· | ● Achieve 15-25% annual revenue growth for the next 5 years ● Achieve 55 to 60% gross margins in 2014 and maintain 60% or better for the next three years ● Achieve 70-75% organic growth and, 25-30% growth through alliances, partnerships and new markets penetration
The plan contemplates the following enhanced activities and initiatives to accomplish these goals: | o | Grow delivery and sales capacity in APAC and the USA from approximately 600 NFS™ domain experts to over 1,000 within 18 months. |
· | Achieve 60-65% gross marginso | Continue to advance infrastructure and systems in 2013Lahore, Bangkok and average 70% for next three years.San Francisco locations. |
· | Resulto | Strengthen the NetSol brand in enhanced organic growththe Americas and penetration in APAC markets such as China, Thailand, Indonesia, Australia and New Zealand. |
· | Build a strong new ecommerce vertical under Vroozi platform |
· o | Continue to enhance deliveryHire and service capabilities in China, Thailand, USA and UK. |
· | Strengthen NetSol brand and market shares in APAC markets |
· | Consistently hireretain the best available talent to develop the next line of managers for our growing demand |
The plan contemplates the following enhanced activities and initiatives will accomplish these goals:
o | Continued expansion in the Chinese market which offers ever growing new opportunities in the auto, banking and lending sectors for NFS™.demand. |
o | NetSol is positioning China to become a dominant marketo
| Develop the sales and delivery capabilities for lending enterprise solutions for captive multinationals and local Chinese companies, including equipment finance, big ticket leasing markets and the banking industry. In the lease and finance domain NetSol can claim the de facto leadership position in the rapidly growing Chinese market. |
o | Further augmentation of NTPK Thailand. The office space in Bangkok has been enhanced with new hires of local and international staff to address and support a very rapidly growing market. The pipeline of new customers is growing from theAmericas markets, in Japan, South Korea, Australia, India and other regional markets. These markets will be serviced and supported fromparticular the Thailand office with strong sales and client support team. The Bangkok facility is intended to become an alternate delivery and implementation center for global customers and partners in Asia Pacific. |
o | The new and fast growing manifestations of e-commerce, such as cloud computing, are being utilized by some of our offerings and will be further explored by us for other offerings. Our e-commerce division’s smartOCI® has been demonstrated and presented to major fortune 500 companiesgrowth in the US as an on-demand, catalogue content management system. The demand of e-procurement search engine seems robustauto and attractive. Continued new license sales activities are in the pipeline for Vroozi, Inc. Presently smartOCI® is the main asset in this entity while we explore other channels of growth in e-commerce and search engine space. There has been a surge of interest amongst fortune 500 corporations for demos and workshops for smartOCI® in recent months. To date, ten new US based major corporations have been signed up for smartOCI®. |
o | Europe continues to experience a severe recession coupled with regional debt crises. NetSol Europe’s operations have maintained modest growth in sales while the Company has further rationalized overall operating overheads. Despite the sluggish economy in Europe, our relationship with existing clientele is very strong and we expect to generate new revenues from these customers in this fiscal year. The integration of VLS in conjunction with Investec Bank as a JV partner should bolster growth in services sectors complementing core solutions and augmenting overall market share in the UK. |
o | The market of the Kingdom of Saudi Arabia is robust, rich and well capitalized, offering vast opportunities for NetSol through our joint venture. Recently, there have been a few new local IT contracts awarded but our vision is based on long term and high value projects in the defense, public, infrastructure and multinational auto captive markets. In order to be equal partners with a major conglomerate, Atheeb Group, a $2 billion groupbanking sectors. A shift in revenue we need to havecontribution from the serious financial wherewithal and resources to bid on major projects exceeding $100 million eachAmericas markets in value. Currently, the joint venture has 10 employees based in Riyadh with direct delivery and implementation support from NetSol PK. Recently ANSCL has signed four new contracts both in defense and private sector to provide IT services and consulting in the key areas that are valued to over $2.0MN. This is just a beginning as we see very exciting new developments as we close new contracts. |
o | Our NFS™ suite of products is currently undergoing a major initiative towards developing the next generation of solutions. The Company believes that thisfew users would change the landscape for NetSol and increase both demand and the market. We are in the middle of developing a comprehensive sales and marketing plan requiring new personnel, markets and investment. However, the demand for current NFS has been very robust with some global clients and many new fortune 500 captive finance companies in China, Thailand and Japan. |
o | In order to maximize the market and product potential of our SAP and Ecommerce line, highlighted by our smartOCI® product, we spun this line off into its own operational entity. We believe this will better enhance product and market development by providing a dedicated management and fulfillment staff. |
● Growth – New Alliances, Mergers & Acquisition
oThe markets in the US and UK offer a host of complementary companies with impressive client bases to expand the distribution channels for NFS™ and its new generation product line. There are established small sized Companies, with relatively low valuations, which can become part of NetSol on an affordable basis. It is important to seek out these companies in order to grow our customer base, revenue and net margins by leveraging our delivery and implementation model.
Funding and Investor Relations:
The fundamental challenge constantly facing the management is to achieve sustainable growth with a healthy balance sheet, without too much dilution. In light of global opportunities for organic growth and through alliances and mergers and acquisitions, the Company raised cash through a public offering of shares of common stock in 2012. We are using this cash infusion to support sales and marketing, Vroozi, infrastructure, and operations and capital investment in the newly formed Chinese subsidiary, NetSol Beijing. Going forward any new capital raise would depend on new opportunities to accelerate growth organically and/or through M&A.
