NetSol(NTWK) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for NETSOL Technologies, Inc Item 1. Financial Statements (Unaudited) This section presents NETSOL Technologies, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive income, and cash flows, with detailed notes Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' equity at specific points in time | ASSETS (as of) | March 31, 2019 ($) | June 30, 2018 ($) | | :----------------------------------- | :------------- | :------------ | | Cash and cash equivalents | $17,014,590 | $22,088,853 | | Accounts receivable, net | $15,971,676 | $12,775,461 | | Total current assets | $56,284,483 | $57,350,896 | | Total assets | $91,743,332 | $99,774,281 | | LIABILITIES AND STOCKHOLDERS' EQUITY (as of) | March 31, 2019 ($) | June 30, 2018 ($) | | Accounts payable and accrued expenses | $6,881,435 | $7,873,809 | | Total current liabilities | $21,322,832 | $22,507,633 | | Total liabilities | $22,039,395 | $22,838,229 | | Total stockholders' equity | $69,703,937 | $76,936,052 | | Total liabilities and stockholders' equity | $91,743,332 | $99,774,281 | - Total assets decreased from $99.8 million as of June 30, 2018, to $91.7 million as of March 31, 2019, primarily driven by a decrease in cash and cash equivalents[7] - Total stockholders' equity decreased from $76.9 million as of June 30, 2018, to $69.7 million as of March 31, 2019[7] Condensed Consolidated Statements of Operations This section outlines the company's financial performance over specific periods, detailing revenues, expenses, and net income | Metric | Three Months Ended March 31, 2019 ($) | Three Months Ended March 31, 2018 ($) | Nine Months Ended March 31, 2019 ($) | Nine Months Ended March 31, 2018 ($) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Total net revenues | $17,127,055 | $17,043,820 | $50,526,227 | $44,309,031 | | Gross profit | $8,557,320 | $9,192,719 | $25,653,949 | $20,692,881 | | Income (loss) from operations | $2,092,909 | $2,753,095 | $5,882,312 | $1,951,923 | | Net income attributable to NetSol | $1,267,560 | $2,864,445 | $5,085,778 | $3,129,368 | | Basic EPS | $0.11 | $0.26 | $0.44 | $0.28 | | Diluted EPS | $0.11 | $0.25 | $0.44 | $0.28 | - For the three months ended March 31, 2019, total net revenues slightly increased by $83,235 (0.5%) YoY, while net income attributable to NetSol decreased by $1,596,885 (55.7%) YoY. Basic EPS decreased from $0.26 to $0.11[9] - For the nine months ended March 31, 2019, total net revenues increased by $6,217,196 (14.0%) YoY, and net income attributable to NetSol increased by $1,956,410 (62.5%) YoY. Basic EPS increased from $0.28 to $0.44[9] Condensed Consolidated Statements of Comprehensive Income (Loss) This section presents the company's comprehensive income or loss, including net income and other comprehensive income items like translation adjustments | Metric | Three Months Ended March 31, 2019 ($) | Three Months Ended March 31, 2018 ($) | Nine Months Ended March 31, 2019 ($) | Nine Months Ended March 31, 2018 ($) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Net income | $1,267,560 | $2,864,445 | $5,085,778 | $3,129,368 | | Net translation adjustment | $(28,021) | $(1,729,215) | $(4,088,761) | $(3,930,675) | | Comprehensive loss attributable to NetSol | $1,239,539 | $1,135,230 | $997,017 | $(801,307) | - The company reported a net translation adjustment loss of $28,021 for the three months ended March 31, 2019, significantly lower than the $1,729,215 loss in the prior year period[10] - For the nine months ended March 31, 2019, the net translation adjustment loss was $4,088,761, slightly higher than the $3,930,675 loss in the prior year period[10] Condensed Consolidated Statements of Cash Flows This section details the cash inflows and outflows from operating, investing, and financing activities over specific periods | Cash Flow Activity (Nine Months Ended March 31) | 2019 ($) | 2018 ($) | | :----------------------------------- | :------------- | :------------- | | Net cash provided by (used in) operating activities | $(255,382) | $2,252,005 | | Net cash used in investing activities | $(2,711,588) | $(1,392,957) | | Net cash provided by (used in) financing activities | $559,667 | $(1,117,872) | | Net decrease in cash and cash equivalents | $(5,074,263) | $(1,460,971) | | Cash and cash equivalents at end of period | $17,014,590 | $12,711,983 | - Operating activities shifted from providing $2.25 million in cash in 2018 to using $0.26 million in 2019[13] - Investing activities used more cash in 2019 ($2.71 million) compared to 2018 ($1.39 million), primarily due to increased purchases of property and equipment and convertible note receivables[13] - Financing activities provided $0.56 million in cash in 2019, a significant improvement from using $1.12 million in 2018, mainly due to higher proceeds from bank loans and fewer treasury stock purchases[13] Notes to the Condensed Consolidated Financial Statements This section provides detailed explanations and additional information supporting the condensed consolidated financial statements NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION This note outlines the basis for preparing the financial statements and the principles governing the consolidation of subsidiaries - The Company designs, develops, markets, and exports proprietary software products for automobile financing, leasing, banking, and financial services industries globally, also offering system integration, consulting, and IT services[18] - The condensed consolidated interim financial statements are unaudited and prepared in accordance with SEC rules, with certain disclosures condensed or omitted, and should be read with the annual report on Form 10-K for the year ended June 30, 2018[19][20] - The consolidated financial statements include NetSol Technologies, Inc. and its wholly-owned and majority-owned subsidiaries across various global regions[21] NOTE 2 – ACCOUNTING POLICIES This note describes the significant accounting policies and estimates used in the preparation of the financial statements - The preparation of financial statements requires management to make significant estimates and assumptions, particularly for doubtful accounts, taxation, useful life of assets, and contract costs[22] - The Company adopted Topic 606 (Revenue from Contracts with Customers) on July 1, 2018, using the modified retrospective transition method, resulting in a net decrease of $5,795,795 to opening accumulated deficit and $2,957,860 to non-controlling interest[40][41] - New accounting pronouncements recently issued but not yet adopted include ASU 2016-02 (Leases), ASU 2017-04 (Goodwill Impairment), ASU 2017-11 (Financial Instruments with Down Round Features), ASU 2018-02 (Tax Effects from AOCI), ASU 2018-05 (Income Taxes), ASU 2018-07 (Nonemployee Share-Based Payment Accounting), ASU 2018-13 (Fair Value Measurement Disclosures), and ASU 2018-15 (Cloud Computing Implementation Costs)[53][54][55][56][57][59][60][61] NOTE 3 – REVENUE RECOGNITION This note details the company's policies and methods for recognizing revenue from contracts with customers - Revenue recognition follows a five-step process: identifying contracts, performance obligations, transaction price, allocating price to obligations, and recognizing revenue upon satisfaction of obligations[65] - The Company has two primary revenue streams: core revenue (software licenses, services, maintenance for lease/finance industry) and non-core revenue (BPO, other IT, internet services)[66][67][68] Revenue by Category | Revenue Category (Three Months Ended March 31) | 2019 ($) | 2018 ($) | | :----------------------------------- | :------------- | :------------- | | Total core revenue, net | $15,546,966 | $14,573,948 | | Total non-core revenue, net | $1,580,089 | $2,469,872 | | Total net revenue | $17,127,055 | $17,043,820 | | Revenue Category (Nine Months Ended March 31) | 2019 ($) | 2018 ($) | | :----------------------------------- | :------------- | :------------- | | Total core revenue, net | $45,916,030 | $37,271,615 | | Total non-core revenue, net | $4,610,197 | $7,037,416 | | Total net revenue | $50,526,227 | $44,309,031 | - Contracted but unsatisfied performance obligations were approximately $76.7 million as of March 31, 2019, with an estimated $13.2 million to be recognized in the next 12 months and the remainder over an estimated 6 years[96] NOTE 4 – EARNINGS PER SHARE This note explains the calculation of basic and diluted earnings per share for the reporting periods - Basic EPS is calculated based