10-Q 1 form10-q.htm

 

 

 

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, 2016

 

[  ] For the transition period from __________ to __________

 

Commission file number: 0-22773

 

NETSOL TECHNOLOGIES, INC.

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

 

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

 

24025 Park Sorrento, Suite 410, Calabasas, CA 91302
(Address of principal executive offices) (Zip Code)

 

(818) 222-9195 / (818) 222-9197
(Issuer’s telephone/facsimile numbers, including area code)

 

Indicate by check mark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [  ]

 

Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

 

Large Accelerated Filer [  ]   Accelerated Filer [  ]
Non-Accelerated Filer [  ]   Small Reporting Company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes [  ] No [X]

 

The issuer had 10,558,600 shares of its $.01 par value Common Stock and no Preferred Stock issued and outstanding as of May 6, 2016.

 

 

 

 
 

 

NETSOL TECHNOLOGIES, INC.

 

  Page No.
PART I. FINANCIAL INFORMATION  
   
Item 1. Financial Statements (Unaudited) 3
   
Condensed Consolidated Balance Sheets as of March 31, 2016 and June 30, 2015 3
   
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2016 and 2015 4
   
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended March 31, 2016 and 2015 5
   
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2016 and 2015 6
   
Notes to the Condensed Consolidated Financial Statements 8
   
Item 2. Management’s Discussion and Analysis or Plan of Operation 22
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk 33
   
Item 4. Controls and Procedures 33
   
PART II. OTHER INFORMATION  
   
Item 1. Legal Proceedings 34
   
Item 1A Risk Factors 34
   
Item 2. Unregistered Sales of Equity and Use of Proceeds 34
   
Item 3. Defaults Upon Senior Securities 34
   
Item 4. Mine Safety Disclosures 34
   
Item 5. Other Information 34
   
Item 6. Exhibits 34

 

Page 2
 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   As of   As of 
   March 31, 2016   June 30, 2015 
ASSETS          
Current assets:          
Cash and cash equivalents  $11,881,159   $14,168,957 
Restricted cash   90,000    90,000 
Accounts receivable, net of allowance of $501,496 and $524,565   6,072,413    6,480,344 
Accounts receivable, net - related party   6,467,551    3,491,899 
Revenues in excess of billings   8,860,248    5,267,275 
Other current assets   2,756,621    2,012,190 
Total current assets   36,127,992    31,510,665 
Investment   555,556    - 
Property and equipment, net   23,178,350    25,119,634 
Intangible assets, net   20,276,715    22,815,467 
Goodwill   9,516,568    9,516,568 
Total assets  $89,655,181   $88,962,334 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable and accrued expenses  $6,354,959   $5,952,561 
Current portion of loans and obligations under capitalized leases   4,538,218    3,896,353 
Unearned revenues   3,412,019    4,897,327 
Common stock to be issued   88,324    88,324 
Total current liabilities   14,393,520    14,834,565 
Long term loans and obligations under capitalized leases; less current maturities   315,653    487,492 
Total liabilities   14,709,173    15,322,057 
Commitments and contingencies          
Stockholders’ equity:          
Preferred stock, $.01 par value; 500,000 shares authorized;   -    - 
Common stock, $.01 par value; 14,500,000 shares authorized;10,558,600 shares issued and 10,531,321 outstanding as of March 31, 2016 and 10,307,826 shares issued and 10,280,547 outstanding as of June 30, 2015           105,586               103,078    
Additional paid-in-capital   120,513,094    119,209,807 
Treasury stock (27,279 shares)   (415,425)   (415,425)
Accumulated deficit   (39,412,605)   (40,726,121)
Stock subscription receivable   (947,353)   (1,204,603)
Other comprehensive loss   (18,898,747)   (17,167,100)
Total NetSol stockholders’ equity   60,944,550    59,799,636 
Non-controlling interest   14,001,458    13,840,641 
Total stockholders’ equity   74,946,008    73,640,277 
Total liabilities and stockholders’ equity  $89,655,181   $88,962,334 

 

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, 
   2016   2015   2016   2015 
Net Revenues:                    
License fees  $1,358,469   $1,215,201   $3,261,514   $4,900,469 
Maintenance fees   3,388,526    2,978,587    9,641,236    8,963,240 
Services   8,159,490    7,022,982    24,487,467    16,650,646 
License fees - related party   484,644    -    484,644    - 
Maintenance fees - related party   28,423    43,948    218,409    237,523 
Services - related party   2,554,347    1,813,197    7,377,430    4,901,792 
Total net revenues   15,973,899    13,073,915    45,470,700    35,653,670 
                     
Cost of revenues:                    
Salaries and consultants   5,542,829    4,895,515    15,468,284    13,310,632 
Travel   543,672    760,065    1,779,134    1,772,289 
Depreciation and amortization   1,483,695    1,912,492    4,419,396    5,514,812 
Other   860,868    792,737    2,822,347    2,129,646 
Total cost of revenues   8,431,064    8,360,809    24,489,161    22,727,379 
                     
Gross profit   7,542,835    4,713,106    20,981,539    12,926,291 
                     
Operating expenses:                    
Selling and marketing   1,896,295    1,712,151    5,597,689    4,419,466 
Depreciation and amortization   321,230    551,127    898,018    1,569,903 
General and administrative   3,957,028    3,997,186    10,859,751    11,584,696 
Research and development cost   132,123    84,038    362,117    230,740 
Total operating expenses   6,306,676    6,344,502    17,717,575    17,804,805 
                     
Income (loss) from operations   1,236,159    (1,631,396)   3,263,964    (4,878,514)
                     
Other income and (expenses)                    
Gain (loss) on sale of assets   14,848    6,496    642    (74,099)
Interest expense   (56,070)   (45,234)   (196,399)   (165,592)
Interest income   29,673    97,094    117,084    261,091 
Gain (loss) on foreign currency exchange transactions   12,955    (247,845)   (235,291)   (589,707)
Other income   25,258    607,111    200,256    625,650 
Total other income (expenses)   26,664    417,622    (113,708)   57,343 
                     
Net income (loss) before income taxes   1,262,823    (1,213,774)   3,150,256    (4,821,171)
Income tax provision   (106,209)   (107,398)   (454,707)   (235,157)
Net income (loss)   1,156,614    (1,321,172)   2,695,549    (5,056,328)
Non-controlling interest   (307,135)   (315,073)   (1,382,033)   214,888 
Net income (loss) attributable to NetSol  $849,479   $(1,636,245)  $1,313,516   $(4,841,440)
                     
Net income (loss) per common share                    
Basic  $0.08   $(0.17)  $0.13   $(0.51)
Diluted  $0.08   $(0.17)  $0.12   $(0.51)
                     
Weighted average number of shares outstanding                    
Basic   10,427,664    9,914,321    10,338,740    9,573,336 
Diluted   10,643,479    9,914,321    10,554,555    9,573,336 

 

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, 
   2016   2015   2016   2015 
                 