We are using proceeds from the last offering of shares to the public on:
· | Expansion in China, Thailand and other emerging markets. |
· | Expanding the North American operation to roll out NetSol new generation solutions and enter Cloud Computing Solutions including building Vroozi. |
· | Build Vroozi as a winning name in the E-Commerce space. |
· | Support larger IT related public and defense sectors projects in the Kingdom of Saudi Arabia with our joint venture partner. |
· | Capital Expenditures for our next generation products, technology and infrastructure. |
· | Hiring and training of programmers, engineers, sales and marketing to create a bigger bench for technical team to cater to bigger volume new contracts. |
Investor Relations efforts will include:
· | Working to grow our institutional investor base. |
· | Sharing the NetSol story with sell side analysts, funds, portfolio managers and the financial media. |
�� | Aggressively positioning NetSol in front of major investors’ conferences and road shows to be organized by our IR consultants and investment bankers. |
· | Utilizing US mainstream media to highlight NetSol’s image and ‘niche’ business offering. |
· | Founding management continued investment in the Company in the open market reaffirming their commitment to the potential and the future of the Company. |
Improving the Bottom Line:
Management believes that these measures will improve the bottom line on an ongoing basis:
· | Improve pricing, sales volume and fee structures. |
· | Continue consolidation and reevaluating operating margins as ongoing activities. |
· | Streamline further cost of goods sold to improve gross margins to historical levels over 60%, as sales ramp up. |
· | Generate higher revenues per employee, enhance productivity and lower cost per employee. |
· | Optimize the utilization of NetSol’s best talent and resources, infrastructure, processes and disciplines to maximize the bottom-line and fully leverage the cost arbitrage. |
· | Grow process automation and leverage the best practices of CMMI level 5. Global delivery concept and integration will further improve both gross and net margins.operating margins due to the volume and size of US contracts; further position NetSol to deliver and support the new growth and technology dimensions in IT services, maintenance, mobile apps and cloud based solutions. |
· | Cost efficient managemento | Maintain the quality of every operation and continue further consolidation to improve bottom line. |
· | Create more visibility and predictabilityour delivery illustrated by implementing SaaS model in mature markets. Retire Debt to reduce the interest cost significantly and to make every effort to avoid any one time charges.our CMM Level 5 certification. |
Management continues to be focused on scaling up its delivery capability and has achieved key milestones in that respect. Key projects are being delivered on time and on budget, quality initiatives are succeeding, especially in maturing internal processes. CMMI level companies are reassessed every three years by independent consultants under the standards of the Carnegie Mellon University to maintain its CMMI Level 5 quality certification. As required, NetSol was reassessed in 2010 and was successfully recertified as CMMI Level 5. While we believe this quality certification will be renewed, our current reassessment due for August 2013 is currently pending. We believe that the CMMI standards are a key reason in NetSol’s demand surge worldwide. We remain convinced that this trend will continue for all NetSol offerings promoting further beneficial alliances and increasing the number and quality of our global customers. MATERIAL TRENDS AFFECTING NETSOL Management has identified the following material trends affecting NetSol. Positive trends: · | The global economic uncertainty· | Improving sales trends in US auto and consolidations have opened doors for low cost solution providers such as NetSol. The BestShoring® model of NetSol is a catalyst in today’s environment.banking sectors. |
| · | Slowly improving economic environment in the UK and major European economies. |
· | Global economic pressures and the recession have shifted users of· | The declining IT processes and technologyoutsourcing from India gives strength to utilize both offshore and onshore solutions providers, to control costs and improve ROIs.NetSol APAC delivery centers. |
| · | New emerging markets and IT destinations in Thailand, Malaysia, Indonesia and Australia. |
· | Serious· | Growing interest of global companies in NetSol’s next generation solution has been expressed by a few global companies. Demos and workshops with key global clients and partners of have been very well received. Hence, the new generation solution, while not completely ready, is gaining momentum.solution. |
· | First successful implementation of NextGen – NFS™ solution with a Thai bank is a very positive indicator for new deals. |
| · | China has become the world’s second largest economy, continuing to grow by over 8% a year while growth in other industrial nations has declined or grown only marginally. |
· | China’s automobile and banking sectors have been unaffected by the global meltdown and their recent automobile sales statistics have outperformed all other economies. |
· | Growing interest in Japan for IT services and NFSNFS™ applications within banking, equipment finance and general leasing industries. |
· | As reported· | Investment by the Associated Press, China surpassed the US as the number one automobile market in auto sales. JD Powers & Associates anticipated further strong growth in future auto sales. It is anticipated that this market opportunity will result in further penetration by NetSol into China’s burgeoning leasing and finance market. |
· | E-Commerce, new technologies, innovations and online activities are gaining momentum in many verticals. New areas for diversification are opening for NetSol. The B2B market has never been stronger in the US market alone thereby offering a potentially huge opportunity to grow Vroozi offerings. |
· | Strong entry in e-commerce space by way of developing and marketing a new IP and winning series of fortune 500 US customers. |
· | The surviving IT companies, such as NetSol, with price advantage and a global presence, will gain further momentum as economic indicators turn positive. The bigger customers and targeted verticals are much more cost conscious and are seeking a better rate of return on investments in IT services. NetSol has an edge due to its BestShoring® model and proven track record of delivery and implementations worldwide. |
· | The Kingdom of Saudi Arabia is investing billions in healthcare, education, defense, cyberspace securities, IT, infrastructure and many other new sectors. This makes it one of the most promising markets for the Atheeb NetSol joint venture. |
· | The dependency· | A peaceful democratic transition of our blue chip clients on NetSol solutions has further deepened; creating new enhancements, new modules,government in Pakistan provides stability to fight off extremism and services orders inshift focus to the US. |
· | Improved outlook and earnings of bellwether technology companies in USA, reflecting the turnaround of this sector after recession.economy. |
· | Global opportunities requiring NetSol to diversify its delivery capabilities to Bangkok and such other new emerging economies that offer geopolitical stability and low cost IT resources, thereby reducing dependency upon the Lahore technology campus. |
· | Our global multi-national clients have continued to pursue deeper relationships in newer regions and countries. This reflects our customers’ dependencies and satisfaction with our NetSol Financial Suite of products. |
· | The levy of Indian IT sector excise tax of 35% (NASSCOM) on software exports is very positive for NetSol. In Pakistan there is a 15 year tax holiday on IT exports of services. There are 5 more years remaining on this tax incentive. |
Negative trends: | · | Geopolitical unrest due to extremism in the regions of Pakistan and Afghanistan.Middle East. |
| · | Continued strains in US-Pakistan relations. |
| · | The delays of CBRC licenses at least for another year in China. |
· | The emergence of many smaller players offering IT solutions in China has resulted in greater price competition. |
| · | The fear of renewed recession in the US and a continued sluggish European market, could adversely affect our business in North America and Europe. |
· | Tightened liquidity and credit restrictions in consumer spending has either delayed or reduced spending on business solutions and systems, squeezing IT budgets and extending decision making cycles. |
| · | Restricted liquidity and financial burden due to tighter internal processes and limited budgets might cause delays in the receivables from some clients. |
· | Anticipated worsening· | The threats of conflict between the US deficit and a rise in inflation in coming years would put further stress on consumersother nations and business spending. |
· | VolatilitySyria could potentially create volatility in oil prices Euro zone in European marketscausing readjustments of corporate budgets and uncertainty overall inconsumer spending slowing global economies could deter the growth and GDP in the US.auto sales. |
· | Unrest and growing war· | Continued conflicts in Afghanistan could increase the migration of both refugees and extremists to Pakistan, thus creating domestic and regional challenges. |
CRITICAL ACCOUNTING POLICIES
Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Critical accounting policies for us include revenue recognition and multiple element arrangements, intangible assets, software development costs, and goodwill. REVENUE RECOGNTION
The Company recognizes revenue from license contracts without major customization when a non-cancelable, non-contingent license agreement has been signed, delivery of the software has occurred, the fee is fixed or determinable, and collectability is probable. Revenue from the sale of licenses with major customization, modification, and development is recognized on a percentage of completion method. Revenue from the implementation of software is recognized on a percentage of completion method.
