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 March 31, 2017

 

(  ) 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 11,132,349 shares of its $.01 par value Common Stock and no Preferred Stock issued and outstanding as of May 17, 2017.

 

 

 

 
 

 

NETSOL TECHNOLOGIES, INC.

 

  Page No
PART I. FINANCIAL INFORMATION  
   
Item 1. Financial Statements (Unaudited)  
   
Condensed Consolidated Balance Sheets as of March 31, 2017 and June 30, 2016 3
   
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2017 and 2016 4
   
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended March 31, 2017 and 2016 5
   
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2017 and 2016 6
   
Notes to the Condensed Consolidated Financial Statements 8
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 38
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk 51
   
Item 4. Controls and Procedures 51
   
PART II. OTHER INFORMATION  
   
Item 1. Legal Proceedings 52
   
Item 1A Risk Factors 52
   
Item 2. Unregistered Sales of Equity and Use of Proceeds 53
   
Item 3. Defaults Upon Senior Securities 53
   
Item 4. Mine Safety Disclosures 53
   
Item 5. Other Information 53
   
Item 6. Exhibits 54

 

Page 2
 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)
 

   As of
March 31, 2017
   As of
June 30, 2016
 
ASSETS          
Current assets:          
Cash and cash equivalents  $8,450,115   $11,557,527 
Accounts receivable, net of allowance of $494,011 and $492,498   10,301,949    9,691,229 
Accounts receivable, net - related party   4,414,635    5,691,178 
Revenues in excess of billings   20,893,955    10,493,096 
Revenues in excess of billings - related party   94,685    804,168 
Other current assets   3,040,774    2,214,628 
Total current assets   47,196,113    40,451,826 
Restricted cash   90,000    90,000 
Property and equipment, net   21,205,976    22,774,435 
Other assets   2,549,858    842,553 
Intangible assets, net   17,662,773    19,674,033 
Goodwill   9,516,568    9,516,568 
Total assets  $98,221,288   $93,349,415 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable and accrued expenses  $7,404,181   $5,962,770 
Current portion of loans and obligations under capitalized leases   5,650,475    4,440,084 
Unearned revenues   4,025,642    4,739,214 
Common stock to be issued   88,324    88,324 
Total current liabilities   17,168,622    15,230,392 
Long term loans and obligations under capitalized leases; less current maturities   499,515    477,692 
Total liabilities   17,668,137    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; 11,132,349 shares issued and 11,097,570 outstanding as of March 31, 2017 and 10,713,372 shares issued and 10,686,093 outstanding as of June 30, 2016   111,324    107,134 
Additional paid-in-capital   123,693,569    121,448,946 
Treasury stock (At cost, 34,779 shares and 27,279 shares as of March 31, 2017 and June 30, 2016, respectively)   (454,310)   (415,425)
Accumulated deficit   (39,177,897)   (37,323,360)
Stock subscription receivable   (359,070)   (783,172)
Other comprehensive loss   (18,797,496)   (18,730,494)
Total NetSol stockholders’ equity   65,016,120    64,303,629 
Non-controlling interest   15,537,031    13,337,702 
Total stockholders’ equity   80,553,151    77,641,331 
Total liabilities and stockholders’ equity  $98,221,288   $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 Nine Months 
   Ended March 31,   Ended March 31, 
   2017   2016   2017   2016 
Net Revenues:                    
License fees  $5,730,222   $1,358,469   $14,953,574   $3,076,541 
Maintenance fees   3,538,996    3,388,526    10,651,692    9,826,209 
Services   7,004,272    8,159,490    19,795,073    24,487,467 
License fees - related party   -    484,644    246,957    484,644 
Maintenance fees - related party   51,698    28,423    233,674    218,409 
Services - related party   1,624,132    2,554,347    5,003,605    7,377,430 
Total net revenues   17,949,320    15,973,899    50,884,575    45,470,700 
                     
Cost of revenues:                    
Salaries and consultants   6,161,110    5,691,530    18,034,263    15,936,191 
Travel   764,867    543,672    2,313,002    1,779,134 
Depreciation and amortization   1,340,188    1,483,695    3,989,824    4,419,396 
Other   686,950    860,868    2,725,015    2,822,347 
Total cost of revenues   8,953,115    8,579,765    27,062,104    24,957,068 
                     
