UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2016
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-22773
NETSOL TECHNOLOGIES, INC.
(Name of small business issuer as specified in its charter)
| NEVADA | 95-4627685 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification Number) |
24025 Park Sorrento, Suite 410,
Calabasas, CA 91302
(Address of principal executive offices) (Zip code)
(818) 222-9195
(Issuer’s telephone number including area code)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
COMMON STOCK, $.01 PAR VALUE
THE NASDAQ CAPITAL MARKET
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant 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 check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K(§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
| Large Accelerated Filer [ ] | Accelerated Filer [ ] |
| Non-accelerated Filer [ ] | Smaller reporting company [X] |
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the Common Stock held by non-affiliates of the registrant was approximately $73,199,126 based upon the closing price of the stock as reported on NASDAQ Capital Market ($7.76 per share) on December 31, 2015, the last business day of the registrant’s second quarter. As of September 12, 2016, there were 10,737,437 shares of common stock outstanding and no shares of its Preferred Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(None)
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
TABLE OF CONTENTS AND CROSS REFERENCE SHEET
NOTE ABOUT FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 relating to the development of the Company’s products and services and future operation results, including statements regarding the Company that are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. The words “believe,” “expect,” “anticipate,” “intend,” variations of such words, and similar expressions, identify forward looking statements, but their absence does not mean that the statement is not forward looking. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Factors that could affect the Company’s actual results include the progress and costs of the development of products and services and the timing of the market acceptance. Forward looking statements may appear throughout this report, including without limitation, the following sections: Item 1 “Business,” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risk and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
As used herein, “NetSol,” “we”, “our,” and similar terms include NetSol Technologies, Inc. and its subsidiaries, unless the context indicates otherwise.
GENERAL
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 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 continues to maintain services, solutions and/or sales specific offices in the USA, England, Germany, Pakistan, Thailand, China, and Australia.
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OUR BUSINESS
Company Business Model
NetSol believes that strong technology solutions with provable returns on investment are required to sell to its globally competitive and mature marketplace. NetSol believes that people are the drivers of success and we invest in hiring, training and retaining top-notch staff to ensure not only successful selling but also the ongoing satisfaction of our clients. Taken together, this “selling and attentive servicing” approach creates a distinctive advantage for NetSol and a unique value for its customers. NetSol continues to underpin this effective business model with a combination of careful cost arbitrage, subject matter expertise, domain experience, scalability and proximity with its global and regional customers.
Niche Market Focus
By specializing in leasing and financing solutions, we have gained footholds in several global locations and a market leading position in the captive auto-finance segment and a growing presence in the general asset finance space.
Subject Matter Expertise
NetSol’s dual expertise in enterprise technology implementation and financial application development has helped it emerge as a global contender in the lease and finance industry, and secure a broad footprint throughout the major markets of North America, Asia Pacific and Europe. The Asia Pacific operating region has particularly benefitted from the organic growth in the fast developing leasing automation industry, which is still nascent by Western standards.
Domain Experience
NetSol has a strong presence in the captive auto-finance domain. With a collective experience of almost two decades in Asia Pacific and over three decades in North America and Europe, NetSol is one of a few global competitors in this niche industry.
Proximity with Global and Regional Customers
The Company has offices across the world, located strategically to maintain close contact and proximity with its customers in various key markets. It has helped in strengthening customer relationships and building a deeper understanding of local market dynamics. Simultaneously, the Company is able to extend services and even development support through a combination of local/onsite and central/off-site resources. This approach allows the Company to offer blended rates to its customers by employing a unique and cost effective global development model.
While our business model is built around the development, implementation and maintenance of our suite of financial applications, under NFS™, NetSol has employed the same facilities and competencies to extend its offerings into related segments, including:
| ● | IT consulting & services | |
| ● | business intelligence | |
| ● | information security | |
| ● | independent system review | |
| ● | outsourcing services and software process improvement consulting | |
| ● | maintenance and support of existing systems | |
| ● | project management | |
| ● | technology/start-up incubation |
Our global operation is broken down into three regions: North America, Europe and Asia Pacific. All of the subsidiaries are seamlessly integrated to function effectively with global delivery capabilities, cross selling to multinational asset finance companies, leveraging a centralized marketing and pre-sales organization and a network of employees connected across the globe to support local and global customers and partners.
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OUR SOLUTIONS
NetSol Financial Suite™
NetSol’s offerings include its flagship global solution, NFS™. A robust suite of four software applications that is an end-to-end solution for the asset finance industry covering the complete leasing and finance cycle starting from quotation origination through end of contract transactions, and including digital channel support with intuitive mobile applications. The four 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 companies of any size, including those with multi-billion dollar portfolios.
On October 24, 2013, we announced the introduction and release of NFS Ascent™, 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 40 years combined with UX design concepts. 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 in compliance with various regulatory standards. 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. We believe that the transition from NFS™ to NFS Ascent™ allows:
| ● | Improvement in overall productivity throughout the delivery organization: |
| ● | The features of the integrated Business Process Manager, Workflow Engine and Business Rule Engine, will provide flexibility to our clients allowing them to configure certain parts of the application themselves rather than requesting customization. | |
| ● | The NFS Ascent™ platform and the SOA architecture allow us to develop portals and mobile applications quickly by utilizing our existing services. | |
| ● | The n-tier architecture allows us to intelligently distribute processing and eases application maintenance. The loose coupling between various modules and layers reduces the risk of regression in other parts of the system as a result of changes made in one part of the system and follows proven and accepted SOA principles. |
| ● | Improvement in talent acquisition and retention: |
| ● | Because NFS Ascent™ has been developed using the latest technologies and tools available in the market, it is helping us in attracting and retaining top engineers. |
| ● | Better customer satisfaction: |
| ● | As a result of the powerful NFS Ascent™ platform and improvement in the talent pool, the quality of our deliverables have increased. |
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NFS™ and NFS Ascent™ have the following as their constituent applications:
Loan Origination System (LOS)
Point of Sale (POS)
POS is a front office processing system for companies in the financial sector. It provides a quotation system which also incorporates a simulation for all kinds of financial products using a powerful built-in loan calculator.
Credit Application Processing System (CAP)
CAP provides companies in the financial sector with an environment to handle the incoming credit applications from dealers, agents, brokers and the direct sales force. CAP automatically gathers information from different interfaces like credit rating agencies, evaluation guides, and contract management systems and gives the applications a score against a user defined point scoring system. This automated workflow permits the credit team members to make their decisions more quickly and accurately. CAP is a database independent online system developed in Microsoft’s .Net framework. It can be run from any computer system with normal specifications, which is a key benefit for clients.
Contract Management System (CMS)
CMS provides comprehensive business functionality that enables its users to effectively and smoothly manage and maintain a contract with the most comprehensive details throughout its life cycle. It provides interfaces with external systems such as banks and accounting systems. CMS effectively maintains details of all business partners that do business with the company including, but not limited to, customers, dealers, debtors, guarantors, insurance companies and banks.
Wholesale Finance System (WFS)
WFS automates and manages the floor plan/bailment activities of dealerships through a finance company. The design of the system is based on the concept of one asset/one loan to facilitate asset tracking and costing. The system covers credit limit, payment of loan, billing and settlement, stock auditing, online dealer and auditor access, and ultimately the pay-off functions.
Fleet Management System (FMS)
FMS is designed to efficiently handle all fleet management needs. FMS is easily integrated with CMS and WFS as well as with any third party contract management system to ensure a single comprehensive system. FMS key features include: a detailed tracking of information on every driver and vehicle; customizable reports; periodic reporting on fleet related aspects; internet based access to information; integration with third party software; and, linkage to GPS for real time tracking.
Dealer Auditor Access System (DAAS)
DAAS is a web-based solution that can be used in conjunction with WFS or any third party wholesale finance system. It addresses the needs of dealer, distributor and auditor access in a wholesale financing arrangement.
NFS Mobility
NetSol launched NFS mobility in 2014. It enables a sales force for the finance and leasing company across different channels like point of sale, field investigation and auditing as well as allowing end customers to access their contract details through a self-service mobile application.
Mobile Account
The powerful mAccount is a self-service mobile solution. It empowers the dealer with a commanding backend system and allows the customer to setup a secured account and view information 24/7 to keep track of contract status, reducing inbound calls for customer queries and improving turnaround time for repayments.
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Mobile Point of Sale
The application mPOS is a web and mobile enabled platform featuring a customizable home screen dashboard along with multiple quotation, application submission, work queues and detailed reporting to empower dealer networks in making the right decisions at the right time, in turn optimizing productivity.
Mobile Dealer
Mobile Platform mDealer provides more visibility and control over inventories – with minimal effort. Dealers can view their use of floor plan facility, stock status and financial conditions, while entering settlement requests or relocating assets.
Mobile Auditor
The mAuditor schedules visits, records audit exceptions and tracks assets for higher levels of transparency, in real time.
Mobile Field Investigator
By using Mobile Field Investigator (mFI), the applicant has access to powerful features that permit detailed verification on the go. The application features a reporting dashboard that displays progress stats, action items and latest notifications, enabling the client to achieve daily goals while tracking performance.
Regional NFS™ Offerings
While NFS Ascent™ is designed to be a truly global solution ready for customization in any market, the Company has historically provided products tailored to various markets. As such, we offer the following additional regional products:
LeasePak
In North America, NetSol Technologies Americas, Inc. (NTA) has and continues to develop the LeasePak CMS product. 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 SQL Server, 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.
LeasePak-SaaS
NTA also offers the LeasePak Software-as-a-Service (“Saas”) business line, which provides high performance with a reduced total cost of ownership. SaaS offers a proven deployment option whereby customers only require access to the internet to use the software. With an elastic cloud price, revenue stream predictability and improved return on investment for customers, management believes that its SaaS customers will experience the performance, the reliability and the speed usually associated with a highly scalable private cloud. LeasePak-SaaS targets small and mid-sized leasing and finance companies.
LeaseSoft
In addition to offering NFS Ascent™ to the Europe market, NTE has some regional offerings, including:
| ● | LeaseSoft – 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 – similar to LeaseSoft, but optimized for the consumer loan market. |
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Implementation Process
The implementation process can span from three to eighteen months depending upon the complexity and scope. The implementation process also includes related software services such as configuration, data migration, training and any other additional third party interfaces. Even after implementation, customers seek enhancements and additions to improve their business processes. NetSol charges these efforts in a man-day rate. Post implementation, NetSol consultants may remain at the client site to assist the customer in smooth operations. After this phase, the regular maintenance and support services phase for the implemented software begins. In addition to the daily rate paid by the customer for each consultant, the customer also pays for all the transportation related expenses, boarding of the consultants, and a living allowance. NetSol’s involvement in all of the above steps is priced to bring value to our customers and increase our profitability from our interactions.
Pricing and Revenue Streams
The Company’s revenue streams occur through the following three main areas:
| ● | Product licensing | |
| ● | Implementation related services | |
| ● | Maintenance and support related services |
License fees can vary generally between $100,000 for SaaS minimal modules to more than $2,000,000 for more robust multiple module implementations. There are various attributes which determine the level of complexity, a few of which are: number of contracts; size of the portfolio; business strategy of the customer; internal business processes followed by the customer; number of business users; and branch network of the customer. 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. However, revenue from sale of licenses with major customization, modification, and development is recognized on a percentage of completion basis. Implementation related services, including configuration, data migration and third party interfaces are recognized in accordance with the percentage of completion method. Maintenance and support related services are then provided on a continued basis. The annual maintenance fee, which typically is an agreed upon percentage of overall monetary value of the license, then becomes an ongoing revenue stream realized on yearly basis. Revenue from software services includes fixed price contracts and is recognized in accordance with the percentage of completion method using the output measure of “Unit of Work Completed.”
Joint Ventures
NetSol-Innovation
In November 2004, the Company entered into a joint venture agreement with 1insurer (formerly the Innovation Group) forming NetSol-Innovation (Pvt) Ltd., (“NetSol-Innovation”), a Pakistani company. NetSol-Innovation provides support services enabling 1insurer to scale solution delivery operations in key growth markets. NetSol-Innovation operations are centered in NetSol’s delivery center in Lahore, Pakistan. NetSol owns a majority of the venture. The entities share in the profits of the joint venture on the basis of their shareholding. The outsourcing model between 1insurer and NetSol involves services pertaining to business analyses, configuration, testing, software quality assurance, technical communication, research and development regarding its insurance platform, client support as well as project management for development of software for 1insurer.
Initiated with a 10-person outsourcing team in Lahore in February 2005, this arrangement has extended to over 200 persons with the additional resources catering to the increased influx of outsourcing of configuration and testing assignments from 1insurer. Currently, prominent 1insurer’s customers being serviced from Lahore include GuideOne USA, Homesite USA, UPC USA and MDU UK.
Virtual Lease Services
Virtual Lease Services (VLS) is a joint venture partnership with NTE and Investec Bank. NetSol owns a majority of the venture. VLS provides an asset finance services proposition complementing our core solutions offerings. VLS provides three core services, covering business process outsourcing (BPO), provision of standby servicing to the securitization markets, and audit services. The cornerstone of VLS’s range of services is the BPO offering which provides portfolio management to a range of businesses, including start-ups, growth businesses, and those in run down mode. The BPO service also supports portfolio acquirers. VLS carries a Fitch ABS Primary Servicer Rating of “ABPS3”, upgraded from “ABPS3-” in October 2014.
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Alliances
Daimler Financial Services (“DFS”) Asia Pacific has established an “Application Support Centre (ASC)” in Singapore to facilitate the regional companies in NFS™ related matters. This ASC is powered by highly qualified technical and business personnel. ASC, in conjunction with our Asia Pacific Region, are supporting DFS companies in seven different countries in Asia and this list can increase as other DFS companies from other countries also opt for NFS™. In July 2008, the Company entered into a Frame Agreement with Daimler Financial Services AG (“DFS”) for the Asia Pacific and Africa regions. This agreement was renewed in October 2010 for an additional 3year term and renewed again in 2013. The agreement serves as a base line for use of the NFS™ products by DFS companies and affiliated companies.
Technical Affiliations
The Company is a Microsoft Certified Silver Partner and an Oracle Certified Partner.
Marketing and Selling
NetSol management continues its optimism that the Company will experience ever increasing opportunities for its product and services offerings in 2016 and beyond. The objective of the Company’s marketing program is to create and sustain preference and loyalty for NetSol. Marketing is performed at the corporate and business unit levels. The corporate marketing department has overall responsibility for communications, advertising, public relations and the website. In addition, corporate marketing oversees central marketing and communications programs for use by each of the business units.
Our dedicated marketing personnel, within the regions, undertake a variety of marketing activities, including sponsoring focused client events to demonstrate our skills and products, sponsoring and participating in targeted conferences and holding private briefings with individual companies. We believe that the industry focus of our sales professionals and our business unit marketing personnel enhances their knowledge and expertise in these industries and will generate additional client engagements.
The Markets
NetSol provides its services primarily to clients in global commercial industries. In the global commercial area, the Company’s service offerings are marketed to clients in a wide array of industries including, automotive, software, banks, higher education and financial services.
The Asian continent, including Australia and New Zealand, from the perspective of marketing, are targeted by the Asia Pacific Region from its Bangkok, Beijing and Lahore facilities. The marketing for our core offerings in the Americas and Europe is carried out from our San Francisco Bay Area and London Metropolitan area offices respectively.
People and Culture
The Company believes it has developed a strong corporate culture that is critical to its success. Its key values are delivering world-class quality software, client-focused timely delivery, leadership, long-term relationships, creativity, openness and transparency and professional growth. The services provided by NetSol require proficiency in many fields, such as software engineering, project management, business analysis, technical writing, sales and marketing, and communication and presentation skills.
Due to the growing demand for our core offerings and IT services, retention of technical and management personnel is essential. We have enhanced the compensation structure for our technical teams and senior management to stay ahead of global and regional competition. As a result, we have improved IT employee turnover from almost 20% in 2012 to less than 10% today. This is a significant milestone towards building capacity and driving revenue growth. In addition, we are committed to improving key performance indicators such as efficiency, productivity and revenue per employee.
To encourage all employees to build on our core values, we reward teamwork and promote individuals that demonstrate these values. We believe that our growth and success are attributable in large part to the high caliber of our employees and our commitment to maintain the values on which our success has been based. NetSol is an equal opportunity employer with the largest concentration of female employees in Lahore, Pakistan and our U.S. headquarters.
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NetSol believes it should give back to the community and employees as much as possible. Certain of our subsidiaries are located in regions where basic services are not readily available. Where possible, NetSol acts to not only improve the quality of life of its employees but also the standard of living in these regions. Examples of such programs are:
| ● | Humanitarian Relief - We are all aware of the devastation that can be wrought by natural disasters. NetSol has historically supported earthquake and flood relief where the need is the greatest. |
| ● | Literacy Program - launched to educate low paid illiterate employees of the organization. The main objective of this program is to enable these resources to acquire basic reading, writing and arithmetic skills. |
| ● | Noble Cause Fund - A noble cause fund has been established to meet medical and education expenses of the children of low paid employees. NetSol employees voluntarily contribute a fixed amount every month to the fund and the Company matches the employee subscriptions with an equivalent contribution amount. A portion of this fund is also utilized to support social needs of certain institutions and individuals, outside NetSol. |
| ● | Day Care Facility - NetSol’s human resources are its key assets and thus the Company takes numerous steps to ensure the provision of basic comforts to its employees. In Pakistan, the provision of outside pre-school child care is a rarity. With this in mind, a child day care facility has been created in close proximity to NetSol offices providing employees with peace of mind knowing their children are nearby and being taken care of by qualified staff in a child friendly facility. |
| ● | Preventative Health Care Program - In addition to the comprehensive out-patient and in-patient medical benefits, preventive health care has also been introduced. This phased program focuses on vaccination of our employees against such diseases as Hepatitis – A/B, Tetanus, Typhoid and Flu on a routine basis. |
There is significant competition for employees with the skills required to perform the services we offer. The Company runs an elaborate training program for different cadre of employees to cover technical skills and business domain knowledge, as well as communication, management and leadership skills. The Company believes that it has been successful in its efforts to attract and retain the highest level of talent available, in part because of the emphasis on core values, training and professional growth. We intend to continue to recruit, hire and promote employees who share our vision.
As of June 30, 2016, we had approximately 1,630 employees; comprised of 1,235 IT project and technical personnel; and 395 non-IT personnel. The IT project and technical personnel include 840 employees dedicated to NFS and NFS Ascent™, 197 employees dedicated to the joint venture with 1insurer and 125 employees supporting the regional offerings as well as IT consulting and services. None of our employees are subject to a collective bargaining agreement.
Competition
Neither a single company, nor a small number of companies, dominate the IT market in the space in which the Company competes. A substantial number of companies offer services that overlap and are competitive with those offered by NetSol. Some of these are large include computer manufacturers and computer consulting firms that have greater financial resources than NetSol and, in some cases, may have greater capacity to perform services similar to those provided by NetSol.
In the NFS™ business space, the barriers to entry are getting higher. The products are becoming more cutting-edge while richness in functionality is paramount. Older companies have prolonged the life of their legacy products by creating web-based front ends, while the core of the systems has not been re-engineered. In the case of NFS™, we compete chiefly against leading suppliers of IT solutions to the financial industry, including names such as White Clarke, Fimasys, International Decision Systems (IDS), Data Scan, CHP Consulting, 3i Infotech, Finnone and Nucleus Software.
In the IT based business services areas, we compete with both smaller local firms and many global IT services providers, including names such as Wipro, InfoSys, Satyam Infoway, HCL and TCS (Tata Consulting).
Many of the competitors of NetSol have longer operating history, larger client bases, and longer relationships with clients, greater brand or name recognition and significantly greater financial, technical, and public relations resources than NetSol. Existing or future competitors may develop or offer services that are comparable or superior to ours at a lower price, which could have a material adverse effect on our business, financial condition and results of operations.
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Customers
NetSol customers include world renowned auto manufacturers through their finance arms and large regional banks. In addition, NetSol provides offshore development and testing services to 1insurer, formerly Innovation Group Plc UK, and their blue chip global insurance customers through the NetSol-Innovation joint venture, which contributes about 12.64% of NetSol’s revenues. NetSol is also a strategic business partner for Daimler (which consists of a group of many companies in different countries), which accounts for 19.96% of our revenue.
Global Operations and Geographic Data
The Company divides its operations into three regions: the Americas, Europe and Asia Pacific. The regions consist of individual subsidiaries which operate as autonomous companies and are strategically managed on a regional basis.
The Americas
At NTA, Mr. Jeffrey Bilbrey, formerly a NetSol Technologies Inc. independent board member for three years and also Vice President at Majesco Software and Services, joins us as President. Mr. Bilbrey has vacated his board position for this role and brings 24 years of software product management, consulting services delivery and technology business operations leadership to NTA. His focus will be to expand the presence of NetSol in the Americas region while assuring elevated service levels to all existing clients.
Operations continue to be led by Farooq Ghauri. Mr. Farooq Ghauri is a technology industry expert with an 11 year proven track record in driving the rapid expansion of an industry leading global software organization. He has been working in NTA since 2008 as an active member of the management team. He has worked in NetSol’s Pakistan, China, Australia, Thailand and US offices providing him with the complete understanding of NetSol’s global operations in an industry that is rapidly expanding and changing.
Europe
NTE is led by Tim O’Sullivan as Managing Director and by Paul Stevens as CIO Europe. Both Paul and Tim have a wealth of industry expertise and domain knowledge and are now building a team with extensive capability to service the needs of the European Market.
VLS is led by Louise Ikonomides. As Managing Director and founding shareholder of VLS, Ms. Ikonomides has been with VLS since its inception in 1999.
Asia Pacific Region
NetSol Technologies, Ltd., a majority owned subsidiary of the parent company is located in Lahore, Pakistan and is headed by Salim Ghauri as its CEO. Mr. Ghauri is a co-founder of NetSol Technologies and has been with the Company since 1996.
NetSol Beijing is headed by Umar Qadri as President. Mr Qadri has been with NetSol for over five years where he has gained valuable experience in both technology and management.
The Global Sales Division is headed by Naeem Ghauri as President of Sales from the NetSol Thai offices located in Bangkok, Thailand. Mr. Naeem Ghauri has been with NetSol since 1999 and has over 27 combined years of experience in business and IT. He is also a member of the board of directors of the parent Company.
The Asia Pacific region including Australia/New Zealand and the Middle East, is targeted from the Asia Pacific region offices located in Beijing China; Bangkok, Thailand; Lahore and Karachi, Pakistan. While Lahore continues to be a mainstay of the Company’s delivery and research and development, Bangkok’s expanded sales operation and client relations facility has grown into a back-up to the Lahore facility. With the continued growth of the Chinese market, our Beijing office continues to expand as both a sales and support facility. Finally, the Asia Pacific region maintains and will establish offices through the region as is necessary to support its customers and to explore potential markets.
Our Asia Pacific Region accounted for approximately 75% of our revenues in 2016 and our North America and European regions together accounted for approximately 25% of our revenues in 2016. Information regarding financial data by geographic areas is set forth in Item 7 and Item 8 of this Annual Report on form 10-K. See note 17 of Notes to Consolidated Financial Statements under Item 8.
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Intellectual Property
The Company relies upon a combination of nondisclosure and other contractual arrangements, as well as common law trade secret, copyright and trademark laws to protect its proprietary rights. The Company enters into confidentiality agreements with its employees, generally requires its consultants and clients to enter into these agreements, and limits access to and distribution of its proprietary information. The NetSol logo and name, as well as the NFS logo and product name have been copyrighted and trademark registered in Pakistan. The NetSol logo and BestShoring® name has been registered with the U.S. Patent and Trademark Office. An application has been filed to trademark the NFS Ascent™ with the U.S. Patent and Trademark Office and is currently being processed. The Company intends to trademark and copyright its intellectual property as necessary and in the appropriate jurisdictions.
Governmental Approval and Regulation
Current Company operations do not require specific governmental approvals. Like all companies, including those with multinational subsidiaries, we are subject to the laws of the countries in which the Company maintains subsidiaries and conducts operations. Pakistani law allows a tax exemption on income from exports of IT services and products up to 2018. While foreign based companies may invest in Pakistan, repatriation of their investment, in the form of dividends or other methods, requires approval of the State Bank of Pakistan.
Available Information
Our website is located at www.netsoltech.com, and our investor relations website is located at http://ir.netsoltech.com. The following filings are available through our investor relations website after we file with the SEC: Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and our Proxy Statements for our annual meetings of stockholders. These filings are also available for download free of charge on our investor relations website. We also provide a link to the section of the SEC’s website at www.sec.gov that has all of our public filings, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, our Proxy Statements and other ownership related filings. Further, a copy of this Annual Report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases, and blogs as part of our investor relations website. Investors and others can receive notifications of new information posted on our investor relations website by signing up for e-mail alerts. Further corporate governance information, including our committee charters and code of conduct, is also available on our investor relations website at http://ir.netsoltech.com/governance-docs. The content of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
On June 23, 2016, the United Kingdom (U.K.) held a referendum in which voters approved an exit from the E.U., commonly referred to as “Brexit”. As a result of the referendum, it is expected that the British government will begin negotiating the terms of the U.K.’s future relationship with the E.U. Although it is unknown what those terms will be, it is possible that there will be greater restrictions on imports and exports between the U.K. and E.U. countries and perhaps increased regulatory complexities. These changes may adversely affect our operations and financial results.
Our corporate headquarters are located in Calabasas, California where we lease 7,210 square feet of office space. We own our Lahore Technology Campus which consists of approximately 140,000 square feet of computer and general office space. This includes the newly constructed building having a covered area of approximately 90,000 square feet with the capacity to house approximately 1,000 resources. In addition, we lease office space for our sales and support offices in North America, Europe, and Asia Pacific. We believe our existing facilities, both owned and leased, are in good condition and suitable for the conduct of our business.
| 10 |
As previously disclosed, on July 25, 2014, purported class action lawsuits were filed in the U.S. District Court for the Central District of California against the Company and certain of its current or former officers and/or directors, which have been consolidated under the caption Rand-Heart of New York, Inc. v. NetSol Technologies, Inc., et al., Case No. 2:14-cv-05787 PA (SHx). Plaintiffs subsequently filed consolidated amended complaints, which asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. As a result of the Company’s motions, the Court dismissed all of plaintiffs’ claims except those related to the scope of the Company’s release of its next generation product, NFS Ascent™, during the narrow proposed class period of October 24, 2013 to November 8, 2013. The Company filed an answer and affirmative defenses denying the remaining claims. On February 26, 2016, the parties executed a Stipulation of Settlement to fully resolve the consolidated class action lawsuit, and filed a motion seeking the Federal Court’s approval of the settlement. On March 28, 2016, the Court issued an order preliminarily approving the settlement and providing for notice to class members. Following class notice and hearing, the Court issued an order granting the motion for final approval of the settlement and plan of allocation and motion for an award of attorneys’ fees and case expenses on July 1, 2016. The Court’s Judgment approving the settlement on the terms set forth in the Stipulation of Settlement was signed on July 2, 2016. The cost of the settlement was covered by the Company’s insurers.
On October 27, 2015, a shareholder derivative lawsuit was filed in the California state court entitled McArthur v Ghauri, et al., Case No. BC599020 (Los Angeles, Cty.), naming current and former members of the Company’s board of directors as defendants. The complaint alleges that the defendants breached their fiduciary duties based on the same alleged factual premise as the pending federal securities class action described above. The Company is named as a nominal defendant only and no damages are sought from it. On March 16, 2016, the parties in the California lawsuit reached an agreement-in-principle providing for the settlement of that case. The proposed settlement is on the terms and conditions set forth in a Memorandum of Understanding (“MOU”).
On December 30, 2015, a virtually identical shareholder derivative lawsuit was filed in Nevada state court, Paulovits v. Ghauri, et al., Case No. CV15-02470 (Washoe Cty.). The Nevada complaint names the same defendants and is based on the same alleged facts as the earlier-filed California case. On April 29, 2016, the Company filed a motion to dismiss or stay the Nevada proceeding on multiple grounds, including that is it duplicative of the first-filed California action. On May 23, 2016, pursuant to the parties’ stipulation, the Nevada court ordered that matter to be stayed for a period of one year.
On June 15, 2016, the parties in the California and the Nevada cases jointly executed a Stipulation and Agreement of Settlement of Derivative Claims, which is intended to fully resolve both cases. Pursuant to the stipulation and subject to the court’s approval, the Company has agreed to adopt or maintain certain corporate governance measures, and has agreed to cause its insurers to pay plaintiff counsel’s fees and expenses in an aggregate amount not to exceed $175,000. On June 16, 2016, the California plaintiff filed a motion for preliminary approval of the derivative settlement. The motion is scheduled to be heard by the California court on October 25, 2016.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
| 11 |
ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITY
(a) MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION - Common stock of NetSol Technologies, Inc. is listed and traded on NASDAQ Capital Market under the ticker symbol “NTWK”.
The table shows the high and low intra-day prices of the Company’s common stock as reported on the composite tape of the NASDAQ for each quarter during the last two fiscal years.
| Fiscal Year 2016 | High | Low | ||||||
| First Quarter | $ | 5.66 | $ | 4.20 | ||||
| Second Quarter | $ | 9.50 | $ | 4.50 | ||||
| Third Quarter | $ | 8.20 | $ | 6.02 | ||||
| Fourth Quarter | $ | 7.46 | $ | 5.40 | ||||
| Fiscal Year 2015 | High | Low | ||||||
| First Quarter | $ | 4.19 | $ | 2.68 | ||||
| Second Quarter | $ | 4.5 | $ | 2.81 | ||||
| Third Quarter | $ | 6.4 | $ | 3.91 | ||||
| Fourth Quarter | $ | 6.5 | $ | 5.05 | ||||
RECORD HOLDERS - As of September 12, 2016, the number of holders of record of the Company’s common stock was 166.
DIVIDENDS - The Company has not paid dividends on its Common Stock in the past two fiscal years.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLAN
The table shows information related to our equity compensation plans as of June 30, 2016:
| Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) | ||||||||||
| Equity Compensation Plans approved by Security holders | 610,133 | (1) | $ | 4.90 | (2) | 642,095 | (3) | |||||
| Equity Compensation Plans not approved by Security holders | None | None | None | |||||||||
| Total | 610,133 | $ | 4.90 | 642,095 | ||||||||
| (1) | Consists of 1,000 under the 2003 Incentive and Nonstatutory Stock Option Plan; 53,462 under the 2005 Incentive and Nonstatutory Stock Option Plan; 130,000 under the 2011 Incentive and Nonstatutory Stock Option Plan; and 425,671 under the 2013 Incentive and Nonstatutory Stock Option Plan. | |
| (2) | The weighted average exercise price of the options is $4.90. | |
| (3) | Represents 2,595 available for issuance under the 2013 Incentive and Nonstatutory Stock Option Plan and 639,500 under the 2015 Incentive and Nonstatutory Stock Option Plan. |
| 12 |
(b) RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 6 – SELECTED FINANCIAL DATA
Not applicable.
ITEM 7- MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATIONS
The following discussion is intended to assist in an understanding of NetSol’s financial position and results of operations for the year ended June 30, 2016. It should be read together with our consolidated financial statements and related notes included under Item 8 of this Annual Report on Form 10-K.
A few of our highlights for 2015-2016 were:
| ● | Signed a 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. The implementations include China, Japan, Australia, South.Korea, Singapore, New Zealand, India, Thailand, Hong Kong, Malaysia, Taiwan and South Africa. | |
| ● | Signed NFS Ascent™ contract with UK-based Tier 1 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. | |
| ● | Signed five agreements with leading auto captive finance companies in China for the implementation of NFS™ valued at over $4 million. | |
| ● | Went live with NFS Ascent™ re-finance system for a major Japanese multi-national bank with an Indonesian subsidiary. | |
| ● | Completed multiple implementations in the Asia Pacific region and went live with one of the largest valued NFS legacy systems. | |
| ● | Upgraded an existing Tier 1 multi-national auto captive finance client to the new LeasePak modules in the U.S. | |
| ● | Implemented first mobility solution with MotoLease, a U.S. based power sports equipment lease company. | |
| ● | Upgraded and enhanced the infrastructure at our global delivery center in in Lahore, Pakistan. | |
|
● | Created Nspire, a new division established to promote new ideas and innovations. NSpire is an incubator to allow entrepreneurs to build new and pioneering concepts that would build some diversification and strong value proposition for NetSol. |
| ● | 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. | |
| ● | Continued to execute our vision by investing in senior management roles in the Americas, Europe and China as follows: | |
| Appointed Jeffrey Bilbrey, a 20 year plus leader in the IT industry, as President of NetSol Technologies Americas, as well as the addition of additional talents in sales, client relations and in the product group. | ||
| Promoted Mr. Tim Sullivan, a 25 year plus executive in the asset finance space, to Managing Director, NTE. | ||
| Hired Mr. Iwan Spillebeen as Head of System Development Practices for the Bangkok and Lahore offices. He brings 25 years of industry experience that will assist NetSol with implementations of advanced processes and systems in the global delivery center. |
| 13 |
| Appointed Mr. Umar Qadri as President of NetSol China. | ||
| Hired Mr. Fawad Khan, a 20 years plus veteran in IT and Software industry to head up the NetSol delivery center in Lahore. |
Our success, in the near term, will depend in large part on the Company’s ability to: (a) continue to grow revenues and improve profits, (b) adequately capitalize for growth in various markets and verticals; (c) make progress in the North American and European markets and, (d) continue to increase sales and marketing efforts in every market we operate.
Marketing and Business Development Activities
Management has developed, and the board of directors has ratified, an aggressive growth strategy aimed at increasing competitiveness, enhancing global delivery capabilities and increasing financial strength to become a leading global IT institution in the leasing and finance space.
The growth strategy contemplates the following enhanced activities and initiatives to accomplish these goals:
| ● | Build strong C-level executive teams in each key location to execute our long term strategy. | |
| ● | Continue to advance infrastructure and systems in Lahore, Bangkok, Beijing and Los Angeles locations. | |
| ● | Strengthen the NetSol brand in the Americas and Europe and further penetrate the APAC markets such as China, Thailand, Indonesia, Australia and New Zealand. | |
| ● | Develop the sales and delivery capabilities for the Americas markets, in particular the growth in the U.S. auto and banking sectors. | |
| ● | Maximize penetration into new and existing smaller markets by increasing the sales activities for our legacy version of NFS™ in emerging markets in Latin America, APAC, and the Middle Eastern regions where the legacy product is better suited to middle market companies with limited IT budgets yet growing leasing volumes. | |
| ● | Maintain the quality of our delivery, after delivery support, and client relationships. | |
| ● | Further penetration of NFS Ascent™ into the leasing and financing sectors in China, APAC, Europe and North America by focusing on multi-national auto captive Fortune 500 companies. | |
| ● | Continue to develop new tools, systems and processes, such as JIRA and the Agile frame work to further enhance productivity, efficiencies and operating margins. |
Growth Prospects for NFS™
Growth prospects for NFS™ are linked to the maturing of the product portfolio and its growing customer base across different geographic and product markets. NetSol is eyeing key international markets for growth in sales. Its sales strategy now carefully balances expansion into new geographic markets, including North and South America, and further penetration of our leading position in Asia Pacific.
Growth in North America is expected to come from the huge potential market for replacement of legacy systems. NFS Ascent™ is aimed at providing a highly flexible solution based on the latest technology and advanced architecture for the North American customers looking to replace their legacy systems. We believe that NFS Ascent™ can provide substantial competitive disruption to the market’s lagging technology provided by incumbent vendors. The existing customer base may also represent latent demand for increased service and maintenance revenues by offering business process optimization, customization and upgrade services.
Growth in Europe will come from the introduction of NFS AscentTM, which will allow NTE to support larger organizations than those typically selecting the existing LeaseSoft product set, and also opens the door for European expansion. This will attract larger license and professional services revenues across a wider geography. In addition, leveraging the core strengths of NFS AscentTM will increasingly provide opportunities in the automotive sector where NTE is currently underrepresented.
| 14 |
Growth in NetSol’s traditionally strong base in Asia Pacific is expected through diversification across market segments to include new customers in related banking and commercial lending areas. At the same time, the existing customer base is tapped for increased service and maintenance revenues by offering enhanced features and new solutions to emerging customer needs. In addition, there is a potential for NFS AscentTM in Asia Pacific in the form of existing customers who are looking for replacement of their current system.
In China, NetSol is a leader in the leasing and finance enterprise solution domain. With this position, NetSol continues to enjoy demand for the current NFS™ solution, as well as NFS Ascent™. NetSol will continue strengthening its position within existing multinational auto manufacturers, as well as, local Chinese captive finance and leasing companies. The Chinese auto leasing market is young and low on consumer penetration in comparison with the giant U.S. market. We see a tremendous opportunity to grow demand for our products widely and in new markets in China such as Shanghai.
In Thailand, NetSol established a proximity delivery and client service center. NetSol Thai operation is the hub for NetSol Global markets and directly supports all APAC markets including China and Australia. Our operation in Bangkok serves a very robust and growing market for leasing companies and regional banks.
MATERIAL TRENDS AFFECTING NETSOL
Management has identified the following material trends affecting NetSol.
Positive trends:
| ● | Improving U.S. economy generally, and particularly auto and banking markets. | |
| ● | Robust Chinese markets as asset based leasing and finance sector are far from maturity levels. | |
| ● | Latin American markets, primarily in Mexico, remain largely untapped. | |
| ● | Pakistan economy growth in gross domestic product reached 4.24% in 2015, according to the Pakistan Bureau of Statistics; and improved credit ratings by Bloomberg, S&P, Moody’s and Forbes Pakistan security and geopolitical environment has improved. | |
| ● | China to invest $46 billion in Pakistan on energy and infrastructure projects. | |
| ● | Continuous strong U.S. auto sales in excess of 17 million units in 2016 according to Auto news.com. | |
| ● | New emerging markets and IT destinations in Thailand, Malaysia, Indonesia, China and Australia. | |
| ● | Continued interest from Fortune 500 multinational auto captives and global companies in NetSol Ascent™. | |
| ● | Continued interest from existing clients in the NFS™ legacy systems. | |
| ● | Growing demand for NFS Ascent™ by existing tier one auto captive clients. | |
| ● | Higher caliber and quality talent joining NetSol, globally. | |
| ● | Employee turnover is contained to 10% level in 2016 from 20+% in 2014. |
Negative trends:
| ● | Growing Global terrorism and extremism primarily in European countries. | |
| ● | Geopolitical unrest in the Middle East and potential terrorism and the disruption risk it creates. | |
| ● | 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 Eastern region could potentially create volatility in oil prices, causing readjustments of corporate budgets and consumer spending slowing global auto sales. |
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.
| 15 |
REVENUE RECOGNTION
The Company derives revenues from the following sources: (1) software licenses, (2) services, which include implementation and consulting services, and (3) maintenance, which includes post contract customer support.
The Company recognizes revenue from license contracts without major customization when a non-cancelable, non-contingent license agreement has been signed, delivery of the software has occurred, the fee is fixed or determinable, and collectability is probable. Delivery is considered to have occurred upon electronic transfer of the license key that provides immediate availability of the product to the purchaser. Determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue the Company reports.
If an arrangement does not qualify for separate accounting of the software license and consulting transactions, then new software license revenue is generally recognized together with the consulting services based on contract accounting using either the percentage-of-completion or completed-contract method. Contract accounting is applied to any arrangements: (1) that include milestones or customer specific acceptance criteria that may affect collection of the software license fees; (2) where services include significant modification or customization of the software; (3) where significant consulting services are provided for in the software license contract without additional charge or are substantially discounted; or (4) where the software license payment is tied to the performance of consulting services.
Revenue from consulting services is recognized as the services are performed for time-and-materials contracts. Revenue from training and development services is recognized as the services are performed.
Revenue from maintenance agreements is recognized ratably over the term of the maintenance agreement, typically one year.
Multiple Element Arrangements
The Company may enter into multiple element revenue arrangements in which a customer may purchase a number of different combinations of software licenses, consulting services, maintenance and support, as well as training and development.
Vendor specific objective evidence (“VSOE”) of fair value for each element is based on the price for which the element is sold separately. The Company determines the VSOE of fair value of each element based on historical evidence of the Company’s stand-alone sales of these elements to third-parties or from the stated renewal rate for the elements contained in the initial software license arrangement. When VSOE of fair value does not exist for any undelivered element, revenue is deferred until the earlier of the point at which such VSOE of fair value exists or until all elements of the arrangement have been delivered. The only exception to this guidance is when the only undelivered element is maintenance and support or other services, then the entire arrangement fee is recognized ratably over the performance period.
COST OF REVENUES
Cost of revenues includes salaries and benefits for technical employees, consultant costs, amortization of capitalized computer software development costs, depreciation of computer and equipment, travel costs, and indirect costs such as rent and insurance.
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 discounted expected future cash flows. If the future discounted 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 present value of future net income from the product. If such evaluations indicate that the unamortized software development costs exceed the present value of expected future net income, the Company writes off the amount which the unamortized software development costs exceed such present 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.
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 exceeds its carrying value, step two does not need to be performed. 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.
The source of the Company’s goodwill relates to the acquisition of four companies. NetSol PK operates in the Asia Pacific region; CQ Systems (now NetSol Technologies Europe Limited) and VLS both operate in Europe; and McCue Systems (now NetSol Technologies Americas, Inc.) operates in the North American region. All these geographies are considered as different reporting segments. Goodwill arising from the acquisition of these companies has been allocated to their respective geographical segments to which they relate. While identifying reporting segments, we take into consideration the reports reviewed by the CEO (chief operating decision maker). As our financial reports are analyzed on this regional basis, we have defined this as segment reporting for purposes of goodwill impairment testing. The Company tests for goodwill impairment at each reporting unit.
| 16 |
RESULTS OF OPERATIONS
THE YEAR ENDED JUNE 30, 2016 COMPARED TO THE YEAR ENDED JUNE 30, 2015
The following table sets forth the items in our consolidated statement of operations for the years ended June 30, 2016 and 2015 as a percentage of revenues.
| For the Year | ||||||||||||||||
| Ended June 30, | ||||||||||||||||
| 2016 | % | 2015 | % | |||||||||||||
| Net Revenues: | ||||||||||||||||
| License fees | $ | 6,352,441 | 9.84 | % | $ | 6,328,989 | 12.40 | % | ||||||||
| Maintenance fees | 13,310,591 | 20.62 | % | 12,196,073 | 23.89 | % | ||||||||||
| Services | 32,288,229 | 50.02 | % | 24,827,822 | 48.64 | % | ||||||||||
| License fees - related party | 1,616,138 | 2.50 | % | - | 0.00 | % | ||||||||||
| Maintenance fees - related party | 365,772 | 0.57 | % | 395,951 | 0.78 | % | ||||||||||
| Services - related party | 10,617,022 | 16.45 | % | 7,299,743 | 14.30 | % | ||||||||||
| Total net revenues | 64,550,193 | 100.00 | % | 51,048,578 | 100.00 | % | ||||||||||
| Cost of revenues: | ||||||||||||||||
| Salaries and consultants | 21,789,329 | 33.76 | % | 19,859,684 | 38.90 | % | ||||||||||
| Travel | 2,334,019 | 3.62 | % | 2,374,864 | 4.65 | % | ||||||||||
| Depreciation and amortization | 5,926,969 | 9.18 | % | 8,336,857 | 16.33 | % | ||||||||||
| Other | 3,698,290 | 5.73 | % | 3,020,107 | 5.92 | % | ||||||||||
| Total cost of revenues | 33,748,607 | 52.28 | % | 33,591,512 | 65.80 | % | ||||||||||
| Gross profit | 30,801,586 | 47.72 | % | 17,457,066 | 34.20 | % | ||||||||||
| Operating expenses: | ||||||||||||||||
| Selling and marketing | 7,823,916 | 12.12 | % | 6,092,530 | 11.93 | % | ||||||||||
| Depreciation and amortization | 1,225,170 | 1.90 | % | 2,006,957 | 3.93 | % | ||||||||||
| General and administrative | 14,965,016 | 23.18 | % | 14,208,493 | 27.83 | % | ||||||||||
| Research and development cost | 485,783 | 0.75 | % | 314,892 | 0.62 | % | ||||||||||
| Total operating expenses | 24,499,885 | 37.95 | % | 22,622,872 | 44.32 | % | ||||||||||
| Income (loss) from operations | 6,301,701 | 9.76 | % | (5,165,806 | ) | -10.12 | % | |||||||||
| Other income and (expenses) | ||||||||||||||||
| Loss on sale of assets | 23,930 | 0.04 | % | (64,598 | ) | -0.13 | % | |||||||||
| Interest expense | (264,511 | ) | -0.41 | % | (166,962 | ) | -0.33 | % | ||||||||
| Interest income | 161,794 | 0.25 | % | 331,432 | 0.65 | % | ||||||||||
| Gain (loss) on foreign currency exchange transactions | (738,158 | ) | -1.14 | % | (453,770 | ) | -0.89 | % | ||||||||
| Other income | 224,931 | 0.35 | % | 684,030 | 1.34 | % | ||||||||||
| Total other income (expenses) | (592,014 | ) | -0.92 | % | 330,132 | 0.65 | % | |||||||||
| Net income (loss) before income taxes | 5,709,687 | 8.85 | % | (4,835,674 | ) | -9.47 | % | |||||||||
| Income tax provision | (652,546 | ) | -1.01 | % | (413,498 | ) | -0.81 | % | ||||||||
| Net income (loss) | 5,057,141 | 7.83 | % | (5,249,172 | ) | -10.28 | % | |||||||||
| Non-controlling interest | (1,654,380 | ) | -2.56 | % | (299,646 | ) | -0.59 | % | ||||||||
| Net income (loss) attributable to NetSol | $ | 3,402,761 | 5.27 | % | $ | (5,548,818 | ) | -10.87 | % | |||||||
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A significant portion of our business is conducted in currencies other than the U.S. dollar. We operate in several geographical regions as described in Note 17 “Segment Information and Geographic Areas” within the Notes to the Consolidated Financial Statements. Weakening of the value of the U.S. dollar compared to foreign currency exchange rates generally has the effect of increasing our revenues but also increasing our expenses denominated in currencies other than the U.S. dollar. Similarly, strengthening of the U.S. dollar compared to foreign currency exchange rates generally has the effect of reducing our revenues but also reducing our expenses denominated in currencies other than the U.S. dollar. We plan our business accordingly by deploying additional resources to areas of expansion, while continuing to monitor our overall expenditures given the economic uncertainties of our target markets. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, we compare the changes in results from one period to another period using constant currency. In order to calculate our constant currency results, we apply the current period results to the prior period foreign currency exchange rates. In the table below, we present the change based on actual results in reported currency and in constant currency.
| Favorable | Favorable | Total | ||||||||||||||||||
| (Unfavorable) | (Unfavorable) | Favorable | ||||||||||||||||||
| For the Year | Change in | Change due to | (Unfavorable) | |||||||||||||||||
| Ended June 30, | Constant | Currency | Change as | |||||||||||||||||
| 2016 | 2015 | Currency | Fluctuation | Reported | ||||||||||||||||
| Net Revenues: | 64,550,193 | 51,048,578 | 14,466,060 | (964,445 | ) | 13,501,615 | ||||||||||||||
| Cost of revenues: | 33,748,607 | 33,591,512 | (1,232,904 | ) | 1,075,809 | (157,095 | ) | |||||||||||||
| Gross profit | 30,801,586 | 17,457,066 | 13,233,156 | 111,364 | 13,344,520 | |||||||||||||||
| Operating expenses: | 24,499,885 | 22,622,872 | (2,748,731 | ) | 871,718 | (1,877,013 | ) | |||||||||||||
| Income (loss) from operations | 6,301,701 | (5,165,806 | ) | 10,484,425 | 983,082 | 11,467,507 | ||||||||||||||
Net revenues for the years ended June 30, 2016 and 2015 by segment are as follows:
| 2016 | 2015 | |||||||||||||||
| Revenue | % | Revenue | % | |||||||||||||
| North America | $ | 5,464,740 | 8.47 | % | $ | 5,535,183 | 10.84 | % | ||||||||
| Europe | 10,670,117 | 16.53 | % | 7,359,204 | 14.42 | % | ||||||||||
| Asia-Pacific | 48,415,336 | 75.00 | % | 38,154,191 | 74.74 | % | ||||||||||
| Total | $ | 64,550,193 | 100.00 | % | $ | 51,048,578 | 100.00 | % | ||||||||
Revenues
License fees
License fees for the year ended June 30, 2016 were $7,968,579 compared to $6,328,989 for the year ended June 30, 2015 reflecting an increase of $1,639,590 with a change in constant currency of $1,878,542. Included in the license fees are licenses provided to related parties of $1,616,138 for the year ended June 30, 2016 compared to $nil for the same period last year. During the fiscal year ended June 30, 2016, we increased our license revenues through sales of our regional offerings in the U.S. and the U.K., our continued sales of our NFS legacy product, and sales of our NFS Ascent™ product.