Revenue from consulting services is recognized as the services are performed for time-and-materials contracts. Revenue from training and development services is recognized as the services are performed. Revenue from maintenance agreements is recognized ratably over the term of the maintenance agreement, which in most instances is one year.
MULTIPLE ELEMENT ARRANGEMENTS
We may enter into multiple element revenue arrangements in which a customer may purchase a number of different combinations of software licenses, consulting services, maintenance and support, as well as training and development (multiple-element arrangements).
VSOEVendor Specific Object Evidence (“VSOE”) of fair value for each element is based on the price for which the element is sold separately. We determine the VSOE of fair value of each element based on historical evidence of our stand-alone sales of these elements to third-parties or from the stated renewal rate for the elements contained in the initial software license arrangement. When VSOE of fair value does not exist for any undelivered element, revenue is deferred until the earlier of the point at which such VSOE of fair value exists or until all elements of the arrangement have been delivered. The only exception to this guidance is when the only undelivered element is maintenance and support or other services, then the entire arrangement fee is recognized ratably over the performance period.
INTANGIBLE ASSETS
Intangible assets consist of product licenses, renewals, enhancements, copyrights, trademarks, trade names, and customer lists. Intangible assets with finite lives are amortized over the estimated useful life and are evaluated for impairment at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We assess recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If the future undiscounted cash flows are less than the carrying amount of these assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.
SOFTWARE DEVELOPMENT COSTS
Costs incurred to internally develop computer software products or to enhance an existing product are recorded as research and development costs and expensed when incurred until technological feasibility for the respective product is established. Thereafter, all software development costs are capitalized and reported at the lower of unamortized cost or net realizable value. Capitalization ceases when the product or enhancement is available for general release to customers.
The Company makes on-going evaluations of the recoverability of its capitalized software projects by comparing the amount capitalized for each product to the estimated net realizable value of the product. If such evaluations indicate that the unamortized software development costs exceed the net realizable value, the Company writes off the amount which the unamortized software development costs exceed net realizable value. Capitalized and purchased computer software development costs are being amortized ratably based on the projected revenue associated with the related software or on a straight-line basis, whichever method results in a higher level of amortization.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 is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. The company does impairment testing of the goodwill on an annual basis at the balance sheet date i.e., June 30th. In addition to our annual internal impairment testing, the Company retains the services of an independent valuation specialist to validate our findings. The source of the Company’s goodwill relates to the acquisition of three companies namely NetSol PK, Tech, CQ Systems, UK, VLS, UK and McCue Systems, USA. NetSol PK Tech operates in the Asia Pacific region; CQ Systems (currently NetSol Technologies Europe Limited) and VLS both operate in Europe; and McCue Systems (currently NetSol Technologies North America, Inc.) operates in the North American region. All these geographies are considered as different reporting units (segments). Goodwill arising from the acquisition of these companies has been allocated to their respective geographical segments to which they relate. While identifying reporting units/ segments, the Company takes 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. Reporting unit detail of goodwill as of June 30, 20122013 and 20112012 is given below: | | | | As of June 30, | | | As of June 30, | | | | | | | 2012 | | | 2011 | | | | | Asia Pacific | | $ | 1,303,372 | | | $ | 1,303,372 | | | | | Europe | | | 3,685,858 | | | | 3,471,813 | | | | | USA | | | 4,664,100 | | | | 4,664,100 | | | | | | | | | | | | | | | | | Total | | $ | 9,653,330 | | | $ | 9,439,285 | | |
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| | | | | | | | | Asia Pacific | | $ | 1,303,372 | | | $ | 1,303,372 | | | Europe | | | 3,685,858 | | | | 3,685,858 | | | USA | | | 4,664,100 | | | | 4,664,100 | | | | | | | | | | | | | Total | | $ | 9,653,330 | | | $ | 9,653,330 | |
There was no impairment of goodwill for the years ended June 30, 20122013 and 2011.2012. A number of factors are taken into consideration while calculating the fair value of the reporting units. These factors include the projected after tax earnings of the reporting unit, industry price earnings ratio and a reasonable discount rate to arrive at the actual fair value of the reporting unit. As the fair value of all reporting units substantially exceeded the carrying values, no impairment was identified in the consolidated financial statements. The following table sets forth the percentage by which the fair value exceeds the carrying value for all reporting units as on June 30, 2012:2013: | Reporting Units | Percentage by which fair value exceeds carrying value | | Asia Pacific | 7,138.84%14,274.72% | | Europe | 221.77%1,236.62% | | North America | 148.8%491.53% |
CASH RESOURCES
We were successful in maintaining our cash position by the end of our fiscal year, June 30, 2012 with $7.6 million in cash worldwide. In addition, $6.47 million was injected by the exercise of options and sale of equity during the fiscal year.
RESULTS OF OPERATIONS
THE YEAR ENDED JUNE 30, 20122013 COMPARED TO THE YEAR ENDED JUNE 30, 20112012
Net revenues for the year ended June 30, 2012 were $39,775,524 as compared to $36,547,573 for the year ended June 30, 2011. Net revenues are broken out among the subsidiaries as follows:
| | | 2012 | | | 2011 | | | | | Revenue | | | % | | | Revenue | | | % | | | Corporate headquarters | | $ | - | | | | 0.00 | % | | $ | - | | | | 0.00 | % | | | | | | | | | | | | | | | | | | | | North America: | | | | | | | | | | | | | | | | | | NTNA | | | 3,257,059 | | | | 8.19 | % | | | 4,223,863 | | | | 11.56 | % | | Vroozi | | | 1,295,114 | | | | 3.26 | % | | | - | | | | 0.00 | % | | | | | 4,552,173 | | | | 11.44 | % | | | 4,223,863 | | | | 11.56 | % | | | | | | | | | | | | | | | | | | | | Europe: | | | | | | | | | | | | | | | | | | Netsol UK | | | - | | | | 0.00 | % | | | - | | | | 0.00 | % | | NTE | | | 4,395,364 | | | | 11.05 | % | | | 7,158,145 | | | | 19.59 | % | | VLS | | | 1,276,838 | | | | 3.21 | % | | | - | | | | 0.00 | % | | HAFL | | | 4,190 | | | | 0.01 | % | | | - | | | | 0.00 | % | | | | | 5,676,392 | | | | 14.27 | % | | | 7,158,145 | | | | 19.59 | % | | Asia-Pacific: | | | | | | | | | | | | | | | | | | Netsol Tech (PK) | | | 22,679,948 | | | | 57.02 | % | | | 19,432,469 | | | | 53.17 | % | | Netsol-Innovation | | | 3,444,916 | | | | 8.66 | % | | | 2,864,942 | | | | 7.84 | % | | Netsol Connect | | | 636,849 | | | | 1.60 | % | | | 612,789 | | | | 1.68 | % | | Netsol-Abraxas Australia | | | 390,819 | | | | 0.98 | % | | | 44,540 | | | | 0.12 | % | | Netsol-Thailand | | | 1,084,285 | | | | 2.73 | % | | | 2,210,827 | | | | 6.05 | % | | NetSol Beijing | | | 1,310,142 | | | | 3.29 | % | | | - | | | | 0.00 | % | | | | | | | | | | | | | | | | | | | | | | | 29,546,959 | | | | 74.28 | % | | | 25,165,567 | | | | 68.86 | % | | | | | | | | | | | | | | | | | | | | Total | | $ | 39,775,524 | | | | 100.00 | % | | $ | 36,547,574 | | | | 100.00 | % |
Until Vroozi was incorporated as a new entity in the middle of the fiscal year 2012, the Vroozi revenue was recorded as a division of NTNA through the third quarter of the fiscal year 2012.