Gross profit   8,996,205    7,394,134    23,822,471    20,513,632 
                     
Operating expenses:                    
Selling and marketing   2,439,948    1,896,295    7,497,464    5,597,689 
Depreciation and amortization   284,642    321,230    825,224    898,018 
General and administrative   4,329,798    3,808,327    12,882,407    10,391,844 
Research and development cost   101,193    132,123    285,732    362,117 
Total operating expenses   7,155,581    6,157,975    21,490,827    17,249,668 
                     
Income from operations   1,840,624    1,236,159    2,331,644    3,263,964 
                     
Other income and (expenses)                    
Gain (loss) on sale of assets   1,647    14,848    (33,095)   642 
Interest expense   (60,357)   (56,070)   (176,959)   (196,399)
Interest income   27,229    29,673    81,085    117,084 
Gain (loss) on foreign currency exchange transactions   390,897    12,955    (645,886)   (235,291)
Other income (expense)   (219)   25,258    28,164    200,256 
Total other income (expenses)   359,197    26,664    (746,691)   (113,708)
                     
Net income before income taxes   2,199,821    1,262,823    1,584,953    3,150,256 
Income tax provision   (61,604)   (106,209)   (440,363)   (454,707)
Net income   2,138,217    1,156,614    1,144,590    2,695,549 
Non-controlling interest   (1,438,249)   (307,135)   (2,999,127)   (1,382,033)
Net income (loss) attributable to NetSol  $699,968   $849,479   $(1,854,537)  $1,313,516 
                     
Net income (loss) per share:                    
Net income (loss) per common share                    
Basic  $0.06   $0.08   $(0.17)  $0.13 
Diluted  $0.06   $0.08   $(0.17)  $0.12 
                     
Weighted average number of shares outstanding                    
Basic   10,987,214    10,427,664    10,850,538    10,338,740 
Diluted   11,121,620    10,643,479    10,850,538    10,554,555 

 

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 Nine Months 
   Ended March 31,   Ended March 31, 
   2017   2016   2017   2016 
                 
Net income (loss)  $699,968   $849,479   $(1,854,537)  $1,313,516 
Other comprehensive income (loss):                    
Currency translation adjustment   (240,245)   (333,340)   (91,008)   (2,247,813)
Comprehensive income (loss)   459,723    516,139    (1,945,545)   (934,297)
Comprehensive income (loss) attributable to non-controlling interest   (71,144)   19,111    (24,006)   (516,166)
Comprehensive income (loss) attributable to NetSol  $530,867   $497,028   $(1,921,539)  $(418,131)

 

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 Nine Months 
   Ended March 31, 
   2017   2016 
Cash flows from operating activities:          
Net income  $1,144,590   $2,695,549 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
Depreciation and amortization   4,815,048    5,317,414 
Provision for bad debts   732    49,605 
(Gain) Loss on sale of assets   33,095    (642)
Stock issued for services   1,998,968    694,693 
Fair market value of warrants and stock options granted   26,956    145,716 
Changes in operating assets and liabilities:           
Accounts receivable   (649,776)   115,428 
Accounts receivable - related party   405,009    (3,111,316)
Revenues in excess of billing   (10,388,695)   (3,078,655)
Revenues in excess of billing - related party   553,767    15,507 
Other current assets   419,704    (838,913)
Accounts payable and accrued expenses   337,890    617,112 
Unearned revenue   (715,880)   (1,490,697)
Net cash provided by (used in) operating activities    (2,018,592)   1,130,801 
           
Cash flows from investing activities:          
Purchases of property and equipment   (1,315,922)   (2,523,865)
Sales of property and equipment   149,430    556,280 
Purchase of treasury stock   (38,885)   - 
Investment in eeGeo   (905,555)   (555,556)
Purchase of subsidiary shares from open market   -    (767,397)
Net cash used in investing activities    (2,110,932)   (3,290,538)
           
Cash flows from financing activities:          
Proceeds from sale of common stock   -    64,931 
Proceeds from the exercise of stock options and warrants   785,479    728,699 
Proceeds from exercise of subsidiary options   54,377    16,744 
Dividend paid by subsidiary to non-controlling interest   (968,657)   - 
Proceeds from bank loans   1,484,162    1,334,285 
Payments on capital lease obligations and loans - net   (251,040)   (736,405)
Net cash provided by financing activities    1,104,321    1,408,254 
Effect of exchange rate changes   (82,209)   (1,536,315)
Net decrease in cash and cash equivalents   (3,107,412)   (2,287,798)
Cash and cash equivalents, beginning of the period   11,557,527    14,168,957 
Cash and cash equivalents, end of period  $8,450,115   $11,881,159 

