as of September 30, 2016 and 10,713,372 shares issued and 10,686,093 outstanding as of June 30, 2016 108,823 108,823
Additional paid-in-capital 122,367,231 122,367,231
Accumulated deficit (39,089,079 ) 1,379,608 (37,709,471 )
Stock subscription receivable (602,811 ) (602,811 )
Other comprehensive loss (17,960,133 ) (17,960,133 )
Total NetSol stockholders’ equity 64,408,606 1,379,608 65,788,214
Non-controlling interest 13,813,125 695,303 14,508,428
Total stockholders’ equity 78,221,731 2,074,911 80,296,642
Total liabilities and stockholders’ equity $ 94,066,907 $ 2,074,911 $ 96,141,818
License fees $ 3,499,860 $ 1,953,935 $ 5,453,795
Maintenance fees 3,402,821 120,976 3,523,797
Services 5,806,717 5,806,717
License fees - related party 246,957 246,957
Maintenance fees - related party 130,631 130,631
Services - related party 1,914,572 1,914,572
Total net revenues 15,001,558 2,074,911 17,076,469
Salaries and consultants 5,893,349 5,893,349
Travel 711,895 711,895
Depreciation and amortization 1,330,872 1,330,872
Other 972,338 972,338
Total cost of revenues 8,908,454 - 8,908,454
Gross profit 6,093,104 2,074,911 8,168,015
Selling and marketing 2,411,136 2,411,136
Depreciation and amortization 269,097 269,097
General and administrative 4,552,098 4,552,098
Research and development cost 92,932 92,932
Total operating expenses 7,325,263 - 7,325,263
Income (loss) from operations (1,232,159 ) 2,074,911 842,752
Loss on sale of assets (2,403 ) (2,403 )
Interest expense (54,475 ) (54,475 )
Interest income 30,440 30,440
Loss on foreign currency exchange transactions (414,896 ) (414,896 )
Other income 21,560 21,560
Total other income (expenses) (419,774 ) - (419,774 )
Net income (loss) before income taxes (1,651,933 ) 2,074,911 422,978
Income tax provision (39,875 ) (39,875 )
Net income (loss) (1,691,808 ) 2,074,911 383,103
Non-controlling interest (73,911 ) (695,303 ) (769,214 )
Net income (loss) attributable to NetSol $ (1,765,719 ) $ 1,379,608 $ (386,111 )
Basic $ (0.17 ) $ 0.14 $ (0.04 )
Diluted $ (0.17 ) $ 0.14 $ (0.04 )
Basic 10,697,425 10,697,425 10,697,425
Diluted 10,697,425 10,697,425 10,697,425
Net income (loss) $ (1,765,719 ) $ 1,379,608 $ (386,111 )
Translation adjustment 1,094,074 - 1,094,074
Comprehensive income (loss) (671,645 ) 1,379,608 707,963
Comprehensive income (loss) attributable to non-controlling interest 323,713 - 323,713
Comprehensive income (loss) attributable to NetSol $ (995,358 ) $ 1,379,608 $ 384,250
Net income (loss) $ (1,691,808 ) $ 2,074,911 $ 383,103
Depreciation and amortization 1,599,969 1,599,969
Loss on sale of assets 2,403 2,403
Stock issued for services 865,456 865,456
Fair market value of warrants and stock options granted 21,804 21,804
Accounts receivable 2,336,894 2,336,894
Accounts receivable - related party 121,800 121,800
Revenues in excess of billing (2,746,917 ) (2,074,911 ) (4,821,828 )
Revenues in excess of billing - related party 93,208 93,208
Other current assets 306,339 306,339
Accounts payable and accrued expenses (780,569 ) (780,569 )
Unearned revenue (346,108 ) (346,108 )
Net cash used in operating activities (217,529 ) - (217,529 )
Purchases of property and equipment (554,873 ) (554,873 )
Sales of property and equipment 151,818 151,818
Investment (555,555 ) (555,555 )
Net cash used in investing activities (958,610 ) - (958,610 )
Proceeds from the exercise of stock options and warrants 276,861 276,861
Proceeds from exercise of subsidiary options 14,013 14,013
Payments on capital lease obligations and loans - net (49,117 ) (49,117 )
Net cash provided by financing activities 241,757 - 241,757
Effect of exchange rate changes 533,292 533,292
Net decrease in cash and cash equivalents (401,090 ) - (401,090 )
Cash and cash equivalents, beginning of the period 11,557,527 11,557,527
Cash and cash equivalents, end of period $ 11,156,437 $ - $ 11,156,437
Subsequent to September 30, 2017, the Company loaned an additional $50,000 to WRLD3D pursuant to the Convertible Promissory Note agreement. (See Note 7)
Pursuant to the Company’s stock buyback plan, the Company repurchased 27,495 shares of our common stock from the open market at an average price of $3.65 per share. Total shares purchased on this buyback plan to date is 139,275 at an average price of $4.30 per share.