The following table sets forth the items in our consolidated statement of operations for the years ended June 30, 20122013 and 20112012 as a percentage of revenues.
| | | For the Year | | | | | | Ended June 30, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Year Ended June 30, | | | | | 2012 | | | | | | 2011 | | | | | | 2013 | | | % | | | 2012 | | | % | | | Net Revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | License fees | | $ | 13,369,701 | | | | 33.61 | % | | $ | 11,284,472 | | | | 30.88 | % | | $ | 17,756,447 | | | | 34.96 | % | | $ | 13,369,701 | | | | 33.61 | % | | Maintenance fees | | | 7,866,930 | | | | 19.78 | % | | | 7,488,388 | | | | 20.49 | % | | | 9,550,471 | | | | 18.80 | % | | | 7,866,930 | | | | 19.78 | % | | Services | | | 18,538,893 | | | | 46.61 | % | | | 17,774,714 | | | | 48.63 | % | | | 23,490,243 | | | | 46.24 | % | | | 18,538,893 | | | | 46.61 | % | | Total net revenues | | | 39,775,524 | | | | 100.00 | % | | | 36,547,574 | | | | 100.00 | % | | | 50,797,161 | | | | 100.00 | % | | | 39,775,524 | | | | 100.00 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cost of revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Salaries and consultants | | | 10,236,109 | | | | 25.73 | % | | | 8,716,495 | | | | 23.85 | % | | | 13,051,360 | | | | 25.69 | % | | | 10,236,109 | | | | 25.73 | % | | Travel | | | 1,273,259 | | | | 3.20 | % | | | 1,044,766 | | | | 2.86 | % | | | 1,710,561 | | | | 3.37 | % | | | 1,273,259 | | | | 3.20 | % | | Repairs and maintenance | | | 373,359 | | | | 0.94 | % | | | 307,115 | | | | 0.84 | % | | | 485,070 | | | | 0.95 | % | | | 373,359 | | | | 0.94 | % | | Insurance | | | 145,351 | | | | 0.37 | % | | | 126,584 | | | | 0.35 | % | | | 179,959 | | | | 0.35 | % | | | 145,351 | | | | 0.37 | % | | Depreciation and amortization | | | 3,528,229 | | | | 8.87 | % | | | 3,108,286 | | | | 8.50 | % | | | 4,147,347 | | | | 8.16 | % | | | 3,528,229 | | | | 8.87 | % | | Other | | | 2,721,716 | | | | 6.84 | % | | | 1,500,880 | | | | 4.11 | % | | | 3,379,636 | | | | 6.65 | % | | | 2,721,716 | | | | 6.84 | % | | Total cost of revenues | | | 18,278,023 | | | | 45.95 | % | | | 14,804,126 | | | | 40.51 | % | | | 22,953,933 | | | | 45.19 | % | | | 18,278,023 | | | | 45.95 | % | | Gross profit | | | 21,497,501 | | | | 54.05 | % | | | 21,743,448 | | | | 59.49 | % | | | 27,843,228 | | | | 54.81 | % | | | 21,497,501 | | | | 54.05 | % | | Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Selling and marketing | | | 3,130,379 | | | | 7.87 | % | | | 3,016,402 | | | | 8.25 | % | | | 3,556,997 | | | | 7.00 | % | | | 3,130,379 | | | | 7.87 | % | | Depreciation and amortization | | | 1,113,758 | | | | 2.80 | % | | | 1,180,226 | | | | 3.23 | % | | | 1,555,402 | | | | 3.06 | % | | | 1,113,758 | | | | 2.80 | % | | Bad debt expense | | | 124,291 | | | | 0.31 | % | | | 367,064 | | | | 1.00 | % | | | 415,482 | | | | 0.82 | % | | | 124,291 | | | | 0.31 | % | | Salaries and wages | | | 4,191,593 | | | | 10.54 | % | | | 3,347,896 | | | | 9.16 | % | | | 5,078,278 | | | | 10.00 | % | | | 4,191,593 | | | | 10.54 | % | | Professional services, including non-cash compensation | | | 993,058 | | | | 2.50 | % | | | 806,212 | | | | 2.21 | % | | | 907,844 | | | | 1.79 | % | | | 993,058 | | | | 2.50 | % | | Lease abandonment charges | | | - | | | | 0.00 | % | | | (858,969 | ) | | | -2.35 | % | | | General and adminstrative | | | 4,679,840 | | | | 11.77 | % | | | 3,719,796 | | | | 10.18 | % | | | 4,662,127 | | | | 9.18 | % | | | 4,679,840 | | | | 11.77 | % | | Total operating expenses | | | 14,232,919 | | | | 35.78 | % | | | 11,578,627 | | | | 31.68 | % | | | 16,176,130 | | | | 31.84 | % | | | 14,232,919 | | | | 35.78 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income from operations | | | 7,264,582 | | | | 18.26 | % | | | 10,164,821 | | | | 27.81 | % | | | 11,667,098 | | | | 22.97 | % | | | 7,264,582 | | | | 18.26 | % | | Other income and (expenses) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gain (loss) on sale of assets | | | (18,979 | ) | | | -0.05 | % | | | (21,461 | ) | | | -0.06 | % | | | 3,682 | | | | 0.01 | % | | | (18,979 | ) | | | -0.05 | % | | Interest expense | | | (823,684 | ) | | | -2.07 | % | | | (863,707 | ) | | | -2.36 | % | | | (664,025 | ) | | | -1.31 | % | | | (823,684 | ) | | | -2.07 | % | | Interest income | | | 82,039 | | | | 0.21 | % | | | 154,856 | | | | 0.42 | % | | | 185,343 | | | | 0.36 | % | | | 82,039 | | | | 0.21 | % | | Gain on foreign currency exchange transactions | | | 404,708 | | | | 1.02 | % | | | 1,115,647 | | | | 3.05 | % | | | 1,367,448 | | | | 2.69 | % | | | 404,708 | | | | 1.02 | % | | Share of net loss from equity investment | | | (300,000 | ) | | | -0.75 | % | | | (220,506 | ) | | | -0.60 | % | | | 482,664 | | | | 0.95 | % | | | (300,000 | ) | | | -0.75 | % | | Beneficial conversion feature | | | (179,576 | ) | | | -0.45 | % | | | (453,989 | ) | | | -1.24 | % | | | (635,882 | ) | | | -1.25 | % | | | (179,576 | ) | | | -0.45 | % | | Other (expense) | | | 275,565 | | | | 0.69 | % | | | (52,149 | ) | | | -0.14 | % | | | 147,153 | | | | 0.29 | % | | | 275,565 | | | | 0.69 | % | | Total other income (expenses) | | | (559,927 | ) | | | -1.41 | % | | | (341,309 | ) | | | -0.93 | % | | | 886,383 | | | | 1.74 | % | | | (559,927 | ) | | | -1.41 | % | | Net income before income taxes | | | 6,704,655 | | | | 16.86 | % | | | 9,823,512 | | | | 26.88 | % | | | 12,553,481 | | | | 24.71 | % | | | 6,704,655 | | | | 16.86 | % | | Income taxes | | | (55,384 | ) | | | -0.14 | % | | | (120,542 | ) | | | -0.33 | % | | | (465,426 | ) | | | -0.92 | % | | | (55,384 | ) | | | -0.14 | % | | Net income after tax | | | 6,649,271 | | | | 16.72 | % | | | 9,702,970 | | | | 26.55 | % | | | 12,088,055 | | | | 23.80 | % | | | 6,649,271 | | | | 16.72 | % | | Non-controlling interest | | | (4,202,726 | ) | | | -10.57 | % | | | (3,974,882 | ) | | | -10.88 | % | | | (4,224,912 | ) | | | -8.32 | % | | | (4,202,727 | ) | | | -10.57 | % | | Net income attibutable to NetSol | | | 2,446,545 | | | | 6.15 | % | | | 5,728,088 | | | | 15.67 | % | | | 7,863,143 | | | | 15.48 | % | | | 2,446,544 | | | | 6.15 | % |
The following table represents revenues by each subsidiary and corresponding geographical region: | | | 2013 | | 2012 | | | | Revenue | | | % | | | Revenue | | | % | | | Corporate headquarters | | $ | - | | | | 0.00 | % | | $ | - | | | | 0.00 | % | | | | | | | | | | | | | | | | | | | | North America: | | | | | | | | | | | | | | | | | | NTNA | | | 5,796,484 | | | | 11.41 | % | | | 3,257,059 | | | | 8.19 | % | | Vroozi | | | 947,698 | | | | 1.87 | % | | | 1,295,114 | | | | 3.26 | % | | | | | 6,744,182 | | | | 13.28 | % | | | 4,552,173 | | | | 11.44 | % | | | | | | | | | | | | | | | | | | | | Europe: | | | | | | | | | | | | | | | | | | NTE | | | 6,183,202 | | | | 12.17 | % | | | 4,395,364 | | | | 11.05 | % | | VLS | | | 1,655,440 | | | | 3.26 | % | | | 1,276,838 | | | | 3.21 | % | | HAFL | | | - | | | | 0.00 | % | | | 4,190 | | | | 0.01 | % | | | | | 7,838,642 | | | | 15.43 | % | | | 5,676,392 | | | | 14.27 | % | | Asia-Pacific: | | | | | | | | | | | | | | | | | | NetSol PK | | | 22,605,831 | | | | 44.50 | % | | | 22,679,948 | | | | 57.02 | % | | Netsol-Innovation | | | 3,734,583 | | | | 7.35 | % | | | 3,444,916 | | | | 8.66 | % | | Connect | | | 760,795 | | | | 1.50 | % | | | 636,849 | | | | 1.60 | % | | Abraxas | | | 1,359,322 | | | | 2.68 | % | | | 390,819 | | | | 0.98 | % | | NTPK Thailand | | | 7,433,648 | | | | 14.63 | % | | | 1,084,285 | | | | 2.73 | % | | NetSol Beijing | | | 320,158 | | | | 0.63 | % | | | 1,310,142 | | | | 3.29 | % | | | | | 36,214,337 | | | | 71.29 | % | | | 29,546,959 | | | | 74.28 | % | | Total | | $ | 50,797,161 | | | | 100.00 | % | | $ | 39,775,524 | | | | 100.00 | % |
The Company has maintained its estimated revenue projections despite severe global economic challenges. Total consolidated net revenue Net revenues for fiscalthe year 2012, increased 8.83% from $36,547,574 in fiscal year 2011,ended June 30, 2013 were $50,797,161 as compared to $39,775,524 in fiscalfor the year ended June 30, 2012. In terms of percentage, the revenues increased by 27.71% compared with last year. This increase included a 5.06%21.4% growth in maintenance fee revenue, from $7,488,388$7,866,930 to $7,866,930$9,550,471, due to re-negotiation of some maintenance agreements in APAC and a 4.3% growth in service revenue from $17,774,714 to $18,538,893, includingEurope. Services income which also include consulting and implementation services.services, increased by 26.71% from $18,538,893 to $23,490,243. The increase in consolidated net revenue is mainly attributed to approximately a 18.48% rise inCompany’s license revenue also increased by 32.81%, from $11,284,472 in 2011 to $13,369,701 in 2012.2012, to $17,756,447 in 2013. This increase in license revenue showsis mainly due to the increasing demand of our flagship product NFSTM and the confidence of the customers in our flagship product NetSol Financial Suite.delivery capability due to a zero percent failure rate. The Company is well-positioned for revenue growth and has invested heavily in the development of its next generation product, which is expected to be completed during the calendar year 2013.2014. Globally, our target customers are still using old systems for maintaining their lease and finance portfolios and are now planning to replace their legacy systems. NetSol, being a trusted name in this field, is in a good position to tap new business from these companies. The completion of this next generation software will provide the Company the capability to enter into a much larger market. We note that this product-conversion may negatively impact our license fee revenue until which point the new product gains traction in the marketplace.
The gross profit was $21,497,501$27,843,228 for year ended June 30, 2012,2013, as compared with $21,743,448$21,497,501 for the same period of the previous year. This is a slight decreasean increase of 1.13%29.52%. The gross profit percentage was 54.05%54.81% for the current fiscal year and 59.49%slightly up from 54.05% in the prior year. The cost of sales was $18,278,023$22,953,933 in the current year compared to $14,804,126$18,278,023 in the prior year. The increase in cost of sales is mainly due to increase in salaries of the technical staff, impact of hiring of further resources to increase the delivery capacity, increased travel to implement the software at client sides, increase in depreciation and amortization expense and some inflationary factors affecting global economy.