 

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 Nine Months 
   Ended March 31, 
   2017   2016 
SUPPLEMENTAL DISCLOSURES:          
Cash paid during the period for:          
Interest  $201,670   $195,737 
Taxes  $215,424   $195,104 
           
NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Provided services for investment in eeGeo, Inc.  $836,070   $- 
Assets acquired under capital lease  $466,528   $- 

 

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

 

Page 7
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

 

The Company designs, develops, markets, and exports proprietary software products to customers in the automobile financing and leasing, banking, and financial services industries worldwide. The Company also provides system integration, consulting, and IT products and services in exchange for fees from customers.

 

The consolidated condensed interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.

 

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 March 31, 2017, and June 30, 2016, the Company had uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $6,786,368 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

MARCH 31, 2017

(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 Accounting Standards Update (“ASU”) No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. It is intended to reduce diversity in the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. The new standard requires that restricted cash and restricted cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Earlier adoption is permitted. The Company maintains restricted cash balances and, 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 ASU No. 2017-01, Clarifying the Definition of a Business, which clarifies and provides a more robust framework to use in determining when a set of assets and activities is a business. The amendments in this update should be applied prospectively on or after the effective date. This update is effective for annual periods beginning after December 15, 2017, and interim periods within those periods. Early adoption is permitted for acquisition or deconsolidation transactions occurring before the issuance date or effective date and only when the transactions have not been reported in issued or made available for issuance financial statements. The Company does not expect the adoption to have any significant impact on its Consolidated Financial Statements.

 

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. Under the new standard, goodwill impairment would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. This ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods. Early adoption is permitted for interim or annual goodwill impairment test performed on testing dates after January 1, 2017. The Company will apply this guidance to applicable impairment tests after the adoption date.

 

Page 9
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(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
March 31, 2017
   For the nine months ended
March 31, 2017
 
   Net Income   Shares   Per Share   Net Loss   Shares   Per Share 
Basic income (loss) per share:                        
Net income (loss) available to common shareholders  $699,968    10,987,214   $0.06   $(1,854,537)   10,850,538   $(0.17)
Effect of dilutive securities                              
Stock options   -    134,406    -    -    -    - 
Diluted income (loss) per share  $699,968    11,121,620   $0.06   $(1,854,537)   10,850,538   $(0.17)

 

   For the three months ended
March 31, 2016
   For the nine months ended
March 31, 2016
 
   Net Income   Shares   Per Share   Net Income   Shares   Per Share 
Basic income per share:                              
Net income available to common shareholders  $849,479    10,427,664   $0.08   $1,313,516    10,338,740   $0.13 
Effect of dilutive securities                              
Stock options   -    212,674    -    -    212,674    - 
Warrants   -    3,141    -    -    3,141    - 
Diluted income per share  $849,479    10,643,479   $0.08   $1,313,516    10,554,555   $0.12 

 

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 Nine Months 
   Ended March 31, 
   2017   2016 
         
Stock Options   480,133    - 
    480,133    - 

 

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 $18,797,496 and $18,730,494 as of March 31, 2017 and June 30, 2016, respectively. During the three and nine months ended March 31, 2017, comprehensive income (loss) in the consolidated statements of comprehensive income (loss) included a translation loss attributable to NetSol of $169,101 and $67,002, respectively. During the three and nine months ended March 31, 2016, comprehensive income (loss) in the consolidated statements of comprehensive income (loss) included a translation loss attributable to NetSol of $352,451 and $1,731,647, respectively.

 

Page 10
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

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 nine months ended March 31, 2017, NetSol Innovation provided services of $1,446,749 and $4,403,368, respectively. During the three and nine months ended March 31, 2016, NetSol Innovation provided services of $2,069,940 and $6,096,466, respectively. Accounts receivable at March 31, 2017 and June 30, 2016 were $3,779,982 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 nine months ended March 31, 2017, NTE and VLS provided license, maintenance and services of $229,081 and $1,080,868, respectively. During the three and nine months ended March 31, 2016, NTE and VLS provided license, maintenance and services of $997,474 and $1,984,017, respectively. Accounts receivable at March 31, 2017 and June 30, 2016 were $634,653 and $1,001,856, respectively. Revenue in excess of billing at March 31, 2017 and June 30, 2016 were $94,685 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”.

