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.

 

Page 21
 

 

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)   (1,986,547)
Comprehensive income (loss) attributable to non-controlling interest   (285,367)   -    (285,367)
Comprehensive income (loss) attributable to NetSol  $(1,374,228)  $(326,952)  $(1,701,180)

 

Page 24
 

 

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 
Cash flows from operating activities:               
Net loss  $(219,526)  $(502,231)  $(721,757)
Adjustments to reconcile net loss to net cash used in operating activities:               
Depreciation and amortization   1,765,407         1,765,407 
Provision for bad debts   36,780         36,780 
Loss on sale of assets   11,873         11,873 
Stock issued for services   77,750         77,750 
Changes in operating assets and liabilities:                
Accounts receivable   (1,268,570)        (1,268,570)
Accounts receivable - related party   (975,266)        (975,266)
Revenues in excess of billing   (773,583)   591,119    (182,464)
Revenues in excess of billing - related party   (138,926)        (138,926)
Other current assets   (322,533)        (322,533)
Accounts payable and accrued expenses   (833,638)        (833,638)
Unearned revenue   (538,259)   (88,888)   (627,147)
Net cash used in operating activities    (3,178,491)   -    (3,178,491)
                
Cash flows from investing activities:               
Purchases of property and equipment   (625,794)        (625,794)
Sales of property and equipment   180,258         180,258 
Net cash used in investing activities    (445,536)   -    (445,536)
                
Cash flows from financing activities:               
Proceeds from sale of common stock   64,931         64,931 
Proceeds from bank loans   437,070         437,070 
Payments on capital lease obligations and loans - net   (174,385)        (174,385)
Net cash provided by financing activities    327,616    -    327,616 
Effect of exchange rate changes   (797,222)        (797,222)
Net decrease in cash and cash equivalents   (4,093,633)   -    (4,093,633)
Cash and cash equivalents, beginning of the period   14,168,957         14,168,957 
Cash and cash equivalents, end of period  $10,075,324   $-   $10,075,324 

 

Page 25
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

  

 Balance Sheet

As of December 31, 2015

 
             
   As Originally   Amount of     
   Presented   Restatement   As Restated 
ASSETS            
Current assets:               
Cash and cash equivalents  $13,986,773        $13,986,773 
Restricted cash   90,000         90,000 
Accounts receivable, net of allowance of $487,937 and $524,565   6,025,334         6,025,334 
Accounts receivable, net - related party   5,749,523         5,749,523 
Revenues in excess of billings   5,061,568    (184,973)   4,876,595 
Other current assets   2,671,613         2,671,613 
Total current assets   33,584,811    (184,973)   33,399,838 
Property and equipment, net   23,251,920         23,251,920 
Intangible assets, net   20,877,711         20,877,711 
Goodwill   9,516,568         9,516,568 
Total assets  $87,231,010   $(184,973)  $87,046,037 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY               
Current liabilities:               
Accounts payable and accrued expenses  $5,907,103        $5,907,103 
Current portion of loans and obligations under capitalized leases   3,767,193         3,767,193 
Unearned revenues   3,546,819    (184,973)   3,361,846 
Common stock to be issued   88,324         88,324 
Total current liabilities   13,309,439    (184,973)   13,124,466 
Long term loans and obligations under capitalized leases; less current maturities   273,109         273,109 
Total liabilities   13,582,548    (184,973)   13,397,575 
Commitments and contingencies               
Stockholders’ equity:               
Preferred stock, $.01 par value; 500,000 shares authorized;   -    -    - 
Common stock, $.01 par value; 14,500,000 shares authorized; 10,418,350 shares issued and 10,391,071 outstanding as of December 31, 2015 and 10,307,826 shares issued and 10,280,547 outstanding as of June 30, 2015   104,184         104,184 
Additional paid-in-capital   119,890,798         119,890,798 
Treasury stock (27,279 shares)   (415,425)        (415,425)
Accumulated deficit   (40,262,084)        (40,262,084)
Stock subscription receivable   (1,139,672)        (1,139,672)
Other comprehensive loss   (18,546,296)        (18,546,296)
Total NetSol stockholders’ equity   59,631,505    -    59,631,505 
Non-controlling interest   14,016,957         14,016,957 
Total stockholders’ equity   73,648,462    -    73,648,462 
Total liabilities and stockholders’ equity  $87,231,010   $(184,973)  $87,046,037 

 

Page 26
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

   For the Three Months   For the Six Months 
   Ended December 31, 2015   Ended December 31, 2015 
                         
   As Originally   Amount of   As   As Originally   Amount of   As 
   Presented   Restatement   Restated   Presented   Restatement   Restated 
Net Revenues:                        
License fees  $709,691   $406,146   $1,115,837   $1,903,045   $(184,973)  $1,718,072 
Maintenance fees   3,240,472    96,085    3,336,557    6,252,710    184,973    6,437,683 
Services   9,574,104         9,574,104    16,327,977         16,327,977 
Maintenance fees - related party   31,755         31,755    189,986         189,986 
Services - related party   2,635,675         2,635,675    4,823,083         4,823,083 
Total net revenues   16,191,697    502,231    16,693,928    29,496,801    -    29,496,801 
                               
Cost of revenues:                              
Salaries and consultants   4,925,565         4,925,565    9,925,455         9,925,455 
Travel   754,009         754,009    1,235,462         1,235,462 
Depreciation and amortization   1,461,466         1,461,466    2,935,701         2,935,701 
Other   1,022,682         1,022,682    1,961,479         1,961,479 
Total cost of revenues   8,163,722    -    8,163,722    16,058,097    -    16,058,097 
                               
Gross profit   8,027,975    502,231    8,530,206    13,438,704    -    13,438,704 
                               
Operating expenses:                              
Selling and marketing   2,002,990         2,002,990    3,701,394         3,701,394 
Depreciation and amortization   285,616         285,616    576,788         576,788 
General and administrative   3,536,676         3,536,676    6,902,723         6,902,723 
Research and development cost   117,924         117,924    229,994         229,994 
Total operating expenses   5,943,206    -    5,943,206    11,410,899    -    11,410,899 
                               
Income from operations   2,084,769    502,231    2,587,000    2,027,805    -    2,027,805 
                               
Other income and (expenses)                              
Loss on sale of assets   (2,333)        (2,333)   (14,206)        (14,206)
Interest expense   (72,156)        (72,156)   (140,329)        (140,329)
Interest income   35,299         35,299    87,411         87,411 
Loss on foreign currency exchange transactions   (134,527)        (134,527)   (248,246)        (248,246)
Other income   120,684         120,684    174,998         174,998 
Total other income (expenses)   (53,033)   -    (53,033)   (140,372)   -    (140,372)
                               
Net Income (loss) before income taxes   2,031,736    502,231    2,533,967    1,887,433    -    1,887,433 
Income tax provision   (273,275)        (273,275)   (348,498)        (348,498)
Net income (loss) from continuing operations   1,758,461    502,231    2,260,692    1,538,935    -    1,538,935 
Non-controlling interest   (883,396)   (175,279)   (1,058,675)   (1,074,898)   -    (1,074,898)
Net Income (loss) attributable to NetSol  $875,065   $326,952   $1,202,017   $464,037   $-   $464,037 
                               
Net income per share:                              
                               
Net income per common share                              
Basic  $0.08   $0.04   $0.12   $0.05   $-   $0.05 
Diluted  $0.08   $0.03   $0.11   $0.04   $-   $0.04 
                               
Weighted average number of shares outstanding                              
Basic   10,308,186    10,308,186    10,308,186    10,294,760    10,294,760    10,294,760 
Diluted   10,548,922    10,548,922    10,548,922    10,535,496    10,535,496    10,535,496 

 

Page 27
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

   For the Three Months 
   Ended December 31, 2015 
             
   As Originally   Amount of     
   Presented   Restatement   As Restated 
Net income  $875,065   $326,952   $1,202,017 
Other comprehensive income (loss):               
Translation adjustment   (665,906)   -    (665,906)
Comprehensive income (loss)   209,159    326,952    536,111 
Comprehensive income (loss) attributable to non-controlling interest   (249,910)   -    (249,910)
Comprehensive income attributable to NetSol  $459,069   $326,952   $786,021 

 

   For the Six Months 
   Ended December 31, 2015 
             
   As Originally   Amount of     
   Presented   Restatement   As Restated 
Net income (loss)  $464,037   $-   $464,037 
Other comprehensive income (loss):               
Translation adjustment   (1,914,473)   -    (1,914,473)
Comprehensive income (loss)   (1,450,436)   -    (1,450,436)
Comprehensive income (loss) attributable to non-controlling interest   (535,277)   -    (535,277)
Comprehensive income (loss) attributable to NetSol  $(915,159)  $-   $(915,159)

 

Page 28
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

   For the Six Months 
   Ended December 31, 2015 
             
   As Originally   Amount of     
   Presented   Restatement   As Restated 
Cash flows from operating activities:               
Net income (loss)  $1,538,935        $1,538,935 
Adjustments to reconcile net income (loss) to net cash used in operating activities:               
Depreciation and amortization   3,512,489         3,512,489 
Provision for bad debts   37,043         37,043 
Loss on sale of assets   14,206         14,206 
Stock issued for services   326,019         326,019 
Fair market value of warrants and stock options granted   145,716         145,716 
Changes in operating assets and liabilities:                
Accounts receivable   111,967         111,967 
Accounts receivable - related party   (2,383,828)        (2,383,828)
Revenues in excess of billing   535,937    184,973    720,910 
Other current assets   (758,802)        (758,802)
Accounts payable and accrued expenses   142,008         142,008 
Unearned revenue   (1,190,072)   (184,973)   (1,375,045)
Net cash provided by operating activities    2,031,618    -    2,031,618 
                
Cash flows from investing activities:               
Purchases of property and equipment   (1,177,443)        (1,177,443)
Sales of property and equipment   357,933         357,933 
Purchase of subsidiary shares from open market   (347,623)   -    (347,623)
Net cash used in investing activities    (1,167,133)   -    (1,167,133)
                
Cash flows from financing activities:               
Proceeds from sale of common stock   64,931         64,931 
Proceeds from the exercise of stock options and warrants   194,680         194,680 
Proceeds from bank loans   306,750         306,750 
Payments on capital lease obligations and loans - net   (530,733)        (530,733)
Net cash provided by financing activities    35,628    -    35,628 
Effect of exchange rate changes   (1,082,297)        (1,082,297)
Net decrease in cash and cash equivalents   (182,184)   -    (182,184)
Cash and cash equivalents, beginning of the period   14,168,957         14,168,957 
Cash and cash equivalents, end of period  $13,986,773   $-   $13,986,773 

 

Page 29
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

   Balance Sheet 
   As of September 30, 2016 
             
   As Originally   Amount of     
   Presented   Restatement   As Restated 
ASSETS               
Current assets:               
Cash and cash equivalents  $11,156,437        $11,156,437 
Accounts receivable, net of allowance of $500,853 and $492,498   7,142,255         7,142,255 
Accounts receivable, net - related party   5,384,573         5,384,573 
Revenues in excess of billings   13,358,858    2,074,911    15,433,769 
Revenues in excess of billings - related party   682,049         682,049 
Other current assets   3,192,425         3,192,425 
Total current assets   40,916,597    2,074,911    42,991,508 
Restricted cash   90,000         90,000 
Property and equipment, net   22,612,752         22,612,752 
Other assets   1,604,731         1,604,731 
Intangible assets, net   19,326,259         19,326,259 
Goodwill   9,516,568         9,516,568 
Total assets  $94,066,907   $2,074,911   $96,141,818 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY               
Current liabilities:               
Accounts payable and accrued expenses  $6,389,128        $6,389,128 
Current portion of loans and obligations under capitalized leases   4,408,173         4,408,173 
Unearned revenues   4,419,692         4,419,692 
Common stock to be issued   88,324         88,324 
Total current liabilities   15,305,317    -    15,305,317 
Long term loans and obligations under capitalized leases; less current maturities   539,859         539,859 
Total liabilities   15,845,176    -    15,845,176 
Commitments and contingencies               
Stockholders’ equity:               
Preferred stock, $.01 par value; 500,000 shares authorized;   -    -    - 
Common stock, $.01 par value; 14,500,000 shares authorized; 10,882,281 shares issued and 10,855,002 outstanding as of September 30, 2016 and 10,713,372 shares issued and 10,686,093 outstanding as of June 30, 2016   108,823         108,823 
Additional paid-in-capital   122,367,231         122,367,231 
Treasury stock (27,279 shares)   (415,425)        (415,425)
Accumulated deficit   (39,089,079)   1,379,608    (37,709,471)
Stock subscription receivable   (602,811)        (602,811)
Other comprehensive loss   (17,960,133)        (17,960,133)
Total NetSol stockholders’ equity   64,408,606    1,379,608    65,788,214 
Non-controlling interest   13,813,125    695,303    14,508,428 
Total stockholders’ equity   78,221,731    2,074,911    80,296,642 
Total liabilities and stockholders’ equity  $94,066,907   $2,074,911   $96,141,818 

 

Page 30
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

   For the Three Months 
   Ended September 30, 2016 
             
   As Originally   Amount of     
   Presented   Restatement   As Restated 
Net Revenues:               
License fees  $3,499,860   $1,953,935   $5,453,795 
Maintenance fees   3,402,821    120,976    3,523,797 
Services   5,806,717         5,806,717 
License fees - related party   246,957         246,957 
Maintenance fees - related party   130,631         130,631 
Services - related party   1,914,572         1,914,572 
Total net revenues   15,001,558    2,074,911    17,076,469 
                
Cost of revenues:               
Salaries and consultants   5,893,349         5,893,349 
Travel   711,895         711,895 
Depreciation and amortization   1,330,872         1,330,872 
Other   972,338         972,338 
Total cost of revenues   8,908,454    -    8,908,454 
                
Gross profit   6,093,104    2,074,911    8,168,015 
                
Operating expenses:               
Selling and marketing   2,411,136         2,411,136 
Depreciation and amortization   269,097         269,097 
General and administrative   4,552,098         4,552,098 
Research and development cost   92,932         92,932 
Total operating expenses   7,325,263    -    7,325,263 
                
Income (loss) from operations   (1,232,159)   2,074,911    842,752 
                
Other income and (expenses)               
Loss on sale of assets   (2,403)        (2,403)
Interest expense   (54,475)        (54,475)
Interest income   30,440         30,440 
Loss on foreign currency exchange transactions   (414,896)        (414,896)
Other income   21,560         21,560 
Total other income (expenses)   (419,774)   -    (419,774)
                
Net income (loss) before income taxes   (1,651,933)   2,074,911    422,978 
Income tax provision   (39,875)        (39,875)
Net income (loss)   (1,691,808)   2,074,911    383,103 
Non-controlling interest   (73,911)   (695,303)   (769,214)
Net income (loss) attributable to NetSol  $(1,765,719)  $1,379,608   $(386,111)
                
Net Income (loss) per share:               
Net income (loss) per common share               
Basic  $(0.17)  $0.14   $(0.04)
Diluted  $(0.17)  $0.14   $(0.04)
                
Weighted average number of shares outstanding               
Basic   10,697,425    10,697,425    10,697,425 
Diluted   10,697,425    10,697,425    10,697,425 

 

Page 31
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

   For the Three Months 
   Ended September 30, 2016 
             
   As Originally   Amount of     
   Presented   Restatement   As Restated 
Net income (loss)  $(1,765,719)  $1,379,608   $(386,111)
Other comprehensive income (loss):               
Translation adjustment   1,094,074    -    1,094,074 
Comprehensive income (loss)   (671,645)   1,379,608    707,963 
Comprehensive income (loss) attributable to non-controlling interest   323,713    -    323,713 
Comprehensive income (loss) attributable to NetSol  $(995,358)  $1,379,608   $384,250 

 

Page 32
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

   For the Three Months 
   Ended September 30, 2016 
             
   As Originally   Amount of     
   Presented   Restatement   As Restated 
Cash flows from operating activities:               
Net income (loss)  $(1,691,808)  $2,074,911   $383,103 
Adjustments to reconcile net income (loss) to net cash used in operating activities:               
Depreciation and amortization   1,599,969         1,599,969 
Loss on sale of assets   2,403         2,403 
Stock issued for services   865,456         865,456 
Fair market value of warrants and stock options granted   21,804         21,804 
Changes in operating assets and liabilities:                
Accounts receivable   2,336,894         2,336,894 
Accounts receivable - related party   121,800         121,800 
Revenues in excess of billing   (2,746,917)   (2,074,911)   (4,821,828)
Revenues in excess of billing - related party   93,208         93,208 
Other current assets   306,339         306,339 
Accounts payable and accrued expenses   (780,569)        (780,569)
Unearned revenue   (346,108)        (346,108)
Net cash used in operating activities    (217,529)   -    (217,529)
                
Cash flows from investing activities:               
Purchases of property and equipment   (554,873)        (554,873)
Sales of property and equipment   151,818         151,818 
Investment   (555,555)        (555,555)
Net cash used in investing activities    (958,610)   -    (958,610)
                
Cash flows from financing activities:               
Proceeds from the exercise of stock options and warrants   276,861         276,861 
Proceeds from exercise of subsidiary options   14,013         14,013 
Payments on capital lease obligations and loans - net   (49,117)        (49,117)
Net cash provided by financing activities    241,757    -    241,757 
Effect of exchange rate changes   533,292         533,292 
Net decrease in cash and cash equivalents   (401,090)   -    (401,090)
Cash and cash equivalents, beginning of the period   11,557,527         11,557,527 
Cash and cash equivalents, end of period  $11,156,437   $-   $11,156,437 

 

Page 33
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

The following tables present the restated financial statements for the quarter ended December 31, 2016.

 

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

 

Page 34
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

   For the Three Months   For the Six Months 
   Ended December 31, 2016   Ended December 31, 2016 
                         
   As Originally   Amount of   As   As Originally   Amount of   As 
   Presented   Restatement   Restated   Presented   Restatement   Restated 
Net Revenues:                              
License fees  $5,350,086   $(1,580,529)  $3,769,557   $8,849,946   $373,406   $9,223,352 
Maintenance fees   3,787,696    (198,797)   3,588,899    7,190,517    (77,821)   7,112,696 
Services   6,984,084         6,984,084    12,790,801         12,790,801 
License fees - related party   -         -    246,957         246,957 
Maintenance fees - related party   51,345         51,345    181,976         181,976 
Services - related party   1,464,901         1,464,901    3,379,473         3,379,473 
Total net revenues   17,638,112    (1,779,326)   15,858,786    32,639,670    295,585    32,935,255 
                               
Cost of revenues:                              
Salaries and consultants   5,979,804         5,979,804    11,873,153         11,873,153 
Travel   836,240         836,240    1,548,135         1,548,135 
Depreciation and amortization   1,318,764         1,318,764    2,649,636         2,649,636 
Other   1,065,727         1,065,727    2,038,065         2,038,065 
Total cost of revenues   9,200,535    -    9,200,535    18,108,989    -    18,108,989 
                               
Gross profit   8,437,577    (1,779,326)   6,658,251    14,530,681    295,585    14,826,266 
                               
Operating expenses:                              
Selling and marketing   2,713,478         2,713,478    5,057,516         5,057,516 
Depreciation and amortization   271,485         271,485    540,582         540,582 
General and administrative   3,933,413         3,933,413    8,552,609         8,552,609 
Research and development cost   91,607         91,607    184,539         184,539 
Total operating expenses   7,009,983    -    7,009,983    14,335,246    -    14,335,246 
                               
Income (loss) from operations   1,427,594    (1,779,326)   (351,732)   195,435    295,585    491,020 
                               
Other income and (expenses)                              
Loss on sale of assets   (32,339)        (32,339)   (34,742)        (34,742)
Interest expense   (62,127)        (62,127)   (116,602)        (116,602)
Interest income   23,416         23,416    53,856         53,856 
Loss on foreign currency exchange transactions   (621,887)        (621,887)   (1,036,783)        (1,036,783)
Other income   6,823         6,823    28,383         28,383 
Total other income (expenses)   (686,114)   -    (686,114)   (1,105,888)   -    (1,105,888)
                               
Net income (loss) before income taxes   741,480    (1,779,326)   (1,037,846)   (910,453)   295,585    (614,868)
Income tax provision   (338,884)        (338,884)   (378,759)        (378,759)
Net income (loss) from continuing operations   402,596    (1,779,326)   (1,376,730)   (1,289,212)   295,585    (993,627)
Non-controlling interest   (1,388,272)   596,608    (791,664)   (1,462,183)   (98,695)   (1,560,878)
Net income (loss) attributable to NetSol  $(985,676)  $(1,182,718)  $(2,168,394)  $(2,751,395)  $196,890   $(2,554,505)
                               
Net income (loss) per share:                              
                               
Net income (loss) per common share                              
Basic  $(0.09)  $(0.11)  $(0.20)  $(0.26)  $0.03   $(0.24)
Diluted  $(0.09)  $(0.11)  $(0.20)  $(0.26)  $0.03   $(0.24)
                               
Weighted average number of shares outstanding                              
Basic   10,877,446    10,877,446    10,877,446    10,783,685    10,783,685    10,783,685 
Diluted   10,877,446    10,877,446    10,877,446    10,783,685    10,783,685    10,783,685 

 

Page 35
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

   For the Three Months 
   Ended December 31, 2016 
             
   As Originally   Amount of     
   Presented   Restatement   As Restated 
Net income (loss)  $(985,676)  $(1,182,718)  $(2,168,394)
Other comprehensive income (loss):               
Translation adjustment   (944,837)   -    (944,837)
Comprehensive income (loss)   (1,930,513)   (1,182,718)   (3,113,231)
Comprehensive income (loss) attributable to non-controlling interest   (276,575)   -    (276,575)
Comprehensive income (loss) attributable to NetSol  $(1,653,938)  $(1,182,718)  $(2,836,656)

 

   For the Six Months 
   Ended December 31, 2016 
             
   As Originally   Amount of     
   Presented   Restatement   As Restated 
Net income (loss)  $(2,751,395)  $262,469   $(2,488,926)
Other comprehensive income (loss):               
Translation adjustment   149,237    -    149,237 
Comprehensive income (loss)   (2,602,158)   262,469    (2,339,689)
Comprehensive income (loss) attributable to non-controlling interest   47,138    -    47,138 
Comprehensive income (loss) attributable to NetSol  $(2,649,296)  $262,469   $(2,386,827)

 

Page 36
 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017

(UNAUDITED)

 

   For the Six Months 
   Ended December 31, 2016 
             
   As Originally   Amount of     
   Presented   Restatement   As Restated 
Cash flows from operating activities:               
Net income (loss)  $(1,289,212)  $295,585   $(993,627)
Adjustments to reconcile net income (loss) to net cash used in operating activities:               
Depreciation and amortization   3,190,218         3,190,218 
Provision for bad debts   1,026         1,026 
Loss on sale of assets   34,742         34,742 
Stock issued for services   1,525,775         1,525,775 
Fair market value of warrants and stock options granted   21,804         21,804 
Changes in operating assets and liabilities:                
Accounts receivable   3,678,110         3,678,110 
Accounts receivable - related party   829,285         829,285 
Revenues in excess of billing   (7,219,089)   (373,406)   (7,592,495)
Revenues in excess of billing - related party   285,791         285,791 
Other current assets   585,147         585,147 
Accounts payable and accrued expenses   334,241         334,241 
Unearned revenue   (1,908,440)   77,821    (1,830,619)
Net cash used in operating activities    69,398    -    69,398 
                
Cash flows from investing activities:               
Purchases of property and equipment   (1,074,316)        (1,074,316)
Sales of property and equipment   181,087         181,087 
Purchase of treasury stock   (38,885)        (38,885)
Investment   (705,555)        (705,555)
Net cash used in investing activities    (1,637,669)   -    (1,637,669)
                
Cash flows from financing activities:               
Proceeds from the exercise of stock options and warrants   429,452         429,452 
Proceeds from exercise of subsidiary options   18,089         18,089 
Dividend paid by subsidiary to Non controlling interest   (968,657)        (968,657)
Payments on capital lease obligations and loans - net   (69,998)        (69,998)
Net cash provided by financing activities    (591,114)   -    (591,114)
Effect of exchange rate changes   107,241         107,241 
Net decrease in cash and cash equivalents   (2,052,144)   -    (2,052,144)
Cash and cash equivalents, beginning of the period   11,557,527         11,557,527 
Cash and cash equivalents, end of period  $9,505,383   $-   $9,505,383 

 

Page 37
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion is intended to assist in an understanding of the Company’s financial position and results of operations for the three and nine months ended March 31, 2017. The following discussion should be read in conjunction with the information included within our Annual Report on Form 10-K for the year ended June 30, 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 such as point of sale, field investigation and auditing, and allows end customers to access their contract details through a self-service mobile application. NFS 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 nine months ended March 31, 2017. It should be read together with our condensed consolidated financial statements and related notes included herein.

 

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Highlights

 

Listed below are a few of NetSol’s major successes achieved in the nine months ended March 31, 2017:

 

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.
   
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 March 31, 2017 compared to the Quarter Ended March 31, 2016

 

The following table sets forth the items in our unaudited condensed consolidated statement of operations for the quarter ended March 31, 2017 and 2016 as a percentage of revenues.

 

   For the Three Months 
   Ended March 31, 
   2017   %   2016   % 
Net Revenues:                    
License fees  $5,730,222    31.92%  $1,358,469    8.50%
Maintenance fees   3,538,996    19.72%   3,388,526    21.21%
Services   7,004,272    39.02%   8,159,490    51.08%
License fees - related party   -    0.00%   484,644    3.03%
Maintenance fees - related party   51,698    0.29%   28,423    0.18%
Services - related party   1,624,132    9.05%   2,554,347    15.99%
Total net revenues   17,949,320    100.00%   15,973,899    100.00%
                     
Cost of revenues:                    
Salaries and consultants   6,161,110    34.33%   5,691,530    35.63%
Travel   764,867    4.26%   543,672    3.40%
Depreciation and amortization   1,340,188    7.47%   1,483,695    9.29%
Other   686,950    3.83%   860,868    5.39%
Total cost of revenues   8,953,115    49.88%   8,579,765    53.71%
                     
Gross profit   8,996,205    50.12%   7,394,134    46.29%
Operating expenses:                    
Selling and marketing   2,439,948    13.59%   1,896,295    11.87%
Depreciation and amortization   284,642    1.59%   321,230    2.01%
General and administrative   4,329,798    24.12%   3,808,327    23.84%
Research and development cost   101,193    0.56%   132,123    0.83%
Total operating expenses   7,155,581    39.87%   6,157,975    38.55%
                     
Income from operations   1,840,624    10.25%   1,236,159    7.74%
Other income and (expenses)                    
Gain on sale of assets   1,647    0.01%   14,848    0.09%
Interest expense   (60,357)   -0.34%   (56,070)   -0.35%
Interest income   27,229    0.15%   29,673    0.19%
Gain on foreign currency exchange transactions   390,897    2.18%   12,955    0.08%
Other income (expense)   (219)   0.00%   25,258    0.16%
Total other income (expenses)   359,197    2.00%   26,664    0.17%
                     
Net income before income taxes   2,199,821    12.26%   1,262,823    7.91%
Income tax provision   (61,604)   -0.34%   (106,209)   -0.66%
Net income   2,138,217    11.91%   1,156,614    7.24%
Non-controlling interest   (1,438,249)   -8.01%   (307,135)   -1.92%
Net income attributable to NetSol  $699,968    3.90%  $849,479    5.32%

 

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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 March 31,   Constant   Currency   Change as 
   2017   %   2016   %   Currency   Fluctuation   Reported 
                             
Net Revenues:   17,949,320    100.00%   15,973,899    100.00%   2,378,546    (403,125)   1,975,421 
                                    
Cost of revenues:   8,953,115    49.88%   8,579,765    53.71%   (402,479)   29,129    (373,350)
                                    
Gross profit   8,996,205    50.12%   7,394,134    46.29%   1,976,067    (373,996)   1,602,071 
                                    
Operating expenses:   7,155,581    39.87%   6,157,975    38.55%   (1,178,355)   180,749    (997,606)
                                    
Income from operations   1,840,624    10.25%   1,236,159    7.74%   797,712    (193,247)   604,465 

 

Net revenues for the quarter ended March 31, 2017 and 2016 are broken out among the segments as follows:

 

   2017   2016 
   Revenue   %   Revenue   % 
North America   1,111,897    6.19%   1,739,115    10.89%
Europe   1,808,567    10.08%   2,511,844    15.72%
Asia-Pacific   15,028,856   83.73%   11,722,940    73.39%
Total  $17,949,320    100.00%  $15,973,899    100.00%

 

Revenues

 

License fees

 

License fees for the three months ended March 31, 2017 were $5,730,222 compared to $1,843,113 for the three months ended March 31, 2016 reflecting an increase of $3,887,109 with a change in constant currency of $3,885,931. Included in the license fees are licenses provided to related parties of $nil for the three months ended March 31, 2017 compared to $484,644 for the same period last year. During the three months ended March 31, 2017, we increased our license revenues through sales of our NFS Ascent™ product and sales of our regional offerings in the U.S.

 

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Maintenance fees

 

Maintenance fees for the three months ended March 31, 2017 were $3,590,694 compared to $3,416,949 for the three months ended March 31, 2016 reflecting an increase of $173,745 with a change in constant currency of $267,025. Maintenance fees include maintenance provided to related parties of $51,698 for the three months ended March 31, 2017 compared to $28,423 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™.

 

Services

 

Services income for the three months ended March 31, 2017 was $8,628,404 compared to $10,713,837 for the three months ended March 31, 2016 reflecting a decrease of $2,085,433 with a change in constant currency of $1,774,410. Included in the services revenue are services provided to related parties of $1,624,132 for the three months ended March 31, 2017 compared to $2,554,347 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 $8,996,205, for the three months ended March 31, 2017 as compared with $7,394,134 for the three months ended March 31, 2016. This is an increase of $1,602,071 with an increase in constant currency of $1,976,067. The gross profit percentage for the three months ended March 31, 2017, increased to 50.12% from 46.29% for the three months ended March 31, 2016. The cost of sales was $8,953,115 for the three months ended March 31, 2017 compared to $8,579,765 for the three months ended March 31, 2016 or an increase of $373,350 and on a constant currency basis an increase of $402,479. As a percentage of sales, cost of sales decreased from 53.71% for the three months ended March 31, 2016 to 49.88% for the three months ended March 31, 2017.

 

Salaries and consultant fees increased by $469,580 from $5,691,530 for the three months ended March 31, 2016 to $6,161,110 for the three months ended March 31, 2017 and on a constant currency basis increased $539,464. The increase in salaries and consultant fees is due to 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 $1,340,188 compared to $1,483,695 for the three months ended March 31, 2016 or a decrease of $143,507 and on a constant currency basis a decrease of $160,284. Depreciation and amortization expense decreased as some products became fully amortized.

 

Operating Expenses

 

Operating expenses were $7,155,581 for the three months ended March 31, 2017 compared to $6,157,975, for the three months ended March 31, 2016 or an increase of 16.20% or $997,606 and on a constant currency basis an increase of 19.14% or $1,178,355. As a percentage of sales, it slightly increased from 38.55% to 39.87%. The increase in operating expenses was primarily due to the increase in selling and marketing expenses of $543,653 or 28.67% and on a constant currency basis an increase of $574,133 or 30.28%, and an increase in general and administrative expenses of $521,471 or 13.69% and on a constant currency basis an increase of $666,134 or 17.49%.

 

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 $4,329,798 for the three months ended March 31, 2017 compared to $3,808,327 at March 31, 2016 or an increase of $521,471 or 13.69% and on a constant currency basis an increase of $666,134 or 17.49%. During the three months ended March 31, 2017, salaries increased by approximately $247,163 or $266,470 on a constant currency basis due to the increase in the number of employees, annual raises, share grants and options; other general and administrative expenses slightly increased by approximately $1,696 or $123,533 on a constant currency basis; professional services increased by approximately $272,612 or $276,131 on a constant currency basis.

 

Income from Operations

 

Income from operations was $1,840,624 for the three months ended March 31, 2017 compared to $1,236,159 for the three months ended March 31, 2016. This represents an increase in income of $604,465 with an increase in income of $797,712 on a constant currency basis for the three months ended March 31, 2017 compared with the three months ended March 31, 2016. As a percentage of sales, income from operations was 10.25% for the three months ended March 31, 2017 compared to 7.74% for the three months ended March 31, 2016.

 

Net Income

 

Net income was $699,968 for the three months ended March 31, 2017 compared to $849,479 for the three months ended March 31, 2016. This is a decrease in income of $149,511 compared to the prior year. For the three months ended March 31, 2017, net income per basic and diluted share was $0.06 compared to $0.08 for the three months ended March 31, 2016.

 

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Nine Months Ended March 31, 2017 compared to the Nine Months Ended March 31, 2016

 

The following table sets forth the items in our unaudited condensed consolidated statement of operations for the nine months ended March 31, 2017 and 2016 as a percentage of revenues.

 

   For the Nine Months 
   Ended March 31, 
   2017   %   2016   % 
Net Revenues:                    
License fees  $14,953,574    29.39%  $3,076,541    6.77%
Maintenance fees   10,651,692    20.93%   9,826,209    21.61%
Services   19,795,073    38.90%   24,487,467    53.85%
License fees - related party   246,957    0.49%   484,644    1.07%
Maintenance fees - related party   233,674    0.46%   218,409    0.48%
Services - related party   5,003,605    9.83%   7,377,430    16.22%
Total net revenues   50,884,575    100.00%   45,470,700    100.00%
                     
Cost of revenues:                    
Salaries and consultants   18,034,263    35.44%   15,936,191    35.05%
Travel   2,313,002    4.55%   1,779,134    3.91%
Depreciation and amortization   3,989,824    7.84%   4,419,396    9.72%
Other   2,725,015    5.36%   2,822,347    6.21%
Total cost of revenues   27,062,104    53.18%   24,957,068    54.89%
                     
Gross profit   23,822,471    46.82%   20,513,632    45.11%
Operating expenses:                    
Selling and marketing   7,497,464    14.73%   5,597,689    12.31%
Depreciation and amortization   825,224    1.62%   898,018    1.97%
General and administrative   12,882,407    25.32%   10,391,844    22.85%
Research and development cost   285,732    0.56%   362,117    0.80%
Total operating expenses   21,490,827    42.23%   17,249,668    37.94%
                     
Income from operations   2,331,644    4.58%   3,263,964    7.18%
Other income and (expenses)                    
Gain (loss) on sale of assets   (33,095)   -0.07%   642    0.00%
Interest expense   (176,959)   -0.35%   (196,399)   -0.43%
Interest income   81,085    0.16%   117,084    0.26%
Loss on foreign currency exchange transactions   (645,886)   -1.27%   (235,291)   -0.52%
Other income   28,164    0.06%   200,256    0.44%
Total other income (expenses)   (746,691)   -1.47%   (113,708)   -0.25%
                     
Net income before  income taxes   1,584,953    3.11%   3,150,256    6.93%
Income tax provision   (440,363)   -0.87%   (454,707)   -1.00%
Net income   1,144,590    2.25%   2,695,549    5.93%
Non-controlling interest   (2,999,127)   -5.89%   (1,382,033)   -3.04%
Net income (loss) attributable to NetSol #  $(1,854,537)   -3.64%  $1,313,516    2.89%

 

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                   Favorable   Favorable   Total 
                   (Unfavorable)   (Unfavorable)   Favorable 
   For the Nine Months   Change in   Change due to   (Unfavorable) 
   Ended March 31,   Constant   Currency   Change as 
   2017   %   2016   %   Currency   Fluctuation   Reported 
                             
Net Revenues:   50,884,575    100.00%   45,470,700    100.00%   6,478,304    (1,064,429)   5,413,875 
                                    
Cost of revenues:   27,062,104    53.18%   24,957,068    54.89%   (2,507,459)   402,423    (2,105,036)
                                    
Gross profit   23,822,471    46.82%   20,513,632    45.11%   3,970,845    (662,006)   3,308,839 
                                    
Operating expenses:   21,490,827    42.23%   17,249,668    37.94%   (4,854,819)   613,660    (4,241,159)
                                    
Income from operations   2,331,644    4.58%   3,263,964    7.18%   (883,974)   (48,346)   (932,320)

 

Net revenues for the nine months ended March 31, 2017 and 2016 are broken out among the segments as follows:

 

   2017   2016 
   Revenue   %   Revenue   % 
North America  $4,467,325    8.78%  $4,194,321    9.22%
Europe   5,164,440    10.15%   6,676,142    14.68%
Asia-Pacific   41,252,810    81.07%   34,600,237    76.09%
Total  $50,884,575    100.00%  $45,470,700    100.00%

 

Revenues

 

License fees

 

License fees for the nine months ended March 31, 2017 were $15,200,531 compared to $3,561,185 for the nine months ended March 31, 2016 reflecting an increase of $11,639,346 with a change in constant currency of $11,733,078. Included in the license fees are licenses provided to related parties of $246,957 for the nine months ended March 31, 2017 compared to $484,644 for the same period last year. During the nine months ended March 31, 2017, 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 nine months ended March 31, 2017 were $10,885,366 compared to $10,044,618 for the nine months ended March 31, 2016 reflecting an increase of $840,748 with a change in constant currency of $1,137,055. Maintenance fees include maintenance provided to related parties of $233,674 for the nine months ended March 31, 2017 compared to $218,409 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™.

Services

 

Services income for the nine months ended March 31, 2017 was $24,798,678 compared to $31,864,897 for the nine months ended March 31, 2016 reflecting a decrease of $7,066,219 with a change in constant currency of $6,391,829. Included in the services revenue are services provided to related parties of $5,003,605 for the nine months ended March 31, 2017 compared to $7,377,430 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.

 

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Gross Profit

 

The gross profit was $23,822,471, for the nine months ended March 31, 2017 as compared with $20,513,632 for the nine months ended March 31, 2016. This is an increase of $3,308,839 with an increase in constant currency of $3,970,845. The gross profit percentage for the nine months ended March 31, 2017 slightly increased to 46.82% from 45.11% for the nine months ended March 31, 2016. The cost of sales was $27,062,104 for the nine months ended March 31, 2017 compared to $24,957,068 for the nine months ended March 31, 2016 for an increase of $2,105,036 and on a constant currency basis an increase of $2,507,459. As a percentage of sales, cost of sales slightly decreased from 54.89% for the nine months ended March 31, 2016 to 53.18% for the nine months ended March 31, 2017.

 

Salaries and consultant fees increased by $2,098,072 from $15,936,191 for the nine months ended March 31, 2016 to $18,034,263 for the nine months ended March 31, 2017 and on a constant currency basis increased $2,438,781. The increase in salaries and consultant fees is due to 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 $3,989,824 compared to $4,419,396 for the nine months ended March 31, 2016 or a decrease of $429,572 and on a constant currency basis a decrease of $445,624. Depreciation and amortization expense decreased as some products became fully amortized.

 

Operating Expenses

 

Operating expenses were $21,490,827 for the nine months ended March 31, 2017 compared to $17,249,668, for the nine months ended March 31, 2016 for an increase of 24.59% or $4,241,159 and on a constant currency basis an increase of 28.14% or $4,854,819. As a percentage of sales, it increased from 37.94% to 42.23%. The increase in operating expenses was primarily due to the increase in selling and marketing expenses of $1,899,775 or 33.94% and on a constant currency basis an increase of $2,125,617 or 37.97%, and an increase in general and administrative expenses of $2,490,563 or 23.97% and on a constant currency basis an increase of $2,855,483 or 27.48%.

 

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 $12,882,407 for the nine months ended March 31, 2017 compared to $10,391,844 at March 31, 2016 or an increase of $2,490,563 or 23.97% and on a constant currency basis an increase of $2,855,483 or 27.48%. During the nine months ended March 31, 2017, salaries increased by approximately $2,533,264 or $2,689,781 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 $266,940 or $83,685 on a constant currency basis; professional services increased by approximately $224,239 or $249,387 on a constant currency basis.

 

Income from Operations

 

Income from operations was $2,331,644 for the nine months ended March 31, 2017 compared to $3,263,964 for the nine months ended March 31, 2016. This represents a decrease in income of $932,320 with a decrease in income of $883,974 on a constant currency basis for the nine months ended March 31, 2017 compared with the nine months ended March 31, 2016. As a percentage of sales, net income from operations was 4.58% for the nine months ended March 31, 2017 compared to income of 7.18% for the nine months ended March 31, 2016.

 

Net Income (Loss)

 

Net loss was $1,854,537 for the nine months ended March 31, 2017 compared to net income of $1,313,516 for the nine months ended March 31, 2016. This is an increase in loss of $3,168,053 compared to the prior year. For the nine months ended March 31, 2017, net loss per basic and diluted share was $0.17 compared to net income basic and diluted per share of $0.13 and $0.12, respectively for the nine months ended March 31, 2016.

 

Non-GAAP Financial Measures

 

Regulation S-K Item 10(e), “Use of Non-GAAP Financial Measures in Commission Filings,” defines and prescribes the conditions for use of non-GAAP financial information. Our measures of adjusted EBITDA and adjusted EBITDA per basic and diluted share meet the definition of a non-GAAP financial measure.

 

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We define the non-GAAP measures as follows:

 

EBITDA is GAAP net income or loss before net interest expense, income tax expense, depreciation and amortization.
   
Non-GAAP adjusted EBITDA is EBITDA less stock-based compensation expense.
   
Adjusted EBITDA per basic and diluted share – Adjusted EBITDA allocated to common stock divided by the weighted average shares outstanding and diluted shares outstanding.

 

We use non-GAAP measures internally to evaluate the business and believe that presenting non-GAAP measures provides useful information to investors regarding the underlying business trends and performance of our ongoing operations as well as useful metrics for monitoring our performance and evaluating it against industry peers. The non-GAAP financial measures presented should be used in addition to, and in conjunction with, results presented in accordance with GAAP, and should not be relied upon to the exclusion of GAAP financial measures. Management strongly encourages investors to review our consolidated financial statements in their entirety and not to rely on any single financial measure in evaluating the Company.

 

The non-GAAP measures reflect adjustments based on the following items:

 

EBITDA: We report EBITDA as a non-GAAP metric by excluding the effect of net interest expense, income tax expense, depreciation and amortization from net income or loss because doing so makes internal comparisons to our historical operating results more consistent. In addition, we believe providing an EBITDA calculation is a more useful comparison of our operating results to the operating results of our peers.

 

Stock-based compensation expense: We have excluded the effect of stock-based compensation expense from the non-GAAP adjusted EBITDA and non-GAAP adjusted EBITDA per basic and diluted share calculations. Although stock-based compensation expense is calculated in accordance with current GAAP and constitutes an ongoing and recurring expense, such expense is excluded from non-GAAP results because it is not an expense which generally requires cash settlement by NetSol, and therefore is not used by us to assess the profitability of our operations. We also believe the exclusion of stock-based compensation expense provides a more useful comparison of our operating results to the operating results of our peers.

 

Non-controlling interest: We add back the non-controlling interest in calculating gross adjusted EBITDA and then subtract out the income taxes, depreciation and amortization and net interest expense attributable to the non-controlling interest to arrive at a net adjusted EBITDA.

 

Our reconciliation of the non-GAAP financial measures of adjusted EBITDA and non-GAAP earnings per basic and diluted share to the most comparable GAAP measures for the three and nine months ended March 31, 2017 and 2016 are as follows:

 

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   Three Months   Three Months   Nine Months   Nine Months 
   Ended   Ended   Ended   Ended 
   March 31, 2017   March 31, 2016   March 31, 2017   March 31, 2016 
                 
Net Income (loss) before preferred dividend, per GAAP  $699,968   $849,479   $(1,854,537)  $1,313,516 
Non-controlling interest   1,438,249    307,135    2,999,127    1,382,033 
Income taxes   61,604    106,209    440,363    454,707 
Depreciation and amortization   1,624,830    1,804,925    4,815,048    5,317,414 
Interest expense   60,357    56,070    176,959    196,399 
Interest (income)   (27,229)   (29,673)   (81,085)   (117,084)
EBITDA  $3,857,779   $3,094,145   $6,495,875   $8,546,985 
Add back:                    
Non-cash stock-based compensation   478,345    368,674-    2,025,924    840,409 
Adjusted EBITDA, gross  $4,336,124   $3,462,819   $8,521,799   $9,387,394 
Less non-controlling interest (a)   (2,045,028)   (1,186,132)   (4,860,826)   (3,884,124)
Adjusted EBITDA, net  $2,291,096   $2,276,687   $3,660,973   $5,503,270 
                     
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    10,984,944    10,554,555 
                     
Basic adjusted EBITDA  $0.21   $0.22   $0.34   $0.53 
Diluted adjusted EBITDA  $0.21   $0.21   $0.33   $0.52 
                     
(a)The reconciliation of adjusted EBITDA of non-controlling interest                    
to net income attributable to non-controlling interest is as follows                    
                     
Net Income attributable to non-controlling interest  $1,438,249   $307,135   $2,999,127   $1,382,033 
Income Taxes   10,871    36,569    71,916    74,350 
Depreciation and amortization   538,118    790,065    1,587,412    2,346,603 
Interest expense   17,502    9,416    53,918    40,749 
Interest (income)   (10,610)   (31,715)   (27,702)   (83,112)
EBITDA  $1,994,130   $1,111,470   $4,684,671   $3,760,623 
Add back:                    
Non-cash stock-based compensation   50,898    74,662    176,155    123,501 
Adjusted EBITDA of non-controlling interest  $2,045,028   $1,186,132   $4,860,826   $3,884,124 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our cash position was $8,450,115 at March 31, 2017, compared to $11,557,527 at June 30, 2016.

 

Net cash used in operating activities was $2,018,592 for the nine months ended March 31, 2017 compared to $1,130,801 provided by operating activities for the nine months ended March 31, 2016. At March 31, 2017, we had current assets of $47,196,113 and current liabilities of $17,168,622. We had accounts receivable of $14,716,584 at March 31, 2017 compared to $15,382,407 at June 30, 2016. We had revenues in excess of billings of $20,988,640 at March 31, 2017 compared to $11,297,264 at June 30, 2016. During the nine months ended March 31, 2017, our revenues in excess of billings were reclassified to accounts receivable pursuant to billing requirements detailed in each contract. The combined totals for accounts receivable and revenues in excess of billings increased by $9,025,553, from $26,679,671 at June 30, 2016, to $35,705,224 at March 31, 2017. The increase is due to recognition of revenue according to progress of contracts. Accounts payable and accrued expenses, and current portions of loans and lease obligations amounted to $7,404,181 and $5,650,475, respectively at March 31, 2017.

 

The average days sales outstanding for the nine months ended March 31, 2017 and 2016 were 165 and 165 days, respectively, for each period. The days sales outstanding have been calculated by taking into consideration the average combined balances of accounts receivable and revenue in excess of billings.

 

Net cash used in investing activities was $2,110,932 for the nine months ended March 31, 2017, compared to $3,290,538 for the nine months ended March 31, 2016. We had purchases of property and equipment of $1,315,922 compared to $2,523,865 for the comparable period last fiscal year. During the nine months ended March 31, 2017, the Company purchased a 2.5% interest in eeGeo, Inc. for $555,555 increasing its investment to 4.9%. NetSol PK also paid $350,000 to eeGeo, Inc. in addition to providing services for investment. The Company purchased 7,500 of its common stock from open market at an average price of $5.18 per share.

 

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Net cash provided by financing activities was $1,104,321, compared to $1,408,254 for the nine months ended March 31, 2017, and 2016, respectively. The nine months ended March 31, 2017 included the cash inflow of $785,479 from the exercising of stock options and warrants compared to $728,699 for the same period last year. During the nine months ended March 31, 2017, we had net receipts from bank loans and capital leases of $1,233,122 compared to $597,880 for the nine months ended March 31, 2016. We are operating in various geographical regions of the world through its various subsidiaries. Those subsidiaries have financial arrangements from various financial institutions to meet both their short and long term funding requirements. These loans will become due at different maturity dates as described in Note 12 of the financial statements. We are in compliance with the covenants of the financial arrangements and there is no default, which may lead to early payment of these obligations. We anticipate paying back all these obligations on their respective due dates from its own sources.

 

We typically fund the cash requirements for our operations in the U.S. through our license, services, and maintenance agreements, intercompany charges for corporate services, and through the exercise of options and warrants. As of March 31, 2017, we had approximately $8.45 million of cash, cash equivalents and marketable securities of which approximately $6.79 million is held by our foreign subsidiaries. As of June 30, 2016, we had approximately $11.56 million of cash, cash equivalents and marketable securities of which approximately $7.64 million is held by our foreign subsidiaries. We intend to permanently reinvest these funds outside the U.S., and therefore, we do not anticipate repatriating undistributed earnings from our non-U.S. operations. If funds from foreign operations are required to fund U.S. operations in the future, and if U.S. tax has not previously been provided, we would be required to accrue and pay additional U.S. taxes to repatriate these funds.

 

We remain open to strategic relationships that would provide value added benefits. The focus will remain on continuously improving cash reserves internally and reduced reliance on external capital raise.

 

As a growing company, we have on-going capital expenditure needs based on our short term and long term business plans. Although our requirements for capital expenses vary from time to time, for the next 12 months, we anticipate needing $3 million for APAC, U.S. and Europe new business development activities and infrastructure enhancements, which we expect to provide from current operations.

 

While there is no guarantee that any of these methods will result in raising sufficient funds to meet our capital needs or that even if available will be on terms acceptable to us, we will be very cautious and prudent about any new capital raise given the global market uncertainties. However, we are very conscious of the dilutive effect and price pressures in raising equity-based capital.

 

Financial Covenants

 

The Pakistani subsidiary, NetSol PK has an approved facility for export refinance from Askari Bank Limited amounting to Rupees 400 million or approximately $3.86 million which requires NetSol PK to maintain a long-term debt equity ratio of 60:40 and the current ratio of 1:1.

 

As of the date of this report, we are in compliance with the financial covenants associated with our borrowings. The maturity dates of the borrowings of respective subsidiaries may accelerate if they do not comply with these covenants. In case of any change in control in subsidiaries, they may have to repay their respective credit facilities.

 

CRITICAL ACCOUNTING POLICIES

 

Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Critical accounting policies for us include revenue recognition and multiple element arrangements, intangible assets, software development costs, and goodwill.

 

REVENUE RECOGNITION

 

The Company derives revenues from the following sources: (1) software licenses, (2) services, which include implementation and consulting services, and (3) maintenance, which includes post contract support.

 

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The Company recognizes revenue from license contracts without major customization when a non-cancelable, non-contingent license agreement has been signed, delivery of the software has occurred, the fee is fixed or determinable, and collectability is probable. Delivery is considered to have occurred upon electronic transfer of the license key that provides immediate availability of the product to the purchaser. Determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue the Company reports.

 

If an arrangement does not qualify for separate accounting of the software license and consulting transactions, then new software license revenue is generally recognized together with the consulting services based on contract accounting using either the percentage-of-completion or completed contract method. Contract accounting is applied to any arrangements: (1) that include milestones or customer specific acceptance criteria that may affect collection of the software license fees; (2) where services include significant modification or customization of the software; (3) where significant consulting services are provided for in the software license contract without additional charge or are substantially discounted; or (4) where the software license payment is tied to the performance of consulting services.

 

Revenue from consulting services is recognized as the services are performed for time-and-materials contracts. Revenue from training and development services is recognized as the services are performed.

 

Revenue from maintenance agreements is recognized ratably over the term of the maintenance agreement, typically one year.

 

Multiple Element Arrangements

 

The Company may enter into multiple element revenue arrangements in which a customer may purchase a number of different combinations of software licenses, consulting services, maintenance and support, as well as training and development.

 

Vendor specific objective evidence (“VSOE”) of fair value for each element is based on the price for which the element is sold separately. The Company determines the VSOE of fair value of each element based on historical evidence of the Company’s stand-alone sales of these elements to third-parties or from the stated renewal rate for the elements contained in the initial software license arrangement. When VSOE of fair value does not exist for any undelivered element, revenue is deferred until the earlier of the point at which such VSOE of fair value exists or until all elements of the arrangement have been delivered. The only exception to this guidance is when the only undelivered element is maintenance and support or other services, then the entire arrangement fee is recognized ratably over the performance period.

 

INTANGIBLE ASSETS

 

Intangible assets consist of product licenses, renewals, enhancements, copyrights, trademarks, trade names, and customer lists. Intangible assets with finite lives are amortized over the estimated useful life and are evaluated for impairment at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We assess recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If the future undiscounted cash flows are less than the carrying amount of these assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.

 

SOFTWARE DEVELOPMENT COSTS

 

Costs incurred to internally develop computer software products or to enhance an existing product are recorded as research and development costs and expensed when incurred until technological feasibility for the respective product is established. Thereafter, all software development costs are capitalized and reported at the lower of unamortized cost or net realizable value. Capitalization ceases when the product or enhancement is available for general release to customers.

 

The Company makes on-going evaluations of the recoverability of its capitalized software projects by comparing the amount capitalized for each product to the estimated net realizable value of the product. If such evaluations indicate that the unamortized software development costs exceed the net realizable value, the Company writes off the amount which the unamortized software development costs exceed net realizable value. Capitalized and purchased computer software development costs are being amortized ratably based on the projected revenue associated with the related software or on a straight-line basis.

 

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STOCK-BASED COMPENSATION

 

Our stock-based compensation expense is estimated at the grant date based on the award’s fair value as calculated by the Black-Scholes-Merton (BSM) option pricing model and is recognized as expense over the requisite service period. The BSM model requires various highly judgmental assumptions including expected volatility and expected term. If any of the assumptions used in the BSM model changes significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience and our expectations regarding future pre-vesting termination behavior of employees. To the extent our actual forfeiture rate is different from our estimate; stock-based compensation expense is adjusted accordingly.

 

GOODWILL

 

Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase businesses combination. Goodwill is reviewed for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the carrying amount of goodwill may be impaired. The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 2 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risks.

 

None.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Chief Financial Officer and Chief Executive Officer concluded that our disclosure controls and procedures were ineffective.

 

In connection with the restatement discussed in Note 19 - “Restatement of Previously Issued Interim Financial Statements” management, including our principal executive officer and principal financial officer, re-evaluated the effectiveness of the design operation of our internal control over financial reporting and disclosure controls and procedures as of March 31, 2017 and our principal executive officer and principal financial officer concluded that, due to the material weakness identified in our internal control over financial reporting discussed below, our disclosure controls and procedures were not effective as of March 31, 2017. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management has the responsibility to establish and maintain adequate internal controls over our financial reporting, as defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934. Our internal controls are designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our external financial statements in accordance with generally accepted accounting principles (GAAP).

 

Due to inherent limitations of any internal control system, management acknowledges that there are limitations as to the effectiveness of internal controls over financial reporting and therefore recognize that only reasonable assurance can be gained from any internal control system. Accordingly, our internal control system may not detect or prevent material misstatements in our financial statements and projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Under the supervision and participation of management, including the Chief Executive Officer and Chief Financial Officer, we have performed an assessment of the effectiveness of our internal controls over financial reporting as of March 31, 2017. This assessment was based on the criteria established in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of our assessment, the Company has determined that as of March 31, 2017, there was a material weakness in the Company’s internal control over financial reporting. Our management, including our Chief Executive Officer, believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

 

As of March 31, 2017, we did not maintain an effective control environment attributable to our interpretation of the revenue recognition criteria as it applied to the 10-year contract for a 12-country installation of our product. The weakness was related to when the timing of the revenue should have been realized.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal controls over financial reporting during the nine months ended March 31, 2017, that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15d – 15(f)).

 

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PART II OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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”).

 

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.

 

Item 1A. Risk Factors

 

None.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

The repurchases provided in the table below were made through the quarter ended March 31, 2017:

 

Issuer Purchases of Equity Securities (1)
Month   Total Number of Shares Purchased    Average Price Paid Per Share    Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs    Maximum Number of Shares that may be Purchased Under the Plans or Programs 
Nov-16   -   $-    -    - 
Dec-16   7,500   $5.18    7,500    - 
Jan-17   -   $-    -    - 
Feb-17   -   $-    -    - 
Mar-17   -   $-    -    - 
Total   7,500         7,500    500,000 

 

On November 16, 2016, the Company announced that it had authorized a stock repurchase program permitting the Company to repurchase up to 500,000 of its shares of common stock over the next 6 months. The shares are to be repurchased from time to time in open market transactions or privately negotiated transactions in the Company’s discretion.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CEO)
   
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CFO)
   
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CEO)
   
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CFO)

 

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SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

NETSOL TECHNOLOGIES, INC.

 

Date: May 22, 2017 /s/ Najeeb U. Ghauri
    NAJEEB U. GHAURI
    Chief Executive Officer

 

Date: May 22, 2017 /s/Roger K. Almond
    ROGER K. ALMOND
    Chief Financial Officer
    Principal Accounting Officer

 

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