Operating expenses were $16,176,130 for the year ended June 30, 2013, as compared to, $14,232,919 for the year ended June 30, 2012, as compared to, $11,578,628 for the year ended June 30, 2011, an increase of 22.92%13.65% from the prior year. The increase is mainly attributable to reversal of lease abandonment charges upon final settlement with the lessor last year increase in sales and marketing expense, depreciation and amortization and salaries and wages as well as in general and administrative expenses.wages. Depreciation and amortization expense amounted to $1,113,758$1,555,402 and $1,180,226$1,113,758 for the year ended June 30, 20122013 and 2011,2012, respectively. Combined salaries and wage costs were $4,191,593$5,078,278 and $3,347,896$4,191,593 for the comparable periods, respectively, or an increase of $843,697$886,685 from the corresponding period last year. One of the main reasons for this increase is the acquisitionseverance allowance paid to some staff in Europe and the additional cost recorded on grant of another subsidiary which salaries are consolidated for the first time.options to employees. General and administrative expenses were $4,679,840$4,662,127 and $3,719,796$4,679,840 for the years ended June 30, 2013 and 2012, and 2011, respectively, an increasea decrease of $960,044$17,713 or 25.81%0.38%. As a percentage of sales, these expenses were 11.75%9.18% in the current year compared to 10.18%11.77% in the prior year. The increase in cost is also attributable to the first time consolidation of the new subsidiary acquired in UK.
Selling and marketing expenses slightly increased to $3,556,997 for the year ended June 30, 2013 as compared to $3,130,379 for the year ended June 30, 2012 as compared to $3,016,402 for the year ended June 30, 2011.2012. As a percentage of sales, these expenses were 7.86%7.00% in the current year compared to 8.25%7.86% in the prior year. The Company provided for certain doubtful debts of $124,291$415,482 and $367,064,$124,291, during the years ended June 30, 20122013 and 2011,2012, respectively.
Income from operations in fiscal year 20112012 was $7,264,582$11,667,098 as compared to $10,164,821$7,264,582 in fiscal year 2011.2012. As a percentage of sales, net income from operations was 18.26%22.97% in the current year as compared to 27.81%18.26% in the prior period.
Net income in fiscal year 20122013 was $2,446,545$7,863,143 as compared to $5,728,088$2,446,544 in fiscal year 20112012. The current fiscal year amount includes a net reduction for the minority interest in earnings of $4,202,726$4,224,912 compared to a reduction of $3,974,882$4,202,727 in the prior year for the 49.9% minority interest in NetSol Innovation, the 39.48%34.81% minority interest in NetSol PK, and the 49% minority interest in VLS.VLS and the 9.09% minority interest in Vroozi™. The net earnings per share, basic and diluted, were $0.39$0.96 and $0.95 in 20122013 respectively as compared to $1.18 and $1.16$0.39 in 2011.2012.
The net EBITDA income was $7,885,561$14,510,000 as compared to $10,845,992$7,885,560 after amortization and depreciation charges of $4,641,987$5,702,749 and $4,288,512,$4,641,987, income taxes of $55,384$465,426 and $120,542,$55,384, interest expense of $823,684$664,025 and $863,707$823,684 and interest income of $82,039$185,343 and $154,856$82,039 respectively. The EBITDA income per share, basic & diluted was 1.27$1.77 and $1.26$1.75 as compared to $2.23$1.27 and $2.19$1.26 in the year ago period. Although the net EBITDA income is a non-GAAP measure of income, we are providing it because we believe it to be an important supplemental measure of our performance that is commonly used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry. It should not be considered as an alternative to net income, operating income or any other financial measures calculated and presented, nor as an alternative to cash flow from operating activities as a measure of our liquidity. It may not be indicative of the Company’s historical operating results nor is it intended to be predictive of potential future results. Quarterly Results of Operations for the quarter ended June 30, 2012 and June 30, 2011
Net revenues for the quarter ended June 30, 2012 and 2011 are broken out among the subsidiaries as follows:
| | | 2012 | | | 2011 | | | | | Revenue | | | % | | | Revenue | | | % | | | Corporate headquarters | | $ | - | | | | 0.00 | % | | $ | - | | | | 0.00 | % | | | | | | | | | | | | | | | | | | | | North America: | | | | | | | | | | | | | | | | | | NTNA | | | 813,698 | | | | 5.68 | % | | | 1,045,137 | | | | 15.16 | % | | Vroozi | | | 442,906 | | | | 3.09 | % | | | - | | | | 0.00 | % | | | | | 1,256,604 | | | | 8.77 | % | | | 1,045,137 | | | | 15.16 | % | | | | | | | | | | | | | | | | | | | | Europe: | | | | | | | | | | | | | | | | | | Netsol UK | | | - | | | | 0.00 | % | | | - | | | | 0.00 | % | | NTE | | | 933,307 | | | | 6.51 | % | | | 874,025 | | | | 12.68 | % | | VLS | | | 371,247 | | | | 2.59 | % | | | - | | | | 0.00 | % | | HAFL | | | 1,157 | | | | 0.01 | % | | | - | | | | 0.00 | % | | | | | 1,305,711 | | | | 9.11 | % | | | 874,025 | | | | 12.68 | % | | Asia-Pacific: | | | | | | | | | | | | | | | | | | Netsol Tech (PK) | | | 9,864,308 | | | | 68.84 | % | | | 3,700,178 | | | | 53.69 | % | | Netsol-Innovation | | | 934,733 | | | | 6.52 | % | | | 757,304 | | | | 10.99 | % | | Netsol Connect | | | 167,617 | | | | 1.17 | % | | | 142,385 | | | | 2.07 | % | | Netsol-Abraxas Australia | | | 95,644 | | | | 0.67 | % | | | 19,978 | | | | 0.29 | % | | Netsol-Thailand | | | 398,068 | | | | 2.78 | % | | | 352,800 | | | | 5.12 | % | | NetSol Beijing | | | 307,531 | | | | 2.15 | % | | | - | | | | 0.00 | % | | | | | | | | | | | | | | | | | | | | | | | 11,767,901 | | | | 82.12 | % | | | 4,972,645 | | | | 72.15 | % | | | | | | | | | | | | | | | | | | | | Total | | $ | 14,330,216 | | | | 100.00 | % | | $ | 6,891,807 | | | | 100.00 | % |
The following table presents our unaudited quarterly results of operations for the quarters ended June 30, 2012 and 2011. You should read the following table together with the consolidated financial statements and related notes contained elsewhere in this report. We have prepared the unaudited information on the same basis as our audited consolidated financial statements. This table includes normal recurring adjustments that we consider necessary for the fair presentation of our financial position and operating results for the quarters presented. Operating results for any quarter are not necessarily indicative of results for any future quarters or for a full year.