Net income (loss)  $849,479   $(1,636,245)  $1,313,516   $(4,841,440)
Other comprehensive income (loss):                    
Translation adjustment   (333,340)   291,037    (2,247,813)   (1,618,429)
Comprehensive income (loss)   516,139    (1,345,208)   (934,297)   (6,459,869)
Comprehensive income (loss) attributable to non-controlling interest   19,111    (247,856)   (516,166)   (927,897)
Comprehensive income (loss) attributable to NetSol  $497,028   $(1,097,352)  $(418,131)  $(5,531,972)

 

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, 
   2016   2015 
Cash flows from operating activities:          
Net income (loss)  $2,695,549   $(5,056,328)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:                        
Depreciation and amortization   5,317,414    7,084,715 
Provision for bad debts   49,605    - 
(Gain) loss on sale of assets   (642)   74,099 
Stock issued for services   694,693    1,119,721 
Fair market value of warrants and stock options granted   145,716    466,866 
Changes in operating assets and liabilities:          
Accounts receivable   115,428    (2,369,950)
Accounts receivable - related party   (3,111,316)   (198,640)
Revenues in excess of billing   (3,248,121)   (2,734,788)
Other current assets   (838,913)   188,048 
Accounts payable and accrued expenses   617,112    1,008,270 
Unearned revenue   (1,305,724)   2,984,297 
Net cash provided by operating activities   1,130,801    2,566,310 
           
Cash flows from investing activities:          
Purchases of property and equipment   (2,523,865)   (2,499,314)
Sales of property and equipment   556,280    209,718 
Investment   (555,556)   - 
Purchase of subsidiary shares from open market   (767,397)   (577,222)
Net cash used in investing activities   (3,290,538)   (2,866,818)
           
Cash flows from financing activities:          
Proceeds from sale of common stock   64,931    1,863,000 
Proceeds from the exercise of stock options and warrants   728,699    116,400 
Proceeds from exercise of subsidiary options   16,744    12,306 
Restricted cash   -    2,438,844 
Dividend paid by subsidiary to Non controlling interest   -    (780,106)
Proceeds from bank loans   1,334,285    - 
Payments on capital lease obligations and loans - net   (736,405)   (3,459,143)
Net cash provided by financing activities   1,408,254    191,301 
Effect of exchange rate changes   (1,536,315)   (466,130)
Net decrease in cash and cash equivalents   (2,287,798)   (575,337)
Cash and cash equivalents, beginning of the period   14,168,957    11,462,695 
Cash and cash equivalents, end of period  $11,881,159   $10,887,358 

 

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, 
   2016   2015 
SUPPLEMENTAL DISCLOSURES:          
Cash paid during the period for:          
Interest  $195,737   $107,418 
Taxes  $195,104   $74,850 

 

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

 

Page 7
 

 

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, 2015. 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”)
NetSol Technologies Limited (“NetSol UK”)

NTPK (Thailand) Co. Limited (“NTPK Thailand”)

NetSol Technologies Thailand Limited (“NetSol Thai”)

NetSol Technologies (Beijing) Co. Ltd. (“NetSol Beijing”)

NetSol Omni (Private) Ltd. (“Omni”)

NetSol Technologies (GmbH) (“NTG”)

 

Majority-owned Subsidiaries

 

NetSol Technologies, Ltd. (“NetSol PK”)
NetSol Innovation (Private) Limited (“NetSol Innovation”)
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 Unites States. Balances at financial institutions within certain foreign countries are not covered by insurance. As of March 31, 2016 and June 30, 2015, the Company had uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $8,847,577 and $8,969,443, respectively. The Company has not experienced any losses in such accounts.

 

Page 8
 

 

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. Also, due to the current economic conditions in China and challenges being faced by the Chinese economy, the Company may face a risk of reduction in future revenue growth and non-collection of receivables from the customers in China.

 

New Accounting Pronouncements

 

In May 2014, the (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB deferred the effective date of the new revenue standard by one year, which will make it effective for the Company in the first quarter of its fiscal year ending June 30, 2019. The Company is currently in the process of evaluating the impact of adoption of this ASU on its consolidated financial statements.

 

In June 2014, the FASB issued Accounting Standards Update No. 2014-12, Compensation — Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force) (ASU 2014-12). The guidance applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. For all entities, the amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The effective date is the same for both public business entities and all other entities. The Company is currently evaluating the impact of adopting ASU 2014-12 on the Company’s results of operations or financial condition.

 

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15). The guidance in ASU 2014-15 sets forth management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern as well as required disclosures. ASU 2014-15 indicates that, when preparing financial statements for interim and annual financial statements, management should evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. This evaluation should include consideration of conditions and events that are either known or are reasonably knowable at the date the financial statements are issued or are available to be issued, as well as whether it is probable that management’s plans to address the substantial doubt will be implemented and, if so, whether it is probable that the plans will alleviate the substantial doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods and annual periods thereafter. Early application is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

In January 2015, the FASB issued Accounting Standards Update No. 2015-01, Income Statement – Extraordinary and Unusual items (Subtopic 225-20), Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (ASU 2015-01). The amendment eliminates from U.S. GAAP the concept of extraordinary items. This guidance is effective for the Company in the first quarter of fiscal 2017. Early adoption is permitted and allows the Company to apply the amendment prospectively or retrospectively. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

In February 2015, FASB issued ASU No. 2015-02, (Topic 810): Amendments to the Consolidation Analysis. ASU No. 2015-02 provides amendments to respond to stakeholders’ concerns about the current accounting for consolidation of certain legal entities. Stakeholders expressed concerns that GAAP might require a reporting entity to consolidate another legal entity in situations in which the reporting entity’s contractual rights do not give it the ability to act primarily on its own behalf, the reporting entity does not hold a majority of the legal entity’s voting rights, or the reporting entity is not exposed to a majority of the legal entity’s economic benefits or obligations. ASU No. 2015-02 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

 

Page 9
 

 

In April 2015, FASB issued ASU No. 2015-03, (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU No. 2015-03 provides guidance that will require debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU No. 2015-03 affects disclosures related to debt issuance costs but does not affect existing recognition and measurement guidance for these items. ASU No. 2015-03 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

 

In April 2015, FASB issued ASU No. 2015-05, (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangements. ASU No. 2015-05 provides guidance on a customer’s accounting for fees paid in a cloud computing arrangement, which includes software as a service, platform as a service, infrastructure as a service, and other similar hosting arrangements. ASU No. 2015-05 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

 

In September 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-16, Business Combinations (Topic 805) Simplifying the Accounting for Measurement-Period Adjustments.” ASU No. 2015-06 simplifies the accounting for measurement-period adjustments attributable to an acquisition. Under prior guidance, adjustments to provisional amounts during the measurement period that arise due to new information regarding acquisition date circumstances must be made retrospectively with a corresponding adjustment to goodwill. The amended guidance requires an acquirer to record adjustments to provisional amounts made during the measurement period in the period that the adjustment is determined. The adjustments should reflect the impact on earnings of changes in depreciation, amortization, or other income effects, if any, as if the accounting had been completed as of the acquisition date. Additionally, amounts recorded in the current period that would have been reflected in prior reporting periods if the adjustments had been recognized as of the acquisition date must be disclosed either on the face of the income statement or in the notes to financial statements. This guidance is effective prospectively for interim and annual periods beginning after December 15, 2015 and early application is permitted. The impact of the guidance on our financial condition, results of operations and financial statement disclosures will depend on the level of acquisition activity performed by the Company.