on the weighted average number of common shares outstanding, while diluted EPS includes the effect of dilutive potential common shares (stock options and awards) using the treasury stock method[105] Earnings Per Share | EPS Metric (Three Months Ended March 31) | 2019 ($) | 2018 ($) | | :----------------------------------- | :----- | :----- | | Basic EPS | $0.11 | $0.26 | | Diluted EPS | $0.11 | $0.25 | | EPS Metric (Nine Months Ended March 31) | 2019 ($) | 2018 ($) | | :----------------------------------- | :----- | :----- | | Basic EPS | $0.44 | $0.28 | | Diluted EPS | $0.44 | $0.28 | - Certain share grants were excluded from diluted EPS calculations for both periods as their inclusion would be anti-dilutive[107] NOTE 5 – OTHER COMPREHENSIVE INCOME AND FOREIGN CURRENCY This note details components of other comprehensive income and the impact of foreign currency translation adjustments - The Company operates with various functional currencies for its subsidiaries (British Pound, Euro, Pakistan Rupee, Thai Baht, Australian dollar, Chinese Yuan), while NetSol Technologies, Inc. and NTA use the U.S. dollar[108] - Accumulated translation losses in stockholders' equity were $28,474,832 as of March 31, 2019, compared to $24,836,071 as of June 30, 2018[108] - Net translation adjustment attributable to NetSol was a loss of $28,021 for the three months ended March 31, 2019, and a loss of $4,088,761 for the nine months ended March 31, 2019[108] NOTE 6 – RELATED PARTY TRANSACTIONS This note discloses transactions and balances with related parties, including joint ventures and affiliates - NetSol-Innovation, a joint venture, provided services of $67,286 for the nine months ended March 31, 2019, a significant decrease from $2,702,906 in the prior year[110] - NTE and VLS provided license, maintenance, and services to Investec Asset Finance totaling $743,987 for the nine months ended March 31, 2019, down from $1,508,867 in the prior year[111] NOTE 7 – MAJOR CUSTOMERS This note identifies customers that account for a significant portion of the company's total revenues and receivables - For the nine months ended March 31, 2019, two customers accounted for 33.9% ($17,137,545) and 20.5% ($10,339,704) of total revenues, respectively, both within the Asia-Pacific segment[112] - Accounts receivable from these two major customers were $12,178,689 and $163,121, respectively, as of March 31, 2019[113] NOTE 8 – CONVERTIBLE NOTE RECEIVABLE – RELATED PARTY This note details the convertible promissory notes held by the company and its subsidiary with a related party - The Company holds a Convertible Promissory Note with WRLD3D, with a maximum principal of $750,000, bearing 5% interest, fully disbursed as of June 30, 2018[114] - NetSol Thai, a subsidiary, also holds a Convertible Promissory Note with WRLD3D for a maximum of $2,500,000, bearing 10% interest, with $2,406,500 disbursed as of March 31, 2019[118] - Both convertible notes are convertible into WRLD3D's Series BB Preferred shares upon specific events like qualified financing or change of control, with varying conversion prices[115][119][120] NOTE 9 - OTHER CURRENT ASSETS This note provides a breakdown of other current assets, including prepaid expenses, advances, and other receivables Other Current Assets | Other Current Assets (as of) | March 31, 2019 ($) | June 30, 2018 ($) | | :----------------------------------- | :------------- | :------------ | | Prepaid Expenses | $1,068,575 | $662,431 | | Advance Income Tax | $940,472 | $838,799 | | Employee Advances | $165,132 | $48,096 | | Security Deposits | $97,891 | $85,249 | | Other Receivables | $894,747 | $497,632 | | Other Assets | $426,240 | $570,825 | | Total | $3,593,057 | $2,703,032 | - Total other current assets increased by $889,025 from $2,703,032 at June 30, 2018, to $3,593,057 at March 31, 2019, primarily due to increases in prepaid expenses, employee advances, and other receivables[122] NOTE 10 – REVENUES IN EXCESS OF BILLINGS – LONG TERM This note discusses the status of long-term revenues in excess of billings following the adoption of ASC 606 - As of March 31, 2019, there were no long-term revenues in excess of billings, compared to $1,206,669 at June 30, 2018, due to the adoption of ASC 606[31][125] - In the prior year, the Company accreted $177,298 in interest income for the nine months ended March 31, 2018, related to the discounted long-term revenues in excess of billings[125] NOTE 11 - PROPERTY AND EQUIPMENT This note details the company's property and equipment, including changes in net book value and depreciation expense Property and Equipment, Net | Property and Equipment, Net (as of) | March 31, 2019 ($) | June 30, 2018 ($) | | :----------------------------------- | :------------- | :------------ | | Office Furniture and Equipment | $3,407,947 | $3,496,653 | | Computer Equipment | $21,354,509 | $23,708,034 | | Assets Under Capital Leases | $2,091,538 | $1,479,976 | | Building | $6,958,502 | $8,005,351 | | Land | $1,809,070 | $2,088,463 | | Autos | $1,153,028 | $1,053,749 | | Improvements | $126,654 | $324,023 | | Subtotal | $36,901,248 | $40,156,249 | | Accumulated Depreciation | $(22,526,986) | $(23,990,758) | | Property and Equipment, Net | $14,374,262 | $16,165,491 | - Net property and equipment decreased by $1,791,229 from $16,165,491 at June 30, 2018, to $14,374,262 at March 31, 2019[126] - Depreciation expense for the nine months ended March 31, 2019, was $1,704,606, with $1,046,153 reflected in cost of revenues[126] NOTE 12 – LONG TERM INVESTMENT-RELATED PARTY This note describes the company's long-term equity method investment in a related party, WRLD3D - The Company purchased a 4.9% interest in WRLD3D for $1,111,111, and its subsidiary NetSol PK purchased a 12.2% investment for $2,777,778 by providing IT and enterprise software solutions[129] - The investment in WRLD3D is accounted for using the equity method due to significant influence, with a share of net loss of $843,373 for the nine months ended March 31, 2019[130][132] - NetSol PK provided services valued at $494,333 to WRLD3D for the nine months ended March 31, 2019, recorded as services-related party revenue[131] NOTE 13 - INTANGIBLE ASSETS This note provides details on the company's intangible assets, including product licenses, translation adjustments, and amortization Intangible Assets | Intangible Assets (as of) | March 31, 2019 ($) | June 30, 2018 ($) | | :----------------------------------- | :------------- | :------------ | | Product Licenses - Cost | $47,244,997 | $47,244,997 | | Effect of Translation Adjustment | $(11,792,021) | $(7,857,270) | | Accumulated Amortization | $(26,410,250) | $(27,140,531) | | Net Balance | $9,042,726 | $12,247,196 | - Net intangible assets decreased by $3,204,470 from $12,247,196 at June 30, 2018, to $9,042,726 at March 31, 2019[135] - Amortization expense for the nine months ended March 31, 2019, was $1,646,153, and the remaining unamortized amount of $9,042,726 will be amortized over the next 4.5 years[136][137] NOTE 14 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES This note breaks down accounts payable and accrued expenses, highlighting changes in these liability categories Accounts Payable and Accrued Expenses | Accounts Payable and Accrued Expenses (as of) | March 31, 2019 ($) | June 30, 2018 ($) | | :----------------------------------- | :------------- | :------------ | | Accounts Payable | $1,510,757 | $1,665,865 | | Accrued Liabilities | $4,508,155 | $5,505,312 | | Accrued Payroll & Taxes | $465,400 | $302,640 | | Taxes Payable | $263,191 | $233,959 | | Other Payable | $133,932 | $166,033 | | Total | $6,881,435 | $7,873,809 | - Total accounts payable and accrued expenses decreased by $992,374 from $7,873,809 at June 30, 2018, to $6,881,435 at March 31, 2019, mainly due to a decrease in accrued liabilities[138] NOTE 15 – DEBTS This note details the company's various debt obligations, including bank loans, capital leases, and their maturities Debt Obligations | Debt Type (as of March 31, 2019) | Total ($) | Current Maturities ($) | Long-Term Maturities ($) | | :----------------------------------- | :------------- | :----------------- | :------------------- | | D&O Insurance | $132,971 | $132,971 | $- | | Loan Payable Bank - Export Refinance | $3,557,865 | $3,557,865 | $- | | Loan Payable Bank - Running Finance | $377,144 | $377,144 | $- | | Loan Payable Bank - Export Refinance II | $2,704,049 | $2,704,049 | $- | | Loan Payable Bank - Running Finance II | $853,910 | $853,910 | $- | | Related Party Loan | $89,033 | $16,002 | $73,031 | | Subsidiary Capital Leases | $1,112,923 | $469,391 | $643,532 | | Total | $8,827,895 | $8,111,332 | $716,563 | - Total notes payable and capital leases amounted to $8,827,895 as of March 31, 2019, with $8,111,332 due within one year[140] - The Company's subsidiaries have various bank facilities (export refinance, running finance) with different interest rates and covenants, all of which were in compliance as of March 31, 2019[143][145][146][147][148] NOTE 16 - STOCKHOLDERS' EQUITY This note provides a comprehensive breakdown of the components of stockholders' equity and changes during the period - During the nine months ended March 31, 2019, the Company issued 31,448 shares for officer services ($192,832), 28,278 shares for independent directors ($159,926), and 97,785 shares to employees ($599,424)[153][154] - The adoption of ASC 606 resulted in an $8,753,655 adjustment to equity, with $5,795,795 against retained earnings and $2,957,860 against non-controlling interest[155] Equity Components | Equity Component (as of March 31, 2019) | Amount ($) | | :----------------------------------- | :------------- | | Common Stock | $118,791 | | Additional Paid-in Capital | $127,551,606 | | Treasury Stock | $(1,205,024) | | Accumulated Deficit | $(38,704,519) | | Stock Subscription Receivable | $(221,000) | | Other Comprehensive Loss | $(28,474,832) | | Total NetSol Stockholders' Equity | $59,065,022 | | Non-controlling Interest | $10,638,915 | | Total Stockholders' Equity | $69,703,937 | NOTE 17 - INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN This note details the company's stock option and grant plans, including outstanding options and compensation expense - As of March 31, 2019, 40,386 stock options were outstanding and exercisable at an average exercise price of $6.50, with a weighted average remaining contractual life of 0.85 years[163][166] - The Company extended the life of 40,386 options by one year, resulting in a $43,612 compensation expense calculated using the Black-Scholes model[166] - Unvested stock grants totaled 110,413 shares with a weighted average grant date fair value of $5.88 as of March 31, 2019, with $593,480 in compensation expense to be recognized through fiscal year 2022[166] NOTE 18 – CONTINGENCIES This note discusses potential future obligations arising from legal proceedings, claims, and tax assessments - The Company is subject to legal proceedings, claims, and litigation in the ordinary course of business, including tax assessments[169] - Estimated losses are recorded when probable and reasonably estimable; otherwise, disclosures are provided if there is a reasonable possibility of a material loss[169] NOTE 19 – OPERATING SEGMENTS This note provides financial information segmented by the company's North America, Europe, and Asia-Pacific operations - The Company operates in three reportable segments: North America, Europe, and Asia-Pacific, each providing similar products and services (license fees, maintenance, implementation, and IT consulting) but managed separately due to regional operational differences[170] Revenues from Unaffiliated Customers | Revenues from Unaffiliated Customers (Three Months Ended March 31) | 2019 ($) | 2018 ($) | | :----------------------------------- | :------------- | :------------- | | North America | $1,022,655 | $998,403 | | Europe | $2,075,049 | $1,764,651 | | Asia - Pacific | $13,542,170 | $12,891,024 | | Total | $16,639,874 | $15,654,078 | | Revenues from Unaffiliated Customers (Nine Months Ended March 31) | 2019 ($) | 2018 ($) | | :----------------------------------- | :------------- | :------------- | | North America | $2,843,190 | $3,134,113 | | Europe | $5,746,614 | $4,873,688 | | Asia - Pacific | $40,696,025 | $31,355,376 | | Total | $49,285,829 | $39,363,177 | - Asia-Pacific remains the largest revenue contributor, with unaffiliated customer revenue increasing significantly from $31.36 million to $40.70 million for the nine months ended March 31, 2019[173] NOTE 20 – NON-CONTROLLING INTEREST IN SUBSIDIARY This note details the non-controlling interests in the company's subsidiaries and changes during the period Non-Controlling Interest in Subsidiaries | Subsidiary (as of March 31, 2019) | Non-Controlling Interest % | Non-Controlling Interest Amount ($) | | :----------------------------------- | :------------------------- | :------------------------------ | | NetSol PK | 33.80% | $8,244,871 | | NetSol-Innovation | 49.90% | $1,575,624 | | VLS, VLSH & VLSIL Combined | 49.00% | $818,451 | | NetSol Thai | 0.006% | $(31) | | Total | | $10,638,915 | - Total non-controlling interest decreased from $14,146,417 at June 30, 2018, to $10,638,915 at March 31, 2019[175] - During the nine months ended March 31, 2019, NetSol PK's non-controlling interest increased slightly due to option exercises and paid a cash dividend of $1,675,936[176] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial performance, condition, and outlook for the reporting periods Business Overview This section describes NetSol Technologies, Inc.'s global operations, core products, and target markets in the IT and software solutions industry - NetSol Technologies, Inc. is a global provider of IT and enterprise software solutions, with its primary revenue derived from licensing, customizing, enhancing, and maintaining its NFS™ and NFS Ascent platforms for the global lease and finance industry[183][184] - The company serves Dow-Jones 30 Industrials, Fortune 500 manufacturers, financial institutions, and global vehicle manufacturers, with regional offices in North America, Europe, and Asia Pacific[185][186] - Key product offerings include NFS™ (an end-to-end solution for the leasing/financing cycle), NFS Ascent™ (next-generation platform for auto and equipment finance), NFS Digital (mobile applications for sales and customer self-service), LeasePak (lease management for North America), LeasePak-SaaS (cloud-based LeasePak), and LeaseSoft/LoanSoft (regional offerings for the UK market)[186][187][188][189][190][191] Highlights This section summarizes key business achievements and strategic developments during the reporting period - Signed a five-year, $30 million contract with a tier-one auto captive finance company to implement NFS Ascent™ in China[195] - Secured multi-million-dollar contracts with a major American multinational automaker for NFS Ascent™ Retail Platform in China and a U.S. power sports finance provider for LeasePak Cloud and mAccount[195] - Successfully implemented NFS Ascent™ modules for Daimler Financial Services in China and South Africa, and kicked off implementation in Japan[195] - Expanded European outreach by establishing a new NFS Ascent™ focused office in London and advanced the 'Innovation Lab' initiative in Pakistan and Thailand[195] Management has identified the following material trends affecting NetSol This section outlines significant positive and negative trends impacting the company's business and financial performance - Positive trends include innovation in the auto sector (e.g., car-generated data, IoT, Big Data, AI), a growing IT talent pool and CPEC investment in Pakistan, and continued interest from Fortune 500 auto captives in NFS Ascent™[194][196][197][198] - Negative trends encompass global terrorism/extremism threats, geopolitical unrest, restricted liquidity from some clients, trade negotiation uncertainties (US-China, Brexit), potential oil price volatility affecting auto sales, the impact of autonomous cars, and the continued devaluation of the Pakistan Rupee[199][200] CHANGES IN FINANCIAL CONDITION This section analyzes the changes in the company's financial position and performance over the reporting periods Quarter Ended March 31, 2019 Compared to the Quarter Ended March 31, 2018 This section compares the company's financial results for the three-month periods ended March 31, 2019, and 2018 | Metric | 3 Months Ended March 31, 2019 ($) | 3 Months Ended March 31, 2018 ($) | Change ($) | Change (%) | | :----------------------------------- | :---------------------------- | :---------------------------- | :--------- | :--------- | | Total net revenues | $17,127,055 | $17,043,820 | $83,235 | 0.5% | | Gross profit | $8,557,320 | $9,192,719 | $(635,399) | -6.9% | | Income from operations | $2,092,909 | $2,753,095 | $(660,186) | -24.0% | | Net income attributable to NetSol | $1,267,560 | $2,864,445 | $(1,596,885) | -55.7% | - Services revenue increased by $1,174,009 (12.6%) YoY, driven by new NFS Ascent implementations, while related party services decreased by $917,657 (71.4%) due to reduced revenue from a joint venture and Investec[209][210] - Cost of revenues increased by $718,634 (9.2%) YoY, primarily due to a $1,368,904 increase in travel expenses for new NFS Ascent implementations, leading to a decrease in gross profit margin from 53.9% to 50.0%[211][213] - Other income and expense saw a significant decrease in income by $2,415,439, mainly due to a lower gain on foreign currency exchange transactions ($47,218 in 2019 vs. $2,550,394 in 2018)[221] Nine Months Ended March 31, 2019 Compared to the Nine Months Ended March 31, 2018 This section compares the company's financial results for the nine-month periods ended March 31, 2019, and 2018 | Metric | 9 Months Ended March 31, 2019 ($) | 9 Months Ended March 31, 2018 ($) | Change ($) | Change (%) | | :----------------------------------- | :---------------------------- | :---------------------------- | :--------- | :--------- | | Total net revenues | $50,526,227 | $44,309,031 | $6,217,196 | 14.0% | | Gross profit | $25,653,949 | $20,692,881 | $4,961,068 | 24.0% | | Income from operations | $5,882,312 | $1,951,923 | $3,930,389 | 201.4% | | Net income attributable to NetSol | $5,085,778 | $3,129,368 | $1,956,410 | 62.5% | - License fees surged by $10,099,134 (314.5%) YoY, primarily due to new five-year NFS Ascent platform contracts in China with a tier-one auto captive finance company and a major American multinational automaker[228] - Gross profit increased by $4,961,068 (24.0%) YoY, with the gross profit percentage rising from 46.7% to 50.8%, despite a $3,426,070 increase in travel costs related to implementations[235][237] - Income from operations more tripled, increasing by $3,930,389 (201.4%) YoY, reflecting improved operational efficiency and higher revenues[242] Non-GAAP Financial Measures This section presents and reconciles non-GAAP financial measures used by management to assess business performance - The Company uses non-GAAP measures like Adjusted EBITDA and Adjusted EBITDA per basic and diluted share to evaluate business performance and provide useful information to investors, excluding items such as net interest expense, income tax expense, depreciation, amortization, and stock-based compensation[247][248][249][250] Non-GAAP Metrics | Non-GAAP Metric | 3 Months Ended March 31, 2019 ($) | 3 Months Ended March 31, 2018 ($) | 9 Months Ended March 31, 2019 ($) | 9 Months Ended March 31, 2018 ($) | | :----------------------------------- | :---------------------------- | :---------------------------- | :---------------------------- | :---------------------------- | | EBITDA | $3,041,330 | $6,439,047 | $11,062,751 | $10,930,721 | | Adjusted EBITDA, net | $2,235,926 | $4,346,578 | $8,486,560 | $7,407,615 | | Basic adjusted EBITDA per share | $0.19 | $0.39 | $0.73 | $0.67 | | Diluted adjusted EBITDA per share | $0.19 | $0.39 | $0.73 | $0.66 | - Net Adjusted EBITDA for the nine months ended March 31, 2019, increased by $1,078,945 (14.6%) YoY to $8,486,560[253] LIQUIDITY AND CAPITAL RESOURCES This section discusses the company's cash position, cash flow activities, and future capital requirements - Cash position decreased from $22,088,853 at June 30, 2018, to $17,014,590 at March 31, 2019, with approximately $15.5 million held by foreign subsidiaries[254][260] - Net cash used in operating activities was $255,382 for the nine months ended March 31, 2019, a shift from $2,252,005 provided in the prior year[255] - The Company anticipates needing $2.5 million for APAC, U.S., and Europe new business development and infrastructure enhancements over the next 12 months, expected to be funded from current operations[262] - The average days sales outstanding (DSO) improved significantly to 174 days for the nine months ended March 31, 2019, compared to 274 days in the prior year[257] Financial Covenants This section outlines the financial covenants associated with the company's borrowings and its compliance status - The UK subsidiary (NTE) has an overdraft facility requiring trade debtors not exceeding 90 days old to be at least 200% of the facility[265] - The Pakistani subsidiary (NetSol PK) has multiple facilities requiring maintenance of a long-term debt-equity ratio of 60:40, a current ratio of 1:1, an interest coverage ratio of 4 times, and a leverage ratio of 2 times[265] - As of the report date, the Company was in compliance with all financial covenants associated with its borrowings[266] CRITICAL ACCOUNTING POLICIES This section describes the accounting policies that require significant judgment and estimation by management - Critical accounting policies include revenue recognition and multiple element arrangements, intangible assets, software development costs, stock-based compensation, and goodwill[267] - Revenue recognition involves identifying contracts and performance obligations, determining transaction price, allocating it, and recognizing revenue as obligations are satisfied, with significant judgments required for standalone selling prices and variable consideration[268][272][280][281][287] - Software development costs are expensed until technological feasibility is established, then capitalized and amortized, with ongoing evaluations for recoverability[296][297] - Goodwill is reviewed for impairment annually using a two-step test, comparing the reporting unit's fair value to its carrying value[299] RECENT ACCOUNTING PRONOUNCEMENTS This section refers to disclosures regarding recently issued accounting pronouncements and their potential impact - For information regarding recent accounting pronouncements and their impact, refer to Note 2 of the Notes to Condensed Consolidated Financial Statements[300] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section confirms the absence of quantitative and qualitative disclosures regarding market risk for the reporting period - The company has no quantitative and qualitative disclosures about market risk for the period[301] Item 4. Controls and Procedures This section details the evaluation of disclosure controls and internal control over financial reporting, confirming their effectiveness Evaluation of Disclosure Controls and Procedures This section reports on management's conclusion regarding the effectiveness of the company's disclosure controls and procedures - Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of March 31, 2019[302] Management's Report on Internal Control over Financial Reporting This section presents management's assessment of the effectiveness of internal control over financial reporting - Management is responsible for establishing and maintaining adequate internal controls over financial reporting, designed to provide reasonable assurance regarding reliability[303] - An assessment based on the COSO framework concluded that there was no material weakness in the Company's internal control over financial reporting as of March 31, 2019[305] Changes in Internal Control over Financial Reporting This section confirms that there were no material changes in internal control over financial reporting during the period - There have been no material changes in internal controls over financial reporting during the three months ended March 31, 2019[306] PART II. OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal matters and exhibits Item 1. Legal Proceedings This section confirms that there are no legal proceedings to report for the current period - There are no legal proceedings to report[307] Item 1A. Risk Factors This section indicates that no new material risk factors have emerged since the last annual report - There are no new risk factors to report[307] Item 2. Unregistered Sales of Equity and Use of Proceeds This section confirms no unregistered sales of equity or use of proceeds to report for the period - There are no unregistered sales of equity or use of proceeds to report[308] Item 3. Defaults Upon Senior Securities This section reports that there were no defaults upon senior securities during the reporting period - There are no defaults upon senior securities to report[308] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company's operations - Mine safety disclosures are not applicable[309] Item 5. Other Information This section confirms that there is no other material information to report for the period - There is no other information to report[310] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including required certifications - The exhibits include certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 from the CEO and CFO[311]