| | | For the Three Months | | | | | Ended June 30, | | | | | 2012 | | | % | | | 2011 | | | % | | | Net Revenues: | | | | | | | | | | | | | | License fees | | $ | 7,277,498 | | | | 50.78 | % | | $ | 1,025,446 | | | | 14.88 | % | | Maintenance fees | | | 1,883,857 | | | | 13.15 | % | | | 1,898,641 | | | | 27.55 | % | | Services | | | 5,168,861 | | | | 36.07 | % | | | 3,967,720 | | | | 57.57 | % | | Total net revenues | | | 14,330,216 | | | | 100.00 | % | | | 6,891,807 | | | | 100.00 | % | | | | | | | | | | | | | | | | | | | | Cost of revenues: | | | | | | | | | | | | | | | | | | Salaries and consultants | | | 2,823,178 | | | | 19.70 | % | | | 2,153,809 | | | | 31.25 | % | | Travel | | | 360,839 | | | | 2.52 | % | | | 336,685 | | | | 4.89 | % | | Repairs and maintenance | | | 92,574 | | | | 0.65 | % | | | 99,530 | | | | 1.44 | % | | Insurance | | | 38,032 | | | | 0.27 | % | | | 31,581 | | | | 0.46 | % | | Depreciation and amortization | | | 1,095,968 | | | | 7.65 | % | | | 958,011 | | | | 13.90 | % | | Other | | | 965,087 | | | | 6.73 | % | | | 496,190 | | | | 7.20 | % | | Total cost of revenues | | | 5,375,678 | | | | 37.51 | % | | | 4,075,807 | | | | 59.14 | % | | Gross profit | | | 8,954,538 | | | | 62.49 | % | | | 2,816,000 | | | | 40.86 | % | | Operating expenses: | | | | | | | | | | | | | | | | | | Selling and marketing | | | 859,813 | | | | 6.00 | % | | | 968,677 | | | | 14.06 | % | | Depreciation and amortization | | | 229,877 | | | | 1.60 | % | | | 332,058 | | | | 4.82 | % | | Bad debt expense | | | 124,291 | | | | 0.87 | % | | | 112,068 | | | | 1.63 | % | | Salaries and wages | | | 1,133,503 | | | | 7.91 | % | | | 734,269 | | | | 10.65 | % | | Professional services, including non-cash compensation | | | 431,304 | | | | 3.01 | % | | | 350,841 | | | | 5.09 | % | | Lease abandonment charges | | | | | | | 0.00 | % | | | | | | | 0.00 | % | | General and adminstrative | | | 1,465,410 | | | | 10.23 | % | | | 882,578 | | | | 12.81 | % | | Total operating expenses | | | 4,244,198 | | | | 29.62 | % | | | 3,380,490 | | | | 49.05 | % | | | | | | | | | | | | | | | | | | | | Income from operations | | | 4,710,340 | | | | 32.87 | % | | | (564,490 | ) | | | -8.19 | % | | Other income and (expenses) | | | | | | | | | | | | | | | | | | Gain (loss) on sale of assets | | | (15,039 | ) | | | -0.10 | % | | | (8,159 | ) | | | -0.12 | % | | Interest expense | | | (236,548 | ) | | | -1.65 | % | | | (107,927 | ) | | | -1.57 | % | | Interest income | | | 15,298 | | | | 0.11 | % | | | 11,587 | | | | 0.17 | % | | Gain on foreign currency exchange transactions | | | (55,609 | ) | | | -0.39 | % | | | 217,880 | | | | 3.16 | % | | Share of net loss from equity investment | | | (59,446 | ) | | | -0.41 | % | | | - | | | | 0.00 | % | | Beneficial conversion feature | | | (52,664 | ) | | | -0.37 | % | | | (52,970 | ) | | | -0.77 | % | | Other (expense) | | | 152,894 | | | | 1.07 | % | | | 10,257 | | | | 0.15 | % | | Total other income (expenses) | | | (251,114 | ) | | | -1.75 | % | | | 70,668 | | | | 1.03 | % | | Net income before income taxes | | | 4,459,226 | | | | 31.12 | % | | | (493,822 | ) | | | -7.17 | % | | Income taxes | | | 9,076 | | | | 0.06 | % | | | (95,083 | ) | | | -1.38 | % | | Net income after tax | | | 4,468,302 | | | | 31.18 | % | | | (588,905 | ) | | | -8.55 | % | | Non-controlling interest | | | (2,566,844 | ) | | | -17.91 | % | | | (504,154 | ) | | | -7.32 | % | | Net income attibutable to NetSol | | | 1,901,458 | | | | 13.27 | % | | | (1,093,059 | ) | | | -15.86 | % |
Liquidity and Capital Resources
We note that the Company'sour cash position was $7,874,318 at June 30, 2013 compared to $7,599,607 at June 30, 2012 compared to $4,172,802 at June 30, 2011.2012. Further, we note that the Company’sour current assets, as of June 30, 2012,2013, totaled $36,278,106$42,074,279 and were 39.68%40.97% of total assets, an increase of 4.88%15.98% from $34,590,438,$36,278,106, or 40.39%39.71% of total assets as of June 30, 2011.2012. As of June 30, 2012, the Company's2013, our working capital (current assets less current liabilities) totaled $22,673,556$30,104,263 compared to $14,575,589$22,673,556 as of June 30, 2011,2012, an increase of $8,097,967.$7,530,607. As of June 30, 2012, the Company2013, we had $13,757,637 million$14,684,212 in accounts receivable and $12,131,329 million$15,367,198 in revenues in excess of billings. Net cash provided by operating activities amounted to $13,845,819 for the year ended June 30, 2013, as compared to $8,112,715 for the year ended June 30, 2012, as compared to $13,922,191 for the year ended June 30, 2011.