The following discussion is intended to assist in an understanding of the Company’s financial position and results of operations for the three months ended September 30, 2017. 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.
● Asia Pacific Lahore, Karachi, Bangkok, Beijing, Jakarta and Sydney
The Company continues to maintain services, solutions and/or sales specific offices in the USA, England, Pakistan, Thailand, China, Indonesia and Australia.
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.
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).
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.
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.
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.
Listed below are a few of NetSol’s major successes achieved in the three months ended September 30, 2017:
● We amended the 12 county NFS Ascent™ contract securing 7.7 million Euros (approximately $9.06 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 of the current fiscal year. 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.
● 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 will also be boosted as customization requests grow in addition to new business volume.
● Improving U.S. economy generally, and particularly auto and banking markets.
● Robust Chinese markets as asset based leasing and finance sector are far from maturity levels.
● Pakistan economy growth in gross domestic product reached 4.7% in 2016, according to the Pakistan Bureau of Statistics; and improved credit ratings by Bloomberg, S&P, Moody’s and Forbes Pakistan security and geopolitical environment has improved.
● China investment or CPEC (China Pakistan Economic Corridor) has exceeded $50 billion from originally $46 billion in Pakistan on energy and infrastructure projects.
● Continuous strong U.S. auto sales in excess of 17 million units in 2016 according to Autonews.com.
● Continued interest from Fortune 500 multinational auto captives and global companies in NetSol Ascent™.
● Growing 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.
● Growing Global terrorism and extremism threats in European countries.
● 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.
Quarter Ended September 30, 2017 compared to September 30, 2016
The following table sets forth the items in our unaudited condensed consolidated statement of operations for the quarter ended September 30, 2017 and 2016 as a percentage of revenues.
License fees $ 326,066 2.54 % $ 5,453,795 31.94 %
Maintenance fees 3,473,725 27.10 % 3,523,797 20.64 %
Services 7,017,737 54.75 % 5,556,135 32.54 %
License fees - related party 44,408 0.35 % 246,957 1.45 %
Maintenance fees - related party 102,963 0.80 % 130,631 0.76 %
Services - related party 1,853,877 14.46 % 2,165,154 12.68 %
Total net revenues 12,818,776 100.00 % 17,076,469 100.00 %
Salaries and consultants 5,464,160 42.63 % 5,893,349 34.51 %
Travel 513,112 4.00 % 711,895 4.17 %
Depreciation and amortization 1,173,113 9.15 % 1,330,872 7.79 %
Other 856,582 6.68 % 972,338 5.69 %
Total cost of revenues 8,006,967 62.46 % 8,908,454 52.17 %
Gross profit 4,811,809 37.54 % 8,168,015 47.83 %
Selling and marketing 1,711,296 13.35 % 2,344,038 13.73 %
Depreciation and amortization 245,873 1.92 % 269,097 1.58 %
General and administrative 3,787,558 29.55 % 4,619,196 27.05 %
Research and development cost 185,085 1.44 % 92,932 0.54 %
Total operating expenses 5,929,812 46.26 % 7,325,263 42.90 %