 

In November 2015, the Financial Accounting Standards Board (FASB) issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes” (ASU 2015-17), which changes how deferred taxes are classified on the balance sheet and is effective for financial statements issued for annual periods beginning after December 15, 2016, with early adoption permitted. ASU 2015-17 requires all deferred tax assets and liabilities to be classified as non-current. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

 

In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” (ASU 2016-01), which requires equity investments that are not accounted for under the equity method of accounting to be measured at fair value with changes recognized in net income and updates certain presentation and disclosure requirements. ASU 2016-01 is effective beginning after December 15, 2017. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases,” which requires lessees to recognize right-of-use assets and lease liabilities, for all leases, with the exception of short-term leases, at the commencement date of each lease. This ASU requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. This ASU is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods. Early adoption is permitted. The amendments of this update should be applied using a modified retrospective approach, which requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

 

In March 2016, the FASB issued Accounting Standards Update 2016-07, Investments- Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting (“ASU 2016-07”). ASU 2016-07 eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. ASU 2016-07 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We are currently evaluating the impact the adoption of this standard would have on our financial condition, results of operations and cash flows.

 

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” The guidance simplifies accounting for share-based payments, most notably by requiring all excess tax benefits and tax deficiencies to be recorded as income tax benefits or expense in the income statement and by allowing entities to recognize forfeitures of awards when they occur. This new guidance is effective for annual reporting periods beginning after December 15, 2016 and may be adopted prospectively or retroactively. We are currently evaluating the impact the adoption of this standard would have on our financial condition, results of operations and cash flows.

 

Page 10
 

 

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, 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 

 

   For the three months ended March 31, 2015   For the nine months ended March 31, 2015 
   Net Loss   Shares   Per Share   Net Loss   Shares   Per Share 
Basic loss per share:                              
Net loss available to common shareholders  $(1,636,245)   9,914,321   $(0.17)  $(4,841,440)   9,573,336   $(0.51)
Effect of dilutive securities                              
Stock options   -    -    -    -    -    - 
Warrants   -    -    -    -    -    - 
Diluted loss per share  $(1,636,245)   9,914,321   $(0.17)  $(4,841,440)   9,573,336   $(0.51)

 

The following potential dilutive shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would be anti-dilutive.

 

   For the Three Months   For the Nine Months 
   Ended March 31,   Ended March 31, 
   2016   2015   2016   2015 
                 
Stock Options   -    727,462    -    727,462 
Warrants   -    163,124    -    163,124 
    -    890,586    -    890,586 

 

NOTE 4 – OTHER COMPREHENSIVE INCOME AND FOREIGN CURRENCY:

 

The accounts of NTE, NetSol UK, VLSH and VLS use the British Pound; VLSIL and NTG use the Euro; NetSol PK, Connect, Omni 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 $18,898,747 and $17,167,100 as of March 31, 2016 and June 30, 2015, respectively. During the three and nine months ended March 31, 2016, comprehensive income (loss) in the consolidated statements of operations included a translation loss of $352,451 and $1,731,647, respectively. During the three and nine months ended March 31, 2015, comprehensive income (loss) in the consolidated statements of operations included a translation gain of $538,893 and a loss of $690,532, respectively.

 

Page 11
 

 

NOTE 5 – RELATED PARTY TRANSACTIONS

 

NetSol-Innovation

 

In November 2004, the Company entered into a joint venture agreement with the Innovation Group called NetSol-Innovation (Pvt) Ltd., (“NetSol-Innovation”), a Pakistani company. NetSol-Innovation provides support services to the Innovation Group. During the three and nine months ended March 31, 2016, NetSol-Innovation provided services of $2,069,940 and $6,096,466, respectively. During the three and nine months ended March 31, 2015, NetSol-Innovation provided services of $1,524,528 and $4,275,004, respectively. Accounts receivable at March 31, 2016 and June 30, 2015 were $6,047,908 and $3,226,733, respectively.

 

Investec Asset Finance

 

In October 2011, NTE entered into an agreement with the Investec Asset Finance to acquire VLS. NTE and VLS both provide support services to Investec. 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. During the three and nine months ended March 31, 2015, NTE provided maintenance and services of $332,617 and $864,311, respectively. Accounts receivable at March 31, 2016 and June 30, 2015 were $419,643 and $265,166, respectively.

 

NOTE 6 - OTHER CURRENT ASSETS

 

Other current assets consisted of the following:

 

   As of   As of 
   March 31, 2016   June 30, 2015 
         
Prepaid Expenses  $550,801   $452,314 
Advance Income Tax   1,193,994    895,075 
Employee Advances   143,163    36,816 
Security Deposits   208,793    195,336 
Other Receivables   322,361    322,647 
Other Assets   337,509    110,002 
Total  $2,756,621   $2,012,190 

 

NOTE 7 – INVESTMENT UNDER COST METHOD

 

On March 2, 2016, the Company purchased a 4.9% interest in a non-affiliated, non-public company for $555,556, which the Company accounted for under the cost method. The Company has determined that there is no change in the value of the investment at March 31, 2016.

 

Page 12
 

 

NOTE 8 - PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

   As of   As of 
   March 31, 2016   June 30, 2015 
         
Office Furniture and Equipment  $3,287,876   $3,104,375 
Computer Equipment   25,728,409    25,911,422 
Assets Under Capital Leases   2,090,273    1,887,767 
Building   8,989,221    8,743,130 
Land   2,400,421    2,451,577 
Capital Work In Progress   311,153    392,243 
Autos   974,070    943,873 
Improvements   383,499    204,779 
Subtotal   44,164,922    43,639,166 
Accumulated Depreciation   (20,986,572)   (18,519,532)
Property and Equipment, Net  $23,178,350   $25,119,634 

 

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. For the three and nine months ended March 31, 2015, depreciation expense totaled $1,504,330 and $4,233,689, respectively. Of these amounts, $1,038,817 and $2,889,772, respectively, are reflected in cost of revenues.

 

Following is a summary of fixed assets held under capital leases as of March 31, 2016 and June 30, 2015:

 

   As of   As of 
   March 31, 2016   June 30, 2015 
Computers and Other Equipment  $516,208   $590,625 
Furniture and Fixtures   406,742    414,023 
Vehicles   1,167,323    883,119 
Total   2,090,273    1,887,767 
Less: Accumulated Depreciation - Net   (675,524)   (577,215)
   $1,414,749   $1,310,552 

 

NOTE 9 - INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

 

   As of   As of 
   March 31, 2016   June 30, 2015 
         
Product Licenses - Cost  $48,632,368   $48,632,368 
Additions   -    - 
Effect of Translation Adjustment   (3,281,529)   (2,325,008)
Accumulated Amortization   (25,074,124)   (23,491,893)
Net Balance  $20,276,715   $22,815,467 

 

(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 $20,276,715 will be amortized over the next 8 years. Amortization expense for the three and nine months ended March 31, 2016 was $686,973 and $2,075,357, respectively. Amortization expense for the three and nine months ended March 31, 2015 was $873,675 and $2,625,040, respectively.

 

Page 13
 

 

(B) Future Amortization

 

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

 

Year ended:    
March 31, 2017  $2,746,316 
March 31, 2018   2,746,316 
March 31, 2019   2,746,316 
March 31, 2020   2,746,316 
March 31, 2021   2,746,316 
Thereafter   6,545,135 
   $20,276,715 

 

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   As of 
   March 31, 2016   June 30, 2015 
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 

 

 

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

 

NOTE 11 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following:

 

   As of   As of 
   March 31, 2016   June 30, 2015 
Accounts Payable  $1,596,707   $1,514,841 
Accrued Liabilities   4,219,562    3,978,435 
Accrued Payroll & Taxes   196,737    291,546 
Taxes Payable   205,864    22,957 
Other Payable   136,089    144,782 
Total  $6,354,959   $5,952,561 

 

Page 14
 

 

NOTE 12 – DEBTS

 

Notes payable and capital leases consisted of the following:

 

       As of March 31, 2016 
           Current   Long-Term 
Name      Total   Maturities   Maturities 
                 
D&O Insurance   (1)  $119,583   $119,583   $- 
HSBC Loan   (2)   179,064    179,064    - 
Loan Payable Bank   (3)   3,776,792    3,776,792    - 
Loan From Related Party   (4)   -    -    - 
         4,075,439    4,075,439    - 
Subsidiary Capital Leases   (5)   778,432    462,779    315,653 
        $4,853,871   $4,538,218   $315,653 

 

       As of June 30, 2015 
           Current   Long-Term 
Name      Total   Maturities   Maturities 
                 
D&O Insurance   (1)  $79,872   $79,872   $- 
HSBC Loan   (2)   447,161    322,349    124,812 
Loan Payable Bank   (3)   2,892,961    2,892,961    - 
Loan From Related Party   (4)   129,979    129,979    - 
         3,549,973    3,425,161    124,812 
Subsidiary Capital Leases   (5)   833,872    471,192    362,680 
        $4,383,845   $3,896,353   $487,492 

 

(1) The Company finances Directors’ and Officers’ (“D&O”) liability insurance as well as Errors and Omissions (“E&O”) liability insurance, for which the total balances are renewed on an annual basis and as such are recorded in current maturities. The interest rate on the insurance financing was 0.49% as of March 31, 2016 and June 30, 2015, respectively.

 

(2) In October 2011, the Company’s subsidiary, NTE, entered into a loan agreement with HSBC Bank to finance the acquisition of a 51% controlling interest in Virtual Leasing Services Limited. HSBC Bank guaranteed the loan up to a limit of £1,000,000, or approximately $1,436,782 for a period of 5 years with monthly payments of £18,420, or approximately $26,466. 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, 2016 was $2,243 and $11,254, respectively. Interest expense for the three and nine months ended March 31, 2015 was $7,628 and $37,578, respectively.

 

This facility requires that NTE’s adjusted tangible net worth would not be less than £600,000. For this purpose, adjusted tangible net worth means shareholders’ funds less intangible assets plus non-redeemable preference shares. In addition, NTE’s cash debt service coverage would not fall below 150% of the aggregate debt service cost. As of March 31, 2016, NTE was in compliance with this covenant.

 

(3) The Company’s subsidiary, NetSol PK, has an export refinance facility with Askari Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every six months. Total facility amount is Rs. 400,000,000 or approximately $3,776,792. The interest rate for the loans was 4.5% and 7.5% at March 31, 2016 and June 30, 2015, respectively. Interest expense for the three and nine months ended March 31, 2016 was $31,669 and $109,655, respectively. Interest expense for the three and nine months ended March 31, 2015 was $31,428 and $104,203, respectively.

 

This facility requires NetSol PK to maintain a long term debt equity ratio of 60:40 and the current ratio of 1:1. As of March 31, 2016, NetSol PK was in compliance with this covenant.

 

Page 15
 

 

(4) In March 2014, the Company’s subsidiary, VLS, entered into a loan agreement with Investec. The loan amount was £150,000, or approximately $215,517, for a period of two years with annual payments of £75,000, or approximately $107,758. The interest rate was 3.13%. As of March 31, 2016, VLS has paid in full this facility.

 

(5) The Company leases various fixed assets under capital lease arrangements expiring in various years through 2019. 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, 2016 and 2015.

 

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

 

   Amount 
Minimum Lease Payments     
Due FYE 3/31/17  $510,192 
Due FYE 3/31/18   243,353 
Due FYE 3/31/19   91,772 
Total Minimum Lease Payments   845,317 
Interest Expense relating to future periods   (66,885)
Present Value of minimum lease payments   778,432 
Less: Current portion   (462,779)
Non-Current portion  $315,653 

 

NOTE 13 - STOCKHOLDERS’ EQUITY

 

During the nine months ended March 31, 2016, the Company issued 36,250 shares of common stock for services rendered by officers of the Company. These shares were valued at the fair market value of $197,363.

 

During the nine months ended March 31, 2016, the Company issued 21,750 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 $110,711.

 

During the nine months ended March 31, 2016, the Company issued 70,750 shares of its common stock to employees pursuant to the terms of their employment agreements valued at $386,619.

 

Page 16
 

 

NOTE 14 - INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN

 

Common stock purchase options and warrants consisted of the following:

 

OPTIONS:

 

   # of shares   Weighted Ave Exericse Price   Weighted Average Remaining Contractual Life (in years)   Aggregated Intrinsic Value 
Outstanding and exercisable, June 30, 2015   708,133   $6.84    1.22   $572,352 
Granted   152,024   $4.50           
Exercised   (122,024)  $4.40           
Expired / Cancelled   (11,000)  $23.41           
Outstanding and exercisable, March 31, 2016   727,133   $6.51    0.49   $961,544 
                     
WARRANTS:                    
Outstanding and exercisable, June 30, 2015   163,124   $7.29    1.22   $- 
Granted / adjusted   -    -           
Exercised   -    -           
Expired   -    -           
Outstanding and exercisable, March 31, 2016   163,124   $7.29    0.48   $11,084 

 

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

 

Exercise Price  Number Outstanding and Exercisable   Weighted Average Remaining Contractual Life   Weighted Ave Exericse Price 
OPTIONS:               
$0.10 - $9.90   664,133    0.51   $4.85 
$10.00 - $19.90   8,000    0.33   $17.69 
$20.00 - $29.90   55,000    0.17   $25.00 
Totals   727,133    0.49   $6.51 
                
WARRANTS:               
$5.00 - $7.50   163,124    0.48   $7.29 
Totals   163,124    0.48   $7.29 

 

Page 17
 

 

The following table summarizes stock grants awarded as compensation:

 

   # of shares   Weighted Average Grant Date Fair Value ($) 
         
Unvested, June 30, 2014   232,000   $3.88 
Granted   113,275   $3.26 
Vested   (338,608)  $3.60 
Unvested, June 30, 2015   6,667   $6.00 
Granted   859,000   $5.90 
Vested   (141,167)  $5.36 
Unvested, March 31, 2016   724,500   $6.00 

 

For the three and nine months ended March 31, 2016, the Company recorded compensation expense of $368,674 and $694,693 respectively. For the three and nine months ended March 31, 2015, the Company recorded compensation expense of $517,068 and $1,119,721 respectively. The compensation expense related to the unvested stock grants as of March 31, 2016 was $4,350,330 which will be recognized during the fiscal years of 2016 to 2019.