Maintenance fees
Maintenance fees for the year ended June 30, 2016 were $13,676,363 compared to $12,592,024 for the year ended June 30, 2015 reflecting an increase of $1,084,339 with a change in constant currency of $1,306,679. Included in the maintenance fees are maintenance provided to related parties of $365,772 for the year ended June 30, 2016 compared to $395,951 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 gradually increase as we implement both our NFS legacy product and NFS Ascent™.
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Services
Services income for the year ended June 30, 2016 was $42,905,251 compared to $32,127,565 for the year ended June 30, 2015 reflecting an increase of $10,777,686 with a change in constant currency of $11,280,839. Included in the services revenue are services provided to related parties of $10,617,022 for the year ended June 30, 2016 compared to $7,299,743 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 for customization and enhancement requests. Services revenue is derived from services provided to both current customers as well as services provided to new customers as part of the implementation process. 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 $30,801,586, for the year ended June 30, 2016 as compared with $17,457,066 for the year ended June 30, 2015. This is an increase of $13,344,520 with an increase in constant currency of 13,233,156. The gross profit percentage for the year ended June 30, 2016 also increased to 47.7% from 34.2% for the year ended June 30, 2015. The cost of sales was $33,748,607 for the year ended June 30, 2016 compared to $33,591,512 for the year ended June 30, 2015 for an increase of $157,095 and on a constant currency basis an increase of $1,075,809. As a percentage of sales, cost of sales decreased from 65.8% for the year ended June 30, 2015 to 52.3% for the year ended June 30, 2016.
Salaries and consultant fees increased by $1,929,645 from $19,859,684 for the year ended June 30, 2015 to $21,789,329 for the year ended June 30, 2016 and on a constant currency basis increased $2,627,015. The increase in salaries and consultant fees is due to the hiring and training of technical employees at key locations including Pakistan, Thailand, China, UK and North America as we anticipate new projects associated with NFS Ascent™. In order to prepare for growth with our new product NFS AscentTM, we have continued to focus on hiring technical personnel. We had 1,042, 1,195 and 1,234 technical employees as of June 30, 2014, 2015 and 2016, respectively. As a percentage of sales, salaries and consultant expense decreased from 38.9% for the year ended June 30, 2015 to 33.8% for the year ended June 30, 2016.
Depreciation and amortization expense decreased to $5,926,969 compared to $8,336,857 for the year ended June 30, 2015 or a decrease of $2,409,888 and on a constant currency basis a decrease of $2,229,716. Depreciation and amortization expense decreased as some products became fully amortized.
Operating Expenses
Operating expenses were $24,499,885 for the year ended June 30, 2016 compared to $22,622,872, for the year ended June 30, 2015 for an increase of 8.3% or $1,877,013 and on a constant currency basis an increase of 12.2% or $2,748,731. As a percentage of sales, it decreased from 44.3% to 38.0%. The increase in operating expenses was primarily due to the increase in selling and marketing expenses of $1,731,386 or 28.4% and on a constant currency basis an increase of $2,106,262 or 34.6%.
The increase in selling and marketing expenses is due to the increase in our salaries and commissions, travel expenses, and business development costs to market and sell NFS Ascent™ globally.
General and administrative expenses were $14,965,016 for the year ended June 30, 2016 compared to $14,208,493 at June 30, 2015 or an increase of $756,523 or 5.3% and on a constant currency basis an increase of $1,198,376 or 8.4%. During the year ended June 30, 2016, salaries increased by approximately $525,719 or $756,103 on a constant currency basis due to the increase in the number of employees, annual raises, share grants, cash bonuses and options; other general and administrative expenses decreased by approximately $208,822 or $13,754 on a constant currency basis; professional services decreased by approximately $233,005 or $211,302 on a constant currency basis due to the reduction in legal fees; bad debt expense increased by approximately $672,631 or $677,329 on a constant currency basis. During the fiscal year ended June 30, 2015, we decreased our allowance for doubtful accounts and recorded a negative bad debt expense of $434,928 and during the year ended June 30, 2016, we recorded the expense of $237,703.
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Income/Loss from Operations
Income from operations was $6,301,701 for the year ended June 30, 2016 compared to loss of $5,165,806 for the year ended June 30, 2015. This represents an increase of $11,467,507 with an increase of $10,484,425 on a constant currency basis for the year ended June 30, 2016 compared with the year ended June 30, 2015. As a percentage of sales, net income from operations was 9.76% for the year ended June 30, 2016 compared to loss of 10.12% for the year ended June 30, 2015.
Net Income/Loss
Net income was $3,402,761 for the year ended June 30, 2016 compared to a loss of $5,548,818 for the year ended June 30, 2015. This is an increase of $8,951,579 compared to the prior year. For the year ended June 30, 2016, net income per share was $0.33 and $0.32 for basic and diluted shares, respectively. For the year ended June 30, 2015, net loss per share was $0.57 for basic and diluted shares.
Non-GAAP Financial Measures
Regulation S-K Item 10(e), “Use of Non-GAAP Financial Measures in Commission Filings,” defines and prescribes the conditions for use of non-GAAP financial information. Our measures of adjusted EBITDA and adjusted EBITDA per basic and diluted share meet the definition of a non-GAAP financial measure.
We define the non-GAAP measures as follows:
| ● | EBITDA is GAAP net income before net interest expense, income tax expense, depreciation and amortization. | |
| ● | Non-GAAP adjusted EBITDA is EBITDA less stock-based compensation expense. | |
| ● | Adjusted EBITDA per basic and diluted share – Adjusted EBITDA allocated to common stock divided by the weighted average shares outstanding and diluted shares outstanding. |
We use non-GAAP measures internally to evaluate the business and believe that presenting non-GAAP measures provides useful information to investors regarding the underlying business trends and performance of our ongoing operations as well as useful metrics for monitoring our performance and evaluating it against industry peers. The non-GAAP financial measures presented should be used in addition to, and in conjunction with, results presented in accordance with GAAP, and should not be relied upon to the exclusion of GAAP financial measures. Management strongly encourages investors to review our consolidated financial statements in their entirety and not to rely on any single financial measure in evaluating the Company.
The non-GAAP measures reflect adjustments based on the following items:
EBITDA: We report EBITDA as a non-GAAP metric by excluding the effect of net interest expense, income tax expense, depreciation and amortization from net income because doing so makes internal comparisons to our historical operating results more consistent. In addition, we believe providing an EBITDA calculation is a more useful comparison of our operating results to the operating results of our peers.
Stock-based compensation expense: We have excluded the effect of stock-based compensation expense from the non-GAAP adjusted EBITDA and non-GAAP adjusted EBITDA per basic and diluted share calculations. Although stock-based compensation expense is calculated in accordance with current GAAP and constitutes an ongoing and recurring expense, such expense is excluded from non-GAAP results because it is not an expense which generally requires cash settlement by NetSol, and therefore is not used by us to assess the profitability of our operations. We also believe the exclusion of stock-based compensation expense provides a more useful comparison of our operating results to the operating results of our peers.
Non-controlling interest: We add back the non-controlling interest in calculating gross adjusted EBITDA and then subtract out the income taxes, depreciation and amortization and net interest expense attributable to the non-controlling interest to arrive at a net adjusted EBITDA.
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Our reconciliation of the non-GAAP financial measures of adjusted EBITDA and non-GAAP earnings per basic and diluted share to the most comparable GAAP measures for the years ended June 30, 2016 and 2015 are as follows:
| Year | Year | |||||||
| Ended | Ended | |||||||
| June 30, 2016 | June 30, 2015 | |||||||
| Net Income (loss) before preferred dividend, per GAAP | $ | 3,402,761 | $ | (5,548,818 | ) | |||
| Non-controlling interest | 1,654,380 | 299,646 | ||||||
| Income taxes | 652,546 | 413,498 | ||||||
| Depreciation and amortization | 7,152,139 | 10,343,814 | ||||||
| Interest expense | 264,511 | 166,962 | ||||||
| Interest (income) | (161,794 | ) | (331,432 | ) | ||||
| EBITDA | $ | 12,964,543 | $ | 5,343,670 | ||||
| Add back: | ||||||||
| Non-cash stock-based compensation | 1,533,209 | 1,997,637 | ||||||
| Adjusted EBITDA, gross | $ | 14,497,752 | $ | 7,341,307 | ||||
| Less non-controlling interest (a) | (4,356,858 | ) | (4,008,592 | ) | ||||
| Adjusted EBITDA, net | $ | 10,140,894 | $ | 3,332,715 | ||||
| Weighted Average number of shares outstanding | ||||||||
| Basic | 10,391,157 | 9,728,122 | ||||||
| Diluted | 10,584,835 | 9,767,657 | ||||||
| Basic adjusted EBITDA | $ | 0.98 | $ | 0.34 | ||||
| Diluted adjusted EBITDA | $ | 0.96 | $ | 0.34 | ||||
| (a)The reconciliation of adjusted EBITDA of non-controlling interest to net income attributable to non-controlling interest is as follows | ||||||||
Net Income attributable to non-controlling interest | $ | 1,654,380 | $ | 299,646 | ||||
| Income Taxes | 146,450 | 178,689 | ||||||
| Depreciation and amortization | 2,388,098 | 3,442,235 | ||||||
| Interest expense | 81,189 | 51,023 | ||||||
| Interest (income) | (41,565 | ) | (98,638 | ) | ||||
| EBITDA | $ | 4,228,552 | $ | 3,872,955 | ||||
| Add back: | ||||||||
| Non-cash stock-based compensation | 128,306 | 135,637 | ||||||
| Adjusted EBITDA of non-controlling interest | $ | 4,356,858 | $ | 4,008,592 | ||||
LIQUIDITY AND CAPITAL RESOURCES
Our cash position was $11,557,527 at June 30, 2016, compared to $14,168,957 at June 30, 2015.
Net cash provided by operating activities was $1,659,036 for the year ended June 30, 2016 compared to $5,078,282 for the year ended June 30, 2015. At June 30, 2016, we had current assets of $40,451,826 and current liabilities of $15,230,392. We had accounts receivable of $15,382,407 at June 30, 2016 compared to $9,972,243 at June 30, 2015. We had revenues in excess of billings of $11,297,264 at June 30, 2016 compared to $5,267,275 at June 30, 2015. During the year ended June 30, 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 $11,440,153 from $15,239,518 at June 30, 2015 to $26,679,671 at June 30, 2016. The increase is due to the increase in revenues during FY 2016. Accounts payable and accrued expenses, and current portions of loans and lease obligations amounted to $5,962,770 and $4,440,084, respectively at June 30, 2016. The average days sales outstanding for the years ended June 30, 2016 and 2015 were 119 and 91 days respectively. The days sales outstanding have been calculated by taking into consideration the average combined balances of accounts receivable and revenue in excess of billings.
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Net cash used by investing activities amounted to $3,672,441 for the year ended June 30, 2016, compared to $3,033,319 for the year ended June 30, 2015. We had net purchases of property and equipment of $2,349,488 compared to $2,456,097 for the comparable period last fiscal year. For the year ended June 30, 2016, we invested $720,350 in eeGeo by paying cash of $555,556 and providing services valued at $164,794. We paid $767,397 and $577,222 for the years ended June 30, 2016 and 2015, respectively, to purchase shares of NTPK on the open market.
Net cash provided by financing activities was $598,179 and $1,461,230 for the years ended June 30, 2016, and 2015, respectively. The year ended June 30, 2016 included the cash inflow of $1,137,480 from the exercising of stock options and warrants compared to $191,400 for the year ended June 30, 2015. During the year ended June 30, 2016, we had net proceeds from bank loans and capital leases of $382,877 compared to $2,668,861 for the year ended June 30, 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 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.
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 June 30, 2016, we had approximately $11.56 million of cash, cash equivalents and marketable securities of which approximately $7.64 million is held by our foreign subsidiaries. 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 working capital of $2 to $3 million for APAC, U.S. and European new business development activities and infrastructure enhancements.
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 UK based subsidiary, NTE, has an approved overdraft facility of £300,000 ($400,000) 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 ($1,333,333) for the acquisition VLS. This facility requires that NTE’s adjusted tangible net worth 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 ($3,792,907) which requires NTPK 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.
Dividends and Redemption
It has been our policy to invest earnings in growth rather than distribute earnings as common stock dividends. This policy, under which common stock dividends have not been paid since our inception is expected to continue, but is subject to regular review by the Board of Directors.
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Contractual Obligations
Our contractual obligations are as follows:
| Payment due by period | ||||||||||||||||||||
| Contractual Obligation | Total | Less than 1 year |
1-3 Years | 3-5 Years | More than 5 years |
|||||||||||||||
| Debt Obligations | ||||||||||||||||||||
| HSBC Loan | $ | 93,704 | $ | 93,704 | $ | - | $ | - | $ | - | ||||||||||
| D&O Insurance | 65,114 | 65,114 | - | - | - | |||||||||||||||
| Bank Loan | 3,792,907 | 3,792,907 | - | - | - | |||||||||||||||
| Capital Lease Obligations | - | |||||||||||||||||||
| Subsidiary Capital Leases | 966,051 | 488,359 | 477,692 | - | - | |||||||||||||||
| - | ||||||||||||||||||||
| Operating Lease Obligations | - | |||||||||||||||||||
| Non-cancellable operating lease | 1,838,313 | 915,219 | 717,570 | 197,772 | 7,752 | |||||||||||||||
| - | ||||||||||||||||||||
| Total | $ | 6,756,089 | $ | 5,355,303 | $ | 1,195,262 | $ | 197,772 | $ | 7,752 | ||||||||||
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in currency exchange rates and interest rates.
Foreign Currency Exchange Risk
Economic Exposure
We transact business in various foreign currencies and have significant international revenues, as well as costs denominated in foreign currencies. This exposes us to the risk of fluctuations in foreign currency exchange rates. Since the majority of the Company’s operations are based in the Asia Pacific region where the Pakistan Rupee is continuously losing its value against the U.S. Dollar and we don’t have any imports, therefore, we believe it is counter-productive to hedge this exposure. The devaluation of the Pakistan Rupee results in a foreign exchange gain to the Company.
Transaction Exposure
Our exposure to foreign currency transaction gains and losses is the result of certain net receivables due from our foreign subsidiaries and customers being denominated in currencies other than the functional currency of the subsidiary, primarily the Euro, Yuan, Baht and the Pakistan Rupee. Our foreign subsidiaries conduct their businesses in local currency. Since majority of the operations of the Company are based in the Asia Pacific region where the Pakistan Rupee is continuously losing its value against the U.S. Dollar and we don’t have any imports, therefore, we believe it is counter-productive to hedge this exposure.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements that constitute Item 8 are included at the end of this report on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NetSol’s financial statements for the fiscal years ended June 30, 2016 and June 30, 2015, did not contain an adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope, or accounting principles.
In connection with the audit of NetSol’s financial statements for the fiscal years ended June 30, 2016 and June 30, 2015, there were no disagreements, disputes, or differences of opinion with Kabani & Company on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures, which, if not resolved to the satisfaction of Kabani & Company would have caused Kabani & Company to make reference to the matter in its report.
ITEM 9A. 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 Annual Report on Form 10-K. 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 June 30, 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 June 30, 2016, the Company’s internal control over financial reporting is effective.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal controls over financial reporting during the fourth quarter of fiscal year 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)).
On September 12, 2016, the Compensation Committee of the Company modified the compensation of the CEO to increase the cash compensation to $800,000 per annum, inclusive of base salary, benefits, allowances and other perquisites and granted $500,000 worth of shares of common stock granted and calculated as of September 12, 2016 of which 50% vest immediately and 50% vest equally over the next five years commencing June 30, 2017. In addition, the Compensation Committee granted a $200,000 bonus to the CEO as recognition of his service over the past fiscal year and the performance of the Company over the last fiscal year. Additionally, the Compensation Committee granted each independent board of director member $120,000 worth of shares of common stock granted and calculated as of October 1, 2016 of which 50% vests on October 1, 2016 and 50% vest equally over the next five years commencing September 30, 2017.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that the Company’s directors and executive officers and persons owning more than 10% of the outstanding Common Stock, file reports of ownership and changes in ownership with the Securities and Exchange Commission (“SEC”). Executive officers, directors and beneficial owners of more than 10% of the Company’s Common Stock are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on copies of such forms furnished as provided above, or written representations that no such forms were required, the Company believes that during the fiscal year ended June 30, 2016, all Section 16(a) filing requirements applicable to its executive officers, directors and beneficial owners of more than 10% of its Common Stock were complied with.
CHANGE IN MANAGEMENT AND BOARD OF DIRECTORS
Board of Directors
At the 2016 Annual Shareholders Meeting, a five member board stood for election. The members were elected, and according to the bylaws of the company, shall retain their position as directors until the next meeting. The board of directors is made up of: Mr. Najeeb U. Ghauri (Chairman of the Board) Mr. Eugen Beckert, Mr. Naeem U. Ghauri, Mr. Shahid Burki and Mr. Mark Caton.
Committees
The Audit committee is made up of Mr. Burki as Chairman, and Mr. Caton and Mr. Beckert as members. The Compensation committee consists of Mr. Caton as its Chairman and Mr. Beckert and Mr. Burki as its members. The Nominating and Corporate Governance Committee consists of Mr. Beckert as chairman and Mr. Burki and Mr. Caton as its members.
The table below provides the membership for each of the committees during Fiscal Year 2016.
| Nominating | |||||||||||
| and Corporate | |||||||||||
| Audit | Compensation | Governance | |||||||||
| Director | Committee | Committee | Committee | ||||||||
| Najeeb Ghauri | |||||||||||
| Naeem Ghauri | |||||||||||
| Shahid J. Burki (I) | X | (C) | X | X | |||||||
| Eugen Beckert (I) | X | X | X | (C) | |||||||
| Mark Caton (I) | X | X | (C) | X | |||||||
| (I) | Denotes an independent director. |
| (C) | Denotes the Chairperson of the committee. |
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DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of the current directors and executive officers of the Company, the principal offices and positions with the Company held by each person and the date such person became a director or executive officer of the Company. The Board of Directors elects the executive officers of the Company annually. Each year the stockholders elect the Board of Directors. The executive officers serve varying terms until their death, resignation or removal by the Board of Directors. In addition, there was no arrangement or understanding between any executive officer and any other person pursuant to which any person was selected as an executive officer.
The directors and executive officers of the Company are as follows:
| Name | Year
First Elected As an Officer or Director |
Age | Position
Held with the Registrant |
Family Relationship | ||||
| Najeeb Ghauri | 1997 | 62 | Chief Executive Officer, Chairman and Director | Brother to Naeem Ghauri | ||||
| Roger Almond | 2013 | 51 | Chief Financial Officer | None | ||||
| Patti L. W. McGlasson | 2004 | 51 | Sr. V.P., Legal and Corporate Affairs; Secretary, General Counsel | None | ||||
| Naeem Ghauri | 1999 | 59 | Director | Brother to Najeeb Ghauri | ||||
| Shahid Javed Burki | 2000 | 77 | Director | None | ||||
| Eugen Beckert | 2001 | 69 | Director | None | ||||
| Mark Caton | 2002 | 67 | Director | None |
Business Experience of Officers and Directors:
NAJEEB U. GHAURI is the Chief Executive Officer and Chairman of NetSol. He has been a Director of the Company since 1997, Chairman since 2003 and Chief Executive Officer from January 1998 to September 2002 and from October 2006 to present. Mr. Ghauri is a co-founder of NetSol Technologies, Inc. He was responsible for NetSol listing on NASDAQ in 1999, the NetSol subsidiary listing on KSE (Karachi Stock Exchange) in 2005, and the NetSol listing on the NASDAQ Dubai exchange in 2008. Mr. Ghauri served as the Company’s Chief Executive Officer from 1999 to 2001 and as the Chief Financial Officer from 2001 to 2005. As CEO, Mr. Ghauri is responsible for managing the day-to-day operations of the Company, as well as the Company’s overall growth and expansion plan. Mr. Najeeb Ghauri, as the CEO, was instrumental in the substantial increase in revenue for fiscal year end 2015. In addition, Mr. Ghauri traveled overseas multiple times to execute the largest contract for the Company, worth over $100 million, in December 2015. Prior to joining the Company, Mr. Ghauri was part of the marketing team of Atlantic Richfield Company (ARCO) (now acquired by BP), a Fortune 500 company, from 1987-1997. Prior to ARCO, he spent nearly five years with Unilever as brand and sales managers. Mr. Ghauri attended Eastern Illinois University where he received a Bachelor of Science degree in Management/Economics in 1978. He also received a M.B.A. in Marketing Management from Claremont Graduate School in California in 1981. Mr. Ghauri was elected Vice Chairman of US Pakistan Business Council in 2006, a Washington D.C. based council of US Chamber of Commerce. He is also very active in several philanthropic activities in emerging markets and is a founding director of Pakistan Human Development Fund, a non-profit organization, a partnership with UNDP to promote literacy, health services and poverty alleviation in Pakistan. Mr. Ghauri has participated in NASDAQ opening and/or closing bell ceremonies in 2006, 2008 and 2009.
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ROGER ALMOND was appointed Chief Financial Officer on September 9, 2013.
Since 2007, Roger Almond held the position of Senior Manager at Pickard & Green Certified Public Accountants where he and his team was responsible for assisting national and international companies with their financial reporting requirements to the SEC. Roger Almond’s duties also included overseeing multiple entity consolidations, converting financial data to US GAAP, preparing financials statements, footnotes and MD&A. Prior to his current position, Roger Almond held the position of Assurance Manager at Grant Thornton LLP, in Los Angeles, California from 2003-2006; and from November 1999 to August 2003. He was the Chief Financial Officer of Keysor Century Corporation located in Saugus, California.
Roger Almond received his BS in Accounting from Brigham Young University in 1991 and he is a Certified Public Accountant licensed in California. He has also completed executive management courses at UCLA in 2001.
PATTI L. W. MCGLASSON joined NetSol as General Counsel in January 2004 and was elected to the position of Secretary in March 2004. She was appointed Senior Vice President, Corporate and Legal Affairs in 2013.
In the role of General Counsel, McGlasson is responsible for leading NetSol’s legal department company-wide. McGlasson is also responsible for the implementation of the Company’s internal corporate governance and policy plans, ethics and business conduct. McGlasson oversees all board meetings in her executive position as corporate secretary.
McGlasson has nearly 25 years of experience in corporate law, mergers and acquisitions, business and cross-border transactions and securities law. Prior to joining NetSol, Patti practiced at Vogt & Resnick, law corporation. Ms. McGlasson was admitted to practice in California in 1991.
She received her Bachelor of Arts in Political Science in 1987 from the University of California, San Diego and her Juris Doctor and Masters in Law in Transnational Business from the University of the Pacific, McGeorge School of Law, in 1991 and 1993, respectively. As part of her Masters in Law in Transnational Business, she interned at the law firm of Loeff Claeys Verbeke in Rotterdam, the Netherlands, in 1991.
NAEEM GHAURI has been a Director of the Company since 1999 and was the Company’s Chief Executive Officer from August 2001 to October 2006. Mr. Ghauri was also a co-founder of the Company. Currently, Mr. Ghauri serves as the President and Head of Global Sales of NetSol as well as the director of NetSol (UK) Ltd., a wholly owned subsidiary of the Company located in London, England. While instrumental in numerous transactions, his most significant and recent contribution to the revenue of the Company was his role in overseeing and leading the closing of the largest contract to date for the Company worth $100 million signed in December 2015. Prior to joining the Company, Mr. Ghauri was Program Director for Mercedes-Benz Finance Ltd., from 1994-1999. Mr. Ghauri supervised over 200 project managers, developers, analysis and users in nine European Countries
EUGEN BECKERT was appointed to the Board of Directors in August 2001. A native of Germany, Mr. Beckert received his masters in Engineering and Economics from the University of Karlsruhe, Germany. Mr. Beckert was with Mercedes-Benz AG/Daimler Benz AG from 1973, working in technology and systems development. In 1992, he was appointed director of Global IT (CIO) for Debis Financial Services, the services division of Daimler Benz. From 1996 to 2000, he acted as director of Processes and Systems (CIO) for Financial Services of DaimlerChrysler Asia Pacific Services. During this period he was instrumental to having the LeaseSoft products of NetSol developed and introduced in several countries as a pilot customer. From 2001 to 2004, he served as Vice President in the Japanese company of DCS. Mr. Beckert retired from DaimlerChrysler in November 2006. Mr. Beckert is chairman of the Nominating and Corporate Governance Committee and a member of the Audit and Compensation Committees.
SHAHID JAVED BURKI was first appointed to the Board of Directors in February 2003. Before joining the World Bank in 1974 he was a member of the Civil Service of Pakistan. He had a distinguished career with the World Bank from 1974 to 1999 where he held a number of senior positions including Chief of Policy Planning (1974-1981); Director of International Relations Department (1981-87); Director of China Department (1987-94); and Vice President of Latin America and the Caribbean Region (1994-99). Upon taking early retirement from the Bank, he took up the position of Chief Executive Officer of EMP Financial Advisors, a consulting company linked with the Washington based EMP Global, a private equity firm and worked there until 2005. He is currently Chairman the Institute of Public Policy, a think tank associated with the Beacon house National University, Lahore, Pakistan. He also spends some time each year as Senior Visiting Research Fellow at the Institute of South Asian Studies, National Singapore University. In 1996-97 he took leave of absence from the World Bank to take up the position of Finance Minister of Pakistan. Mr. Burki was educated at Government College, Lahore from where he received M.Sc. in Physics; at Oxford University as a Rhodes Scholar from where he received M.A. (Hons) in Economics; at Harvard University as a Mason Fellow from where he received M.P.A. and also studied for Ph.D. in Economics (not completed). In 1997, he received a Diploma in Advanced Management from Harvard University’s Business School. Mr. Burki has authored several books and articles on development issues including Study of Chinese Communes(Harvard University Press, 1969); Pakistan Under Bhutto (Macmillan, 1990); Changing Perceptions, Altered Reality: Pakistan’s Economy Under Musharraf, 1999-2006 (Oxford University Press, 2007). He is currently working on a book, Changing Asia to be published later this year by Routledge, London. Mr. Burki is a chairman of the Audit Committee and a member of the Compensation and Nominating and Corporate Governance Committees. Mr. Burki is the Company’s Financial Expert on the Audit Committee.
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MARK CATON joined the board of directors in 2007. Mr. Caton is currently President of Centela Systems, Inc. a distributor of computer peripheral solutions in the multimedia and digital electronic market segment, a position he has held since 2003. Prior to joining Centela, Mr. Caton was President of NetSol Technologies USA, responsible for US sales, from June 2002 to December 2003. Mr. Caton was employed by ePlus from 1997 to 2002 as Senior Account Representative. He was a member of the UCLA Alumni Association Board of Directors and served on the Board of Directors of NetSol from 2002-2003. Mr. Caton is a Chairman of the Compensation Committee and a member of the Audit and Nominating Committees. Mr. Caton received his BA from UCLA in psychology in 1971.
CORPORATE GOVERNANCE
Code of Business Conduct & Ethics
The Company adopted its Code of Business Conduct & Ethics, as amended and restated on September 9, 2013, applicable to every officer, director and employee of the Company, including, but not limited to the Company’s principal executive officer, principal financial officer, and principal accounting officer or controller, or persons performing similar functions. Our Code of Business Conduct & Ethics has been posted on our website and may be viewed at http://ir.netsoltech.com/governance-docs.
Audit Committee
The Company has an audit committee whose members are the independent directors of the Company, specifically, Mr. Beckert, Mr. Burki and Mr. Caton. Mr. Burki is the current chairman of the audit committee.
Audit Committee Financial Expert
The Company has identified its audit chairperson, Mr. Shahid Javed Burki as its audit committee financial expert. Mr. Burki is an independent board member as the term is defined in the Nasdaq Listing Rules. Mr. Burki’s experience as Finance Minister of Pakistan, Chief Executive Officer of EMP Financial Advisors, his various roles at the World Bank, and his tenure as both an audit committee member and chair for the Company, provides him with an understanding of generally accepted accounting principles and financial reporting. Additionally, this experience provides an ability to assess the general application of accounting principles in connection with the accounting for estimates, accruals and reserves; experience analyzing financial statements that were comparable in the breadth and complexity of issues that can be reasonably expected to be raised by the Company’s financial statements; an understanding of internal control over financial reporting; and an understanding of audit committee functions.
ITEM 11-EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
NetSol Technologies’ Named Executive Officers, a group comprised of the Chief Executive Officer, the Chief Financial Officer and the Secretary and General Counsel in the 2015-2016 fiscal year are the following individuals:
| Najeeb Ghauri | Chief Executive Officer |
| Roger K. Almond | Chief Financial Officer |
| Patti L. W. McGlasson | Sr. V.P. Legal and Corporate Affairs, Secretary and General Counsel |
Compensation Philosophy and Objectives
The Compensation Committee believes that the most effective executive compensation program is one that is designed to reward the achievement of specific annual, long-term and strategic goals by the Company, and which aligns executives’ interests with those of the stockholders by rewarding performance at or above established goals, with the ultimate objective of increasing stockholder value. The philosophy of the Compensation Committee is to evaluate both performance and compensation to ensure that we maintain our ability to attract and retain superior employees in key positions and that compensation provided to key employees remains competitive relative to the compensation paid to similarly situated executives of our peer companies. To that end, the Compensation Committee believes executive compensation packages should include both cash and equity-based compensation that reward performance as measured against established goals.
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Setting Executive Compensation
Management develops our compensation plans by utilizing publicly available compensation data in the media services and technology industries. We believe that the practices of these groups of companies provide us with appropriate compensation benchmarks, because these groups of companies are in similar businesses and tend to compete with us for executives and other employees. For benchmarking executive compensation, we typically review the compensation data we have collected from these groups of companies, as well as a subset of the data from those companies that have a similar number of employees as the Company. The Compensation Committee has determined to utilize the services of a consultant for purposes of comparing our compensation program with similarly situated companies in like industries. The recommendations of these consultants will be utilized by the Committee in determining the appropriate compensation packages. While these consultants may make general recommendations about the size and components of compensation, we anticipate our philosophy to continue on the basis of a pay-for-performance philosophy.
Based on management’s analyses and recommendations, the Compensation Committee has approved a pay-for-performance compensation philosophy, which is intended to establish base salaries and total executive compensation (taking into consideration the executive’s experience and abilities) that are competitive with those companies with a similar number of employees represented in the compensation data we review.
We work within the framework of this pay-for-performance compensation philosophy to determine each component of an executive’s initial compensation package based on numerous factors, including:
| ● | The individual’s particular background, track record and circumstances, including training and prior relevant work experience; | |
| ● | The individual’s role with us and the compensation paid to similar persons in the companies represented in the compensation data that we review; | |
| ● | The demand for individuals with the individual’s specific expertise and experience; | |
| ● | Performance goals and other expectations for the position; and | |
| ● | Uniqueness of industry skills. |
The terms of each executive officer’s compensation are derived from employment agreements negotiated between the Company and the executive. Each executive’s employment agreement is generally negotiated to cover a one to three-year period, and prescribes the base salary and other annual payments, if any, to the executive. Employment agreements for all executive officers are approved by the Board of Directors and the Compensation Committee. Employment agreements for other executives are approved by the Company’s Chief Executive Officer.
2016 Executive Compensation Components
For the fiscal year ended June 30, 2016, the principal components of compensation that our named executive officers were eligible to receive were:
| ● | Base salary; | |
| ● | Long Term Equity Incentive Compensation; | |
| ● | Performance-based incentive compensation (discretionary bonus); and | |
| ● | Perquisites and other personal benefits. |
The Company’s executive compensation program is intended to promote and maintain stability within the executive team. The Company’s goal for its executive compensation program is to attract, motivate and retain a talented, entrepreneurial, ethical and creative team of executives who will provide leadership for the Company’s success in dynamic and competitive markets.
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Base Salary
An executive’s base salary is evaluated together with components of the executive’s other compensation to ensure that the executive’s total compensation is consistent with our overall compensation philosophy. Base salaries are adjusted annually by the Compensation Committee.
The base salaries were established in arms-length negotiations between the executive and the Company, taking into account their extensive experience, knowledge of the industry, track record, and achievements on behalf of the Company. The Company expects each named executive officer to contribute to the Company’s overall success as a member of the executive team rather than focus solely on specific objectives within the officer’s area of responsibility.
Annual Bonus
Our compensation program includes eligibility for bonuses as rewarded by the Compensation Committee. All executives are eligible for annual performance-based cash bonuses in accordance with Company policies. The compensation committee takes into consideration the executive’s performance during the previous year to determine eligibility for discretionary bonuses. Further, the compensation committee will review, if applicable, the performance criteria set forth in an executive’s previous year’s agreement and will determine if the executive has met such criteria in order to achieve the bonus. The Company’s bonus criteria at the executive management level, is typically based on a gross revenue and per share profit targets.
Long-Term Equity Incentive Compensation
We believe that long-term performance is achieved through an ownership culture that encourages long-term participation by our executives in equity-based awards. Our various Employee Stock Option Plans allow us to grant stock options to employees. We currently make initial equity awards of stock options to new executives and certain non-executive employees in connection with their employment with the Company. Annual grants of options, if any, are approved by the Compensation Committee.
Equity Incentives. Executives, certain non-executive employees, and directors who join us may be awarded stock awards and/or stock option grants after they join the Company. These grants have an exercise price equal to the fair market value of our common stock on the grant date. Such awards are intended to provide the executive with incentive to build value in the organization over an extended period of time. The size of the stock option award is also reviewed in light of the executive’s track record, base salary, other compensation and other factors to ensure that the executive’s total compensation is in line with our overall compensation philosophy. A review of all components of compensation is conducted when determining equity awards to ensure that total compensation conforms to our overall philosophy and objectives.
Equity incentives provided to executives are determined by the Fair Market Value of our common stock on the grant date were provided to the executives as an adjustment of their overall compensation while taking in to account the need to continue to incentivize the executive to build value in the organization. Each executive’s stock award was based on an analysis of the Compensation Committee of an appropriate overall cash compensation for each individual taking into account their position and compensation at similarly situated companies. Each executive’s stock award was based on a desired overall compensation cash value less the base salary as approved by the Compensation Committee.
Perquisites and Other Personal Benefits
We provide named executive officers with perquisites and other personal benefits that we believe are reasonable and consistent with our overall compensation program to better enable the Company to attract and retain superior employees for key positions. The Compensation Committee periodically reviews the levels of perquisites and other personal benefits provided to NetSol’s executive officers.
We maintain benefits and perquisites that are offered to all employees, including health and dental insurance. Benefits and perquisites may vary in different country locations and are consistent with local practices and regulations.
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Termination Based Compensation
Upon termination of employment, all executive officers with a written employment agreement are entitled to receive severance payments under their employment agreements. In determining whether to approve, and as part of the process of setting the terms of, such severance arrangements, the Compensation Committee recognizes that executives and officers often face challenges securing new employment following termination. Further, the Committee recognizes that many of the named executives and officers have participated in the Company since its founding and that this participation has not resulted in a return on their investments. Termination and Change in Control Payments considered both the risk and the dedication of these executives’ service to the Company.
Our Chief Executive Officer has an employment agreement that provides, if his employment is terminated without cause or if the executive terminates the agreement with Good Reason, he is entitled to (a) all remaining salary to the end of the date of termination, plus salary from the end of the employment term through the end of the fourth anniversary of the date of termination, and (b) the continuation by the Company of medical and dental insurance coverage for him and his family until the end of the employment term and through the end of the fourth anniversary of the date of termination. Provided, however, if such benefits cannot be continued for this extended period, the Executive shall receive cash (including a tax-equivalency payment for Federal, state and local income and payroll taxes assuming Executive is in the maximum tax bracket for all such purposes) where such benefits may not be continued. These agreements further provide for vesting of all options and restrictive stock grants, if any.
Our Chief Financial Officer has an employment agreement that provides, if his employment is terminated without cause or if the executive terminates the agreement with Good Reason, he is entitled to (a) all remaining salary to the end of the date of termination, plus salary from the end of the employment term through the end of the first anniversary of the date of termination, and (b) the continuation by the Company of medical and dental insurance coverage for him and his family until the end of the employment term and through the end of the first anniversary from the date of termination. Provided, however, if such benefits cannot be continued for this extended period, the Executive shall receive cash (including a tax-equivalency payment for Federal, state and local income and payroll taxes assuming Executive is in the maximum tax bracket for all such purposes) where such benefits may not be continued. These agreements further provide for vesting of all options and restrictive stock grants, if any.
The Secretary of the Company has an employment agreement that provides, if she is terminated without cause or if the executive terminates the agreement with Good Reason, she is entitled to (a) all remaining salary to the end of the date of termination, plus salary from the end of the employment term through the end of the second anniversary of the date of termination, and (b) the continuation by the Company of medical and dental insurance coverage for her and her family until the end of the employment term and through the end of the second anniversary of the date of termination. Provided, however, if such benefits cannot be continued for this extended period, the Executive shall receive cash (including a tax-equivalency payment for Federal, state and local income and payroll taxes assuming Executive is in the maximum tax bracket for all such purposes) where such benefits may not be continued. These agreements further provide for vesting of all options and restrictive stock grants, if any.
Tax and Accounting Implications
Deductibility of Executive Compensation
As part of its role, the Compensation Committee reviews and considers the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code, which provides that we may not deduct compensation of more than $1,000,000 that is paid to certain individuals. We believe that compensation paid under the management incentive plans is generally fully deductible for federal income tax purposes.
Accounting for Stock-Based Compensation
Commencing on July 1, 2006, we began accounting for stock-based payments, including awards under our Employee Stock Option Plans, in accordance with the of Financial Accounting Standards Board’s Accounting Standards Codification Topic 718, Compensation – Stock Compensation.
Summary Compensation
The following table shows the compensation for the fiscal year ended June 30, 2016, June 30 2015, and June 30, 2014, earned by our Chairman and Chief Executive Officer, our Chief Financial Officer who is our Principal Financial and Accounting Officer, and others considered to be executive officers of the Company.
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| Name and Principle Position | Fiscal Year Ended | Salary ($) | Bonus ($) | Stock Awards ($) (1) | Option Awards ($) | All Other Compensation ($) | Total ($) | |||||||||||||||||||
| Najeeb Ghauri | 2016 | $ | 497,700 | $ | - | $ | - | $ | 44,937 | (2) | $ | 65,745 | (3) | $ | 608,382 | |||||||||||
| CEO & Chairman | 2015 | $ | 497,700 | $ | - | $ | - | $ | - | (2) | $ | 65,724 | (3) | $ | 563,424 | |||||||||||
| 2014 | $ | 474,000 | $ | 166,667 | $ | 407,600 | $ | 248,996 | (2) | $ | 68,139 | (3) | $ | 1,365,402 | ||||||||||||
| Roger K Almond | 2016 | $ | 181,563 | $ | 32,550 | $ | 100,400 | $ | 11,725 | (4) | $ | 326,238 | ||||||||||||||
| Chief Financial Officer | 2015 | $ | 128,433 | $ | - | $ | 60,000 | $ | 3,485 | (4) | $ | 191,918 | ||||||||||||||
| 2014 | $ | 90,400 | $ | - | $ | 19,400 | $ | - | $ | - | (4) | $ | 109,800 | |||||||||||||
| Patti L. W. McGlasson | 2016 | $ | 215,049 | $ | - | $ | 100,400 | $ | 10,393 | (5) | $ | 325,842 | ||||||||||||||
| Secretary, General Counsel | 2015 | $ | 188,180 | $ | - | $ | - | $ | 17,616 | (5) | $ | 205,796 | ||||||||||||||
| 2014 | $ | 171,600 | $ | 5,000 | $ | 168,150 | $ | - | $ | 23,270 | (5) | $ | 368,020 | |||||||||||||
(1) The stock was awarded as compensation to the officers. See also Grants of Plan Based Awards.
(2) Consists of nil options, nil options and 200,000 granted during fiscal years ended 2016, 2015 and 2014, respectively. The options vest quarterly over one year. The life of 155,671 outstanding options, granted in June 2014, was extended for one year.
(3) Consists of $36,000, $36,000 and $36,000 paid for automobile and travel allowance, $16,758, $16,758 and $16,758 on account of life insurance and $12,987, $12,966 and $15,381 paid for medical and dental insurance premiums paid by the Company for participation in the health insurance program for the fiscal years ended June 30, 2016, 2015 and 2014, respectively.
(4) Consists of $11,725, $3,485 and $nil paid for medical and dental insurance premiums for participation in the health insurance program for the fiscal year ended June 30, 2016, 2015 and 2014, respectively.
(5) Consists of $nil, $4,855 and $9,000 paid for automobile allowance and $10,393, $12,761 and $14,270 paid for medical and dental insurance premiums for participation in the health insurance program for the fiscal year ended June 30, 2016, 2015 and 2014, respectively.
Grants of Plan-Based Awards
In May 2016, Mr. Jeffrey Bilbrey was granted 10,000 shares of common stock of the Company. The shares were approved by the Compensation Committee as an incentive to hire Mr. Bilbrey as President of NTA.
In September, 2015, Mr. Roger Almond was granted 20,000 shares of common stock of the Company, which vest quarterly over the period of two years. The shares were approved by the Compensation Committee as an incentive for the named officer.
In September, 2015, Ms. McGlasson was granted 20,000 shares of common stock of the Company, which vest quarterly over the period of two years. The shares were approved by the Compensation Committee as an incentive for the named officer.
In March, 2015, Mr. Roger Almond was granted 10,000 shares of common stock of the Company, which vest quarterly. The shares were approved by the Compensation Committee as an incentive for the named officer.
In June, 2014, Mr. Najeeb Ghauri was granted 50,000 shares of common stock of the Company, which vest quarterly. The shares were approved by the Compensation Committee as an incentive for the named officer.
In June, 2014, Mr. Roger Almond was granted 5,000 shares of common stock of the Company. The shares vested immediately and were approved by the Compensation Committee as an incentive for the named officer.
In June, 2014, Ms. McGlasson was granted 10,000 shares of common stock of the Company. The shares vested quarterly and were approved by the Compensation Committee as an incentive for the named officers.
In June, 2014, Ms. McGlasson was granted 5,000 shares of common stock of the Company. The shares vested immediately and were approved by the Compensation Committee as an incentive for the named officer.
In July, 2013, Ms. McGlasson was granted 10,000 shares of common stock of the Company. The shares vested quarterly and were approved by the Compensation Committee as an incentive for the named officer.
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Discussion of Summary Compensation Table
The terms of our executive officers’ compensation are derived from our employment agreements with them and the annual performance review by our Compensation Committee. The terms of Mr. Najeeb Ghauri’s employment agreement with the Company were the result of negotiations between the Company and the executive and were approved by our Compensation Committee and Board of Directors. The terms of Ms. McGlasson’s and Mr. Almond’s employment agreement with the Company were the result of negotiations between our Chief Executive Officer and the employees and were approved by our Compensation Committee.
Employment Agreement with Najeeb Ghauri
Effective January 1, 2007, the Company entered into an Employment Agreement with our Chief Executive Officer, Najeeb Ghauri (the “CEO Agreement”). The CEO Agreement was amended effective January 1, 2008, January 1, 2010 July 25, 2013 and again on June 30, 2014. Changes made in the June 30, 2014 amendment are effective July 1, 2014. Pursuant to the CEO Agreement, as amended, between Mr. Ghauri and the Company (the “CEO Agreement”), the Company agreed to employ Mr. Ghauri as its Chief Executive Officer for a five year term. The term of employment automatically renews for 12 additional months unless notice of intent to terminate is received by either party at least 6 months prior to the end of the term. Under the CEO Agreement, Mr. Ghauri is entitled to an annualized base salary of $497,700 and is eligible for annual bonuses at the discretion of the Compensation Committee.
Bonuses may be paid in cash or shares of common stock. Mr. Ghauri also earned 12,500 shares of common stock for each quarter of service commencing with the first quarter ended September 30, 2014 through June 30, 2015. Mr. Ghauri was granted options to purchase 200,000 shares common stock of which 25% of these options vest at the completion of each quarter. Mr. Ghauri is entitled to six weeks of paid vacation per calendar year, receives a car allowance totaling $3,000 per month for the term of the CEO Agreement, and the Company shall pay premiums not to exceed $16,600 (or $4,150 quarterly) for life insurance for the Executive.
The CEO Agreement also includes provisions respecting severance, non-solicitation, non-competition, and confidentiality obligations. Pursuant to the CEO Agreement, if he terminates his employment for Good Reason (as described below), or, is terminated prior to the end of the employment term by the Company other than for Cause (as described below) or death, he shall be entitled to all remaining salary from the termination date until 48 months thereafter, at the rate of salary in effect on the date of termination, immediate vesting of all options and continuation of all health related plan benefits for a period of 48 months. He shall have no obligation to seek other employment and any income so earned shall not reduce the foregoing amounts. If he is terminated by the Company for Cause (as described below), or at the end of the employment term, he shall not be entitled to further compensation. Under the CEO Agreement, Good Reason includes the assignment of duties inconsistent with his title, a material reduction in salary and perquisites, the relocation of the Company’s principal office by 30 miles, if the Company asks him to perform any act which is illegal, including the commission of a crime or act of moral turpitude, or a material breach of the CEO Agreement by the Company. Under the CEO Agreement, Cause includes conviction of crime involving moral turpitude, failure to perform his duties to the Company, engaging in activities which are directly competitive to or intentionally injurious to the Company, or any material breach of the CEO Agreement by Mr. Ghauri.
The above summary of the CEO Agreement is qualified in its entirety by reference to the full text of the CEO Agreement, a copy of which was filed as an exhibit to the Company’s 10-KSB for the fiscal year ended June 30, 2007. The above summary of the First Amendment is qualified in its entirety by reference to the full text of the Amendment, a copy of which was filed as an exhibit to the Company’s 10-KSB for the fiscal year ended June 30, 2008. The above summary of the Second Amendment is qualified in its entirety by reference to the full text of the Amendment, a copy of which was filed as an exhibit to the Company’s 10-Q for the fiscal year ended December 31, 2009. The above summary of the Third Amendment is qualified in its entirety by reference to the full text of the Amendment, a copy of which was filed as an exhibit to the Company’s 8-K filed on July 26, 2013. The above summary of the Fourth Amendment is qualified in its entirety by reference to the full text of the Amendment, a copy of which was filed as an exhibit to the Company’s 8-K filed on July 3, 2014.
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Employment Agreement with Roger K. Almond
Effective March 1, 2015, the Company entered into an Employment Agreement with our Chief Financial Officer, Mr. Roger K. Almond. Pursuant to the Employment Agreement, between Mr. Almond and the Company (the “CFO Agreement”), the Company agreed to employ Mr. Almond as its Chief Financial Officer from the date of the CFO Agreement through February 28, 2017. According to the terms of the CFO Agreement, the term of the agreement automatically extends for an additional one year period unless notice of intent to terminate is received by either party at least 6 months prior to the end of the term. Under the CFO Agreement, Mr. Almond is entitled to an annualized base salary of $189,263 per annum, 10,000 shares of common stock to be granted in 25% tranches after each quarter of service through February 28, 2016, and is eligible for annual bonuses at the discretion of the Chief Executive Officer. In addition, Mr. Almond is entitled to participate in the Company’s stock option plans and is entitled to four weeks of paid vacation per calendar year.
The CFO Agreement also includes provisions respecting severance, non-solicitation, non-competition, and confidentiality obligations. Pursuant to the CFO Agreement, if he terminates his employment for Good Reason (as described below), or, is terminated prior to the end of the employment term by the Company other than for Cause (as described below) or death, he shall be entitled to all remaining salary from the termination date until 12 months thereafter, at the rate of salary in effect on the date of termination, immediate vesting of all options and continuation of all health related plan benefits for a period of 12 months. He shall have no obligation to seek other employment and any income so earned shall not reduce the foregoing amounts. If he is terminated by the Company for Cause (as described below), or at the end of the employment term, he shall not be entitled to further compensation. Under the CFO Agreement, Good Reason includes the assignment of duties inconsistent with his title, a material reduction in salary and perquisites, the relocation of the Company’s principal office by 60 miles, if the Company asks him to perform any act which is illegal, including the commission of a crime or act of moral turpitude, or a material breach of the CFO Agreement by the Company. Under the CFO Agreement, Cause includes conviction of crime involving moral turpitude, failure to perform his duties to the Company, engaging in activities which are directly competitive to or intentionally injurious to the Company, or any material breach of the CFO Agreement by Mr. Almond.
The above summary of the CFO Agreement is qualified in its entirety by reference to the full text of the CFO Agreement, a copy of which was filed as an exhibit to the Company’s 8-K filed on March 4, 2015.
Employment Agreement with Patti L. W. McGlasson
Effective May 1, 2006, the Company entered into an Employment Agreement with our Secretary, General Counsel and Sr. Vice President, Legal and Corporate Affairs, Ms. Patti L. W. McGlasson. Pursuant to the Employment Agreement and its related amendments, between Ms. McGlasson and the Company (the “General Counsel Agreement”), the Company agreed to employ Ms. McGlasson as its Secretary and General Counsel from the date of the General Counsel Agreement through June 30, 2017. According to the terms of the General Counsel Agreement, the term of the agreement automatically extends for an additional one-year period unless notice of intent to terminate is received by either party at least 6 months prior to the end of the term. The General Counsel Agreement was amended on July 25, 2013 and again on June 30, 2014 (the General Counsel Agreement and all amendments referred to as the “GC Agreement”). Changes made in the June 30, 2014 amendment are effective July 1, 2014. Under the GC Agreement, Ms. McGlasson is entitled to an annualized base salary of $204,939 per annum, 10,000 shares of common stock to be granted in 25% tranches after each quarter of service through June 30, 2015, and is eligible for annual bonuses at the discretion of the Chief Executive Officer. In addition, Ms. McGlasson is entitled to participate in the Company’s stock option plans and is entitled to six weeks of paid vacation per calendar year.
The General Counsel Agreement also includes provisions respecting severance, non-solicitation, non-competition, and confidentiality obligations. Pursuant to the General Counsel Agreement, if she terminates her employment for Good Reason (as described below), or, is terminated prior to the end of the employment term by the Company other than for Cause (as described below) or death, she shall be entitled to all remaining salary from the termination date until 24 months thereafter, at the rate of salary in effect on the date of termination, immediate vesting of all options and continuation of all health related plan benefits for a period of 24 months. She shall have no obligation to seek other employment and any income so earned shall not reduce the foregoing amounts. If she is terminated by the Company for Cause (as described below), or at the end of the employment term, she shall not be entitled to further compensation. Under the General Counsel Agreement, Good Reason includes the assignment of duties inconsistent with her title, a material reduction in salary and perquisites, the relocation of the Company’s principal office by 60 miles, if the Company asks her to perform any act which is illegal, including the commission of a crime or act of moral turpitude, or a material breach of the General Counsel Agreement by the Company. Under the General Counsel Agreement, Cause includes conviction of crime involving moral turpitude, failure to perform her duties to the Company, engaging in activities which are directly competitive to or intentionally injurious to the Company, or any material breach of the General Counsel Agreement by Ms. McGlasson.
The above summary of the General Counsel Agreement is qualified in its entirety by reference to the full text of the General Counsel Agreement, a copy of which was filed as an exhibit to the Company’s 10-KSB for the fiscal year ended June 30, 2006 on September 27, 2006. The above summary is also qualified in its entirety by reference to the full text of the Amendment to the General Counsel Agreement, a copy of which was filed as an exhibit to the Company’s 10-Q for the quarter ended March 31, 2010. The above summary is also qualified in its entirety by reference to the full text of the Second Amendment to the General Counsel Agreement, a copy of which was filed as an exhibit to the Company’s 8-K filed on July 26, 2013. The above summary is also qualified in its entirety by reference to the full text of the Third Amendment to the General Counsel Agreement, a copy of which was filed as an exhibit to the Company’s 8-K filed on July 3, 2014.
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Outstanding Equity Awards at Fiscal Year-End
The following table shows grants of stock options and grants of unvested stock awards outstanding on June 30, 2016, the last day of our fiscal year, to each of the individuals named in the Summary Compensation Table.
| NAME | NUMBER OF SECURITIES UNDERLYING OPTIONS (#) EXERCISABLE | NUMBER OF SECURITIES UNDERLYING OPTIONS (#) UNEXERCISABLE |
OPTION EXERCISE PRICE ($) | OPTION EXPIRATION DATE |
|||||||
| Najeeb Ghauri | 155,671 | 3.88 | 6/30/17 | ||||||||
| 30,000 | 6.50 | 2/12/19 | |||||||||
| 50,000 | 7.50 | 11/7/21 | |||||||||
| Roger K. Almond | - | - | |||||||||
| - | - | ||||||||||
| Patti L. W. McGlasson | 1,000 | 16.00 | 7/23/17 | ||||||||
Pension Benefits
We do not have any qualified or non-qualified defined benefit plans.
Potential Payments upon Termination or Change of Control
Generally, regardless of the manner in which a named executive officer’s employment terminates, he is entitled to receive amounts earned during his term of employment. Such amounts include the portion of the executive’s base salary that has accrued prior to any termination and not yet been paid and unused vacation pay.
In addition, we are required to make the additional payments and/or provide additional benefits to the individuals named in the Summary Compensation Table in the event of a termination of employment or a change of control, as set forth below.
Change-in-Control Payments
Najeeb Ghauri, Chairman and Chief Executive Officer
In the event that Mr. Ghauri is terminated as a result of a change in control (defined below), he is entitled to all payments due in the event of a termination for Cause or Good Reason and: (a) a onetime payment equal to the product of 2.99 and his salary during the preceding 12 months; (b) a one-time payment equal to the higher of (i) Executive’s bonus for the previous year and (ii) one percent of the Company’s consolidated gross revenues for the previous twelve (12) months; and at the election of the Executive, (c) a one-time cash payment equal to the cash value of all shares eligible for exercise upon the exercise of Executive’s Options then currently outstanding and exercisable as if they had been exercised in full (the “Change of Control Termination Payment”). In the event Executive elects to receive the cash value of the shares underlying Executive’s options, he shall so notify the Company of his intent.
The following table summarizes the potential payments to Mr. Ghauri assuming his employment with us was terminated or a change of control occurred on June 30, 2016, the last day of our most recently completed fiscal year.
| 35 |
| BENEFITS AND PAYMENTS | TERMINATION AFTER CHANGE OF CONTROL | TERMINATION UPON DEATH OR DISABILITY | TERMINATION BY US WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON | |||||||||
| Base Salary Continuance | $ | 1,990,800 | $ | 82,950 | $ | 1,990,800 | ||||||
| Health Related Benefits | 59,136 | - | 59,136 | |||||||||
| Bonus | - | - | - | |||||||||
| Salary Multiple Pay-out | 1,488,123 | - | - | |||||||||
| Bonus or Revenue One-time Pay-Out | 645,502 | - | - | |||||||||
| Net Cash Value of Options | 1,174,003 | - | - | |||||||||
| Total | $ | 5,357,564 | $ | 82,950 | $ | 2,049,936 | ||||||
Roger Almond, Chief Financial Officer
In the event that Mr. Almond is terminated as a result of a change in control (defined below), he is entitled to all payments due in the event of a termination for Cause or Good Reason and: (a) a onetime payment equal to the product of 2.99 and his salary during the preceding 12 months; (b) a one-time payment equal to the higher of (i) Executive’s bonus for the previous year and (ii) one-half of one percent of the Company’s consolidated gross revenues for the previous twelve (12) months (the “Change of Control Termination Payment”).
The following table summarizes the potential payments to Mr. Almond assuming his employment with us was terminated or a change of control occurred on June 30, 2016, the last day of our most recently completed fiscal year.
| BENEFITS AND PAYMENTS | TERMINATION AFTER CHANGE OF CONTROL | TERMINATION UPON DEATH OR DISABILITY | TERMINATION BY US WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON | |||||||||
| Base Salary Continuance | $ | 183,750 | $ | 30,625 | $ | 183,750 | ||||||
| Health related benefits | 10,092 | - | 10,092 | |||||||||
| Bonus | - | - | - | |||||||||
| Salary Multiple Pay-out | 542,873 | - | - | |||||||||
| Bonus or Revenue One-time Pay-Out | 322,751 | - | - | |||||||||
| Net Cash Value of Options | - | - | - | |||||||||
| Total | $ | 1,059,466 | $ | 30,625 | $ | 193,842 | ||||||
| 36 |
Patti L. W. McGlasson, Senior V.P. of Legal and Corporate Affairs, Secretary and General Counsel
In the event that Ms. McGlasson is terminated as a result of a change in control (defined below), she is entitled to all payments due in the event of a termination for Cause or Good Reason and: (a) a onetime payment equal to the product of 2.99 and her salary during the preceding 12 months; (b) a one-time payment equal to the higher of (i) Executive’s bonus for the previous year and (ii) one-half of one percent of the Company’s consolidated gross revenues for the previous twelve (12) months (the “Change of Control Termination Payment”).
The following table summarizes the potential payments to Ms. McGlasson assuming her employment with us was terminated or a change of control occurred on June 30, 2016 the last day of our most recently completed fiscal year.
| BENEFITS AND PAYMENTS | TERMINATION AFTER CHANGE OF CONTROL | TERMINATION UPON DEATH OR DISABILITY | TERMINATION BY US WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON | |||||||||
| Base Salary Continuance | $ | 405,000 | $ | 33,750 | $ | 405,000 | ||||||
| Health related benefits | 19,608 | - | 19,608 | |||||||||
| Bonus | - | - | - | |||||||||
| Salary Multiple Pay-out | 605,475 | - | - | |||||||||
| Bonus or Revenue One-time Pay-Out | 322,751 | - | - | |||||||||
| Net Cash Value of Options | - | - | - | |||||||||
| Total | $ | 1,352,834 | $ | 33,750 | $ | 424,608 | ||||||
Director Compensation
Director Compensation Table
The following table sets forth a summary of the compensation earned by our Directors and/or paid to certain of our Directors pursuant to the Company’s compensation policies for the fiscal year ended June 30, 2016, other than Najeeb Ghauri, Naeem Ghauri and Asad Ghauri who are paid as part of their employment agreements with the Company or its subsidiaries and not as directors.
| NAME | FEES EARNED OR PAID IN CASH ($) | SHARES AWARDS ($) (1) | TOTAL ($) | |||||||||
| Eugen Beckert | 46,028 | 53,445 | 99,473 | |||||||||
| Shahid Javed Burki | 49,245 | 57,264 | 106,509 | |||||||||
| Mark Caton | 64,813 | 38,176 | 102,989 | |||||||||
| Jeffrey M. Bilbrey(2) | 45,469 | 19,088 | 64,557 | |||||||||
| 205,555 | 167,973 | 373,528 | ||||||||||
| (1) | During the fiscal year ended June 30, 2016, 33,000 shares were issued to independent directors. | |
| (2) | Mr. Bilbrey’s services as board member ended on May 16, 2016. Accordingly, his fees earned were pro-rated over his term served |
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Director Compensation Policy
Messrs. Ghauri are not paid any fees or other compensation for services as members of our Board of Directors.
The non-employee members of our Board of Directors received as compensation for services as directors as well as reimbursement for documented reasonable expenses incurred in connection with attendance at meetings of our Board of Directors and the committees thereof. The Company paid the following amounts to members of the Board of Directors for the activities shown during the fiscal year ended June 30, 2016.
| BOARD ACTIVITY | CASH PAYMENTS | |||
| Board Member Fee | $ | 173,900 | ||
| Chairperson for Audit Committee | $ | 14,070 | ||
| Chairperson for Compensation Committee | $ | 10,550 | ||
| Chairperson for Nominating and Corporate Governance Committee | $ | 7,035 | ||
| $ | 205,555 | |||
Members of our Board of Directors are also eligible to receive stock option or stock award grants both upon joining the Board of Directors and on an annual basis in line with recommendations by the Compensation Committee, which grants are non-qualified stock options under our Employee Stock Option Plans. Further, from time to time, the non-employee members of the Board of Directors are eligible to receive stock grants that may be granted if and only if approved by the shareholders of the Company.
In July 2014, the board approved compensation for service on the Audit, Compensation and Nominating and Corporate Governance Committees. This compensation is discussed in the sections entitled “Directors’ Compensation” beginning on page 37. On October 1, 2015, the Compensation Committee granted independent board members 10,000 shares of common stock vesting at 25% at the completion of each quarter served commencing with the quarter ending December 31, 2015 and ending September 30, 2016.
The Compensation Committee further approved to grant a bonus of 10,000 shares of common stock to all independent board members to vest 12.5% over the following eight quarters commencing with December 31, 2015 and ending September 30, 2017.
The Compensation Committee further approved a share bonus of 10,000 shares of common stock of the Company to Asad Ghauri for his work in connection with the NFS Ascent Project vesting 25% per quarter commencing December 31, 2015 and ending September 30, 2016.
Compensation Committee Interlocks and Insider Participation
The current members of the Compensation Committee are Messrs. Caton (Chairman), Mr. Beckert and Mr. Burki. There were no other members of the committee during the fiscal year ended June 30, 2016. All current members of the Compensation Committee are “independent directors” as defined under the NASDAQ Listing Rules. Other than Mr. Bilbrey who did not stand for re-election as board member during fiscal year 2015-2016 and who began his employment with NTA on May 23, 2016, none of these individuals were at any time during the fiscal year ended June 30, 2015, or at any other relevant time, an officer or employee of the Company.
No executive officer of the Company serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of the Company’s Board of Directors or Compensation Committee.
Employee Stock Option Plans
The 2001 plan authorizes the issuance of up to 200,000 options to purchase common stock of which 200,000 have been granted. The grant prices range between $7.50 and $25.00.
The 2002 plan authorizes the issuance of up to 200,000 options to purchase common stock of which 199,913 options have been granted. The grant prices range between $3.00 and $50.00.
In March 2004, our shareholders approved the 2003 stock option plan. This plan authorizes up to 200,000 options to purchase common stock of which 198,000 have been granted. The grant prices range between $5.00 and $50.00.
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In March 2005, our shareholders approved the 2004 stock option plan. This plan authorizes up to 500,000 options to purchase common stock of which 460,526 have been granted. The grant prices range between $3.00 and $28.90.
In April 2006, our shareholders approved the 2005 stock option plan. This plan authorizes up to 500,000 options to purchase common stock of which 440,947 have been granted. The grant prices range between $3.00 and $26.20.
In June 2008, our shareholders approved the 2008 Equity incentive plan. This plan authorizes up to 100,000 grants and/or options of common stock of which 100,000 have been granted. The grant prices range between $3.20 and $23.20.
In May 2011, our shareholders approved the 2011 Equity incentive plan. This plan authorizes up to 500,000 grants and/or options of common stock of which 500,000 have been granted. The grant prices range between $3.00 and $16.70.
In July 2013, our shareholders approved the 2013 Equity incentive plan. This plan authorizes up to 1,250,000 grants and/or options of common stock of which 1,247,405 have been granted. The grant prices range between $2.90 and $10.68.
In May 2015, our shareholders approved the 2015 Equity incentive plan. This plan authorizes up to 1,250,000 grants and/or options of common stock of which 610,500 have been granted. The grant prices range between $5.67 and $6.25.
ITEM 12- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the beneficial ownership of the Company’s Common Stock, its only class of outstanding voting securities as of September 12, 2016, by (i) each person who is known to the Company to own beneficially more than 5% of the outstanding common Stock with the address of each such person, (ii) each of the Company’s present directors and officers, and (iii) all officers and directors as a group:
| Number of Shares | |||||||||
| Name of Beneficial Owner (1) | Beneficially Owned (2) | Percentage | |||||||
| Najeeb Ghauri | (3) | 777,994 | 6.76 | % | |||||
| Naeem Ghauri | (3) | 473,633 | 4.22 | % | |||||
| Eugen Beckert | (3) | 39,750 | * | ||||||
| Shahid Javed Burki | (3) | 61,500 | * | ||||||
| Mark Caton | (3) | 42,436 | * | ||||||
| Patti McGlasson | (3) | 57,050 | * | ||||||
| Roger Almond | (3) | 22,500 | * | ||||||
| All officers and directors as a group (seven persons) | 1,511,454 | 13.05 | % | ||||||
* Less than one percent
(1) Except as otherwise indicated, the Company believes that the beneficial owners of the common stock listed below, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities.
(2) Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Shares of common stock relating to options currently exercisable or exercisable within 60 days of September 6, 2016, are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them.
(3) Address c/o NetSol Technologies, Inc. at 24025 Park Sorrento, Suite 410, Calabasas, CA 91302.
Shares issued and outstanding as of September 12, 2016 were 10,737,437.
| 39 |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
Najeeb Ghauri, CEO and Chairman of the Board, and Naeem Ghauri, Director, have a financial interest in G-Force, LLC which purchased a 4.9% investment in eeGeo, Inc. for $1,111,111. G-Force, LLC paid $555,556 at the initial closing and $555,555 on September 1, 2016. The Company also made a 4.9% investment in eeGeo, Inc., for $1,111,111.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
Kabani & Co. audited the Company’s financial statements for the fiscal years ended June 30, 2016 and June 30, 2015. The aggregate fees billed by Kabani & Co. for the annual audit and review of financial statements included in the Company’s Form 10-K, services related to providing an opinion in connection with our public offering of shares of common stock and/or services that are normally provided by Kabani & Company that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the year ended June 30, 2016 was $244,500 and for the year ended June 30, 2015 was $250,000.
Tax Fees
Tax fees for fiscal year 2016 were $15,000 and consisted of the preparation of the Company’s federal and state tax returns for the fiscal years 2015. Tax fees for fiscal year 2015 were $15,000 and consisted of the preparation of the Company’s federal and state tax returns for the fiscal year 2014.
All Other Fees
No other fees were paid to Kabani & Co. during the fiscal year 2016 and 2015.
Pre-Approval Procedures
The Audit Committee and the Board of Directors are responsible for the engagement of the independent auditors and for approving, in advance, all auditing services and permitted non-audit services to be provided by the independent auditors. The Audit Committee maintains a policy for the engagement of the independent auditors that is intended to maintain the independent auditor’s independence from NetSol. In adopting the policy, the Audit Committee considered the various services that the independent auditors have historically performed or may be needed to perform in the future. The policy, which is to be reviewed and re-adopted at least annually by the Audit Committee:
| (i) | Approves the performance by the independent auditors of certain types of service (principally audit-related and tax), subject to restrictions in some cases, based on the Committee’s determination that this would not be likely to impair the independent auditors’ independence from NetSol; | |
| (ii) | Requires that management obtain the specific prior approval of the Audit Committee for each engagement of the independent auditors to perform other types of permitted services; and | |
| (iii) | Prohibits the performance by the independent auditors of certain types of services due to the likelihood that their independence would be impaired. |
Any approval required under the policy must be given by the Audit Committee, by the Chairman of the Committee in office at the time, or by any other Committee member to whom the Committee has delegated that authority. The Audit Committee does not delegate its responsibilities to approve services performed by the independent auditors to any member of management.
The standard applied by the Audit Committee in determining whether to grant approval of an engagement of the independent auditors is whether the services to be performed, the compensation to be paid therefore and other related factors are consistent with the independent auditors’ independence under guidelines of the Securities and Exchange Commission and applicable professional standards. Relevant considerations include, but are not limited to, whether the work product is likely to be subject to, or implicated in, audit procedures during the audit of NetSol’s financial statements; whether the independent auditors would be functioning in the role of management or in an advocacy role; whether performance of the service by the independent auditors would enhance NetSol’s ability to manage or control risk or improve audit quality; whether performance of the service by the independent auditors would increase efficiency because of their familiarity with NetSol’s business, personnel, culture, systems, risk profile and other factors; and whether the amount of fees involved, or the proportion of the total fees payable to the independent auditors in the period that is for tax and other non-audit services, would tend to reduce the independent auditors’ ability to exercise independent judgment in performing the audit.
| 40 |
ITEM 15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
| 3.1 | Articles of Incorporation of Mirage Holdings, Inc., a Nevada corporation, dated March 18, 1997, incorporated by reference as Exhibit 3.1 to NetSol’s Registration Statement No. 333-28861 filed on Form SB-2 filed June 10, 1997.* | |
| 3.2 | Amendment to Articles of Incorporation dated May 21, 1999, incorporated by reference as Exhibit 3.2 to NetSol’s Annual Report for the fiscal year ended June 30, 1999 on Form 10K-SB filed September 28, 1999.* | |
| 3.3 | Amendment to the Articles of Incorporation of NetSol International, Inc. dated March 20, 2002 incorporated by reference as Exhibit 3.3 to NetSol’s Annual Report on Form 10-KSB/A filed on February 2, 2001.* | |
| 3.4 | Amendment to the Articles of Incorporation of NetSol Technologies, Inc. dated August 20, 2003 filed as Exhibit A to NetSol’s Definitive Proxy Statement filed June 27, 2003.* | |
| 3.5 | Amendment to the Articles of Incorporation of NetSol Technologies, Inc. dated March 14, 2005 filed as Exhibit 3.0 to NetSol’s quarterly report filed on Form 10-QSB for the period ended March 31, 2005.* | |
| 3.6 | Amendment to the Articles of Incorporation dated October 18, 2006 filed as Exhibit 3.5 to NetSol’s Annual Report for the fiscal year ended June 30, 2007 on Form 10-KSB.* | |
| 3.7 | Amendment to Articles of Incorporation dated May 12, 2008* | |
| 3.8 | Bylaws of Mirage Holdings, Inc., as amended and restated as of November 28, 2000 incorporated by reference as Exhibit 3.3 to NetSol’s Annual Report for the fiscal year ending in June 30, 2000 on Form 10K-SB/A filed on February 2, 2001.* | |
| 3.9 | Amendment to the Bylaws of NetSol Technologies, Inc. dated February 16, 2002 incorporated by reference as Exhibit 3.5 to NetSol’s Registration Statement filed on Form S-8 filed on March 27, 2002.* | |
| 4.1 | Form of Common Stock Certificate* | |
| 4.2 | Form of Warrant*. | |
| 4.3 | Form of Series A 7% Cumulative Preferred Stock filed as Annex E to NetSol’s Definitive Proxy Statement filed September 18, 2006*. | |
| 10.1 | Company Stock Option Plan dated May 18, 1999 incorporated by reference as Exhibit 10.2 to the Company’s Annual Report for the Fiscal Year Ended June 30, 1999 on Form 10K-SB filed September 28, 1999.* | |
| 10.2 | Company Stock Option Plan dated April 1, 1997 incorporated by reference as Exhibit 10.5 to NetSol’s Registration Statement No. 333-28861 on Form SB-2 filed June 10, 1997* | |
| 10.3 | Company 2003 Incentive and Nonstatutory incorporated by reference as Exhibit 99.1 to NetSol’s Definitive Proxy Statement filed February 6, 2004.* | |
| 10.4 | Company 2001 Stock Options Plan dated March 27, 2002 incorporated by reference as Exhibit 5.1 to NetSol’s Registration Statement on Form S-8 filed on March 27, 2002.* | |
| 10.5 | Company 2008 Equity Incentive Plan incorporated by reference as Annex A to NetSol’s Definitive Proxy Statement filed May 28, 2008.* | |
| 10.6 | Stock Purchase Agreement dated May 6, 2006 by and between the Company, McCue Systems, Inc. and the shareholders of McCue Systems, Inc. incorporated by reference as Exhibit 2.1 to NetSol’s Current Report filed on form 8-K on May 8, 2006.* | |
| 10.7 | Employment Agreement by and between NetSol Technologies, Inc. and Patti L. W. McGlasson dated May 1, 2006 incorporated by reference as Exhibit 10.20 to NetSol’s Annual Report on form 10-KSB dated September 18, 2006.* | |
| 10.8. | Employment Agreement by and between the Company and Najeeb Ghauri dated January 1, 2007 filed as Exhibit 10.11 to the Company’s Annual Report filed on Form 10-KSB for the year ended June 30, 2007.* | |
| 10.9 | Employment Agreement by and between the Company and Naeem Ghauri dated January 1, 2007 filed as Exhibit 10.11 to the Company’s Annual Report filed on Form 10-KSB for the year ended June 30, 2007.* | |
| 10.10 | 10.15 Amendment to Employment Agreement by and between Company and Najeeb Ghauri dated effective January 1, 2007.* | |
| 10.11 | Amendment to Employment Agreement by and between Company and Naeem Ghauri dated effective January 1, 2007. * | |
| 10.12 | Tenancy Agreement by and between NetSol Technologies, Ltd. and Beijing Lucky Goldstar Building Development Co. Ltd. dated June 26, 2007 filed as Exhibit 10.21 to the Company’s Annual Report filed on Form 10-KSB for the year ended June 30, 2007.* | |
| 10.13 | Company 2005 Stock Option Plan incorporated by reference as Exhibit 99.1 to NetSol’s Definitive Proxy Statement filed on March 3, 2006.* | |
| 10.14 | Company 2004 Stock Option Plan incorporated by reference as Exhibit 99.1 to NetSol’s Definitive Proxy Statement filed on February 7, 2005.* | |
| 10.15 | Rent Agreement by and between Mr. Tahir Mehmood Khan and NetSol Technologies Ltd. Dated January 21, 2008. * |
| 41 |
| 10.16 | Amendment to Employment Agreement by and between Company and Najeeb Ghauri dated effective January 1, 2010. * | |
| 10.17 | Amendment to Employment Agreement by and between Company and Naeem Ghauri dated effective January 1, 2010.* | |
| 10.18 | Office Lease by and between NetSol Technologies North America, Inc. and Legacy Partners I Alameda Mariner Loop, LLC dated November 27, 2009.* | |
| 10.19 | Amendment to Employment Agreement by and between Company and Patti L. W. McGlasson dated effective April 1, 2010.* | |
| 10.20 | Employment Agreement by and between Company and Boo-Ali Siddiqui dated effective April 1, 2010.* | |
| 10.21 | Amendment to Employment Agreement between NetSol Technologies, Inc. and Najeeb Ghauri dated effective July 25, 2013.* | |
| 10.22 | Amendment to Employment Agreement between NetSol Technologies, Inc. and Boo-Ali Siddiqui dated effective July 25, 2013.* | |
| 10.23 | Amendment to Employment Agreement between NetSol Technologies, Inc. and Patti L.W. McGlasson dated effective July 25, 2013.* | |
| 10.24 | Restated Charter of the Compensation Committee dated effective September 10, 2013* | |
| 10.22 | Restated Charter of the Nominating and Corporate Governance Committee dated effective September 10, 2013.* | |
| 10.23 | Restated Charter of the Audit Committee dated effective September 10, 2013* | |
| 10.24 | Restated Code of Business Conduct & Ethics dated effective September 10, 2013* | |
| 10.25 | Consulting Agreement between Roger Almond and NetSol Technologies, Inc. dated September 9, 2013.* | |
| 10.26 | Amendment to Consulting Agreement between Roger Almond and NetSol Technologies, Inc. dated September 9, 2014* | |
| 21.1 | A list of all subsidiaries of the Company(1) | |
| 31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CEO) (1) | |
| 31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CFO) (1) | |
| 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)(1) | |
| 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)(1) |
*Previously Filed
(1) Filed Herewith
| 42 |
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized.
| NetSol Technologies, Inc. | ||
| Date: September 15, 2016 | BY: | /S/ NAJEEB GHAURI |
| Najeeb Ghauri | ||
| Chief Executive Officer | ||
| Date: September 15, 2016 | BY: | /S/ ROGER K. ALMOND |
| Roger K. Almond | ||
| Chief Financial Officer | ||
| Principal Financial Officer | ||
| 43 |
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Date: September 15, 2016 | BY: | /S/ NAJEEB U. GHAURI |
| Najeeb U. Ghauri | ||
| Chief Executive Officer | ||
| Director, Chairman | ||
| Date: September 15, 2016 | BY: | /S/ ROGER K. ALMOND |
| Roger K. Almond | ||
| Chief Financial Officer | ||
| Principal Accounting Officer | ||
| Date: September 15, 2016 | BY: | /S/ NAEEM GHAURI |
| Naeem Ghauri | ||
| Director | ||
| Date: September 15, 2016 | BY: | /S/ EUGEN BECKERT |
| Eugen Beckert | ||
| Director | ||
| Date: September 15, 2016 | BY: | /S/ SHAHID JAVED BURKI |
| Shahid Javed Burki | ||
| Director | ||
| Date: September 15, 2016 | BY: | /S/ MARK CATON |
| Mark Caton | ||
| Director |
| 44 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
NetSol Technologies, Inc. and subsidiaries
Calabasas, California
We have audited the accompanying consolidated balance sheets of NetSol Technologies, Inc. and subsidiaries (the “Company”) as of June 30, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the two years in the period then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of NetSol Technologies, Inc. and subsidiaries as of June 30, 2016 and 2015 and the results of their operations and their cash flows for each of the two years in the period then ended in conformity with accounting principles generally accepted in the United States of America.
Los Angeles, CA
September 15, 2016
| F-2 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of June 30,
| 2016 | 2015 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 11,557,527 | $ | 14,168,957 | ||||
| Accounts receivable, net of allowance of $492,498 and $524,565 | 9,691,229 | 6,480,344 | ||||||
| Accounts receivable, net - related party | 5,691,178 | 3,491,899 | ||||||
| Revenues in excess of billings | 10,493,096 | 5,251,005 | ||||||
| Revenues in excess of billings - related party | 804,168 | 16,270 | ||||||
| Other current assets | 2,214,628 | 1,871,040 | ||||||
| Total current assets | 40,451,826 | 31,279,515 | ||||||
| Restricted cash | 90,000 | 90,000 | ||||||
| Property and equipment, net | 22,774,435 | 25,119,634 | ||||||
| Other assets | 842,553 | 141,150 | ||||||
| Intangible assets, net | 19,674,033 | 22,815,467 | ||||||
| Goodwill | 9,516,568 | 9,516,568 | ||||||
| Total assets | $ | 93,349,415 | $ | 88,962,334 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 5,962,770 | $ | 5,952,561 | ||||
| Current portion of loans and obligations under capitalized leases | 4,440,084 | 3,896,353 | ||||||
| Unearned revenues | 4,739,214 | 4,897,327 | ||||||
| Common stock to be issued | 88,324 | 88,324 | ||||||
| Total current liabilities | 15,230,392 | 14,834,565 | ||||||
| Long term loans and obligations under capitalized leases; less current maturities | 477,692 | 487,492 | ||||||
| Total liabilities | 15,708,084 | 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; 10,713,372 shares issued and 10,686,093 outstanding as of June 30, 2016 and 10,307,826 shares issued and 10,280,547 outstanding as of June 30, 2015 |
107,134 | 103,078 | ||||||
| Additional paid-in-capital | 121,448,946 | 119,209,807 | ||||||
| Treasury stock (27,279 shares) | (415,425 | ) | (415,425 | ) | ||||
| Accumulated deficit | (37,323,360 | ) | (40,726,121 | ) | ||||
| Stock subscription receivable | (783,172 | ) | (1,204,603 | ) | ||||
| Other comprehensive loss | (18,730,494 | ) | (17,167,100 | ) | ||||
| Total NetSol stockholders’ equity | 64,303,629 | 59,799,636 | ||||||
| Non-controlling interest | 13,337,702 | 13,840,641 | ||||||
| Total stockholders’ equity | 77,641,331 | 73,640,277 | ||||||
| Total liabilities and stockholders’ equity | $ | 93,349,415 | $ | 88,962,334 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended June 30,
| 2016 | 2015 | |||||||
| Net Revenues: | ||||||||
| License fees | $ | 6,352,441 | $ | 6,328,989 | ||||
| Maintenance fees | 13,310,591 | 12,196,073 | ||||||
| Services | 32,288,229 | 24,827,822 | ||||||
| License fees - related party | 1,616,138 | - | ||||||
| Maintenance fees - related party | 365,772 | 395,951 | ||||||
| Services - related party | 10,617,022 | 7,299,743 | ||||||
| Total net revenues | 64,550,193 | 51,048,578 | ||||||
| Cost of revenues: | ||||||||
| Salaries and consultants | 21,789,329 | 19,859,684 | ||||||
| Travel | 2,334,019 | 2,374,864 | ||||||
| Depreciation and amortization | 5,926,969 | 8,336,857 | ||||||
| Other | 3,698,290 | 3,020,107 | ||||||
| Total cost of revenues | 33,748,607 | 33,591,512 | ||||||
| Gross profit | 30,801,586 | 17,457,066 | ||||||
| Operating expenses: | ||||||||
| Selling and marketing | 7,823,916 | 6,092,530 | ||||||
| Depreciation and amortization | 1,225,170 | 2,006,957 | ||||||
| General and administrative | 14,965,016 | 14,208,493 | ||||||
| Research and development cost | 485,783 | 314,892 | ||||||
| Total operating expenses | 24,499,885 | 22,622,872 | ||||||
| Income (loss) from operations | 6,301,701 | (5,165,806 | ) | |||||
| Other income and (expenses) | ||||||||
| Gain (loss) on sale of assets | 23,930 | (64,598 | ) | |||||
| Interest expense | (264,511 | ) | (166,962 | ) | ||||
| Interest income | 161,794 | 331,432 | ||||||
| Loss on foreign currency exchange transactions | (738,158 | ) | (453,770 | ) | ||||
| Other income | 224,931 | 684,030 | ||||||
| Total other income (expenses) | (592,014 | ) | 330,132 | |||||
| Net income (loss) before income taxes | 5,709,687 | (4,835,674 | ) | |||||
| Income tax provision | (652,546 | ) | (413,498 | ) | ||||
| Net income (loss) | 5,057,141 | (5,249,172 | ) | |||||
| Non-controlling interest | (1,654,380 | ) | (299,646 | ) | ||||
| Net income (loss) attributable to NetSol | $ | 3,402,761 | $ | (5,548,818 | ) | |||
| Net income (loss) per common share | ||||||||
| Basic | $ | 0.33 | $ | (0.57 | ) | |||
| Diluted | $ | 0.32 | $ | (0.57 | ) | |||
| Weighted average number of shares outstanding | ||||||||
| Basic | 10,391,157 | 9,728,122 | ||||||
| Diluted | 10,584,835 | 9,728,122 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended June 30,
| 2016 | 2015 | |||||||
| Net income (loss) | $ | 3,402,761 | $ | (5,548,818 | ) | |||
| Other comprehensive income (loss): | ||||||||
| Translation adjustment | (2,011,810 | ) | (3,239,086 | ) | ||||
| Comprehensive income (loss) | 1,390,951 | (8,787,904 | ) | |||||
| Comprehensive income (loss) attributable to non-controlling interest | (448,416 | ) | (1,051,209 | ) | ||||
| Comprehensive income (loss) attributable to NetSol | $ | 1,839,367 | $ | (7,736,695 | ) | |||
The accompanying notes are an integral part of these consolidated financial statements
| F-5 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders’ Equity
For the Years Ended June 30, 2016 and 2015
| Additional | Stock | Shares | Other | Non | Total | |||||||||||||||||||||||||||||||||||
| Common Stock | Paid-in | Treasury | Accumulated | Subscriptions | to be | Comprehensive | Controlling | Stockholders’ | ||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Shares | Deficit | Receivable | Issued | Loss | Interest | Equity | |||||||||||||||||||||||||||||||
| Balance at June 30, 2014 | 9,150,889 | $ | 91,509 | $ | 115,394,097 | $ | (415,425 | ) | $ | (35,177,303 | ) | $ | (2,280,488 | ) | $ | - | $ | (14,979,223 | ) | $ | 16,124,512 | 78,757,679 | ||||||||||||||||||
| Exercise of common stock options | 49,329 | 493 | 190,907 | - | - | - | - | - | - | 191,400 | ||||||||||||||||||||||||||||||
| Exercise of subsidiary common stock options | - | - | (16,079 | ) | - | - | - | - | - | 28,264 | 12,185 | |||||||||||||||||||||||||||||
| Common stock issued for: | ||||||||||||||||||||||||||||||||||||||||
| Cash | 743,107 | 7,430 | 2,352,100 | - | - | (64,931 | ) | - | - | 2,294,599 | ||||||||||||||||||||||||||||||
| Services | 364,501 | 3,646 | 1,472,062 | - | - | 158,635 | (259,194 | ) | - | - | 1,375,149 | |||||||||||||||||||||||||||||
| Equity component shown as current liability at | ||||||||||||||||||||||||||||||||||||||||
| June 30, 2014 | - | - | - | - | - | - | 347,518 | - | - | 347,518 | ||||||||||||||||||||||||||||||
| June 30, 2015 | - | - | - | - | - | - | (88,324 | ) | - | - | (88,324 | ) | ||||||||||||||||||||||||||||
| Fair value of options issued | - | - | 622,488 | - | - | - | - | - | - | 622,488 | ||||||||||||||||||||||||||||||
| Acquisition of non controlling interest in subsidiary | - | - | 176,413 | - | - | - | - | - | (753,635 | ) | (577,222 | ) | ||||||||||||||||||||||||||||
| Dividend to non controlling interest | - | - | - | - | - | - | - | - | (806,937 | ) | (806,937 | ) | ||||||||||||||||||||||||||||
| Adjustment in subscription receivable | - | - | (982,181 | ) | - | - | 982,181 | - | - | - | - | |||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | (2,187,877 | ) | (1,051,209 | ) | (3,239,086 | ) | |||||||||||||||||||||||||||
| Net loss for the year | - | - | - | - | (5,548,818 | ) | - | - | 299,646 | (5,249,172 | ) | |||||||||||||||||||||||||||||
| Balance at | ||||||||||||||||||||||||||||||||||||||||
| June 30, 2015 | 10,307,826 | $ | 103,078 | $ | 119,209,807 | $ | (415,425 | ) | $ | (40,726,121 | ) | $ | (1,204,603 | ) | $ | - | $ | (17,167,100 | ) | $ | 13,840,641 | $ | 73,640,277 | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-6 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders’ Equity
For the Years Ended June 30, 2016 and 2015
| Additional | Stock | Shares | Other | Non | Total | |||||||||||||||||||||||||||||||||||
| Common Stock | Paid-in | Treasury | Accumulated | Subscriptions | to be | Comprehensive | Controlling | Stockholders’ | ||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Shares | Deficit | Receivable | Issued | Loss | Interest | Equity | |||||||||||||||||||||||||||||||
| Balance at June 30, 2015 | 10,307,826 | $ | 103,078 | $ | 119,209,807 | $ | (415,425 | ) | $ | (40,726,121 | ) | $ | (1,204,603 | ) | $ | - | $ | (17,167,100 | ) | $ | 13,840,641 | 73,640,277 | ||||||||||||||||||
| Exercise of common stock options | 177,024 | 1,770 | 779,210 | - | - | - | - | - | - | 780,980 | ||||||||||||||||||||||||||||||
| Exercise of subsidiary common stock options | - | - | (28,331 | ) | - | - | - | - | - | 45,075 | 16,744 | |||||||||||||||||||||||||||||
| Common stock issued for: | ||||||||||||||||||||||||||||||||||||||||
| Cash | - | - | - | - | - | 64,931 | - | - | - | 64,931 | ||||||||||||||||||||||||||||||
| Services | 228,522 | 2,286 | 1,262,332 | - | - | - | - | - | - | 1,264,618 | ||||||||||||||||||||||||||||||
| Adjustment for payment of cash in lieu of shares | - | - | (25,391 | ) | - | - | - | - | - | - | (25,391 | ) | ||||||||||||||||||||||||||||
| Equity component shown as current liability at | ||||||||||||||||||||||||||||||||||||||||
| June 30, 2015 | - | - | - | - | - | - | 88,324 | - | - | 88,324 | ||||||||||||||||||||||||||||||
| June 30, 2016 | - | - | - | - | - | - | (88,324 | ) | - | - | (88,324 | ) | ||||||||||||||||||||||||||||
| Fair value | ||||||||||||||||||||||||||||||||||||||||
| of options issued | - | - | 145,716 | - | - | - | - | - | - | 145,716 | ||||||||||||||||||||||||||||||
| of options extended | - | - | 122,875 | - | - | - | - | - | - | 122,875 | ||||||||||||||||||||||||||||||
| Acquisition of non controlling interest in subsidiary | - | - | (17,272 | ) | - | - | - | - | - | (750,125 | ) | (767,397 | ) | |||||||||||||||||||||||||||
| Dividend to non controlling interest | - | - | - | - | - | - | - | - | (1,003,853 | ) | (1,003,853 | ) | ||||||||||||||||||||||||||||
| Payment received for stock subscription | - | - | - | - | - | 356,500 | - | - | - | 356,500 | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | (1,563,394 | ) | (448,416 | ) | (2,011,810 | ) | |||||||||||||||||||||||||||
| Net income for the year | - | - | - | - | 3,402,761 | - | - | - | 1,654,380 | 5,057,141 | ||||||||||||||||||||||||||||||
| Balance at June 30, 2016 | 10,713,372 | $ | 107,134 | $ | 121,448,946 | $ | (415,425 | ) | $ | (37,323,360 | ) | $ | (783,172 | ) | $ | - | $ | (18,730,494 | ) | $ | 13,337,702 | $ | 77,641,331 | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-7 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended June 30,
| 2016 | 2015 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | 5,057,141 | $ | (5,249,172 | ) | |||
| Adjustments to reconcile net income (loss)to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 7,152,139 | 10,343,814 | ||||||
| Provision for bad debts | 237,703 | (434,928 | ) | |||||
| (Gain) loss on sale of assets | (23,930 | ) | 64,598 | |||||
| Stock issued for services | 1,264,618 | 1,375,149 | ||||||
| Fair market value of warrants and stock options granted | 268,591 | 622,488 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (3,758,422 | ) | (871,959 | ) | ||||
| Accounts receivable - related party | (2,564,819 | ) | (1,179,931 | ) | ||||
| Revenues in excess of billing | (4,987,772 | ) | (2,997,449 | ) | ||||
| Revenues in excess of billing - related party | (884,738 | ) | (16,281 | ) | ||||
| Other current assets | (729,359 | ) | 580,618 | |||||
| Accounts payable and accrued expenses | 558,033 | 726,700 | ||||||
| Unearned revenue | 69,851 | 2,114,635 | ||||||
| Net cash provided by operating activities | 1,659,036 | 5,078,282 | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | (3,335,921 | ) | (3,558,712 | ) | ||||
| Sales of property and equipment | 986,433 | 1,102,615 | ||||||
| Investment | (555,556 | ) | - | |||||
| Purchase of subsidiary shares from open market | (767,397 | ) | (577,222 | ) | ||||
| Net cash used in investing activities | (3,672,441 | ) | (3,033,319 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from sale of common stock | 64,931 | 2,294,599 | ||||||
| Proceeds from the exercise of stock options and warrants | 1,137,480 | 191,400 | ||||||
| Proceeds from exercise of subsidiary options | 16,744 | 12,185 | ||||||
| Restricted cash | - | 2,438,844 | ||||||
| Dividend paid by subsidiary to Non controlling interest | (1,003,853 | ) | (806,937 | ) | ||||
| Proceeds from bank loans | 1,333,406 | 1,410,313 | ||||||
| Payments on capital lease obligations and loans - net | (950,529 | ) | (4,079,174 | ) | ||||
| Net cash provided by financing activities | 598,179 | 1,461,230 | ||||||
| Effect of exchange rate changes | (1,196,204 | ) | (799,931 | ) | ||||
| Net increase (decrease) in cash and cash equivalents | (2,611,430 | ) | 2,706,262 | |||||
| Cash and cash equivalents, beginning of the period | 14,168,957 | 11,462,695 | ||||||
| Cash and cash equivalents, end of period | $ | 11,557,527 | $ | 14,168,957 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-8 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended June 30,
| 2016 | 2015 | |||||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 251,551 | $ | 162,904 | ||||
| Taxes | $ | 391,285 | $ | 503,924 | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Provided services for investment in eeGeo, Inc. | $ | 164,794 | $ | - | ||||
| Assets acquired under capital lease | $ | 269,427 | $ | - | ||||
| Adjustment of uncollectable subscription receivable with additional paid in capital | $ | - | $ | 982,181 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-9 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
NetSol Technologies, Inc. and subsidiaries (collectively, the “Company”), was incorporated under the laws of the State of Nevada on March 18, 1997.
The Company designs, develops, markets, and exports proprietary software products to customers in the automobile finance and leasing, banking, healthcare, and financial services industries worldwide. The Company also provides system integration, consulting, IT products and services in exchange for fees from customers.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company as follows:
Wholly-owned Subsidiaries
NetSol Technologies Americas, Inc. (“NTA”)
NetSol Technologies Limited (“NetSol UK”)
NetSol Technologies Australia Pty Limited (“NetSol Australia”)
NetSol Technologies Europe Limited (“NTE”)
NTPK (Thailand) Co. Limited (“NTPK Thailand”)
NetSol Connect (Private), Ltd. (“Connect”)
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”)
NetSol Technologies Thailand Limited (“NetSol Thai”)
Virtual Lease Services Holdings Limited
(“VLSH”)
Virtual Lease Services Limited (“VLS”)
Virtual Lease Services (Ireland) Limited (VLSIL)
The Company consolidates any variable interest entities of which it is the primary beneficiary. Equity investments through which the Company exercises significant influence over but does not control the investee and is not the primary beneficiary of the investee’s activities are accounted for using the equity method. Investments through which the Company is not able to exercise significant influence over the investee and which do not have readily determinable fair values are accounted for under the cost method. All material inter-company accounts have been eliminated in the consolidation.
| F-10 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
(B) Basis of Presentation
The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).
(C) 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.
(D) Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid debt instruments with original maturities of three months or less which are not securing any corporate obligations.
(E) Concentration of Credit Risk
Cash includes cash on hand and demand deposits in accounts maintained within the United States as well as in foreign countries. Certain financial instruments, which subject the Company to concentration of credit risk, consist of cash and restricted cash. The Company maintains balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for the banks located in the United States. Balances at financial institutions within certain foreign countries are not covered by insurance. As of June 30, 2016 and 2015, the Company had uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $7,640,095 and $8,969,443, respectively. The Company has not experienced any losses in such accounts.
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.
On June 23, 2016, the United Kingdom (U.K.) held a referendum in which voters approved an exit from the European Union (E.U.), commonly referred to as “Brexit”. As a result of the referendum, it is expected that the British government will begin negotiating the terms of the U.K.’s future relationship with the E.U. Although it is unknown what those terms will be, it is possible that there will be greater restrictions on imports and exports between the U.K. and E.U. countries and perhaps increased regulatory complexities. These changes may adversely affect the Company’s operations and financial results.
| F-11 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
(F) Restricted Cash
The Company has placed $90,000 in a savings account with HSBC as collateral against a standby letter of credit issued by the bank in favor of the landlord for office space.
(G) Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management regularly reviews the composition of accounts receivable and analyzes customer credit worthiness, customer concentrations, current economic trends and changes in customer payment patterns. Reserves are recorded primarily on a specific identification basis. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of June 30, 2016 and 2015, the Company had recorded allowance for doubtful accounts of $492,498 and $524,565, respectively.
(H) Revenues in Excess of Billings
Revenues in excess of billings represent the total of the project to be billed to the customer over the revenues recognized per US GAAP. As the customers are billed under the terms of their contract, the corresponding amount is transferred from this account to “Accounts Receivable.”
(I) Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation is computed using various methods over the estimated useful lives of the assets, ranging from three to twenty years. Following is the summary of estimated useful lives of the assets:
| Category | Estimated Useful Life | |
| Computer Equipment & Software | 3 to 5 Years | |
| Office furniture and equipment: | 5 to 10 Years | |
| Building | 20 Years | |
| Autos | 5 Years | |
| Assets under capital leases | 3 to 10 Years | |
| Improvements | 5 to 10 Years |
The Company capitalizes costs of materials, consultants, and payroll and payroll-related costs for employees incurred in developing internal-use computer software. These costs are included with “Computer equipment and software.”
| F-12 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
(J) Impairment of Long-Lived Assets
The Company tests long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.
(K) 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. The Company assesses recoverability by determining whether the carrying value of such assets will be recovered through the discounted expected future cash flows. If the future discounted cash flows are less than the carrying amount of these assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets.
(L) 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 present value of expected future net income from the product. If such evaluations indicate that the unamortized software development costs exceed the present value of expected future net income, the Company writes off the amount which the unamortized software development costs exceed such present 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.
(M) 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 exceeds its carrying value, step two does not need to be performed. 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. 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.
| F-13 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
(N) Fair Value of Financial Instruments
The Company applies the provisions of ASC 820-10, “Fair Value Measurements and Disclosures.” ASC 820-10 defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. For certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and short-term debt, the carrying amounts approximate fair value due to their relatively short maturities. The carrying amounts of the long-term debt approximate their fair values based on current interest rates for instruments with similar characteristics.
The three levels of valuation hierarchy are defined as follows:
| Level 1: | Valuations consist of unadjusted quoted prices in active markets for identical assets and liabilities and has the highest priority. |
| Level 2: | Valuations rely on quoted prices in markets that are not active or observable inputs over the full term of the asset or liability. |
| Level 3: | Valuations are based on prices or third party or internal valuation models that require inputs that are significant to the fair value measurement and are less observable and thus have the lowest priority. |
Management analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities From Equity” and ASC 815, “Derivatives and Hedging.” Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments. In addition, the fair values of freestanding derivative instruments such as warrant and option derivatives are valued using the Black-Scholes model.
(O) Revenue Recognition
The Company derives revenues from the following sources: (1) software licenses, (2) services, which include implementation and consulting services, and (3) maintenance, which includes post contract customer support.
The Company recognizes revenue from license contracts without major customization when a non-cancelable, non-contingent license agreement has been signed, delivery of the software has occurred, the fee is fixed or determinable, and collectability is probable. Delivery is considered to have occurred upon electronic transfer of the license key that provides immediate availability of the product to the purchaser. Determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue the Company reports.
| F-14 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
If an arrangement does not qualify for separate accounting of the software license and consulting transactions, then new software license revenue is generally recognized together with the consulting services based on contract accounting using either the percentage-of-completion or completed-contract method. Contract accounting is applied to any arrangements: (1) that include milestones or customer specific acceptance criteria that may affect collection of the software license fees; (2) where services include significant modification or customization of the software; (3) where significant consulting services are provided for in the software license contract without additional charge or are substantially discounted; or (4) where the software license payment is tied to the performance of consulting services.
Revenue from consulting services is recognized as the services are performed for time-and-materials contracts. Revenue from training and development services is recognized as the services are performed.
Revenue from maintenance agreements is recognized ratably over the term of the maintenance agreement, typically one year.
Multiple Element Arrangements
The Company may enter into multiple element revenue arrangements in which a customer may purchase a number of different combinations of software licenses, consulting services, maintenance and support, as well as training and development.
Vendor specific objective evidence (“VSOE”) of fair value for each element is based on the price for which the element is sold separately. The Company determines the VSOE of fair value of each element based on historical evidence of the Company’s stand-alone sales of these elements to third-parties or from the stated renewal rate for the elements contained in the initial software license arrangement. When VSOE of fair value does not exist for any undelivered element, revenue is deferred until the earlier of the point at which such VSOE of fair value exists or until all elements of the arrangement have been delivered. The only exception to this guidance is when the only undelivered element is maintenance and support or other services, then the entire arrangement fee is recognized ratably over the performance period.
(P) Unearned Revenue
Unearned revenue represents billings in excess of revenue earned on contracts and are recognized on a pro-rata basis over the life of the contract. Unearned revenue was $4,739,214 and $4,897,327 as of June 30, 2016 and 2015, respectively.
| F-15 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
(Q) Cost of Revenues
Cost of revenues includes salaries and benefits for technical employees, consultant costs, amortization of capitalized computer software development costs, depreciation of computer and equipment, travel costs, and indirect costs such as rent and insurance.
(R) Advertising Costs
The Company expenses the cost of advertising as incurred. Advertising costs for the years ended June 30, 2016 and 2015 were $293,683 and $250,801, respectively.
(S) Share-Based Compensation
The Company records stock compensation in accordance with ASC 718, Compensation – Stock Compensation. ASC 718 requires companies to measure compensation cost for stock employee compensation at fair value at the grant date and recognize the expense over the employee’s requisite service period. The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.
(T) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Applicable interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statements of operations.
| F-16 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
(U) Foreign Currency Translation
The Company transacts business in various foreign currencies. The accounts of NetSol UK, NTE, VLSH and VLS use the British Pound; VLSIL and NTG use the Euro; NetSol PK, Connect, Omni and NetSol Innovation use Pakistan Rupees; NTPK Thailand and NetSol Thai use Thai Baht; NetSol 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. Consequently, revenues and expenses of operations outside the United States are translated into U.S. Dollars using average exchange rates while assets and liabilities of operations outside the United States are translated into U.S. Dollars using exchange rates at the balance sheet date. The effects of foreign currency translation adjustments are recorded to other comprehensive income. Accumulated translation losses classified as an item of accumulated other comprehensive loss in the stockholders’ equity section of the consolidated balance sheets were $18,730,494 and $17,167,100 as of June 30, 2016 and 2015, respectively. During the years ended June 30, 2016 and 2015, comprehensive income (loss) in the consolidated statements of operations included NetSol’s share of translation loss of $1,563,394 and $2,187,877, respectively.
Net foreign exchange transaction losses included in non-operating income (expense) in the accompanying consolidated statements of operations were $738,158 and $453,770 for the years ended June 30, 2016 and 2015, respectively.
(V) Statement of Cash Flows
The Company’s cash flows from operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheet.
(W) Segment Reporting
The Company defines operating segments as components about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performances. The Company allocates its resources and assesses the performance of its sales activities based on the geographic locations of its subsidiaries (see Note 17).
(X) Reclassifications
Certain 2015 balances have been reclassified to conform to the 2016 presentation.
(Y) 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.
| F-17 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
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.
| F-18 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
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.
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.
| F-19 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
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.
| F-20 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
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 year ended June 30, 2016 | ||||||||||||
| Net Income | Shares | Per Share | ||||||||||
| Basic income per share: | ||||||||||||
| Net income available to common shareholders | $ | 3,402,761 | 10,391,157 | $ | 0.33 | |||||||
| Effect of dilutive securities | ||||||||||||
| Stock options | - | 190,595 | - | |||||||||
| Warrants | - | 3,083 | - | |||||||||
| Diluted income per share | $ | 3,402,761 | 10,584,835 | $ | 0.32 | |||||||
| For the year ended June 30, 2015 | ||||||||||||
| Net Loss | Shares | Per Share | ||||||||||
| Basic loss per share: | ||||||||||||
| Net loss available to common shareholders | $ | (5,548,818 | ) | 9,728,122 | $ | (0.57 | ) | |||||
| Effect of dilutive securities | ||||||||||||
| Stock options | - | - | - | |||||||||
| Warrants | - | - | - | |||||||||
| Diluted loss per share | $ | (5,548,818 | ) | 9,728,122 | $ | (0.57 | ) | |||||
As of June 30, 2016 and 2015, the following potential dilutive shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would be anti-dilutive.
| 2016 | 2015 | |||||||
| Stock Options | - | 708,133 | ||||||
| Warrants | - | 163,124 | ||||||
| - | 871,257 | |||||||
| F-21 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
NOTE 4 – RELATED PARTY TRANSACTIONS
NetSol-Innovation
In November 2004, the Company entered into a joint venture agreement with 1insurer formerly Innovation Group called NetSol-Innovation. NetSol-Innovation provides support services to 1insurer. During the years ended June 30, 2016 and 2015, NetSol Innovation provided services of $8,161,015 and $6,043,617, respectively. Accounts receivable at June 30, 2016 and 2015 were $4,689,322 and $3,226,733, respectively.
Investec Asset Finance
In October 2011, NTE entered into an agreement with Investec Asset Finance to acquire VLS. NTE and VLS provide support services to Investec. During the year ended June 30, 2016 and 2015, NTE and VLS provided maintenance and services of $4,437,917 and $1,652,077, respectively. Accounts receivable at June 30, 2016 and 2015 were $1,001,856 and $265,166, respectively. Revenue in excess of billing was $804,168 as of June 30, 2016.
G-Force; LLC
Najeeb Ghauri, CEO and Chairman of the Board, and Naeem Ghauri, Director, have a financial interest in G-Force, LLC which purchased a 4.9% investment in eeGeo, Inc. for $1,111,111. G-Force, LLC paid $555,556 at the initial closing and $555,555 on September 1, 2016. See Note 8 “Other Long Term Assets”
NOTE 5 – MAJOR CUSTOMERS
The Company is a strategic business partner for Daimler Financial Services (which consists of a group of many companies in different countries), which accounts for approximately 19.96% and 12.89% of revenue, and 1insurer accounts for approximately 12.64% and 11.84% of revenue for the fiscal years ended June 30, 2016 and 2015, respectively. Accounts receivable at June 30, 2016 for these companies were $5,306,166 and $4,689,322, respectively. Accounts receivable at June 30, 2015 for these companies were $446,754 and $3,226,733, respectively.
NOTE 6 – OTHER CURRENT ASSETS
Other current assets consisted of the following:
| As of June 30, | As of June 30, | |||||||
| 2016 | 2015 | |||||||
| Prepaid Expenses | $ | 386,578 | $ | 452,314 | ||||
| Advance Income Tax | 968,334 | 895,075 | ||||||
| Employee Advances | 83,978 | 36,816 | ||||||
| Security Deposits | 72,985 | 54,186 | ||||||
| Other Receivables | 486,562 | 322,647 | ||||||
| Other Assets | 216,191 | 110,002 | ||||||
| Total | $ | 2,214,628 | $ | 1,871,040 | ||||
| F-22 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
NOTE 7 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
| As of June 30, | As of June 30, | |||||||
| 2016 | 2015 | |||||||
| Office Furniture and Equipment | $ | 3,346,156 | $ | 3,104,375 | ||||
| Computer Equipment | 25,935,620 | 25,911,422 | ||||||
| Assets Under Capital Leases | 2,409,074 | 1,887,767 | ||||||
| Building | 9,185,570 | 8,743,130 | ||||||
| Land | 2,410,664 | 2,451,577 | ||||||
| Capital Work In Progress | - | 392,243 | ||||||
| Autos | 1,073,447 | 943,873 | ||||||
| Improvements | 385,135 | 204,779 | ||||||
| Subtotal | 44,745,666 | 43,639,166 | ||||||
| Accumulated Depreciation | (21,971,231 | ) | (18,519,532 | ) | ||||
| Property and Equipment, Net | $ | 22,774,435 | $ | 25,119,634 | ||||
For the years ended June 30, 2016 and 2015, depreciation expense totaled $4,387,121 and $5,671,155, respectively. Of these amounts, $3,161,951 and $3,888,122 are reflected as part of cost of revenues for the years ended June 30, 2016 and 2015, respectively.
Following is a summary of fixed assets held under capital leases as of June 30, 2016 and 2015, respectively:
| As of June 30, | As of June 30, | |||||||
| 2016 | 2015 | |||||||
| Computers and Other Equipment | $ | 503,926 | $ | 590,625 | ||||
| Furniture and Fixtures | 408,200 | 414,023 | ||||||
| Vehicles | 1,496,948 | 883,119 | ||||||
| Total | 2,409,074 | 1,887,767 | ||||||
| Less: Accumulated Depreciation - Net | (713,248 | ) | (577,215 | ) | ||||
| $ | 1,695,826 | $ | 1,310,552 | |||||
NOTE 8 – OTHER LONG TERM ASSETS
| As of June 30, | As of June 30, | ||||||||||
| 2016 | 2015 | ||||||||||
| Investment | (1) | $ | 720,350 | $ | - | ||||||
| Long Term Security Deposits | 122,203 | 141,150 | |||||||||
| Total | $ | 842,553 | $ | 141,150 | |||||||
| F-23 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
| (1) | Investment under cost method |
| On March 2, 2016, the Company purchased a 4.9% interest in eeGeo, Inc. a non-public company for $1,111,111. The Company paid $555,556 at the initial closing and $555,555 on September 1, 2016. NetSol PK, the subsidiary of the Company, purchased a 12.2% investment in eeGeo, Inc., for $2,777,778 which will be earned over future periods by providing IT and enterprise software solutions. Per the agreement, NetSol PK is to provide a minimum of $200,000 of services in each three-month period and the entire balance is required to be provided within three years of the date of the agreement. NetSol PK may be required to forfeit the shares back to eeGeo, Inc., if NetSol PK fails to provide the future services. As of June 30, 2016, NetSol PK has provided services valued at $164,794 which is recorded as investment. |
In connection with the investment, the Company and NetSol PK received a warrant to purchase preferred stock which included the following key terms and features:
| ● | The warrants are exercisable into share of the “Next Round Preferred”, only if and when the Next Round Preferred is issued by eeGeo, Inc., in a “Qualified Financing”. | |
| ● | The warrants expire on March 2, 2020. | |
| ● | “Next Round Preferred” is defined as occurring if eeGeo, Inc.,’s preferred stock (or securities convertible into preferred stock) are issued in a Qualified Financing that occurs after March 2, 2016. | |
| ● | “Qualified Financing” is defined as financing with total proceeds of at least $2 million. | |
| ● | The total number of common stock shares to be issued is equal to $1,250,000 divided by the per share price of the Next Round Preferred. | |
| ● | The exercise price of the warrants is equal to the greater of |
| a) | 70% of the per share price of the Next Round Preferred sold in a Qualified Financing, or | |
| b) | $25,000,000 divided by the total number of shares of common stock outstanding immediately prior to the Qualified Financing (on a fully-diluted basis, excluding the number of common stock shares issuable upon the exercise of any given warrant). |
The Company accounted for this investment using the cost method. At June 30, 2016, the Company has determined that there is no impairment.
| F-24 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
.June 30, 2016 and 2015
NOTE 9 – INTANGIBLE ASSETS
Intangible assets consisted of the following:
| As of June 30, | As of June 30, | |||||||
| 2016 | 2015 | |||||||
| Product Licenses - Cost | $ | 48,632,368 | $ | 48,632,368 | ||||
| Additions | - | - | ||||||
| Deletion | (1,387,371 | ) | - | |||||
| Effect of Translation Adjustment | (3,323,518 | ) | (2,325,008 | ) | ||||
| Accumulated Amortization | (24,247,446 | ) | (23,491,893 | ) | ||||
| Net Balance | $ | 19,674,033 | $ | 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 $19,674,033 will be amortized over the next 7.75 years. Amortization expense for the years ended June 30, 2016 and 2015 was $2,765,018 and $4,448,735, respectively.
During the year ended June 30, 2015, the Company recorded amortization expense of $113,243 and $110,681 related to customer lists and technology, respectively, and they were fully amortized as of June 30, 2015.
(B) Future Amortization
Estimated amortization expense of intangible assets over the next five years is as follows:
| Year ended: | ||||
| June 30, 2017 | $ | 2,758,035 | ||
| June 30, 2018 | 2,758,035 | |||
| June 30, 2019 | 2,758,035 | |||
| June 30, 2020 | 2,758,035 | |||
| June 30, 2021 | 2,758,035 | |||
| Thereafter | 5,883,858 | |||
| $ | 19,674,033 | |||
| F-25 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
NOTE 10 – GOODWILL
Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in prior period business combinations. Goodwill was comprised of the following amounts:
| As of June 30, | As of June 30, | |||||||
| 2016 | 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 year ended June 30, 2016.
NOTE 11 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
| As of June 30, | As of June 30, | |||||||
| 2016 | 2015 | |||||||
| Accounts Payable | $ | 1,346,532 | $ | 1,514,841 | ||||
| Accrued Liabilities | 4,171,058 | 3,978,435 | ||||||
| Accrued Payroll & Taxes | 231,881 | 291,546 | ||||||
| Taxes Payable | 66,437 | 22,957 | ||||||
| Other Payable | 146,862 | 144,782 | ||||||
| Total | $ | 5,962,770 | $ | 5,952,561 | ||||
| F-26 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
NOTE 12 – DEBTS
Notes and leases payable consisted of the following:
| As of June 30, 2016 | ||||||||||||||
| Current | Long-Term | |||||||||||||
| Name | Total | Maturities | Maturities | |||||||||||
| D&O Insurance | (1) | $ | 65,114 | $ | 65,114 | $ | - | |||||||
| HSBC Loan | (2) | 93,704 | 93,704 | - | ||||||||||
| Loan Payable Bank | (3) | 3,792,907 | 3,792,907 | - | ||||||||||
| Loan From Related Party | (4) | - | - | - | ||||||||||
| 3,951,725 | 3,951,725 | - | ||||||||||||
| Subsidiary Capital Leases | (5) | 966,051 | 488,359 | 477,692 | ||||||||||
| $ | 4,917,776 | $ | 4,440,084 | $ | 477,692 | |||||||||
| 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 June 30, 2016 and 2015, respectively.
(2) In October 2011, the Company’s subsidiary, NTE, entered into a loan agreement with HSBC Bank to finance the acquisition of 51% of a controlling interest in Virtual Leasing Services Limited. HSBC Bank guaranteed the loan up to a limit of £1,000,000, or approximately $1,333,333 for a period of 5 years with monthly payments of £18,420, or approximately $24,560. The interest rate was 4% which is 3.5% above the bank sterling base rate. The loan is securitized against 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 years ended June 30, 2016 and 2015 was $12,846 and $47,255, 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 June 30, 2016, NTE was in compliance with this covenant.
| F-27 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
(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 $3,792,907. The interest rate for the loans was 4.5% and 7.5% at June 30, 2016 and 2015, respectively. Interest expense for the year ended June 30, 2016 and 2015 was $148,475 and $146,264, 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 June 30, 2016, NetSol PK was in compliance with this covenant.
(4) In March 2014, the Company’s subsidiary, VLS, entered into a loan agreement with Investec. The loan amount was £150,000, or approximately $200,000, for a period of two years with annual payments of £75,000, or approximately $100,000. The interest rate was 3.13%. As of June 30, 2016, VLS has paid this facility in full.
All future payments of the loans described in the above sub notes 1 to 4 are considered current maturities.
(5) The Company leases various fixed assets under capital lease arrangements expiring in various years through 2018. 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 depreciated over the lesser of their related lease terms or their estimated useful lives and are secured by the assets themselves. Depreciation of assets under capital leases is included in depreciation expense for the years ended June 30, 2016 and 2015.
Following is the aggregate minimum future lease payments under capital leases for the year ended June 30, 2016:
| Amount | ||||
| Minimum Lease Payments | ||||
| Due FYE 6/30/17 | $ | 548,023 | ||
| Due FYE 6/30/18 | 316,115 | |||
| Due FYE 6/30/19 | 195,956 | |||
| Total Minimum Lease Payments | 1,060,094 | |||
| Interest Expense relating to future periods | (94,043 | ) | ||
| Present Value of minimum lease payments | 966,051 | |||
| Less: Current portion | (488,359 | ) | ||
| Non-Current portion | $ | 477,692 | ||
| F-28 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
NOTE 13 – INCOME TAXES
The Company is incorporated in the State of Nevada and registered to do business in the State of California. The following is a breakdown of income before the provision for income taxes:
Consolidated pre-tax income (loss) consists of the following:
| Years Ended June 30, | ||||||||
| 2016 | 2015 | |||||||
| US operations | $ | (2,527,545 | ) | $ | (3,621,392 | ) | ||
| Foreign operations | 8,237,232 | (1,214,282 | ) | |||||
| $ | 5,709,687 | $ | (4,835,674 | ) | ||||
The components of the provision for income taxes are as follows:
| Years Ended June 30, | ||||||||
| 2016 | 2015 | |||||||
| Current: | ||||||||
| Federal | $ | - | $ | - | ||||
| State and Local | - | - | ||||||
| Foreign | 652,546 | 413,498 | ||||||
| Deferred: | ||||||||
| Federal | - | - | ||||||
| State and Local | - | - | ||||||
| Foreign | - | - | ||||||
| Provision for income taxes | $ | 652,546 | $ | 413,498 | ||||
A reconciliation of taxes computed at the statutory federal income tax rate to income tax expense (benefit) is as follows:
| Years Ended June 30, | ||||||||||||||||
| 2016 | 2015 | |||||||||||||||
| Income tax (benefit) provision at statutory rate | $ | 1,998,390 | 35.0 | % | $ | (1,692,486 | ) | 35.0 | % | |||||||
| State income (benefit) taxes, net of federal tax benefit | 328,307 | 5.7 | % | (278,051 | ) | 5.7 | % | |||||||||
| Foreign earnings taxed at different rates | (2,026,031 | ) | -35.5 | % | 1,655,514 | -34.2 | % | |||||||||
| Change in valuation allowance for deferred tax assets | 476,646 | 8.3 | % | 843,390 | -17.4 | % | ||||||||||
| Share of net (income) loss in equity method investee | - | 0.0 | % | - | 0.0 | % | ||||||||||
| Other | (124,766 | ) | -2.19 | % | (114,869 | ) | 2.4 | % | ||||||||
| Provision for income taxes | $ | 652,546 | 11.4 | % | $ | 413,498 | -8.6 | % | ||||||||
| F-29 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
Deferred income tax assets and liabilities as of June 30, 2016 and 2015 consist of tax effects of temporary differences related to the following:
| Years Ended June 30, | ||||||||
| 2016 | 2015 | |||||||
| Net operating loss carry forwards | $ | 14,924,107 | $ | 14,527,578 | ||||
| Other | 559,792 | 479,674 | ||||||
| Net deferred tax assets | 15,483,899 | 15,007,252 | ||||||
| Valuation allowance for deferred tax assets | (15,483,899 | ) | (15,007,252 | ) | ||||
| Net deferred tax assets | $ | - | $ | - | ||||
The Company has established a full valuation allowance as management believes it is more likely than not that these assets will not be realized in the future. The valuation allowance increased by $476,647 for the year ended June 30, 2016 mainly due to adjusting the Company’s net operating loss carry forwards for current year operating losses in certain subsidiaries.
At June 30, 2016, federal and state net operating loss carry forwards in the United States of America were $39,205,468 and $6,614,243, respectively. Federal net operating loss carry forwards begin to expire in 2020, while state net operating loss carry forwards are expiring each year. Due to both historical and recent changes in the capitalization structure of the Company, the utilization of net operating losses may be limited pursuant to section 382 of the Internal Revenue Code. Net operating losses related to foreign entities were $2,827,685 at June 30, 2016.
As of June 30, 2016, the Company does not have any unrecognized tax benefits related to various federal and state income tax matters. The Company will recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense.
The Company is subject to U.S. federal income tax, as well as various state and foreign jurisdictions. The Company is currently open to audit under the statute of limitations by the federal and state jurisdictions for the years ending June 30, 2013 through 2015. The Company does not anticipate any material amount of unrecognized tax benefits within the next 12 months.
The cumulative amount of undistributed earnings of foreign subsidiaries that the Company intends to permanently invest and upon which no deferred US income taxes have been provided is $29,195,810 as of June 30, 2016. The additional US income tax on unremitted foreign earnings, if repatriated, would be offset in part by foreign tax credits. The extent of this offset would depend on many factors, including the method of distribution, and specific earnings distributed. The Company determined that it is not practicable to determine unrecognized deferred tax liability associated with the unremitted earnings attributable to the foreign subsidiaries.
Income from the export of computer software and its related services developed in Pakistan is exempt from tax through June 30, 2018.
| F-30 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
NOTE 14 – STOCKHOLDERS’ EQUITY
During the years ended June 30, 2016 and 2015, the Company issued 54,318 and 152,500 shares of common stock, respectively, for services rendered by officers of the Company. These shares were valued at the fair market value of $304,138 and $699,000, respectively, and recorded as compensation expense in the accompanying consolidated financial statements.
During the years ended June 30, 2016 and 2015, the Company issued 33,000 and 41,726 shares of common stock respectively, 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 $167,974 and $173,633 respectively, and recorded as compensation expense in the accompanying consolidated financial statements.
During the years ended June 30, 2016 and 2015, the Company issued 141,204 and 170,275 shares of common stock, respectively, to employees pursuant to the terms of their employment agreements. These shares were valued at the fair market value of $792,506 and $603,075, respectively, and recorded as compensation expense in the accompanying consolidated financial statements.
During the year ended June 30, 2016, the Company collected subscription receivable of $356,500 related to the exercise of stock options in previous years.
During the year ended June 30, 2016 and 2015, the Company received $780,980 and $191,400, respectively, pursuant to a stock option agreement for the exercise of 177,024 and 49,329 shares of common stock, respectively, at prices ranging from $3.88 to $4.92 and $3.88 per share, respectively.
During the year ended June 30, 2015, the Company received $2,359,530 pursuant to a stock purchase agreement for the purchase of 743,107 restricted shares of common stock at prices ranging from $2.85 to $4.46 per share.
During the year ended June 30, 2015, the Company determined that certain subscription receivables related to stock issuances in previous years were deemed uncollectible and reduced the subscription receivable account $982,181 with a corresponding entry to additional-paid-in-capital.
During the year ended June 30, 2015, the Company determined that certain subscription receivables related to the exercise of stock options were deemed uncollectible and reduced the subscription receivable account by $158,635 with a corresponding entry to compensation expense.
| F-31 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
NOTE 15 – STOCK BASED COMPENSATION
The Company maintains several Incentive and Non-Statutory Stock Option Plans (“Plans”) for its employees and consultants. Options granted under these Plans to an employee of the Company become exercisable over a period of no longer than ten (10) years and no less than twenty percent (20%) of the shares are exercisable annually. Options are not exercisable, in whole or in part, prior to one (1) year from the date of grant unless the board of directors specifically determines otherwise, as provided.
Two types of options may be granted under these Plans: (1) Incentive Stock Options (also known as Qualified Stock Options) which may only be issued to employees of the Company and whereby the exercise price of the option is not less than the fair market value of the common stock on the date it was reserved for issuance under the Plan; and (2) Non-statutory Stock Options which may be issued to either employees or consultants of the Company and whereby the exercise price of the option is less than the fair market value of the common stock on the date it was reserved for issuance under the plan. Grants of options may be made to employees and consultants without regard to any performance measures. All options issued pursuant to the Plan are nontransferable and subject to forfeiture.
In May 2015, the shareholders approved the 2015 Equity Incentive Plan (the “2015 Plan”) which provides for the grant of equity-based awards, including options, stock appreciation rights, restricted stock awards or performance share awards or any other right or interest relating to shares or cash, to eligible participants. The aggregate number of shares reserved and available for award under the 2015 Plan was 1,250,000. The 2015 Plan contemplates the issuance of common stock upon exercise of options or other awards granted to eligible persons under the 2015 Plan. Shares issued under the 2015 Plan may be both authorized and unissued shares or previously issued shares acquired by the Company. Upon termination or expiration of an unexercised option, stock appreciation right or other stock-based award under the 2015 Plan, in whole or in part, the number of shares of common stock subject to such award again becomes available for grant under the 2015 Plan. Any shares of restricted stock forfeited as described below will become available for grant. The maximum number of shares that may be granted to any one participant in any calendar year may not exceed 50,000 shares. All options issued pursuant to the Plan are nontransferable and subject to forfeiture.
Options granted under the 2015 Plan are not generally transferable and must be exercised within 10 years, subject to earlier termination upon termination of the option holder’s employment, but in no event later than the expiration of the option’s term. The exercise price of each option may not be less than the fair market value of a share of the Company’s common stock on the date of grant (except in connection with the assumption or substitution for another option in a manner qualifying under Section 424(a) of the Internal Revenue Code of 1986, as amended. Incentive stock options granted to any participant who owns 10% or more of the Company’s outstanding common stock (a “Ten Percent Shareholder”) must have an exercise price equal to or exceeding 110% of the fair market value of a share of our common stock on the date of the grant and must not be exercisable for longer than five years. Options become vested and exercisable at such times or upon such events and subject to such terms, conditions, performance criteria or restrictions as specified by the Committee. The maximum term of any option granted under the 2015 Plan is ten years, provided that an incentive stock option granted to a Ten Percent Shareholder must have a term not exceeding five years.
| F-32 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
Under the 2015 Plan, a participant may also be awarded a “performance award,” which means that the participant may receive cash, stock or other awards contingent upon achieving performance goals established by the Committee. The Committee may also make “deferred share” awards, which entitle the participant to receive the Company’s stock in the future for services performed between the date of the award and the date the participant may receive the stock. The vesting of deferred share awards may be based on performance criteria and/or continued service with the Company. A participant who is granted a “stock appreciation right” under the Plan has the right to receive all or a percentage of the fair market value of a share of stock on the date of exercise of the stock appreciation right minus the grant price of the stock appreciation right determined by the Committee (but in no event less than the fair market value of the stock on the date of grant). Finally, the Committee may make “restricted stock” awards under the 2015 Plan, which are subject to such terms and conditions as the Committee determines and as are set forth in the award agreement related to the restricted stock. As of June 30, 2015, 460,500 shares were allocated under this plan to non-officer employees.
A summary of option and warrant activity for the years ended June 30, 2016 and 2015 is presented below:
| OPTIONS: | ||||||||||||||||
| # of shares | Weighted Ave Exericse Price | Weighted Average Remaining Contractual Life (in years) | Aggregated Intrinsic Value | |||||||||||||
| Outstanding and exercisable, June 30, 2014 | 757,462 | $ | 6.65 | 2.2 | $ | - | ||||||||||
| Granted | - | - | ||||||||||||||
| Exercised | (49,329 | ) | $ | 3.88 | ||||||||||||
| Expired / Cancelled | - | - | ||||||||||||||
| Outstanding and exercisable, June 30, 2015 | 708,133 | $ | 6.84 | 1.22 | $ | 572,352 | ||||||||||
| Granted | 152,024 | $ | 4.50 | |||||||||||||
| Exercised | (177,024 | ) | $ | 4.37 | ||||||||||||
| Expired / Cancelled | (73,000 | ) | $ | 24.08 | ||||||||||||
| Outstanding and exercisable, June 30, 2016 | 610,133 | $ | 4.90 | 0.99 | $ | 799,030 | ||||||||||
| WARRANTS: | ||||||||||||||||
| Outstanding and exercisable, June 30, 2015 | 163,124 | $ | 7.29 | 1.22 | $ | - | ||||||||||
| Granted / adjusted | - | - | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Expired | - | - | ||||||||||||||
| Outstanding and exercisable, June 30, 2016 | 163,124 | $ | 7.29 | 0.23 | $ | 9,303 | ||||||||||
The following table summarizes information about stock options and warrants outstanding and exercisable at June 30, 2016:
| Exercise Price | Number Outstanding and Exercisable | Weighted Average Remaining Contractual Life | Weighted Ave Exericse Price | |||||||||
| OPTIONS: | ||||||||||||
| $0.10 - $9.90 | 609,133 | 0.99 | $ | 4.88 | ||||||||
| $10.00 - $19.90 | 1,000 | 1.05 | $ | 16.00 | ||||||||
| Totals | 610,133 | 0.99 | $ | 4.90 | ||||||||
| WARRANTS: | ||||||||||||
| $5.00 - $7.50 | 163,124 | 0.23 | $ | 7.29 | ||||||||
| Totals | 163,124 | 0.23 | $ | 7.29 | ||||||||
| F-33 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
The assumptions used in calculating the fair value of options granted using the Black-Scholes option-pricing model for options granted during the year ended June 30, 2016 are as follows:
| June 30, 2016 | ||||
| Risk-free interest rate | 0.01% - 0.02 | % | ||
| Expected life | 3 months - 5 months | |||
| Expected volatility | 41.65% - 47.89 | % | ||
| Expected dividend | 0 | % | ||
The weighted average grant-date fair value for the options granted during the year ended June 30, 2016, was $0.96.
The Company recorded compensation expense of $268,591 and $622,488 for the years ended June 30, 2016 and 2015, respectively.
During 2016, the Company extended the contractual life for one year for 425,671 fully vested share options held by 2 officers and an employee. As a result of that modification, the Company recognized additional compensation expense of $122,875.
The following table summarizes stock grants awarded as compensation:
| # of shares | Weighted Average Grant Date Fair Value ($) | |||||||
| 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 | 864,500 | $ | 5.91 | |||||
| Vested | (240,939 | ) | $ | 5.51 | ||||
| Unvested, March 31, 2016 | 630,228 | $ | 6.07 | |||||
For the years ended June 30, 2016 and 2015, the Company recorded compensation expense of $1,264,618 and $1,475,707, respectively. The compensation expense related to the unvested stock grants as of June 30, 2016 was $3,810,765 which will be recognized during the fiscal years of 2017 to 2019.
| F-34 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
NOTE 16 – COMMITMENTS AND CONTINGENCIES
(A) Non-cancellable operating leases
| ● | The Company’s headquarters is located in Calabasas California with approximately 7,210 rentable square feet for $23,128 per month. The term of the lease is for five years and five months and expires August 31, 2017. A $23,821 security deposit is included in other assets in the accompanying consolidated financial statements. | |
| ● | The Australia lease is a three-year lease that expires in June 2018 with a monthly rent of approximately $4,820. | |
| ● | The Beijing lease is a three-year lease that expires in January 2017 with a monthly rent of approximately $12,649. | |
| ● | The Bangkok lease is a three year lease expiring in November 2016 with a monthly rent of approximately $8,541. | |
| ● | The NetSol Europe facilities, located in Horsham, United Kingdom, are leased until June 23, 2021 with a monthly rent of approximately $7,778. | |
| ● | VLS facilities, located in Chester, United Kingdom, are leased until July 2016 with a monthly rent of approximately $2,361. | |
| ● | NTA facilities are located in Alameda, California with a monthly rent of $8,381. The Alameda lease expired in November 2014, which has been renewed through January 2018. | |
| ● | The NetSol Karachi office lease expires in November 2019 and currently is rented at the rate of approximately $8,344 per month. |
Upon expiration of the leases, the Company does not anticipate any difficulty in obtaining renewals or alternative space. Rent expense amounted to $1,529,618 and $1,524,677 for the years ended June 30, 2016 and 2015, respectively.
The total annual lease commitment for the next five years is as follows:
| FYE 6/30/17 | $ | 915,219 | ||
| FYE 6/30/18 | 486,320 | |||
| FYE 6/30/19 | 231,250 | |||
| FYE 6/30/20 | 104,439 | |||
| FYE 6/30/21 | 93,333 |
(B) Litigation
As previously disclosed, on July 25, 2014, purported class action lawsuits were filed in the U.S. District Court for the Central District of California against the Company and certain of its current or former officers and/or directors, which have been consolidated under the caption Rand-Heart of New York, Inc. v. NetSol Technologies, Inc., et al., Case No. 2:14-cv-05787 PA (SHx). Plaintiffs subsequently filed consolidated amended complaints, which asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. As a result of the Company’s motions, the Court dismissed all of plaintiffs’ claims except those related to the scope of the Company’s release of its next generation product, NFS Ascent™, during the narrow proposed class period of October 24, 2013 to November 8, 2013. The Company filed an answer and affirmative defenses denying the remaining claims. On February 26, 2016, the parties executed a Stipulation of Settlement to fully resolve the consolidated class action lawsuit, and filed a motion seeking the Federal Court’s approval of the settlement. On March 28, 2016, the Court issued an order preliminarily approving the settlement and providing for notice to class members. Following class notice and hearing, the Court issued an order granting the motion for final approval of the settlement and plan of allocation and motion for an award of attorneys’ fees and case expenses on July 1, 2016. The Court’s Judgment approving the settlement on the terms set forth in the Stipulation of Settlement was signed on July 2, 2016. The cost of the settlement was covered by the Company’s insurers.
| F-35 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
On October 27, 2015, a shareholder derivative lawsuit was filed in the California state court entitled McArthur v Ghauri, et al., Case No. BC599020 (Los Angeles, Cty.), naming current and former members of the Company’s board of directors as defendants. The complaint alleges that the defendants breached their fiduciary duties based on the same alleged factual premise as the pending federal securities class action described above. The Company is named as a nominal defendant only and no damages are sought from it. On March 16, 2016, the parties in the California lawsuit reached an agreement-in-principle providing for the settlement of that case. The proposed settlement is on the terms and conditions set forth in a Memorandum of Understanding (“MOU”).
On December 30, 2015, a virtually identical shareholder derivative lawsuit was filed in Nevada state court, Paulovits v. Ghauri, et al., Case No. CV15-02470 (Washoe Cty.). The Nevada complaint names the same defendants and is based on the same alleged facts as the earlier-filed California case. On April 29, 2016, the Company filed a motion to dismiss or stay the Nevada proceeding on multiple grounds, including that is it duplicative of the first-filed California action. On May 23, 2016, pursuant to the parties’ stipulation, the Nevada court ordered that matter to be stayed for a period of one year.
On June 15, 2016, the parties in the California and the Nevada cases jointly executed a Stipulation and Agreement of Settlement of Derivative Claims, which is intended to fully resolve both cases. Pursuant to the stipulation and subject to the court’s approval, the Company has agreed to adopt or maintain certain corporate governance measures, and has agreed to cause its insurers to pay plaintiff counsel’s fees and expenses in an aggregate amount not to exceed $175,000. On June 16, 2016, the California plaintiff filed a motion for preliminary approval of the derivative settlement. The motion is scheduled to be heard by the California court on October 25, 2016.
NOTE 17 – SEGMENT INFORMATION AND GEOGRAPHIC AREAS
The Company has identified three global regions or segments for its products and services; North America, Europe, and Asia-Pacific. The 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 operational issues and strategies unique to their particular regional location. We account for intercompany sales and expenses as if the sales or expenses were to third parties and eliminate them in consolidation.
The following table presents a summary of identifiable assets as of June 30, 2016 and 2015:
| As of June 30, | As of June 30, | |||||||
| 2016 | 2015 | |||||||
| Identifiable assets: | ||||||||
| Corporate headquarters | $ | 3,646,160 | $ | 4,896,334 | ||||
| North America | 6,845,444 | 7,162,846 | ||||||
| Europe | 7,857,427 | 6,631,945 | ||||||
| Asia - Pacific | 75,000,384 | 70,271,209 | ||||||
| Consolidated | $ | 93,349,415 | $ | 88,962,334 | ||||
| F-36 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
The following table presents a summary of operating information for the years ended June 30:
| 2016 | 2015 | |||||||
| Revenues from unaffiliated customers: | ||||||||
| North America | $ | 5,464,740 | $ | 5,535,183 | ||||
| Europe | 6,232,200 | 5,707,127 | ||||||
| Asia - Pacific | 40,254,321 | 32,110,574 | ||||||
| 51,951,261 | 43,352,884 | |||||||
| Revenue from affiliated customers | ||||||||
| Europe | 4,437,917 | 1,652,077 | ||||||
| Asia - Pacific | 8,161,015 | 6,043,617 | ||||||
| 12,598,932 | 7,695,694 | |||||||
| Consolidated | $ | 64,550,193 | $ | 51,048,578 | ||||
| Intercompany revenue | ||||||||
| Europe | $ | 558,645 | $ | 302,812 | ||||
| Asia - Pacific | 4,807,276 | 4,620,426 | ||||||
| Eliminated | $ | 5,365,921 | $ | 4,923,238 | ||||
| Net income (loss) after taxes and before non-controlling interest: | ||||||||
| Corporate headquarters | $ | (3,252,340 | ) | $ | (3,665,755 | ) | ||
| North America | 635,203 | 221,433 | ||||||
| Europe | 1,576,176 | (1,262,222 | ) | |||||
| Asia - Pacific | 6,098,102 | (542,628 | ) | |||||
| Consolidated | $ | 5,057,141 | $ | (5,249,172 | ) | |||
| Depreciation and amortization: | ||||||||
| Corporate headquarters | $ | - | $ | 16,148 | ||||
| North America | 35,268 | 165,240 | ||||||
| Europe | 172,755 | 665,826 | ||||||
| Asia - Pacific | 6,944,116 | 9,496,600 | ||||||
| Consolidated | $ | 7,152,139 | $ | 10,343,814 | ||||
| Interest expense: | ||||||||
| Corporate headquarters | $ | 6,236 | $ | 13,783 | ||||
| North America | 117 | 1,588 | ||||||
| Europe | 40,302 | 52,926 | ||||||
| Asia - Pacific | 217,856 | 98,665 | ||||||
| Consolidated | $ | 264,511 | $ | 166,962 | ||||
| Income tax expense: | ||||||||
| Europe | $ | 46,691 | $ | 1,244 | ||||
| Asia - Pacific | 605,855 | 412,254 | ||||||
| Consolidated | $ | 652,546 | $ | 413,498 | ||||
| F-37 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
The following table presents a summary of capital expenditures for the years ended June 30:
| 2016 | 2015 | |||||||
| Capital expenditures: | ||||||||
| Corporate headquarters | $ | - | $ | 3,439 | ||||
| North America | 66,764 | 47,497 | ||||||
| Europe | 417,861 | 140,870 | ||||||
| Asia - Pacific | 2,851,296 | 3,366,906 | ||||||
| Consolidated | $ | 3,335,921 | $ | 3,558,712 | ||||
Geographic Information
Disclosed in the table below is geographic information for each country that comprised greater than five percent of total revenues for the years ended June 30 2016 and 2015.
| June 30, 2016 | June 30, 2015 | |||||||||||||||
| Revenue | Long-lived Assets | Revenue | Long-lived Assets | |||||||||||||
| China | $ | 17,276,250 | $ | 19,851 | $ | 15,119,518 | $ | 27,453 | ||||||||
| Thailand | 6,428,041 | 309,498 | 4,842,577 | 123,097 | ||||||||||||
| USA | 5,843,204 | 5,360,684 | 7,190,905 | 4,715,670 | ||||||||||||
| UK | 16,894,973 | 4,036,925 | 10,641,565 | 4,075,864 | ||||||||||||
| Pakistan & India | 1,842,046 | 43,047,590 | 1,868,090 | 48,457,329 | ||||||||||||
| Australia & New Zealand | 4,308,784 | 30,259 | 2,672,265 | 37,303 | ||||||||||||
| Mexico | 1,542,530 | - | 1,202,832 | - | ||||||||||||
| Indonesia | 6,201,642 | - | 5,212,919 | - | ||||||||||||
| Other Countries | 4,212,723 | 2,782 | 2,297,907 | 14,953 | ||||||||||||
| Total | $ | 64,550,193 | $ | 52,807,589 | $ | 51,048,578 | $ | 57,451,669 | ||||||||
| F-38 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
Disclosed in the table below is the reconciliation of revenue by each entity and country disclosed above for the years ended June 30 2016 and 2015.
| Revenues 2016 | ||||||||||||||||||||||||||||||||||||||||
| Total | China | Thailand | USA | UK | Pakistan & India | Australia & New Zealand | Mexico | Indonesia | Other Countries | |||||||||||||||||||||||||||||||
| North America: | $ | 5,464,740 | $ | - | $ | - | $ | 3,922,210 | $ | - | $ | - | $ | - | $ | 1,542,530 | $ | - | $ | - | ||||||||||||||||||||
| Europe: | 10,670,117 | - | - | - | 10,446,098 | - | - | - | - | 224,019 | ||||||||||||||||||||||||||||||
| Asia-Pacific: | 48,415,336 | 17,276,250 | 6,428,041 | 1,920,994 | 6,448,875 | 1,842,046 | 4,308,784 | - | 6,201,642 | 3,988,704 | ||||||||||||||||||||||||||||||
| Total | $ | 64,550,193 | $ | 17,276,250 | $ | 6,428,041 | $ | 5,843,204 | $ | 16,894,973 | $ | 1,842,046 | $ | 4,308,784 | $ | 1,542,530 | $ | 6,201,642 | $ | 4,212,723 | ||||||||||||||||||||
| Revenues 2015 | ||||||||||||||||||||||||||||||||||||||||
| Total | China | Thailand | USA | UK | Pakistan & India | Australia & New Zealand | Mexico | Indonesia | Other Countries | |||||||||||||||||||||||||||||||
| North America: | $ | 5,535,183 | $ | - | $ | - | $ | 4,332,351 | $ | - | $ | - | $ | - | $ | 1,202,832 | $ | - | $ | - | ||||||||||||||||||||
| Europe: | 7,375,527 | - | - | - | 7,094,304 | - | - | - | - | 281,223 | ||||||||||||||||||||||||||||||
| Asia-Pacific: | 38,137,868 | 15,119,518 | 4,842,577 | 2,858,554 | 3,547,261 | 1,868,090 | 2,672,265 | - | 5,212,919 | 2,016,684 | ||||||||||||||||||||||||||||||
| Total | $ | 51,048,578 | $ | 15,119,518 | $ | 4,842,577 | $ | 7,190,905 | $ | 10,641,565 | $ | 1,868,090 | $ | 2,672,265 | $ | 1,202,832 | $ | 5,212,919 | $ | 2,297,907 | ||||||||||||||||||||
NOTE 18 – NON-CONTROLLING INTEREST IN SUBSIDIARY
The Company had non-controlling interests in several of its subsidiaries. The balance of non-controlling interest as of June 30, 2016 and 2015 was as follows:
| SUBSIDIARY | Non Controlling Interest % | Non-Controlling Interest at June 30, 2016 |
||||||
| NetSol PK | 33.40 | % | $ | 10,292,495 | ||||
| NetSol-Innovation | 49.90 | % | 2,735,998 | |||||
| VLS, VLSH & VLSIL Combined | 49.00 | % | 309,213 | |||||
| NetSol Thai | 0.006 | % | (4 | ) | ||||
| Total | $ | 13,337,702 | ||||||
| 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 | ||||||
| F-39 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2016 and 2015
NetSol PK
During the year ended June 30, 2016, employees of NetSol PK exercised 108,000 of options of common stock pursuant to employees exercising stock options and NetSol PK received cash of $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%.
NetSol-Innovation
During the year ended June 30, 2016 and 2015, NetSol-Innovation paid a cash dividend of $2,028,805 and $1,500,000, respectively.
NetSol Thai
During the year ended June 30, 2016, NetSol Thai issued 3 qualification shares to each of its directors.
NOTE 19 – SUBSEQUENT EVENTS
On September 1, 2016, the Company paid $555,555 as required by the share purchase agreement described in Note 8.
| F-40 |