Income (loss) from operations (1,118,003 ) -8.72 % 842,752 4.94 %
Gain (loss) on sale of assets (7,130 ) -0.06 % (2,403 ) -0.01 %
Interest expense (118,071 ) -0.92 % (54,475 ) -0.32 %
Interest income 136,911 1.07 % 30,440 0.18 %
Gain (loss) on foreign currency exchange transactions 1,016,362 7.93 % (414,896 ) -2.43 %
Share of net loss from equity investment (67,562 ) -0.53 % - 0.00 %
Other income (expense) 1,099 0.01 % 21,560 0.13 %
Total other income (expenses) 961,609 7.50 % (419,774 ) -2.46 %
Net income (loss) before income taxes (156,394 ) -1.22 % 422,978 2.48 %
Income tax provision (24,871 ) -0.19 % (39,875 ) -0.23 %
Net income (loss) (181,265 ) -1.41 % 383,103 2.24 %
Non-controlling interest (188,233 ) -1.47 % (769,214 ) -4.50 %
Net income (loss) attributable to NetSol $ (369,498 ) -2.88 % $ (386,111 ) -2.26 %
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 18 “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.
For the Three Months (Unfavorable) (Unfavorable) Favorable
Ended September 30, Change in Change due to (Unfavorable)
2017 % 2016 % Constant Currency Change as
Restated Currency Fluctuation Reported
Net Revenues: $ 12,818,776 100.00 % $ 17,076,469 100.00 % $ (4,146,789 ) $ (110,904 ) $ (4,257,693 )
Cost of revenues: 8,006,967 62.46 % 8,908,454 52.17 % 796,528 104,959 901,487-
Gross profit 4,811,809 37.54 % 8,168,015 47.83 % (3,350,261 ) (5,945 ) (3,356,206 )
Operating expenses: 5,929,812 46.26 % 7,325,263 42.90 % 1,367,030 28,421 1,395,451-
Income (loss) from operations $ (1,118,003 ) -8.72 % $ 842,752 4.94 % $ (1,983,231 ) $ 22,476 $ (1,960,755 )
Net revenues for the quarter ended September 30, 2017 and 2016 are broken out among the segments as follows:
Revenue % Revenue Restated %
North America $ 848,072 6.62 % $ 1,841,431 10.78 %
Europe 2,049,016 15.98 % 1,942,734 11.38 %
Asia-Pacific 9,921,688 77.40 % 13,292,304 77.84 %
Total $ 12,818,776 100.00 % $ 17,076,469 100.00 %
License fees for the three months ended September 30, 2017 were $326,066 compared to $5,453,795 for the three months ended September 30, 2016 reflecting a decrease of $5,127,729 with a change in constant currency of $5,127,729. The decrease in license revenue for the fiscal three months ended September 30, 2017 compared to 2016 is primarily due to the decrease of license revenue recognized for the 12 country NFS Ascent™ contract. During the current quarter, we had license revenues through sales of our regional offerings in the U.S. and the U.K.
License fees – related party
License fees from related party for the three months ended September 30, 2017 were $44,408 compared to $246,957 for the three months ended September 30, 2016 reflecting a decrease of $202,549 with a change in constant currency of $202,549.
Maintenance fees for the three months ended September 30, 2017 were $3,473,725 compared to $3,523,797 for the three months ended September 30, 2016 reflecting a slight decrease of $50,072 with a change in constant currency of $54,733. Maintenance fees begin once a customer has “gone live” with our product. The decrease was due to some customers not renewing their maintenance agreements for certain legacy products. 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 September 30, 2017 were $102,963 compared to $130,631 for the three months ended September 30, 2016 reflecting a decrease of $27,668 with a change in constant currency of $27,668. The decrease was due to the fluctuation in usage of active users.