 

NOTE 6 - OTHER CURRENT ASSETS

 

Other current assets consisted of the following:

 

   As of
March 31, 2017
   As of
June 30, 2016
 
         
Prepaid Expenses  $630,285   $386,578 
Advance Income Tax   1,223,242    968,334 
Employee Advances   125,058    83,978 
Security Deposits   279,905    72,985 
Other Receivables   508,620    486,562 
Other Assets   273,664    216,191 
Total  $3,040,774   $2,214,628 

 

Page 11
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

NOTE 7 - PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

   As of
March 31, 2017
   As of
June 30, 2016
 
         
Office Furniture and Equipment  $3,644,613   $3,346,156 
Computer Equipment   26,298,233    25,935,620 
Assets Under Capital Leases   2,393,615    2,409,074 
Building   9,208,029    9,185,570 
Land   2,418,461    2,410,664 
Autos   1,211,460    1,073,447 
Improvements   428,464    385,135 
Subtotal   45,602,875    44,745,666 
Accumulated Depreciation   (24,396,899)   (21,971,231)
Property and Equipment, Net  $21,205,976   $22,774,435 

 

For the three and nine months ended March 31, 2017, depreciation expense totaled $930,712 and $2,732,693, respectively. Of these amounts, $646,070 and $1,907,469, respectively, are reflected in cost of revenues. For the three and nine months ended March 31, 2016, depreciation expense totaled $1,115,544 and $3,242,057, respectively. Of these amounts, $796,722 and $2,344,039, respectively, are reflected in cost of revenues.

 

Following is a summary of fixed assets held under capital leases as of March 31, 2017 and June 30, 2016:

 

   As of
March 31, 2017
   As of
June 30, 2016
 
Computers and Other Equipment  $378,765   $503,926 
Furniture and Fixtures   227,232    408,200 
Vehicles   1,787,618    1,496,948 
Total   2,393,615    2,409,074 
Less: Accumulated Depreciation - Net   (749,736)   (713,248)
   $1,643,879   $1,695,826 

 

NOTE 8 – OTHER LONG TERM ASSETS

 

   As of
March 31, 2017
   As of
June 30, 2016
 
         
Investment (1)  $2,461,975   $720,350 
Long Term Security Deposits   87,883    122,203 
Total  $2,549,858   $842,553 

 

Page 12
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

(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 three and nine months ended March 31, 2017, NetSol PK provided services valued at $286,449 and $836,070, respectively. During the nine months ended March 31, 2017, NetSol PK paid $350,000 to eeGeo to buy out a portion of the services requirement. As of March 31, 2017, the accumulated balance of services provided was $1,000,864 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.

 

NOTE 9 - INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

 

   As of
March 31, 2017
   As of
June 30, 2016
 
         
Product Licenses - Cost  $47,244,997   $48,632,368 
Deletions   -    (1,387,371)
Effect of Translation Adjustment   (3,363,688)   (3,323,518)
Accumulated Amortization   (26,218,536)   (24,247,446)
Net Balance  $17,662,773   $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 $17,662,773 will be amortized over the next 7 years. Amortization expense for the three and nine months ended March 31, 2017 was $694,118 and $2,082,355, respectively. Amortization expense for the three and nine months ended March 31, 2016 was $686,973 and $2,075,357, respectively.

 

Page 13
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

(B) Future Amortization

 

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

 

Year ended:    
March 31, 2018   $2,766,955 
March 31, 2019    2,766,955 
March 31, 2020    2,766,955 
March 31, 2021    2,766,955 
March 31, 2022    2,766,955 
Thereafter    3,827,998 
   $17,662,773 

 

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
March 31, 2017
   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 

 

NOTE 11 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following:

 

   As of
March 31, 2017
   As of
June 30, 2016
 
         
Accounts Payable  $1,336,370   $1,346,532 
Accrued Liabilities   5,464,682    4,171,058 
Accrued Payroll & Taxes   307,083    231,881 
Taxes Payable   183,046    66,437 
Other Payable   113,000    146,862 
Total  $7,404,181   $5,962,770 

 

Page 14
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

NOTE 12 – DEBTS

 

Notes payable and capital leases consisted of the following:

 

      As of March 31, 2017 
          Current   Long-Term 
Name     Total   Maturities   Maturities 
                
D&O Insurance   (1)  $153,033   $153,033   $- 
Bank Overdraft Facility   (2)   284,965    284,965    - 
HSBC Loan   (3)   -    -    - 
Loan Payable Bank   (4)   4,756,469    4,756,469    - 
        5,194,467    5,194,467    - 
Subsidiary Capital Leases   (5)   955,523    456,008    499,515 
       $6,149,990   $5,650,475   $499,515 

 

      As of June 30, 2016 
          Current   Long-Term 
Name     Total   Maturities   Maturities 
                
D&O Insurance   (1)  $65,114   $65,114   $- 
HSBC Loan   (3)   93,704    93,704    - 
Loan Payable Bank   (4)   3,792,907    3,792,907    - 
        3,951,725    3,951,725    - 
Subsidiary Capital Leases   (5)   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, Errors and Omissions (“E&O”) liability insurance and some account payables, for which the D&O and E&O balances are renewed on an annual basis and, as such, are recorded in current maturities. The interest rate on these financings were ranging from 4.8% to 7.69% as of March 31, 2017 and 4.25% to 5.89% as of June 30, 2016, respectively.

 

(2) The Company’s subsidiary, NTE, has an overdraft facility with HSBC Bank plc whereby the bank would cover any overdrafts up to £300,000, or approximately $375,000. The annual interest rate was 4.75% as of March 31, 2017. Total outstanding balance as of March 31, 2017 was £227,972 or approximately $284,965. Interest expense for three and nine months ended March 31, 2017 was $4,501, respectively.

 

This overdraft facility requires that the aggregate amount of invoiced trade debtors (net of provisions for bad and doubtful debts and excluding intra-group debtors) of NTE, not exceeding 90 days old, will not be less than an amount equal to 200% of the facility. As of March 31, 2017, NTE was in compliance with this covenant.

 

(3) 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 $1,250,000 for a period of 5 years with monthly payments of £18,420, or approximately $23,025. 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 nine months ended March 31, 2017 was $nil and $1,576, respectively. Interest expense for the three and nine months ended March 31, 2016 was $2,243 and $11,254, respectively. NTE paid this loan in full during nine months ended March 31, 2017.

 

(4) The Company’s subsidiary, NetSol PK, has an export refinance facility with Askari Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every six months. Total facility amount is Rs. 500,000,000 or approximately $4,756,469. The interest rate for the loans was 3% and 4.5% at March 31, 2017 and June 30, 2016, respectively. Interest expense for the three and nine months ended March 31, 2017 was $28,012 and $85,604, respectively. Interest expense for the three and nine months ended March 31, 2016 was $31,669 and $109,655, respectively.

 

Page 15
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

This facility requires NetSol PK to maintain a long-term debt equity ratio of 60:40 and the current ratio of 1:1. As of March 31, 2017, NetSol PK was in compliance with this covenant.

 

(5) 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 nine months ended March 31, 2017 and 2016.

 

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

 

   Amount 
Minimum Lease Payments     
Due FYE 3/31/18  $511,387 
Due FYE 3/31/19   340,734 
Due FYE 3/31/20   188,220 
Total Minimum Lease Payments   1,040,341 
Interest Expense relating to future periods   (84,818)
Present Value of minimum lease payments   955,523 
Less: Current portion   (456,008)
Non-Current portion  $499,515 

 

NOTE 13 - STOCKHOLDERS’ EQUITY

 

During the nine months ended March 31, 2017, the Company issued 95,526 shares of common stock for services rendered by officers of the Company. These shares were valued at the fair market value of $570,323.

 

During the nine months ended March 31, 2017, the Company issued 48,501 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 $275,442.

 

During the nine months ended March 31, 2017, the Company issued 195,112 shares of its common stock to employees pursuant to the terms of their employment agreements valued at $1,153,203.

 

During the nine months ended March 31, 2017, the Company collected subscription receivable of $424,102 related to the exercise of stock options in previous years.

 

During the nine months ended March 31, 2017, the Company received $361,377 pursuant to a stock option agreement for the exercise of 79,838 shares of common stock at price ranging from $4.45 to $4.75 per share.

 

During the nine months ended March 31, 2017, the Company purchased 7,500 of shares of its common stock from open market at an average price of $5.18 per share.

 

Page 16
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(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   79,838   $4.53           
Exercised   (79,838)  $4.53           
Expired / Cancelled   (130,000)  $7.50           
Outstanding and exercisable, March 31, 2017   480,133   $4.20    0.42   $519,319 
                     
WARRANTS:                    
Outstanding and exercisable, June 30, 2016   163,124   $7.29    0.23   $9,303 
Granted / adjusted   -    -           
Exercised   -    -           
Expired   (163,124)  $7.29           
Outstanding and exercisable, March 31, 2017   -    -    -   $- 

 

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

 

Exercise Price  Number
Outstanding
and
Exercisable
   Weighted
Average
Remaining
Contractual
Life
   Weighted
Ave
Exercise
Price
 
 OPTIONS:               
                 
 $0.10 - $9.90   479,133    0.42   $4.17 
 $10.00 - $19.90   1,000    0.31   $16.00 
 Totals   480,133    0.42   $4.20 

 

Page 17
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(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   225,896   $5.92 
Cancelled   (5,000)  $5.55 
Vested    (308,763)  $5.88 
Unvested, March 31, 2017   542,361   $6.12 

 

For the three and nine months ended March 31, 2017, the Company recorded compensation expense of $499,743 and $2,047,839, respectively. For the three and nine months ended March 31, 2016, the Company recorded compensation expense of $368,674 and $694,693, respectively. The compensation expense related to the unvested stock grants as of March 31, 2017 was $3,085,100 which will be recognized during the fiscal years 2017 through 2022.

 

OPTIONS

 

During the nine months ended March 31, 2017, the Company granted 79,838 options to employees with exercise prices of ranging from $4.45 to $4.75 per share and expiration dates of 1 to 3 months, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $26,956 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% -0.51%
Expected life –1- 3 months
Expected volatility – 16.71% - 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.

 

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”).

 

Page 18
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

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 was scheduled for April 6, 2017. At the April 6, 2017 hearing, the Court continued the hearing for at least 60 days. A hearing date has not yet been set.

 

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 March 31, 2017 and June 30, 2016:

 

   As of
March 31, 2017
   As of
June 30, 2016
 
Identifiable assets:          
Corporate headquarters  $3,170,329   $3,646,160 
North America   6,581,063    6,845,444 
Europe   6,415,485    7,857,427 
Asia - Pacific   82,054,411    75,000,384 
Consolidated  $98,221,288   $93,349,415 

 

Page 19
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

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

 

   For the Three Months   For the Nine Months 
   Ended March 31,   Ended March 31, 
   2017   2016   2017   2016 
Revenues from unaffiliated customers:                    
North America  $1,111,897   $1,739,115   $4,467,325   $4,194,321 
Europe   1,579,486    1,514,370    4,083,572    4,692,125 
Asia - Pacific   13,582,107    9,653,000    36,849,442    28,503,771 
    16,273,490    12,906,485    45,400,339    37,390,217 
Revenue from affiliated customers                    
Europe   229,081    997,474    1,080,868    1,984,017 
Asia - Pacific   1,446,749    2,069,940    4,403,368    6,096,466 
    1,675,830    3,067,414    5,484,236    8,080,483 
Consolidated  $17,949,320   $15,973,899   $50,884,575   $45,470,700 
                     
Intercompany revenue                    
Europe  $112,419   $132,978   $343,599   $375,471 
Asia - Pacific   292,839    1,330,946    2,215,393    4,390,555 
 Eliminated  $405,258   $1,463,924   $2,558,992   $4,766,026 
                     
Net income (loss) after taxes and before non-controlling interest:                    
Corporate headquarters  $(1,147,068)  $(1,160,828)  $(3,967,144)  $(2,350,656)
North America   (302,353)   516,849    (105,595)   97,089 
Europe   (199,215)   696,437    (997,867)   42,267 
Asia - Pacific   3,786,853    1,104,156    6,215,196    4,906,849 
Consolidated  $2,138,217   $1,156,614   $1,144,590   $2,695,549 

 

The following table presents a summary of capital expenditures for the nine months ended March 31:

 

   For the Nine Months 
   Ended March 31, 
   2017   2016 
Capital expenditures:          
Corporate headquarters  $-   $- 
North America   41,340    57,114 
Europe   422,024    333,683 
Asia - Pacific   852,558    2,133,068 
Consolidated  $1,315,922   $2,523,865 

 

Page 20
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(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
March 31, 2017
 
         
NetSol PK   33.70%  $12,657,960 
NetSol-Innovation   49.90%   2,583,427 
VLS, VLSH & VLSIL Combined   49.00%   295,702 
NetSol Thai   0.006%   (58)
Total       $15,537,031 

 

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 nine months ended March 31, 2017, employees of NetSol PK exercised 347,500 options of common stock pursuant to employees exercising stock options and NetSol PK received cash of $54,377, resulting in an increase in non-controlling interest from 33.40% to 33.70%.

 

During the nine months ended March 31, 2017, NetSol PK declared a cash dividend of $425,988.

 

NETSOL INNOVATION

 

During the nine months ended March 31, 2017, NetSol-Innovation declared a cash dividend of $1,669,199.

 

NOTE 18 – INCOME TAXES

 

The current tax provision is based on taxable income for the year determined in accordance with the prevailing law for taxation of income. The charge for tax on income is calculated at the current rates of taxation as applicable after considering tax credit and tax rebates available, if any. We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Our effective tax rate is lower than the U.S. statutory rate primarily because of more earnings realized in countries that have lower statutory tax rates. Our effective tax rate in the future will depend on the portion of our profits earned within and outside the United States. Income from the export of computer software and its related services developed in Pakistan is exempt from tax up to 2019; however, tax at the applicable rates is charged to the income from revenue generated from other than core business activities.

 

During the three and nine months ended March 31, 2017, the Company recorded an income tax provision of $61,604 and $440,363, respectively resulting in an effective tax rate of 2.8% and 27.8%, respectively. For the three and nine months ended March 31, 2016, the Company recorded income tax provision of $106,209 and $454,707, respectively resulting in an effective tax rate of 8.4% and 14.4% respectively.

 

NOTE 19 – RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

 

During the preparation of the Company's Form 10-Q for the nine months ended March 31, 2017, misstatements were identified in the previous financial statements relating to the recording of revenue in the proper period. The Company determined that the Company's quarterly financial statements for the quarters ended September 30, 2015, December 31, 2015, September 31, 2016 and December 31, 2016 should no longer be relied upon.

 

On August 31, 2015, the Company signed a consulting services agreement by which the Company would provide a model office at the customer’s data center which would include a base installation of the Company’s NFS Ascent product, along with certain agreed upon services. The Company received €1,800,000, approximately $2,024,000, as a non-refundable fee, which was received in two equal payments. The Company then entered into a 10-year contract with the same customer on December 21, 2015. The Company recorded the revenue for the model office in the periods that the cash was received. However, since the two contracts were with the same customer and signed within a short period of time, and both contracts stipulate an offset of payments made for services provided for the model office, the two contracts should have been combined and accounted for as a single contract. Revenue was recognized on the percentage-of-completion method in accordance with Accounting Standards Codification (“ASC”) 605-35 for this arrangement. As a result, for the quarter ended September 30, 2015, license revenue was overstated by $591,119 and for the quarter ended December 31, 2015 license revenue was understated by $406,146.

 

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

 

The Company charges maintenance revenue on the license value plus any additional customization that the customer may require. For one customer, the Company did not increase the maintenance fee for the additional customization that was performed during the year. This resulted in an understatement of maintenance revenue of $88,888, $96,085, and $120,976 for the quarters ended September 30, 2015, December 31, 2015, and September 30, 2016, respectively. Maintenance revenue was overstated by $198,797 for the quarter ended December 31, 2016.

 

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NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

   Balance Sheet 
   As of September 30, 2015 
             
   As Originally   Amount of     
   Presented   Restatement   As Restated 
ASSETS               
Current assets:               
Cash and cash equivalents  $10,075,324        $10,075,324 
Restricted cash   90,000         90,000 
Accounts receivable, net of allowance of $518,657 and $524,565   7,485,807         7,485,807 
Accounts receivable, net - related party   4,409,186         4,409,186 
Revenues in excess of billings   6,560,754    (591,119)   5,969,635 
Other current assets   2,279,083         2,279,083 
Total current assets   30,900,154    (591,119)   30,309,035 
Property and equipment, net   24,053,908         24,053,908 
Intangible assets, net   21,837,105         21,837,105 
Goodwill   9,516,568         9,516,568 
Total assets  $86,307,735   $(591,119)  $85,716,616 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY               
Current liabilities:               
Accounts payable and accrued expenses  $5,030,352        $5,030,352 
Current portion of loans and obligations under capitalized leases   4,241,836         4,241,836 
Unearned revenues   4,302,524    (88,888)   4,213,636 
Common stock to be issued   88,324         88,324 
Total current liabilities   13,663,036    (88,888)   13,574,148 
Long term loans and obligations under capitalized leases; less current maturities   329,834         329,834 
Total liabilities   13,992,870    (88,888)   13,903,982 
Commitments and contingencies               
Stockholders’ equity:               
Preferred stock, $.01 par value; 500,000 shares authorized;   -    -    - 
Common stock, $.01 par value; 14,500,000 shares authorized; 10,322,826 shares issued and 10,295,547 outstanding as of September 30, 2015 and 10,307,826 shares issued and 10,280,547 outstanding as of June 30, 2015   103,228         103,228 
Additional paid-in-capital   119,287,407         119,287,407 
Treasury stock (27,279 shares)   (415,425)        (415,425)
Accumulated deficit   (41,137,149)   (326,952)   (41,464,101)
Stock subscription receivable   (1,139,672)        (1,139,672)
Other comprehensive loss   (18,130,300)        (18,130,300)
Total NetSol stockholders’ equity   58,568,089    (326,952)   58,241,137 
Non-controlling interest   13,746,776    (175,279)   13,571,497 
Total stockholders’ equity   72,314,865    (502,231)   71,812,634 
Total liabilities and stockholders’ equity  $86,307,735   $(591,119)  $85,716,616 

 

Page 22
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

   For the Three Months 
   Ended September 30, 2015 
             
   As Originally   Amount of     
   Presented   Restatement   As Restated 
Net Revenues:               
License fees  $1,193,354   $(591,119)  $602,235 
Maintenance fees   3,012,238    88,888    3,101,126 
Services   6,753,873         6,753,873 
Maintenance fees - related party   158,231         158,231 
Services - related party   2,187,408         2,187,408 
Total net revenues   13,305,104    (502,231)   12,802,873 
                
Cost of revenues:               
Salaries and consultants   4,999,890         4,999,890 
Travel   481,453         481,453 
Depreciation and amortization   1,474,235         1,474,235 
Other   938,797         938,797 
Total cost of revenues   7,894,375    -    7,894,375 
                
Gross profit   5,410,729    (502,231)   4,908,498 
                
Operating expenses:               
Selling and marketing   1,698,404         1,698,404 
Depreciation and amortization   291,172         291,172 
General and administrative   3,366,047         3,366,047 
Research and development cost   112,070         112,070 
Total operating expenses   5,467,693    -    5,467,693 
                
Loss from operations   (56,964)   (502,231)   (559,195)
                
Other income and (expenses)               
Loss on sale of assets   (11,873)        (11,873)
Interest expense   (68,173)        (68,173)
Interest income   52,112         52,112 
Loss on foreign currency exchange transactions   (113,719)        (113,719)
Other income   54,314         54,314 
Total other income (expenses)   (87,339)   -    (87,339)
                
Net loss before income taxes   (144,303)   (502,231)   (646,534)
Income tax provision   (75,223)        (75,223)
Net loss   (219,526)   (502,231)   (721,757)
Non-controlling interest   (191,502)   175,279    (16,223)
Net loss attributable to NetSol  $(411,028)  $(326,952)  $(737,980)
                
Net loss per share:               
Net loss per common share               
Basic  $(0.04)  $(0.03)  $(0.07)
Diluted  $(0.04)  $(0.03)  $(0.07)
                
Weighted average number of shares outstanding               
Basic   10,281,335    10,281,335    10,281,335 
Diluted   10,281,335    10,281,335    10,281,335 

 

Page 23
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

   For the Three Months 
   Ended September 30, 2015 
             
   As Originally   Amount of     
   Presented   Restatement   As Restated 
Net loss  $(411,028)  $(326,952)  $(737,980)
Other comprehensive income (loss):               
Translation adjustment   (1,248,567)   -    (1,248,567)
Comprehensive income (loss)   (1,659,595)   (326,952