 

OPTIONS

 

During the nine months ended March 31, 2016, the Company granted 152,024 options to employees with exercise prices of $4.14 to $4.92 per share and expiration dates of 3 to 5 months, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $145,716 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% - 0.02%

 

Expected life – 3 months - 5 months

 

Expected volatility – 41.65% - 47.89%

 

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 now has 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 has 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. The Court also scheduled the final settlement approval hearing for June 27, 2016. The Company expects the cost of settlement to be fully covered by its insurers. The Company believes that plaintiffs’ allegations are meritless and, in the event that the Court does not approve the parties’ settlement, it intends to vigorously defend all claims asserted. If the settlement is not approved and the litigation continues, at this stage of the litigation the Company is unable to form a professional judgment that an unfavorable outcome is either probable or remote, and it is not possible to assess whether or not the outcome of these proceedings will or will not have a material adverse effect on the Company.

 

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. The parties in the California lawsuit recently 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”) dated March 16, 2016. Pursuant to the MOU, the parties shall in good faith attempt to present to this Court the appropriate motion(s) for approval of the settlement. The parties are continuing to negotiate and document the terms of the proposed settlement, which is subject to the Court’s approval.

 

Page 18
 

 

In addition, 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. The individual defendants joined in the Company’s motion and also filed a separate motion to dismiss the Nevada complaint for failure to state a claim.

 

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, 2016 and June 30, 2015:

 

   As of   As of 
   March 31, 2016   June 30, 2015 
Identifiable assets:          
Corporate headquarters  $2,669,405   $4,896,334 
North America   7,564,786    7,162,846 
Europe   6,782,459    6,631,945 
Asia - Pacific   72,638,531    70,271,209 
Consolidated  $89,655,181   $88,962,334 

 

Page 19
 

 

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, 
   2016   2015   2016   2015 
Revenues from unaffiliated customers:                    
North America  $1,739,115   $1,317,971   $4,194,321   $3,908,308 
Europe   1,514,370    1,381,156    4,692,125    4,621,071 
Asia - Pacific   9,653,000    8,517,643    28,503,771    21,984,976 
    12,906,485    11,216,770    37,390,217    30,514,355 
Revenue from affiliated customers                    
Europe   997,474    332,617    1,984,017    864,311 
Asia - Pacific   2,069,940    1,524,528    6,096,466    4,275,004 
    3,067,414    1,857,145    8,080,483    5,139,315 
Consolidated  $15,973,899   $13,073,915   $45,470,700   $35,653,670 
                     
Intercompany revenue                    
Europe  $132,978   $132,013   $375,471   $355,182 
Asia - Pacific   1,330,946    1,410,655    4,390,555    3,101,919 
Eliminated  $1,463,924   $1,542,668   $4,766,026   $3,457,101 
                     
Net income (loss) after taxes and before non-controlling interest:                    
Corporate headquarters  $(1,160,828)  $(1,709,716)  $(2,991,300)  $(2,552,756)
North America   516,849    137,556    560,664    58,529 
Europe   696,437    174,305    537,386    (829,120)
Asia - Pacific   1,104,156    76,683    4,588,799    (1,732,981)
Consolidated  $1,156,614   $(1,321,172)  $2,695,549   $(5,056,328)

 

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

 

   For the Nine Months 
   Ended March 31, 
   2016   2015 
Capital expenditures:          
Corporate headquarters  $-   $3,439 
North America   57,114    18,815 
Europe   333,683    204,481 
Asia - Pacific   2,133,068    2,272,579 
Consolidated  $2,523,865   $2,499,314 

 

Page 20
 

 

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, 2016
 
         
NetSol PK   33.40%  $10,333,383 
NetSol-Innovation   49.90%   3,347,352 
VLS, VLSH & VLSIL Combined   49.00%   320,723 
Total       $14,001,458 

 

SUBSIDIARY  Non Controlling Interest %   Non-Controlling
Interest at
June 30, 2015
 
         
NetSol PK   34.90%  $11,411,954 
NetSol-Innovation   49.90%   2,035,548 
VLS, VLHS & VLSIL Combined   49.00%   393,139 
Total       $13,840,641 

 

NETSOL TECHNOLOGIES, LIMITED

 

During the nine months ended March 31, 2016, employees of the NetSol PK exercised 108,000 options of common stock pursuant to employees exercising stock options and NetSol PK received cash $16,744. The Company purchased 1,374,000 shares of common stock of NetSol PK from the open market for $767,397, resulting in an overall decrease in non-controlling interest from 34.90% to 33.40%.

 

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

 

The following discussion is intended to assist in an understanding of the Company’s financial position and results of operations for the three and nine months ended March 31, 2016. The following discussion should be read in conjunction with the information included within our Annual Report on Form 10-K for the year ended June 30, 2015, 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 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 multi-billion 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.

 

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 Europe 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, 2016. It should be read together with our condensed consolidated financial statements and related notes included herein.

 

Highlights

 

A few of NetSol’s major successes achieved in the nine months of fiscal year 2016 were:

 

  Signed contract with a long-standing customer to upgrade to NFS Ascent™ in 11 countries and implement NFS Ascent™ in one new country. The contract is currently valued at more than $100 million.
     
  Signed NFS Ascent™ contract with UK-based client for approximately $8 million.
     
  Signed LeaseSoft contract with UK-based bank with the value of the project and continuing relationship to exceed $2.5 million.
     
  Signed a contract in Australia for NFS™, the Company’s legacy system, with contract valued at approximately $1.1 million.

 

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  Signed two agreements with leading auto captive finance companies in China for the implementation of NFSTM.
     
  Went live with NFS AscentTM re-finance system at an Indonesian customer.
     
  Upgraded multiple existing clients to new LeasePak modules.
     
  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.

 

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 $46 billion in Pakistan on energy and infrastructure projects.
     
  According to Reuters, US auto manufactures hit a record 17.5 million units of new car sales in 2015, the highest in a decade.
     
  Slowly improving economic environment in the U.K. and major European economies.
     
  New emerging markets and IT destinations in Thailand, Malaysia, Indonesia, China and Australia.
     
  NFS’ largest auto market in China remains healthy and robust with continued momentum for growth.
     
  According to Deloitte’s 2015 China Auto Finance Report, China’s auto finance penetration rate will reach 50% by 2020.
     
  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™.
     
  Higher caliber and quality talents joining NetSol, globally.
     
  Improved economic and geo political indicators in Pakistan to restore business confidence.

 

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.
     
  The threats of conflict between the U.S. and Middle East region could potentially create volatility in oil prices, causing readjustments of corporate budgets and consumer spending slowing global auto sales.

 

CHANGES IN FINANCIAL CONDITION

 

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

 

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

 

   2016   2015 
   Revenue   %   Revenue   % 
North America   1,739,115    10.89%   1,317,971    10.08%
Europe   2,511,844    15.72%   1,713,773    13.11%
Asia-Pacific   11,722,940    73.39%   10,042,171    76.81%
Total  $15,973,899    100.00%  $13,073,915    100.00%

 

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

 

   For the Three Months 
   Ended March 31, 
   2016   %   2015   % 
Net Revenues:                    
License fees  $1,358,469    8.50%  $1,215,201    9.29%
Maintenance fees   3,388,526    21.21%   2,978,587    22.78%
Services   8,159,490    51.08%   7,022,982    53.72%
License fees - related party   484,644    3.03%   -    0.00%
Maintenance fees - related party   28,423    0.18%   43,948    0.34%
Services - related party   2,554,347    15.99%   1,813,197    13.87%
Total net revenues   15,973,899    100.00%   13,073,915    100.00%
                     
Cost of revenues:                    
Salaries and consultants   5,542,829    34.70%   4,895,515    37.44%
Travel   543,672    3.40%   760,065    5.81%
Depreciation and amortization   1,483,695    9.29%   1,912,492    14.63%
Other   860,868    5.39%   792,737    6.06%
Total cost of revenues   8,431,064    52.78%   8,360,809    63.95%
                     
Gross profit   7,542,835    47.22%   4,713,106    36.05%
Operating expenses:                    
Selling and marketing   1,896,295    11.87%   1,712,151    13.10%
Depreciation and amortization   321,230    2.01%   551,127    4.22%
General and administrative   3,957,028    24.77%   3,997,186    30.57%
Research and development cost   132,123    0.83%   84,038    0.64%
Total operating expenses   6,306,676    39.48%   6,344,502    48.53%
                     
Income (loss) from operations   1,236,159    7.74%   (1,631,396)   -12.48%
Other income and (expenses)                    
Loss on sale of assets   14,848    0.09%   6,496    0.05%
Interest expense   (56,070)   -0.35%   (45,234)   -0.35%
Interest income   29,673    0.19%   97,094    0.74%
Gain (loss) on foreign currency exchange transactions   12,955    0.08%   (247,845)   -1.90%
Other income   25,258    0.16%   607,111    4.64%
Total other income (expenses)   26,664    0.17%   417,622    3.19%
                     
Net income (loss) before income taxes   1,262,823    7.91%   (1,213,774)   -9.28%
Income tax provision   (106,209)   -0.66%   (107,398)   -0.82%
Net income (loss)   1,156,614    7.24%   (1,321,172)   -10.11%
Non-controlling interest   (307,135)   -1.92%   (315,073)   -2.41%
Net income (loss) attributable to NetSol  $849,479    5.32%  $(1,636,245)   -12.52%

 

Page 25
 

 

Revenues

 

License fees

 

License fees for the three months ended March 31, 2016, were $1,843,113 compared to $1,215,201 for the three months ended March 31, 2015, reflecting an increase of $627,912. Included in the license fees are licenses provided to related parties of $484,644 for the three months ended March 31, 2016 compared to $nil for the same period last year. During the quarter ended March 31, 2016, we recognized license fees from the NFS Ascent™ projects, which is recognized on the percentage of completion method based on the services delivered to the customer. We have also recognized license revenue for the implementation of our legacy product at a customer site in China and in Australia. In addition, we recognized license revenue related to the delivery of our LeaseSoft product.

 

Maintenance fees

 

Maintenance fees for the three months ended March 31, 2016, were $3,416,949 compared to $3,022,535 for the three months ended March 31, 2015, reflecting an increase of $394,414. Included in the maintenance fee are maintenance provided to related parties of $28,423 for the three months ended March 31, 2016 compared to $43,948 for the same period last year. Maintenance fees begin once a customer has “gone live” with our product. The slight decrease in the maintenance fees is due to exchange rate difference. We anticipate maintenance fees to remain relatively stable until we are able to license NFS Ascent™ to new customers.

 

Services

 

Services revenue for the three months ended March 31, 2016 was $10,713,837 compared to $8,836,179 for the three months ended March 31, 2015 reflecting an increase of $1,877,658. Included in the services revenue are services provided to related parties of $2,554,347 for the three months ended March 31, 2016 compared to $1,813,197 for the same period last year. The increase is due to services provided to new customers both for the implementation of the legacy systems and for the implementation of NFS Ascent™ as well as additional services provided to existing customers on account of customization and enhancement requests. Moving forward, with the implementation of new projects of NFS AscentTM, we anticipate this element of our revenue to increase more compared to the license fee.

 

Gross Profit

 

The gross profit was $7,542,835, for the three months ended March 31, 2016 compared with $4,713,106 for the three months ended March 31, 2015. This is an increase of 60.04% or $2,829,729. The gross profit percentage for the three months ended March 31, 2016 also increased to 47.22% from 36.05% for the three months ended March 31, 2015. The increase in the gross profit is mainly due to the increase in revenues. The cost of sales was $8,431,064 for the three months ended March 31, 2016 compared to $8,360,809 for the three months ended March 31, 2015. As a percentage of sales, cost of sales decreased from 63.95% for the three months ended March 31, 2015 to 52.78% for the three months ended March 31, 2016.

 

Salaries and consultant fees increased by $647,314 from $4,895,515 for the three months ended March 31, 2015 to $5,542,829 for the three months ended March 31, 2016. The increase in salaries and consultant fees is primarily due to salary increases during 2016. As a percentage of sales, salaries and consultant expense decreased from 37.44% for the three months ended March 31, 2015 to 34.7% for the three months ended March 31, 2016.

 

Depreciation and amortization expense decreased to $1,483,695 compared to $1,912,492 for the three months ended March 31, 2015, or a decrease of $428,797. Depreciation and amortization expense decreased as some products became fully amortized.

 

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Operating Expenses

 

Operating expenses were $6,306,676 for the three months ended March 31, 2016, compared to $6,344,502, for the three months ended March 31, 2015, or a decrease of 0.6% or $37,826. As a percentage of sales, it decreased from 48.53% to 39.48%. This slight decrease in operating expenses was a mix of an increase in selling and marketing expenses of $184,144 or 10.76%, a decrease in general and administrative expenses of $40,158 or 1.00% and a decrease in depreciation expense of $229,897 or 41.71%. The increase in selling and marketing expenses is due to the hiring of additional employees and the increase in marketing efforts for NFS AscentTM. The decrease in general and administrative expenses is primarily due to reduction of legal and professional services.

 

Income (Loss) from Operations

 

Income from operations was $1,236,159 for the three months ended March 31, 2016, compared to loss of $1,631,396 for the three months ended March 31, 2015. This represents an increase of $2,867,555 for the three months ended March 31, 2016, compared with the three months ended March 31, 2015. As a percentage of sales, net income from operations was 7.74% for the three months ended March 31, 2016, compared to loss of 12.48% for the three months ended March 31, 2015.

 

Other Income and Expenses

 

Other income was $26,664 for the three months ended March 31, 2016, compared to $417,622 for the three months ended March 31, 2015. Included in other expense for the quarter ended March 31, 2015, was an exchange loss of $247,845 on foreign currency exchange transactions compared to exchange gain of $12,955 in the current quarter. The Company had also recorded other income arising from sale of terminal business by VLS amounting to $556,142 in the quarter ended March 31, 2015.

 

Net Income (Loss)

 

Net income was $849,479 for the three months ended March 31, 2016, compared to a loss of $1,636,245 for the three months ended March 31, 2015. This is an increase of $2,485,724 compared to the prior year. Net income per share, basic and diluted, was $0.08 for the three months ended March 31, 2016, compared to loss per share of $0.17 for the three months ended March 31, 2015.

 

Nine Months Ended March 31, 2016 compared to the Nine Months Ended March 31, 2015

 

Net revenues for the nine months ended March 31, 2016 and 2015 are broken out among the segments as follows:

 

   2016   2015 
   Revenue   %   Revenue   % 
North America  $4,194,321    9.22%  $3,908,308    10.96%
Europe   6,676,142    14.68%   5,485,382    15.39%
Asia-Pacific   34,600,237    76.09%   26,259,980    73.65%
Total  $45,470,700    100.00%  $35,653,670    100.00%

 

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

 

   For the Nine Months 
   Ended March 31, 
   2016   %   2015   % 
Net Revenues:                    
License fees  $3,261,514    7.17%  $4,900,469    13.74%
Maintenance fees   9,641,236    21.20%   8,963,240    25.14%
Services   24,487,467    53.85%   16,650,646    46.70%
License fees - related party   484,644    1.07%   -    0.00%
Maintenance fees - related party   218,409    0.48%   237,523    0.67%
Services - related party   7,377,430    16.22%   4,901,792    13.75%
Total net revenues   45,470,700    100.00%   35,653,670    100.00%
                     
Cost of revenues:                    
Salaries and consultants   15,468,284    34.02%   13,310,632    37.33%
Travel   1,779,134    3.91%   1,772,289    4.97%
Depreciation and amortization   4,419,396    9.72%   5,514,812    15.47%
Other   2,822,347    6.21%   2,129,646    5.97%
Total cost of revenues   24,489,161    53.86%   22,727,379    63.74%
                     
Gross profit   20,981,539    46.14%   12,926,291    36.26%
Operating expenses:                    
Selling and marketing   5,597,689    12.31%   4,419,466    12.40%
Depreciation and amortization   898,018    1.97%   1,569,903    4.40%
General and administrative   10,859,751    23.88%   11,584,696    32.49%
Research and development cost   362,117    0.80%   230,740    0.65%
Total operating expenses   17,717,575    38.96%   17,804,805    49.94%
                     
Income (loss) from operations   3,263,964    7.18%   (4,878,514)   -13.68%
Other income and (expenses)                    
Loss on sale of assets   642    0.00%   (74,099)   -0.21%
Interest expense   (196,399)   -0.43%   (165,592)   -0.46%
Interest income   117,084    0.26%   261,091    0.73%
Gain (loss) on foreign currency exchange transactions   (235,291)   -0.52%   (589,707)   -1.65%
Other income   200,256    0.44%   625,650    1.75%
Total other income (expenses)   (113,708)   -0.25%   57,343    0.16%
                     
Net income (loss) before income taxes   3,150,256    6.93%   (4,821,171)   -13.52%
Income tax provision   (454,707)   -1.00%   (235,157)   -0.66%
Net income (loss)   2,695,549    5.93%   (5,056,328)   -14.18%
Non-controlling interest   (1,382,033)   -3.04%   214,888    0.60%
Net income (loss) attributable to NetSol  $1,313,516    2.89%  $(4,841,440)   -13.58%

 

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Revenues

 

License fees

 

License fees for the nine months ended March 31, 2016 were $3,746,158 compared to $4,900,469 for the nine months ended March 31, 2015 reflecting a decrease of $1,154,311. Included in the license fees are licenses provided to related parties of $484,644 for the nine months ended March 31, 2016 compared to $nil for the same period last year. During the nine months ended March 31, 2016, we recognized license fees from the NFS Ascent™ projects which is recognized on the percentage of completion method based on the services delivered to the customer. We have also recognized license revenue from two new customers for the implementation of our legacy product at customer site in China and one new customer in Australia. In addition, we recognized license revenue related to the delivery of our LeaseSoft product.

 

Maintenance fees

 

Maintenance fees for the nine months ended March 31, 2016, were $9,859,645 compared to $9,200,763, for the nine months ended March 31, 2015, reflecting an increase of $658,822. Included in the maintenance fee are maintenance provided to related parties of $218,409 for the nine months ended March 31, 2016 compared to $237,523 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 2015 and into fiscal year 2016. We anticipate maintenance fees to remain relatively stable until we are able to license NFS Ascent™ to new customers.

 

Services

 

Services income for the nine months ended March 31, 2016 was $31,864,897 compared to $21,552,438 for the nine months ended March 31, 2015 reflecting an increase of $10,312,459. Included in the services income are services provided to related parties of $7,377,430 for the nine months ended March 31, 2016 compared to $4,901,792 for the same period last year. The increase is due to services provided to new customers both for the implementation of the legacy systems and for the implementation of NFS Ascent™ as well as additional services provided to existing customers on account of customization and enhancement requests. Moving forward, with the implementation of new projects of NFS AscentTM, we anticipate this element of our revenue to increase more compared to the license fee.

 

Gross Profit

 

The gross profit was $20,981,539, for the nine months ended March 31, 2016 compared with $12,926,291 for the nine months ended March 31, 2015. This is an increase of 62.32% or $8,055,248. The gross profit percentage for the nine months ended March 31, 2016 increased to 46.14% from 36.26% for the nine months ended March 31, 2015. The cost of sales was $24,489,161 for the nine months ended March 31, 2016 compared to $22,727,379 for the nine months ended March 31, 2015. As a percentage of sales, cost of sales decreased from 63.74% for the nine months ended March 31, 2015 to 53.86% for the nine months ended March 31, 2016.

 

Salaries and consultant fees increased by $2,157,652 from $13,310,632 for the nine months ended March 31, 2015 to $15,468,284 for the nine months ended March 31, 2016. The increase in salaries and consultant fees is due to salary increases during 2016 as well as certain new hires in Thailand, China and Europe. As a percentage of sales, salaries and consultant expense decreased from 37.33% for the nine months ended March 31, 2015 to 34.02% for the nine months ended March 31, 2016.

 

Depreciation and amortization expense decreased to $4,419,396 compared to $5,514,812 for the nine months ended March 31, 2015, or a decrease of $1,095,416. Depreciation and amortization expense decreased as some products became fully amortized.

 

Operating Expenses

 

Operating expenses were $17,717,575 for the nine months ended March 31, 2016 compared to $17,804,805, for the nine months ended March 31, 2015 or a decrease of 0.49% or $87,230. As a percentage of sales, it decreased from 49.94% to 38.96%. The decrease in operating expenses was a mix of an increase in selling and marketing expenses of $1,178,223 or 26.66%, a decrease in general and administrative expenses of $724,945 or 6.26% and a decrease in depreciation expense of $671,885 or 42.80%. The increase in selling and marketing expenses is due to the hiring of additional employees and increased marketing efforts for NFS AscentTM. The decrease in general and administrative expenses is primarily due to reduction of legal and professional services.

 

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Income (Loss) from Operations

 

Income from operations was $3,263,964 for the nine months ended March 31, 2016 compared to loss of $4,878,514 for the nine months ended March 31, 2015. This represents an increase of $8,142,478 for the nine months ended March 31, 2016 compared with the nine months ended March 31, 2015. As a percentage of sales, net income from operations was 7.18% for the nine months ended March 31, 2016 compared to loss of 13.68% for the nine months ended March 31, 2015.

 

Other Income and Expenses

 

Other expense was $113,708 for the nine months ended March 31, 2016 compared to other income of $57,343 for the nine months ended March 31, 2015. Included in other income for the nine months ended March 31, 2015 was an exchange loss of $589,707 on foreign currency exchange transactions compared to $235,291 in the current period. The Company had also recorded other income arising from sale of terminal business by VLS amounting to $556,142 in the nine months ended March 31, 2015.

 

Net Income (Loss)

 

Net income was $1,313,516 for the nine months ended March 31, 2016 compared to a net loss of $4,841,440 for the nine months ended March 31, 2015. This is an increase of $6,154,956 compared to the prior year. Net income per share, basic and diluted, was $0.13 and $0.12 for the nine months ended March 31, 2016 compared to loss per share of $0.51 for the nine months ended March 31, 2015.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our cash position was $11,881,159 at March 31, 2016, compared to $14,168,957 at June 30, 2015.

 

Net cash provided by operating activities was $1,130,801 for the nine months ended March 31, 2016 compared to $2,566,310 for the nine months ended March 31, 2015. At March 31, 2016, we had current assets of $36,127,992 and current liabilities of $14,393,520. We had accounts receivable of $12,539,964 at March 31, 2016 compared to $9,972,243 at June 30, 2015. We had revenues in excess of billings of $8,860,248 at March 31, 2016 compared to $5,267,275 at June 30, 2015. During the nine months ended March 31, 2016, 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 $6,160,694, from $15,239,518 at June 30, 2015, to $21,400,212 at March 31, 2016. The increase in accounts receivable is due to invoicing for services and maintenance fees to various customers. To some customers, the maintenance fee is invoiced in advance for the year. The amount is recorded in unearned revenue and is recognized as revenue on the time proportionate method. Accounts payable and accrued expenses, and current portions of loans and lease obligations amounted to $6,354,959 and $4,538,218, respectively at March 31, 2016.

 

The average days sales outstanding for the nine months ended March 31, 2016 and 2015 were 111 and 96 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 by investing activities was $3,290,538 for the nine months ended March 31, 2016, compared to $2,866,818 for the nine months ended March 31, 2015. We had purchases of property and equipment of $2,523,865 compared to $2,499,314 for the comparable period last fiscal year. During the nine months ended March 31, 2016, we had purchased 5% interest in a non-affiliated, non-public company for $555,556.

 

Net cash provided by financing activities was $1,408,254 and $191,301 for the nine months ended March 31, 2016, and 2015, respectively. The nine months ended March 31, 2016 included the cash inflow of $536,380 from the exercising of stock options and warrants compared to $116,400 for the nine months ended March 31, 2015. During the nine months ended March 31, 2016, we had net receipts from bank loans and capital leases of $1,334,285 compared to $nil for the nine months ended March 31, 2015. During the nine months ended March 31, 2016, we had net payments for bank loans and capital leases of $736,405 compared to $3,459,143 for the nine months ended March 31, 2015. 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 No. 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.

 

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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, 2016, we had approximately $11.88 million of cash, cash equivalents and marketable securities of which approximately $8.85 million is held by our foreign subsidiaries. As of June 30, 2015, we had approximately $14.17 million of cash, cash equivalents and marketable securities of which approximately $8.97 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 $1.5 to $2.5 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

 

Our U.K. based subsidiary, NTE, has an approved overdraft facility of £300,000 which 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. NTE had been granted another credit facility of £1,000,000 for the VLS acquisition. This facility requires that NTE’s adjusted tangible net worth would not be less than £600,000. For this purpose, adjusted tangible net worth means shareholders’ funds less intangible assets plus non-redeemable preference shares. In addition, NTE’s cash debt service coverage would not fall below 150% of the aggregate debt service cost.

 

The Pakistani subsidiary, NetSol PK has an approved facility for export refinance from Askari Bank Limited amounting to Rupees 400 million ($3.78) 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 RECOGNTION

 

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. Revenue from the sale of licenses with major customization, modification, and development is recognized on a percentage of completion method. Revenue from the implementation of software is recognized on a percentage of completion method.

 

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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, which in most instances is one year.

 

MULTIPLE ELEMENT ARRANGEMENTS

 

We 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 (multiple element arrangements).

 

Vendor Specific Objective Evidence (“VSOE”) of fair value for each element is based on the price for which the element is sold separately. We determine the VSOE of fair value of each element based on historical evidence of our 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.

 

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.

 

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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 PRONOUNCEMENTES

 

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 effective.

 

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, 2016. 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, 2016, there was no 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.

 

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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, 2016, 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)).

 

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 now has 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 has 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. The Court also scheduled the final settlement approval hearing for June 27, 2016. The Company expects the cost of settlement to be fully covered by its insurers. The Company believes that plaintiffs’ allegations are meritless and, in the event that the Court does not approve the parties’ settlement, it intends to vigorously defend all claims asserted. If the settlement is not approved and the litigation continues, at this stage of the litigation the Company is unable to form a professional judgment that an unfavorable outcome is either probable or remote, and it is not possible to assess whether or not the outcome of these proceedings will or will not have a material adverse effect on the Company.

 

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. The parties in the California lawsuit recently 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”) dated March 16, 2016. Pursuant to the MOU, the parties shall in good faith attempt to present to this Court the appropriate motion(s) for approval of the settlement. The parties are continuing to negotiate and document the terms of the proposed settlement, which is subject to the Court’s approval.

 

In addition, 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. The individual defendants joined in the Company’s motion and also filed a separate motion to dismiss the Nevada complaint for failure to state a claim.

 

Item 1A. Risk Factors

 

None.

 

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

 

On March 3, 2016, the Company issued 2,500 shares of common stock to an employee of the Company as part of his compensation. The shares were issued in reliance on an exemption from registration under Rule 4(6) of the Securities Act of 1933, as amended.

 

On March 31, 2016, the Company issued 25,000 shares of common stock to 6 employees of the Company as part of their compensation. The shares were issued in reliance on an exemption from registration under Rule 4(6) of the Securities Act of 1933, as amended.

 

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 10, 2016 /s/ Najeeb U. Ghauri
  NAJEEB U. GHAURI
  Chief Executive Officer
   
Date: May 10, 2016 /s/ Roger K. Almond
  ROGER K. ALMOND
  Chief Financial Officer
  Principal Accounting Officer

 

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