Services income for the three months ended September 30, 2017 was $7,017,737 compared to $5,556,135 for the three months ended September 30, 2016 reflecting an increase of $1,461,602 with a change in constant currency of $1,459,197. 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 income from related party for the three months ended September 30, 2017 was $1,853,877 compared to $2,165,154 for the three months ended September 30, 2016 reflecting a decrease of $311,277 with a change in constant currency of $294,483. The decrease in related party service revenue is due to a decrease in revenue from our joint venture with 1insurer of approximately $423,000 off set by an increase of approximately $94,000 and $17,000 in service revenue related to services performed for Investec and WRLD3D, respectively.
The gross profit was $4,811,809, for the three months ended September 30, 2017 as compared with $8,168,015 for the three months ended September 30, 2016. This is a decrease of $3,356,206 with a decrease in constant currency of $3,451,437. The gross profit percentage for the three months ended September 30, 2017 also decreased to 37.5% from 47.8% for the three months ended September 30, 2016. The cost of sales was $8,006,967 for the three months ended September 30, 2017 compared to $8,908,454 for the three months ended September 30, 2016 for a decrease of $901,487 and on a constant currency basis a decrease of $796,528. As a percentage of sales, cost of sales increased from 52.2% for the three months ended September 30, 2016 to 62.5% for the three months ended September 30, 2017.
Salaries and consultant fees decreased by $429,189 from $5,893,349 for the three months ended September 30, 2016 to $5,465,160 for the three months ended September 30, 2017 and on a constant currency basis decreased $342,313. 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 34.5% for the three months ended September 30, 2016 to 42.6% for the three months ended September 30, 2017.
Depreciation and amortization expense decreased to $1,173,113 compared to $1,330,872 for the three months ended September 30, 2016 or a decrease of $157,759 and on a constant currency basis a decrease of $140,344. Depreciation and amortization expense decreased as some products became fully amortized.
Operating expenses were $5,929,812 for the three months ended September 30, 2017 compared to $7,325,263, for the three months ended September 30, 2016 for a decrease of 19.0% or $1,395,451 and on a constant currency basis a decrease of 18.7% or $1,365,992. As a percentage of sales, it increased from 42.9% to 46.3%. The decrease in operating expenses was primarily due to decreases in selling and marketing expenses, salaries and wages, depreciation, and professional services.
Selling and marketing expenses decreased $632,742 or 27.0% and on a constant currency basis a decrease of $629,080 or 26.8%. 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 $3,787,558 for the three months ended September 30, 2017 compared to $4,619,196 at September 30, 2016 or a decrease of $831,638 or 18.0% and on a constant currency basis a decrease of $811,277 or 17.56%. During the three months ended September 30, 2017, salaries decreased by approximately $896,956 or $869,131 on a constant currency basis due to the decrease in the number of employees, minimal annual raises, less share grants and options, offset by an increase in other general and administrative expenses of approximately $72,971 or $65,634 on a constant currency basis.
Loss from operations was $1,118,003 for the three months ended September 30, 2017 compared to income of $842,752 for the three months ended September 30, 2016. This represents a decrease of $1,960,755 with a decrease of 1,983,231 on a constant currency basis for the three months ended September 30, 2017 compared with the three months ended September 30, 2016. As a percentage of sales, loss from operations was 8.7% for the three months ended September 30, 2017 compared to income of 4.9% for the three months ended September 30, 2016.
Net loss was $369,498 for the three months ended September 30, 2017 compared to $386,111 for the three months ended September 30, 2016. This is a decrease of $16,613 with an increase of $2,719 on a constant currency basis, compared to the prior year. For the three months ended September 30, 2017, net loss per share was $0.03 for basic and diluted shares compared to $0.04 for basic and diluted shares for the three months ended September 30, 2016.
● Non-GAAP adjusted EBITDA is EBITDA less stock-based compensation expense.
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 months ended September 30, 2017 and 2016 are as follows: