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, 2016

 

[  ] For the transition period from _____________ to _____________

 

Commission file number: 0-22773

 

NETSOL TECHNOLOGIES, INC.

(Exact name of small business issuer as specified in its charter)

 

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

 

24025 Park Sorrento, Suite 410, 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 10,993,054 shares of its $.01 par value Common Stock and no Preferred Stock issued and outstanding as of February 10, 2017.

 

 

 

   
 

 

NETSOL TECHNOLOGIES,INC

 

    Page No.
     
PART I. FINANCIAL INFORMATION   3
     
Item 1. Financial Statements (Unaudited)   3
     
Condensed Consolidated Balance Sheets as of December 31, 2016 and June 30, 2016   3
     
Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2016 and 2015   4
     
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended December 31, 2016 and 2015   5
     
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2016 and 2015   6
     
Notes to the Condensed Consolidated Financial Statements   8
     
Item 2. Management’s Discussion and Analysis or Plan of Operation   21
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk   34
     
Item 4. Controls and Procedures   34
   
PART II. OTHER INFORMATION   35
     
Item 1. Legal Proceedings   35
     
Item 1ARisk Factors   35
     
Item 2. Unregistered Sales of Equity and Use of Proceeds   36
     
Item 3. Defaults Upon Senior Securities   36
     
Item 4. Mine Safety Disclosures   36
     
Item 5. Other Information   36
     
Item 6. Exhibits   36

 

Page  2
   

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   As of   As of 
  December 31, 2016   June 30, 2016 
ASSETS        
Current assets:          
Cash and cash equivalents  $9,505,383   $11,557,527 
Accounts receivable, net of allowance of $495,760 and $492,498   5,840,490    9,691,229 
Accounts receivable, net - related party   4,303,380    5,691,178 
Revenues in excess of billings   17,646,488    10,493,096 
Revenues in excess of billings - related party   469,030    804,168 
Other current assets   2,904,650    2,214,628 
Total current assets   40,669,421    40,451,826 
Restricted cash   90,000    90,000 
Property and equipment, net   21,873,277    22,774,435 
Other assets   2,054,938    842,553 
Intangible assets, net   18,423,439    19,674,033 
Goodwill   9,516,568    9,516,568 
Total assets  $92,627,643   $93,349,415 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable and accrued expenses  $7,373,097   $5,962,770 
Current portion of loans and obligations under capitalized leases   4,368,930    4,440,084 
Unearned revenues   2,806,804    4,739,214 
Common stock to be issued   88,324    88,324 
Total current liabilities   14,637,155    15,230,392 
Long term loans and obligations under capitalized leases; less current maturities   501,554    477,692 
Total liabilities   15,138,709    15,708,084 
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 and10,713,372 shares issued and 10,686,093 outstanding as of June 30, 2016   109,931    107,134 
Additional paid-in-capital   123,019,215    121,448,946 
Treasury stock (34,779 shares and 27,279 shares)   (454,310)   (415,425)
Accumulated deficit   (40,074,755)   (37,323,360)
Stock subscription receivable   (450,220)   (783,172)
Other comprehensive loss   (18,628,395)   (18,730,494)
Total NetSol stockholders’ equity   63,521,466    64,303,629 
Non-controlling interest   13,967,468    13,337,702 
Total stockholders’ equity   77,488,934    77,641,331 
Total liabilities and stockholders’ equity  $92,627,643   $93,349,415 

 

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, 
   2016   2015   2016   2015 
Net Revenues:                    
License fees  $5,350,086   $709,691   $8,849,946   $1,903,045 
Maintenance fees   3,787,696    3,240,472    7,190,517    6,252,710 
Services   6,984,084    9,574,104    12,790,801    16,327,977 
License fees - related party   -    -    246,957    - 
Maintenance fees - related party   51,345    31,755    181,976    189,986 
Services - related party   1,464,901    2,635,675    3,379,473    4,823,083 
Total net revenues   17,638,112    16,191,697    32,639,670    29,496,801 
                     
Cost of revenues:                    
Salaries and consultants   5,979,804    5,083,412    11,873,153    10,244,661 
Travel   836,240    754,009    1,548,135    1,235,462 
Depreciation and amortization   1,318,764    1,461,466    2,649,636    2,935,701 
Other   1,065,727    1,022,682    2,038,065    1,961,479 
Total cost of revenues   9,200,535    8,321,569    18,108,989    16,377,303 
                     
Gross profit   8,437,577    7,870,128    14,530,681    13,119,498 
                     
Operating expenses:                    
Selling and marketing   2,713,478    2,002,990    5,057,516    3,701,394 
Depreciation and amortization   271,485    285,616    540,582    576,788 
General and administrative   3,933,413    3,378,829    8,552,609    6,583,517 
Research and development cost   91,607    117,924    184,539    229,994 
Total operating expenses   7,009,983    5,785,359    14,335,246    11,091,693 
                     
Income from operations   1,427,594    2,084,769    195,435    2,027,805 
                     
Other income and (expenses)                    
Loss on sale of assets   (32,339)   (2,333)   (34,742)   (14,206)
Interest expense   (62,127)   (72,156)   (116,602)   (140,329)
Interest income   23,416    35,299    53,856    87,411 
Loss on foreign currency exchange transactions   (621,887)   (134,527)   (1,036,783)   (248,246)
Other income   6,823    120,684    28,383    174,998 
Total other income (expenses)   (686,114)   (53,033)   (1,105,888)   (140,372)
                     
Net income (loss) before  income taxes   741,480    2,031,736    (910,453)   1,887,433 
Income tax provision   (338,884)   (273,275)   (378,759)   (348,498)
Net income (loss)   402,596    1,758,461    (1,289,212)   1,538,935 
Non-controlling interest   (1,388,272)   (883,396)   (1,462,183)   (1,074,898)
Net income (loss) attributable to NetSol  $(985,676)  $875,065   $(2,751,395)  $464,037 
                     
Net income (loss) per share:                    
Net income (loss) per common share                    
Basic  $(0.09)  $0.08   $(0.26)  $0.05 
Diluted  $(0.09)  $0.08   $(0.26)  $0.04 
                     
Weighted average number of shares outstanding                    
Basic   10,877,446    10,308,186    10,783,685    10,294,760 
Diluted   10,877,446    10,548,922    10,783,685    10,535,497 

 

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, 
   2016   2015   2016   2015 
                 
Net income (loss)  $(985,676)  $875,065   $(2,751,395)  $464,037 
Other comprehensive income (loss):                    
Translation adjustment   (944,837)   (665,906)   149,237    (1,914,473)
Comprehensive income (loss)   (1,930,513)   209,159    (2,602,158)   (1,450,436)
Comprehensive income (loss) attributable to non-controlling interest   (276,575)   (249,910)   47,138    (535,277)
Comprehensive income (loss) attributable to NetSol  $(1,653,938)  $459,069   $(2,649,296)  $(915,159)

 

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, 
   2016   2015 
Cash flows from operating activities:          
Net income (loss)  $(1,289,212)  $1,538,935 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:          
Depreciation and amortization   3,190,218    3,512,489 
Provision for bad debts   1,026    37,043 
Loss on sale of assets   34,742    14,206 
Stock issued for services   1,525,775    326,019 
Fair market value of warrants and stock options granted   21,804    145,716 
Changes in operating assets and liabilities:          
Accounts receivable   3,678,110    111,967 
Accounts receivable - related party   829,285    (2,383,828)
Revenues in excess of billing   (7,219,089)   520,071 
Revenues in excess of billing - related party   285,791    15,866 
Other current assets   585,147    (758,802)
Accounts payable and accrued expenses   334,241    142,008 
Unearned revenue   (1,908,440)   (1,190,072)
Net cash provided by operating activities   69,398    2,031,618 
           
Cash flows from investing activities:          
Purchases of property and equipment   (1,074,316)   (1,177,443)
Sales of property and equipment   181,087    357,933 
Purchase of treasury stock   (38,885)   - 
Purchase of non-controlling interest in subsidiary   -    (347,623)
Investment   (705,555)   - 
Net cash used in investing activities   (1,637,669)   (1,167,133)
           
Cash flows from financing activities:          
Proceeds from sale of common stock   -    64,931 
Proceeds from the exercise of stock options and warrants   429,452    194,680 
Proceeds from exercise of subsidiary options   18,089    - 
Dividend paid by subsidiary to Non-controlling interest   (968,657)   - 
Proceeds from bank loans   -    306,750 
Payments on capital lease obligations and loans - net   (69,998)   (530,733)
Net cash provided by (used in) financing activities   (591,114)   35,628 
Effect of exchange rate changes   107,241    (1,082,297)
Net decrease in cash and cash equivalents   (2,052,144)   (182,184)
Cash and cash equivalents, beginning of the period   11,557,527    14,168,957 
Cash and cash equivalents, end of period  $9,505,383   $13,986,773 

 

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, 
   2016   2015 
SUPPLEMENTAL DISCLOSURES:          
Cash paid during the period for:          
Interest  $123,682   $132,764 
Taxes  $77,414   $156,737 
           
NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Provided services for investment in eeGeo, Inc.  $549,621   $- 
Assets acquired under capital lease  $312,632   $- 

 

Page  7
   

 

NETSOL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
(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.

 

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, 2016. 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 year.

 

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. 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, 2016, and June 30, 2016, the Company had uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $7,869,426 and $7,640,095, respectively. The Company has not experienced any losses in such accounts.

 

Page  8
   

 

NETSOL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
(UNAUDITED)

 

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.

 

On June 23, 2016, the United Kingdom (U.K.) held a referendum in which voters approved an exit from the European Union (E.U.), commonly referred to as “Brexit”. As a result of the referendum, it is expected that the British government will begin negotiating the terms of the U.K.’s future relationship with the E.U. Although it is unknown what those terms will be, it is possible that there will be greater restrictions on imports and exports between the U.K. and E.U. countries and perhaps increased regulatory complexities. These changes may adversely affect the Company’s operations and financial results.

 

New Accounting Pronouncements

 

On November 17, 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. It is intended to reduce diversity in the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. The new standard requires that restricted cash and restricted cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for annual periods beginning after December 15, 2017 including interim periods within those fiscal years. Earlier adoption is permitted. The Company maintains restricted cash balances and upon adoption of this standard, the Company will show restricted cash as part of cash and restricted cash equivalents.

 

In January 2017, the FASB issued Accounting Standards Update 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  9
   

 

NETSOL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
(UNAUDITED)

 

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.

 

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

 

   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 
Basic loss per share:                              
Net loss available to common shareholders  $(985,676)   10,877,446   $(0.09)  $(2,751,395)   10,783,685   $(0.26)
Effect of dilutive securities                              
Stock options   -    -    -    -    -    - 
Warrants   -    -    -    -    -    - 
Diluted loss per share  $(985,676)   10,877,446   $(0.09)  $(2,751,395)   10,783,685   $(0.26)

 

   For the three months ended
December 31, 2015
   For the six months ended
December 31, 2015
 
   Net Income   Shares   Per Share   Net Income   Shares   Per Share 
Basic income per share:                              
Net income available to common shareholders  $875,065    10,308,186   $0.08   $464,037    10,294,760   $0.05 
Effect of dilutive securities                              
Stock options   -    237,618    -    -    237,618    - 
Warrants   -    3,118    -    -    3,118    - 
Diluted income per share  $875,065    10,548,922   $0.08   $464,037    10,535,496   $0.04 

 

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, 
   2016   2015   2016   2015 
Stock Options   480,133    -    480,133    - 
Warrants   11,075    -    11,075    - 
    491,208    -    491,208    - 

 

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 $18,628,395 and $18,730.494 as of December 31, 2016 and June 30, 2016, 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. During the three and six months ended December 31, 2015, comprehensive income (loss) in the consolidated statements of operations included a translation loss of $415,996 and $1,379,196, respectively.

 

NOTE 5 – RELATED PARTY TRANSACTIONS

 

NetSol-Innovation

 

In November 2004, the Company entered into a joint venture agreement with 1insurer (formerly Innovation Group) called NetSol-Innovation. NetSol-Innovation provides support services to 1insurer. During the three and six months ended December 31, 2016, NetSol-Innovation provided services of $1,401,144 and $2,956,619, respectively. During the three and six months ended December 31, 2015, NetSol-Innovation provided services of $2,128,727 and $4,026,526, respectively. Accounts receivable at December 31, 2016 and June 30, 2016 were $4,221,689 and $4,689,322, respectively.

 

Investec Asset Finance

 

In October 2011, NTE entered into an agreement with Investec Asset Finance to acquire VLS. NTE and VLS both provide support services to Investec. 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. During the three and six months ended December 31, 2015, NTE and VLS provided maintenance and services of $538,703 and $986,543, respectively. Accounts receivable at December 31, 2016 and June 30, 2016 were $81,691 and $1,001,856, respectively. Revenue in excess of billing at December 31, 2016 and June 30, 2016 were $469,030 and $804,168, respectively.

 

G-Force LLC

 

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 eeGeo, Inc. (“eeGeo”) for $1,111,111. See Note 8 “Other Long Term Assets”.

 

Page  10
   

 

NETSOL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
(UNAUDITED)

 

NOTE 6 - OTHER CURRENT ASSETS

 

Other current assets consisted of the following:

 

   As of
December 31, 2016
   As of
June 30, 2016
 
         
Prepaid Expenses  $665,018   $386,578 
Advance Income Tax   1,061,190    968,334 
Employee Advances   57,934    83,978 
Security Deposits   280,465    72,985 
Other Receivables   515,571    486,562 
Other Assets   324,472    216,191 
Total  $2,904,650   $2,214,628 

 

NOTE 7 - PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

   As of
December 31, 2016
   As of
June 30, 2016
 
Office Furniture and Equipment  $3,434,984   $3,346,156 
Computer Equipment   26,125,171    25,935,620 
Assets Under Capital Leases   2,557,974    2,409,074 
Building   9,244,025    9,185,570 
Land   2,427,467    2,410,664 
Autos   1,219,978    1,073,447 
Improvements   387,820    385,135 
Subtotal   45,397,419    44,745,666 
Accumulated Depreciation   (23,524,142)   (21,971,231)
Property and Equipment, Net  $21,873,277   $22,774,435 

 

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. For the three and six months ended December 31, 2015, depreciation expense totaled $1,060,216 and $2,124,105, respectively. Of these amounts, $774,600 and $1,547,317, respectively, are reflected in cost of revenues.

  

Page  11
   

 

NETSOL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
(UNAUDITED)

 

Following is a summary of fixed assets held under capital leases as of December 31, 2016 and June 30, 2016:

 

   As of
December 31, 2016
   As of
June 30, 2016
 
Computers and Other Equipment  $387,033   $503,926 
Furniture and Fixtures   410,591    408,200 
Vehicles   1,760,350    1,496,948 
Total   2,557,974    2,409,074 
Less:  Accumulated Depreciation - Net   (790,786)   (713,248)
   $1,767,188   $1,695,826 

 

NOTE 8 – OTHER LONG TERM ASSETS

 

      As of
December 31, 2016
   As of
June 30, 2016
 
Investment (1)  $1,975,527   $720,350 
Long Term Security Deposits      79,411    122,203 
Total     $2,054,938   $842,553 

 

(1) Investment under cost method
     
  On March 2, 2016, the Company purchased a 4.9% interest in eeGeo 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 eeGeo, 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 eeGeo. During the six months ended December 31, 2016, NetSol PK paid $150,000 to eeGeo for its share of investment. During the three and six months ended December 31, 2016, NetSol PK provided services valued at $300,963 and $549,621, respectively. As of December 31, 2016, the accumulated balance of services provided was $714,416 which is recorded as investment.

 

In connection with the investment, the Company and NetSol PK received a warrant to purchase preferred stock of eeGeo 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 eeGeo in a “Qualified Financing”.
       
    The warrants expire on March 2, 2020.
       
    “Next Round Preferred” is defined as occurring if eeGeo’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 accounted for this investment using the cost method. At December 31, 2016, the Company has determined that there is no impairment.

 

Page  12
   

 

NETSOL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
(UNAUDITED)

 

NOTE 9 - INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

 

   As of
December 31, 2016
   As of
June 30, 2016
 
        
Product Licenses - Cost  $47,244,997   $48,632,368 
Additions   -    - 
Deletions   -    (1,387,371)
Effect of Translation Adjustment   (3,265,457)   (3,323,518)
Accumulated Amortization   (25,556,101)   (24,247,446)
Net Balance  $18,423,439   $19,674,033 

 

(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 $18,423,439 will be amortized over the next 7.25 years. Amortization expense for the three and six months ended December 31, 2016 was $687,571 and $1,388,237, respectively. Amortization expense for the three and six months ended December 31, 2015 was $686,866 and $1,388,384, respectively.

 

(B) Future Amortization

 

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

 

Year ended:    
December 31, 2017  $2,777,259 
December 31, 2018   2,777,259 
December 31, 2019   2,777,259 
December 31, 2020   2,777,259 
December 31, 2021   2,777,259 
Thereafter   4,537,144 
   $18,423,439 

 

NOTE 10 – GOODWILL

 

Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in businesses combinations. Goodwill was comprised of the following amounts:

 

   As of
December 31, 2016
   As of
June 30, 2016
 
NetSol PK  $1,166,610   $1,166,610 
NTE   3,471,814    3,471,814 
VLS   214,044    214,044 
NTA   4,664,100    4,664,100 
Total  $9,516,568   $9,516,568 

 

Page  13
   

 

NETSOL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
(UNAUDITED)

 

The Company tests for goodwill impairment at each reporting unit. There was no goodwill impairment for the period ended December 31, 2016.

 

NOTE 11 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following:

 

   As of
December 31, 2016
   As of
June 30, 2016
 
Accounts Payable  $1,579,841   $1,346,532 
Accrued Liabilities   4,787,577    4,171,058 
Accrued Payroll & Taxes   609,154    231,881 
Taxes Payable   264,332    66,437 
Other Payable   132,193    146,862 
Total  $7,373,097   $5,962,770 

 

NOTE 12 – DEBTS

 

Notes payable and capital leases consisted of the following:

 

      As of December 31, 2016 
Name      Total   Current
Maturities
   Long-Term
Maturities
 
                 
D&O Insurance   (1)  $89,732   $89,732   $- 
HSBC Loan   (2)   -    -    - 
Loan Payable Bank   (3)   3,819,345    3,819,345    - 
         3,909,077    3,909,077    - 
Subsidiary Capital Leases   (4)   961,407    459,853    501,554 
        $4,870,484   $4,368,930   $501,554 

 

       As of June 30, 2016 
Name      Total   Current Maturities   Long-Term Maturities 
                 
D&O Insurance   (1)  $65,114   $65,114   $- 
HSBC Loan   (2)   93,704    93,704    - 
Loan Payable Bank   (3)   3,792,907    3,792,907    - 
         3,951,725    3,951,725    - 
Subsidiary Capital Leases   (4)   966,051    488,359    477,692 
        $4,917,776   $4,440,084   $477,692 

 

(1) The Company finances Directors’ and Officers’ (“D&O”) liability insurance as well as Errors and Omissions (“E&O”) liability insurance, for which the total balances are renewed on an annual basis and as such are recorded in current maturities. The interest rate on the insurance financing was 5.9% as of December 31, 2016 and June 30, 2016, respectively.

 

Page  14
   

 

NETSOL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
(UNAUDITED)

 

(2) In October 2011, the Company’s subsidiary, NTE, entered into a loan agreement with HSBC Bank to finance the acquisition of a 51% controlling interest in Virtual Leasing Services Limited. HSBC Bank guaranteed the loan up to a limit of £1,000,000, or approximately $1,234,568 for a period of 5 years with monthly payments of £18,420, or approximately $22,741. The interest rate was 4% which is 3.5% above the bank sterling base rate. The loan is securitized against a debenture comprising of fixed and floating charges over all the assets and undertakings of NTE including all present and future freehold and leasehold property, book and other debts, chattels, goodwill and uncalled capital, both present and future. Interest expense for the three and six months ended December 31, 2016 was $38 and $1,596, respectively. Interest expense for the three and six months ended December 31, 2015 was $1,161 and $9,011, respectively. NTE paid this loan in full during six months ended December 31, 2016.

 

(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. 400,000,000 or approximately $3,819,345. The interest rate for the loans was 3% and 4.5% at December 31, 2016 and June 30, 2016, respectively. Interest expense for the three and six months ended December 31, 2016 was $28,527 and $57,592, respectively. Interest expense for the three and six months ended December 31, 2015 was $36,980 and $77,986, 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 December 31, 2016, NetSol PK was in compliance with this covenant.

 

(4) The Company leases various fixed assets under capital lease arrangements expiring in various years through 2021. 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 and six months ended December 31, 2016 and 2015.

 

Following is the aggregate minimum future lease payments under capital leases as of December 31, 2016:

 

   Amount 
Minimum Lease Payments     
Due FYE 12/31/17  $517,595 
Due FYE 12/31/18   396,414 
Due FYE 12/31/19   126,178 
Due FYE 12/31/20   6,551 
Due FYE 12/31/21   5,459 
Total Minimum Lease Payments   1,052,197 
Interest Expense relating to future periods   (90,790)
Present Value of minimum lease payments   961,407 
Less:  Current portion   (459,853)
Non-Current portion  $501,554 

 

NOTE 13 - STOCKHOLDERS’ EQUITY

 

During the six months ended December 31, 2016, the Company issued 77,458 shares of common stock for services rendered by officers of the Company. These shares were valued at the fair market value of $463,548.

 

During the six months ended December 31, 2016, the Company issued 44,751 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 $256,353.

 

During the six months ended December 31, 2016, the Company issued 137,158 shares of its common stock to employees pursuant to the terms of their employment agreements valued at $805,874.

 

During the six months ended December 31, 2016, the Company collected subscription receivable of $332,952 related to the exercise of stock options in previous years.

 

During the six months ended December 31, 2016, the Company received $96,500 pursuant to a stock option agreement for the exercise of 20,315 shares of common stock at price $4.75 per share.

 

During the six months ended December 31, 2016, the Company purchased 7,500 of shares of its common stock from open market at an average price of $5.18 per share.

 

Page  15
   

 

NETSOL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
(UNAUDITED)

 

NOTE 14 - 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   20,315   $4.75           
Exercised   (20,315)  $4.75           
Expired / Cancelled   (130,000)  $7.50           
Outstanding and exercisable, December 31, 2016   480,133   $4.20    0.67   $561,886 

 

WARRANTS:
Outstanding and exercisable, June 30, 2016   163,124   $7.29    0.23   $9,303 
Granted / adjusted   -    -           
Exercised   -    -           
Expired   (152,049)  $7.46           
Outstanding and exercisable, December 31, 2016   11,075   $5.00    0.18   $2,215 

 

The following table summarizes information about stock options and warrants outstanding and exercisable at December 31, 2016.

 

Exercise Price  Number Outstanding and Exercisable   Weighted Average Remaining Contractual Life   Weighted Ave Exercise Price 
OPTIONS:               
$0.10 - $9.90   479,133    0.67   $4.17 
$10.00 - $19.90   1,000    0.56   $16.00 
Totals   480,133    0.67   $4.20 
                
WARRANTS:               
$5.00 - $7.50   11,075    0.18   $5.00 
Totals   11,075    0.18   $5.00 

 

Page  16
   

 

NETSOL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
(UNAUDITED)

 

The following table summarizes stock grants awarded as compensation:

 

   # of shares   Weighted Average Grant Date Fair Value ($) 
         
Unvested, June 30, 2015   6,667   $6.00 
Granted   864,500   $5.91 
Vested   (240,939)  $5.51 
Unvested, June 30, 2016   630,228   $6.07 
Granted   229,646   $5.92 
Cancelled   (1,000)  $5.09 
Vested / cancelled   (229,616)  $5.86 
Unvested, December 31, 2016   629,258   $6.09 

 

For the three and six months ended December 31, 2016, the Company recorded compensation expense of $682,640, and $1,548,096 respectively. For the three and six months ended December 31, 2015, the Company recorded compensation expense of $248,268 and $326,019, respectively. The compensation expense related to the unvested stock grants as of December 31, 2016 was $3,628,898 which will be recognized during the fiscal years 2017 through 2022.

 

OPTIONS

 

During the six months ended December 31, 2016, the Company granted 20,315 options to employees with exercise prices of $4.75 per share and expiration date of 3 months, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $21,804 in compensation expense for these options in the accompanying condensed consolidated financial statements. The fair market value was calculated using the Black-Scholes option pricing model with the following assumptions:

 

Risk-free interest rate - 0.01%
   
Expected life – 3 months
   
Expected volatility – 19.27%
   
Expected dividend - 0%

 

NOTE 15 – CONTINGENCIES

 

As previously disclosed, on July 25, 2014, purported class action lawsuits were filed in the U.S. District Court for the Central District of California against the Company and certain of its current or former officers and/or directors, which have been consolidated under the caption Rand-Heart of New York, Inc. v. NetSol Technologies, Inc., et al., Case No. 2:14-cv-05787 PA (SHx). Plaintiffs subsequently filed consolidated amended complaints, which asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. As a result of the Company’s motions, the Court dismissed all of plaintiffs’ claims except those related to the scope of the Company’s release of its next generation product, NFS Ascent™, during the narrow, proposed class period of October 24, 2013 to November 8, 2013. The Company filed an answer and affirmative defenses denying the remaining claims. On February 26, 2016, the parties executed a Stipulation of Settlement to fully resolve the consolidated class action lawsuit, and filed a motion seeking the Federal Court’s approval of the settlement. On March 28, 2016, the Court issued an order preliminarily approving the settlement and providing for notice to class members. Following class notice and hearing, the Court issued an order granting the motion for final approval of the settlement and plan of allocation and motion for an award of attorneys’ fees and case expenses on July 1, 2016. The Court’s Judgment approving the settlement on the terms set forth in the Stipulation of Settlement was signed on July 2, 2016. The cost of the settlement was covered by the Company’s insurers.

 

Page  17
   

 

NETSOL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
(UNAUDITED)

 

On October 27, 2015, a shareholder derivative lawsuit was filed in the California state court entitled McArthur v Ghauri, et al., Case No. BC599020 (Los Angeles, Cty.), naming current and former members of the Company’s board of directors as defendants. The complaint alleges that the defendants breached their fiduciary duties based on the same alleged factual premise as the pending federal securities class action described above. The Company is named as a nominal defendant only and no damages are sought from it. On March 16, 2016, the parties in the California lawsuit reached an agreement-in-principle providing for the settlement of that case. The proposed settlement is on the terms and conditions set forth in a Memorandum of Understanding (“MOU”).

 

On December 30, 2015, a virtually identical shareholder derivative lawsuit was filed in Nevada state court, Paulovits v. Ghauri, et al., Case No. CV15-02470 (Washoe Cty.). The Nevada complaint names the same defendants and is based on the same alleged facts as the earlier-filed California case. On April 29, 2016, the Company filed a motion to dismiss or stay the Nevada proceeding on multiple grounds, including that is it duplicative of the first-filed California action. On May 23, 2016, pursuant to the parties’ stipulation, the Nevada court ordered that matter to be stayed for a period of one year.

 

On June 15, 2016, the parties in the California and the Nevada cases jointly executed a Stipulation and Agreement of Settlement of Derivative Claims, which is intended to fully resolve both cases. Pursuant to the stipulation and subject to the court’s approval, the Company has agreed to adopt or maintain certain corporate governance measures, and has agreed to cause its insurers to pay plaintiff counsel’s fees and expenses in an aggregate amount not to exceed $175,000. On June 16, 2016, the California plaintiff filed a motion for preliminary approval of the derivative settlement. The motion for approval of the settlement was continued by the California court until December 14, 2016. Effective January 9, 2017, the California Court issued a preliminary order approving the settlement. A final approval hearing is scheduled for April 6, 2017.

 

NOTE 16 – 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, 2016 and June 30, 2016:

 

   As of
December 31, 2016
   As of
June 30, 2016
 
Identifiable assets:          
Corporate headquarters  $2,854,674   $3,646,160 
North America   6,380,919    6,845,444 
Europe   7,081,665    7,857,427 
Asia - Pacific   76,310,385    75,000,384 
Consolidated  $92,627,643   $93,349,415 

 

Page  18
   

 

NETSOL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
(UNAUDITED)

 

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

 

   For the Three Months
Ended December 31,
   For the Six Months
Ended December 31,
 
   2016   2015   2016   2015 
Revenues from unaffiliated customers:                    
North America  $1,513,997   $952,738   $3,355,428   $2,455,206 
Europe   1,298,037    1,679,224    2,504,086    3,177,755 
Asia - Pacific   13,309,832    10,892,305    22,971,750    18,850,771 
    16,121,866    13,524,267    28,831,264    24,483,732 
Revenue from affiliated customers                    
Europe   115,102    538,703    851,787    986,543 
Asia - Pacific   1,401,144    2,128,727    2,956,619    4,026,526 
    1,516,246    2,667,430    3,808,406    5,013,069 
Consolidated  $17,638,112   $16,191,697   $32,639,670   $29,496,801 
                     
Intercompany revenue                    
Europe  $95,053   $105,707   $231,180   $242,493 
Asia - Pacific   1,462,603    2,115,420    1,922,554    3,059,609 
Eliminated  $1,557,656   $2,221,127   $2,153,734   $3,302,102 
                     
Net income (loss) after taxes and before non-controlling interest:                    
Corporate headquarters  $(1,190,559)  $(1,116,822)  $(2,820,076)  $(1,189,828)
North America   (71,134)   (332,899)   196,758    (419,760)
Europe   (698,364)   35,530    (798,652)   (654,170)
Asia - Pacific   2,362,653    3,172,652    2,132,758    3,802,693 
Consolidated  $402,596   $1,758,461   $(1,289,212)  $1,538,935 

 

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

 

   For the Six Months Ended December 31, 
   2016   2015 
Capital expenditures:          
Corporate headquarters  $-   $- 
North America   41,275    44,679 
Europe   273,794    63,222 
Asia - Pacific   759,247    1,069,542 
Consolidated  $1,074,316   $1,177,443 

 

Page  19
   

 

NETSOL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
(UNAUDITED)

 

NOTE 17 – 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, 2016
 
         
NetSol PK   33.53%  $11,330,750 
NetSol-Innovation   49.90%   2,343,344 
VLS, VLSH & VLSIL Combined   49.00%   293,411 
NetSol Thai   0.006%   (37)
Total       $13,967,468 

 

SUBSIDIARY  Non-Controlling Interest %   Non-Controlling Interest at
June 30, 2016
 
           
NetSol PK   33.40%  $10,292,495 
NetSol-Innovation   49.90%   2,735,998 
VLS, VLHS & VLSIL Combined   49.00%   309,213 
NetSol Thai   0.006%   (4)
Total       $13,337,702 

 

NETSOL TECHNOLOGIES, LIMITED

 

During the six months ended December 31, 2016, employees of NetSol PK exercised 116,000 options of common stock pursuant to employees exercising stock options and NetSol PK received cash of $18,089, resulting in an increase in non-controlling interest from 33.40% to 33.53%.

 

During the six months ended December 31, 2016, NetSol PK paid a cash dividend of $425,988.

 

NETSOL INNOVATION

 

During the six months ended December 31, 2016, NetSol-Innovation paid a cash dividend of $1,669,199.

 

Page  20
   

 

Item 2. Management’s Discussion and Analysis of Plan of Operation

 

The following discussion is intended to assist in an understanding of the Company’s financial position and results of operations for the three and six months ended December 31, 2016. 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, 2016, and the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

 

Forward-Looking Information

 

This report contains certain forward-looking statements and information relating to the Company that is based on the beliefs of its management as well as assumptions made by and information currently available to its management. When used in this report, the words “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”, and similar expressions as they relate to the Company or its management, are intended to identify forward-looking statements. These statements reflect management’s current view of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions. Should any of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this report as anticipated, estimated or expected. The Company’s realization of its business aims could be materially and adversely affected by any technical or other problems in, or difficulties with, planned funding and technologies, third party technologies which render the Company’s technologies obsolete, the unavailability of required third party technology licenses on commercially reasonable terms, the loss of key research and development personnel, the inability or failure to recruit and retain qualified research and development personnel, or the adoption of technology standards which are different from technologies around which the Company’s business ultimately is built. The Company does not intend to update these forward-looking statements.

 

Business Overview

 

NetSol Technologies, Inc. (NasdaqCM: NTWK) is a worldwide provider of IT and enterprise software solutions. We believe that our solutions constitute mission critical applications for our clients as they encapsulate end-to-end business processes, facilitating faster processing and increased transactions.

 

The Company’s primary source of revenue is the licensing, customization, enhancement and maintenance of its suite of financial applications under the brand name NFS™ (NetSol Financial Suite) and NFS AscentTM for leading businesses in the global lease and finance industry.

 

NetSol’s clients include Dow-Jones 30 Industrials and Fortune 500 manufacturers and financial institutions, global vehicle manufacturers, and enterprise technology providers, all of which are serviced by NetSol delivery locations around the globe.

 

Founded in 1997, NetSol is headquartered in Calabasas, California. While the Company follows a global strategy for sales and delivery of its portfolio of solutions and services, it continues to maintain regional offices in the following locations:

 

  North America San Francisco Bay Area
       
  Europe London Metropolitan area
       
  Asia Pacific Lahore, Karachi, Bangkok, Beijing, Jakarta and Sydney

 

The Company maintains services, solutions and/or sales specific offices in the USA, England, Germany, Pakistan, Thailand, China and Australia.

 

NetSol’s offerings include its flagship global solution, NFS™. A robust suite of five software applications, it is an end-to-end solution for the lease and finance industry covering the complete leasing and financing cycle, starting from quotation origination through end of contract transactions. The five software applications under NFS™ have been designed and developed for a highly flexible setting and are capable of dealing with multinational, multi-company, multi-asset, multi-lingual, multi-distributor and multi-manufacturer environments. Each application is a complete system in itself and can be used independently to address specific sub-domains of the leasing/financing cycle. When used together, they fully automate the entire leasing/financing cycle for any size company, including those with multi-billion dollar portfolios.

 

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NFS Ascent™

 

NFS Ascent™ is the Company’s next-generation platform, offering a technologically advanced solution for the auto and equipment finance and leasing industry. NFS Ascent’s™ architecture and user interfaces were designed based on the Company’s collective experience with global Fortune 500 companies over the past 30 years. The platform’s framework allows auto captive and asset finance companies to rapidly transform legacy driven technology into a state-of-the-art IT and business process environment. At the core of the NFS Ascent™ platform is a lease accounting and contract processing engine, which allows for an array of interest calculation methods, as well as robust accounting of multibillion dollar lease portfolios under various generally accepted accounting principles (GAAP), as well as international financial reporting standards (IFRS). NFS Ascent™, with its distributed and clustered deployment across parallel application and high volume data servers, enables finance companies to process voluminous data in a hyper speed environment. NFS Ascent™ has been developed using the latest tools and technologies and its n-tier SOA architecture allows the system to greatly improve a myriad of areas including, but not limited to, scalability, performance, fault tolerance and security.

 

NFS Mobility

 

NetSol launched NFS mobility in 2014. It enables a sales force for the finance and leasing company across different channels like point of sale, field investigation and auditing as well as allowing end customers to access their contract details through a self-service mobile application. NFS Mobility includes mAccount, mPOS, mDealer, mAuditor, and Mobile Field Investigator (mFI).

 

LeasePak

 

In North America, NTA has and continues to develop the LeasePak Productivity modules as an additional companion set of products to operate in conjunction with the LeasePak base system licensed software. LeasePak streamlines the lease management lifecycle, while maintaining customer service and reducing operating costs. It is web-enabled and can be configured to run on HP-UX, SUN/Solaris or Linux, as well as for Oracle and Sybase users. 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 Vertex Series O.

 

The LeasePak solution includes the LeasePak Software-as-a-Service (“SaaS”) business line, which provides an enhanced performance, while reducing the overall cost of ownership. SaaS offers a new deployment option whereby customers only require access to the internet and web browser to use the software. LeasePak-SaaS targets small and mid-sized leasing and finance companies.

 

NTA has updated the LeasePak’s technology set to .Net. The most recent upgrade includes faster performance, new features, improved security, and compatibility with the latest hardware. LeasePak.Net takes full advantage of the existing business functionality of LeasePak.

 

LeaseSoft

 

In addition to offering NFS Ascent™ to the European market, NTE has some regional offerings, including LeaseSoft and LoanSoft. LeaseSoft is a full lifecycle lease and finance system aimed predominantly at the UK funder market, including modules to support web portals and an electronic data interchange manager to facilitate integration between funders and introducers. LoanSoft is similar to LeaseSoft, but optimized for the consumer loan market.

 

The following discussion is intended to assist in an understanding of NetSol’s financial position and results of operations for the six months ended December 31, 2016. It should be read together with our condensed consolidated financial statements and related notes included herein.

 

Highlights

 

Listed below are a few of NetSol’s major successes achieved in the six months ended December 31, 2016:

 

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  The first implementation of our contract with a long-standing customer to upgrade to NFS Ascent™ in 11 countries and implement NFS Ascent™, in one new country, was recently completed in Australia and New Zealand. The first implementation phase continues in China, Korea, and South Africa.
     
  Sold LeasePak license valued at $500,000 to Korean based automotive captive for their U.S. operations.
     
  NetSol PK signed a collaboration agreement to provide technology services to eeGeo, an interactive 3D mapping company based in the United Kingdom. The eeGeo platform enables businesses to easily visualize complex data sets and location-based services in a 3D mobile experience. This agreement is progressing well as per joint agreements with NetSol and eeGeo.
     
  Went live with a major implementation of our NFS legacy system with Tri Petch Isuzu Leasing in Thailand.
   
  Went live with NFS legacy system in China.
     
  A restructuring of the Company’s efficiencies initiated in December 2016, is expected to result in approximately $4 million in savings spread over the next year.
     
  Teamed up with Microsoft Pakistan to foster innovation, encourage entrepreneurship and provide senior mentorship to promising new start-ups as part of the NSPIRE program.
     
  NetSol PK signed an agreement with Microsoft North Africa, East Mediterranean & Pakistan to further support the Pakistan technological start-ups.

 

Our success, in the near term, will depend, in large part, on the Company’s ability to continue to grow revenues and improve profits, adequately capitalize for growth in various markets and verticals, make progress in the North American and European markets and, continue to streamline sales and marketing efforts in every market we operate. However, management’s outlook for the continuing operations, which has been consolidated and has been streamlined, remains optimistic.

 

Management has identified the following material trends affecting NetSol.

 

Positive trends:

 

  Improving U.S. economy generally, and particularly in the auto and banking markets.
     
  China to invest $55 billion in Pakistan on energy and infrastructure projects.
     
  NFS legacy Solutions and Ascent’s largest auto finance market remains robust and resilient in China.
     
  Continued interest from existing Auto Captives Clients and few new major prospective clients for Ascent
     
  According to Business Insider, US auto manufactures hit a record 18.4 million units of new car sales in 2016 up from 17.5 million in 2015.
     
  New emerging markets and IT destinations in Thailand, Malaysia, Indonesia, and Australia.
     
  According to a Bloomberg December 2016 report, China’s car sales have been on a 26-year Record Streak fueled by tax break to consumers.
     
  According to a KPMG report, global car sales are rising and forecast to exceed 91 million by 2017.
     
  Continued interest from multinational auto captives, global companies and existing clients in NetSol Ascent™.
     
  As noted by Bloomberg, an improved economic environment, major foreign investment and improved security in Pakistan should restore business confidence and increase foreign travel.

 

Negative trends:

 

  The disruption risk of geopolitical unrest in the Middle East and the global threat of terrorist attacks.
     
  Restricted liquidity and financial burden due to tighter internal processes and limited budgets might cause delays in the receivables from some clients.
     
  Uncertainty in European countries due to Brexit.
     
  Continued concerns about absorbing refugees and associated security risks in Europe.

 

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CHANGES IN FINANCIAL CONDITION

 

Quarter Ended December 31, 2016 compared to the Quarter Ended December 31, 2015

 

The following table sets forth the items in our unaudited condensed consolidated statement of operations for the quarter ended December 31, 2016 and 2015 as a percentage of revenues.

 

   For the Three Months 
   Ended December 31, 
   2016   %   2015   % 
Net Revenues:                    
License fees  $5,350,086    30.33%  $709,691    4.38%
Maintenance fees   3,787,696    21.47%   3,240,472    20.01%
Services   6,984,084    39.60%   9,574,104    59.13%
Maintenance fees - related party   51,345    0.29%   31,755    0.20%
Services - related party   1,464,901    8.31%   2,635,675    16.28%
 Total net revenues   17,638,112    100.00%   16,191,697    100.00%
                     
Cost of revenues:                    
 Salaries and consultants   5,979,804    33.90%   5,083,412    31.40%
 Travel   836,240    4.74%   754,009    4.66%
 Depreciation and amortization   1,318,764    7.48%   1,461,466    9.03%
 Other   1,065,727    6.04%   1,022,682    6.32%
Total cost of revenues   9,200,535    52.16%   8,321,569    51.39%
                     
Gross profit   8,437,577    47.84%   7,870,128    48.61%
Operating expenses:                    
Selling and marketing   2,713,478    15.38%   2,002,990    12.37%
Depreciation and amortization   271,485    1.54%   285,616    1.76%
General and administrative   3,933,413    22.30%   3,378,829    20.87%
Research and development cost   91,607    0.52%   117,924    0.73%
Total operating expenses   7,009,983    39.74%   5,785,359    35.73%
                     
Income from operations   1,427,594    8.09%   2,084,769    12.88%
Other income and (expenses)                    
Loss on sale of assets   (32,339)   -0.18%   (2,333)   -0.01%
Interest expense   (62,127)   -0.35%   (72,156)   -0.45%
Interest income   23,416    0.13%   35,299    0.22%
Loss on foreign currency exchange transactions   (621,887)   -3.53%   (134,527)   -0.83%
Other income   6,823    0.04%   120,684    0.75%
Total other income (expenses)   (686,114)   -3.89%   (53,033)   -0.33%
                     
Net income (loss) before  income taxes   741,480    4.20%   2,031,736    12.55%
Income tax provision   (338,884)   -1.92%   (273,275)   -1.69%
Net income (loss)   402,596    2.28%   1,758,461    10.86%
Non-controlling interest   (1,388,272)   -7.87%   (883,396)   -5.46%
Net income (loss) attributable to NetSol  $(985,676)   -5.59%  $875,065    5.40%

 

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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 16 “Operating Segments” within the Notes to the Condensed Consolidated Financial Statements. Weakening of the value of the U.S. dollar compared to foreign currency exchange rates generally has the effect of increasing our revenues but also increasing our expenses denominated in currencies other than the U.S. dollar. Similarly, strengthening of the U.S. dollar compared to foreign currency exchange rates generally has the effect of reducing our revenues but also reducing our expenses denominated in currencies other than the U.S. dollar. We plan our business accordingly by deploying additional resources to areas of expansion, while continuing to monitor our overall expenditures given the economic uncertainties of our target markets. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, we compare the changes in results from one period to another period using constant currency. In order to calculate our constant currency results, we apply the current period results to the prior period foreign currency exchange rates. In the table below, we present the change based on actual results in reported currency and in constant currency.

 

           Favorable   Favorable   Total 
           (Unfavorable)   (Unfavorable)   Favorable 
   For the Three Months       Change in   Change due to   (Unfavorable) 
   Ended December 31,       Constant   Currency   Change as 
   2016   %   2015   %   Currency   Fluctuation   Reported 
                             
Net Revenues:   17,638,112    100.00%   16,191,697    100.00%   1,738,617    (292,202)   1,446,425 
                                    
Cost of revenues:   9,200,535    52.16%   8,321,569    51.39%   (1,093,111)   214,145    (878,966)
                                    
Gross profit   8,437,577    47.84%   7,870,128    48.61%   645,506    (78,057)   567,449 
         0.00%        0.00%               
Operating expenses:   7,009,983    39.74%   5,785,359    35.73%   (1,439,578)   214,954    (1,224,624)
                                    
Income from operations   1,427,594    8.09%   2,084,769    12.88%   (794,072)   136,897    (657,175)

 

Net revenues for the quarter ended December 31, 2016 and 2015 are broken out among the segments as follows:

 

   2016   2015 
   Revenue   %   Revenue   % 
North America  $1,513,997    8.61%  $952,738    5.88%
Europe   1,413,139    8.04%   2,217,927    13.70%
Asia-Pacific   14,658,832    83.36%   13,021,032    80.42%
Total  $17,585,968    100.00%  $16,191,697    100.00%

 

Revenues

 

License fees

 

License fees for the three months ended December 31, 2016 were $5,350,086 compared to $709,691 for the three months ended December 31, 2015 reflecting an increase of $4,640,395 with a change in constant currency of $4,678,514. During the three months ended December 31, 2016, we increased our license revenues through sales of our NFS Ascent™ product and sales of our regional offerings in the U.S.

 

Maintenance fees

 

Maintenance fees for the three months ended December 31, 2016 were $3,839,041 compared to $3,272,227 for the three months ended December 31, 2015 reflecting an increase of $566,814 with a change in constant currency of $670,830. Maintenance fees include maintenance provided to related parties of $51,345 for the three months ended December 31, 2016 compared to $31,755 for the same period last year. Maintenance fees begin once a customer has “gone live” with our product. The increase was due to the start of new maintenance agreements from customers who went live with our product during the latter stages of fiscal year 2016 and into fiscal year 2017. We anticipate maintenance fees to gradually increase as we implement both our NFS legacy product and NFS Ascent™.

 

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Services 

 

Services income for the three months ended December 31, 2016 was $8,448,985 compared to $12,209,779 for the three months ended December 31, 2015 reflecting a decrease of $3,760,794 with a change in constant currency of $3,610,727. Included in the services revenue are services provided to related parties of $1,464,901 for the three months ended December 31, 2016 compared to $2,635,675 for the same period last year. The decrease is due to a decrease in consulting services with current customers and a reduction in implementation services. 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.

 

Gross Profit

 

The gross profit was $8,437,577, for the three months ended December 31, 2016 as compared with $7,870,128 for the three months ended December 31, 2015. This is an increase of $567,449 with an increase in constant currency of $645,506. The gross profit percentage for the three months ended December 31, 2016 slightly decreased to 47.84% from 48.61% for the three months ended December 31, 2015. The cost of sales was $9,200,535 for the three months ended December 31, 2016 compared to $8,321,569 for the three months ended December 31, 2015 for an increase of $878,966 and on a constant currency basis an increase of $1,093,111. As a percentage of sales, cost of sales increased from 51.39% for the three months ended December 31, 2015 to 52.16% for the three months ended December 31, 2016.

 

Salaries and consultant fees increased by $896,392 from $5,083,412 for the three months ended December 31, 2015 to $5,979,804 for the three months ended December 31, 2016 and on a constant currency basis increased $1,050,256. The increase in salaries and consultant fees is due annual salary increases and the strategic hiring of employees at key locations including Pakistan, Thailand, China, UK and North America as we anticipate new projects associated with NFS Ascent™.

 

Depreciation and amortization expense decreased to $1,318,764 compared to $1,461,466 for the three months ended December 31, 2015 or a decrease of $142,702 and on a constant currency basis a decrease of $143,820. Depreciation and amortization expense decreased as some products became fully amortized.

 

Operating Expenses

 

Operating expenses were $7,009,983 for the three months ended December 31, 2016 compared to $5,785,359, for the three months ended December 31, 2015 for an increase of 21.17% or $1,224,624 and on a constant currency basis an increase of 24.88% or $1,439,578. As a percentage of sales, it increased from 35.73% to 39.74%. The increase in operating expenses was primarily due to the increase in selling and marketing expenses of $710,488 or 35.47% and on a constant currency basis an increase of $808,840 or 40.38%, and an increase in general and administrative expenses of $554,584 or 16.41% and on a constant currency basis an increase of $661,841 or 19.59%.

 

The increase in selling and marketing expenses is due to the increase in our salaries and commissions, travel expenses, and business development costs to market and sell NFS Ascent™ globally.

 

General and administrative expenses were $3,933,413 for the three months ended December 31, 2016 compared to $3,378,829 at December 31, 2015 or an increase of $554,584 or 16.41% and on a constant currency basis an increase of $661,841 or 19.59%. During the three months ended December 31, 2016, salaries increased by approximately $793,188 or $853,938 on a constant currency basis due to the increase in the number of employees, annual raises, share grants, cash bonuses and options; other general and administrative expenses decreased by approximately $110,835 or $73,520 on a constant currency basis; professional services decreased by approximately $127,769 or $118,577 on a constant currency basis.

 

Income from Operations

 

Income from operations was $1,427,594 for the three months ended December 31, 2016 compared to $2,084,769 for the three months ended December 31, 2015. This represents a decrease in income of $657,175 with a decrease in income of $794,072 on a constant currency basis for the three months ended December 31, 2016 compared with the three months ended December 31, 2015. As a percentage of sales, net income from operations was 8.09% for the three months ended December 31, 2016 compared to 12.88% for the three months ended December 31, 2015.

 

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Net Loss

 

Net loss was $985,676 for the three months ended December 31, 2016 compared to net income of $875,065 for the three months ended December 31, 2015. This is an increase in loss of $1,860,741 compared to the prior year. For the three months ended December 31, 2016, net loss per basic and diluted share was $0.09 compared to net income per basic and diluted share of $0.08 for the three months ended December 31, 2015.

 

Six Months Ended December 31, 2016 compared to the Six Months Ended December 31, 2015

 

The following table sets forth the items in our unaudited condensed consolidated statement of operations for the six months ended December 31, 2016 and 2015 as a percentage of revenues.

 

   For the Six Months 
   Ended December 31, 
   2016   %   2015   % 
Net Revenues:                    
License fees  $8,849,946    27.11%  $1,903,045    6.45%
Maintenance fees   7,190,517    22.03%   6,252,710    21.20%
Services   12,790,801    39.19%   16,327,977    55.36%
License fees - related party   246,957    0.76%   -    0.00%
Maintenance fees - related party   181,976    0.56%   189,986    0.64%
Services - related party   3,379,473    10.35%   4,823,083    16.35%
Total net revenues   32,639,670    100.00%   29,496,801    100.00%
                     
Cost of revenues:                    
Salaries and consultants   11,873,153    36.38%   10,244,661    34.73%
Travel   1,548,135    4.74%   1,235,462    4.19%
Depreciation and amortization   2,649,636    8.12%   2,935,701    9.95%
Other   2,038,065    6.24%   1,961,479    6.65%
Total cost of revenues   18,108,989    55.48%   16,377,303    55.52%
                     
Gross profit   14,530,681    44.52%   13,119,498    44.48%
Operating expenses:                    
Selling and marketing   5,057,516    15.49%   3,701,394    12.55%
Depreciation and amortization   540,582    1.66%   576,788    1.96%
General and administrative   8,552,609    26.20%   6,583,517    22.32%
Research and development cost   184,539    0.57%   229,994    0.78%
Total operating expenses   14,335,246    43.92%   11,091,693    37.60%
                     
Income from operations   195,435    0.60%   2,027,805    6.87%
Other income and (expenses)                    
Loss on sale of assets   (34,742)   -0.11%   (14,206)   -0.05%
Interest expense   (116,602)   -0.36%   (140,329)   -0.48%
Interest income   53,856    0.17%   87,411    0.30%
Loss on foreign currency exchange transactions   (1,036,783)   -3.18%   (248,246)   -0.84%
Other income   28,383    0.09%   174,998    0.59%
Total other income (expenses)   (1,105,888)   -3.39%   (140,372)   -0.48%
                     
Net income (loss) before  income taxes   (910,453)   -2.79%   1,887,433    6.40%
Income tax provision   (378,759)   -1.16%   (348,498)   -1.18%
Net income (loss)   (1,289,212)   -3.95%   1,538,935    5.22%
Non-controlling interest   (1,462,183)   -4.48%   (1,074,898)   -3.64%
Net income (loss) attributable to NetSol  $(2,751,395)   -8.43%  $464,037    1.57%

 

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                   Favorable   Favorable   Total 
                   (Unfavorable)   (Unfavorable)   Favorable 
   For the Six Months   Change in   Change due   (Unfavorable) 
   Ended December 31,   Constant   to Currency   Change as 
   2016   %   2015   %   Currency   Fluctuation   Reported 
                             
Net Revenues:   32,639,670    100.00%   29,496,801    100.00%   3,804,173    (661,304)   3,142,869 
                                    
Cost of revenues:   18,108,989    55.48%   16,377,303    55.52%   (2,104,980)   373,294    (1,731,686)
                                    
Gross profit   14,530,681    44.52%   13,119,498    44.48%   1,699,193    (288,010)   1,411,183 
         0.00%        0.00%               
Operating expenses:   14,335,246    43.92%   11,091,693    37.60%   (3,676,464)   432,911<