2012. The decreaseincrease is mainly due to a decreasean increase in accounts receivable and net profits of the company, accounts receivable.profits. The average collection cycle for accounts receivables ranges between three to six months from the date of invoicing. Payments are usually received within the due dates. The average days sales outstanding for the year ended June 30, 2012,2013, were 127106 days as compared with 150127 days in fiscal year 2011.2012. We note that net cash used in investing activities amounted to $14,472,252 for the year ended June 30, 2013, as compared to $11,407,346 for the year ended June 30, 2012, as compared to $17,795,596 for the year ended June 30, 2011.2012. The differenceincrease is primarily as a result of purchase/ replacement of more property and equipment during the less capitalizationyear. The company also acquired some non-controlling interest in in its majority owned subsidiaries against the payment of intangible assets and decrease in purchases of fixed assets.$799,349. Please note that the Companywe had purchases of property and equipment of $4,912,322$8,958,876 compared to $9,085,148$4,912,322 for the comparable period last fiscal year. We note that net cash provided by financing activities amounted to $9,091,751$1,690,794 and $4,266,782$9,091,751 for years ended June 30, 2012,2013, and 2011,2012, respectively. The current fiscal year included the cash inflow of $5,743,300$Nil from the sale of common stock and $728,500$2,648,848 from the exercising of stock options and warrants, compared to $4,099,250$5,743,300 and $1,615,050$728,500 in the prior year, respectively. As of June 30, 2012 the convertible notes payable, net of the associated beneficial conversion feature amounted to $3,745,457 out of which 75% could be payable in fiscal 2013 at the option of lender. In the current fiscal year, the Companywe had $4,250,308$1,795,663 in proceeds from bank loans, and net capital leases payments of $630,714 as compared to $4,190,395 in proceeds from bank loans, and net capital leases payments of $8,089,139 as compared to $2,969,146 in proceeds from bank loans, and net capital leases payments of $3,118,344 in the comparable period last year. The Company operatesWe operate in a range of geographical regions of the world through itsour various subsidiaries. These 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 the detail of which is given in Note No. 12 of the annexed financial statements. The CompanyWe and all of itsour subsidiaries are in compliance with our financial covenant arrangements. The Company’sOur subsidiary, NetSol PK, has a term finance facility from Askari Bank to finance the construction of a new building. The total amount of the facility is Rs. 162,500,000112,500,000 or approximately $1,719,577$1,114,965 which is secured by way of first charge of Rs. 580 million of land, building, and equipment of the Company. The Company hasequipment. We have used only Rs. 10087.5 million ($1,058,201 approximately)(approximately $867,000) of this facility as on June 30, 20122013 and the balance of Rs. 62.525 million is available depending upon theour financial requirements of the Company.requirements. We plan on pursuing various, and feasible means of raising new funding to: expand its infrastructure, enhance product offerings and strengthen marketing and sales activities in strategic markets. A strong growth in earnings and the signing of larger contracts with Fortune 500 customers largely depends on the financial strength of NetSol. Generally, the bigger name clients and new prospects diligently analyze and take into consideration a stronger balance sheet before awarding big projects to vendors. Therefore, NetSol would continue its effort to further enhance its financial resources in order to continue to attract large name customers and big value contracts. As a growing and dynamic company, we will continue our organic growth strategy in selective markets. In light of the strong growth outlook for the next few years, we will need to invest in hiring, training and development and build capacity in our main facilities. While this is a key element affecting gross margins, it is essential to have sufficient personnel ready to deliver. While we have scaled down any majorbeen most prudent in our capital expenditures,investment, there will be on-going capital expenditure needs based on our short term and long term business plans. Although ourOur requirements for capital expenses vary from time to time, for the next 12 months, we anticipate having the need for working capital of $4.0$6.0 to $6.0$7.0 million for overall expansion plans that would involve continued R&D, new product development, business development activities and infrastructure enhancements.
Management intends to further improve the accounts receivable collections process from our customers. In addition, we expect that significant executive and employee stock options exercises as a substantial amount of these options are in the money. The CompanyWe will explore injections of new capital from strategic investors, as the most feasible and viable source of new capital. Some of the joint ventures partners could be amongst the strategic investors to strengthen our balance sheet. Management is very aware of the need to continue to reduce both short term and long term liabilities while continuously improving cash flow and net cash position. Management remains very committed and focused to strengthening overall assets and will employ all of the above mentioned tools and such others as may become available to achieve these goals.
Financial Covenants
Our UK based subsidiary, NetSol Technologies Europe Limited (NTE) has an approved overdraft facility of £200,000 ($312,340) 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 ($1,521,600) for the acquisition VLS. This facility requires that NTE’s adjusted tangible net worth would not be less than £600,000. For this purpose, adjusted tangible net worth means shareholders’ funds less intangible assets plus non-redeemable preference shares. In addition, NTE’s cash debt service coverage would not fall below 150% of the aggregate debt service cost. The Pakistani subsidiary, NetSol Technologies Limited (NTPK) has an approved facility for both export refinance and term finance from Askari Bank Limited amounting to Rupees 362.5312.5 million ($3,835,979)3,097,126) 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, the Company and all its subsidiarieswe are in compliance with the financial covenants associated with itsour 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 the Company'sour policy to invest earnings in the growth of the Company rather than distribute earnings as common stock dividends. This policy, under which common stock dividends have not been paid since the Company'sour inception and is expected to continue, but is subject to regular review by the Board of Directors.
Contractual Obligations
Our significant 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 | | | | | | | | | | | | | | | | | Term Finance Facility | | $ | 867,195 | | | $ | 495,540 | | | $ | 371,655 | | | $ | - | | | $ | - | | | HSBC Loan | | | 1,047,014 | | | | 336,339 | | | | 672,678 | | | | 37,997 | | | | - | | | D&O Insurance | | | 88,292 | | | | 88,292 | | | | - | | | | - | | | | - | | | Habib Bank Line of Credit | | | 1,785,237 | | | | 1,785,237 | | | | - | | | | - | | | | - | | | Bank Overdraft Facility | | | 312,139 | | | | 312,139 | | | | - | | | | - | | | | - | | | Bank Loan | | | 1,982,161 | | | | 1,982,161 | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | Capital Lease Obligations | | | | | | | | | | | | | | | | | | | - | | | Subsidiary Capital Leases | | | 638,800 | | | | 308,918 | | | | 318,197 | | | | 11,685 | | | | - | | | | | | | | | | | | | | | | | | | | | | - | | | Operating Lease Obligations | | | | | | | | | | | | | | | | | | | - | | | Non-cancellable operating lease | | | 2,401,272 | | | | 645,087 | | | | 815,078 | | | | 621,571 | | | | 319,536 | | | | | | | | | | | | | | | | | | | | | | - | | | Total | | $ | 9,122,110 | | | $ | 5,953,713 | | | $ | 2,177,608 | | | $ | 671,253 | | | $ | 319,536 | |
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 7A7A.. 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 majority of the operations of the company are based in the Asia Pacific region where Pak Rupee is continuously losing its value against the US Dollar and we don’t have any imports, therefore, we believe it is counter-productive to hedge this exposure. Devaluation of Pak rupee results in 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 Pak 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 Pak Rupee is continuously losing its value against the US Dollar and we don’t have any imports, therefore, we believe it is counter-productive to hedge this exposure.
ITEM 88.. 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 99.. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Except as noted in Item 9A, Kabani & Company, Inc.’s report on NetSol’s financial statements for the fiscal years ended June 30, 20122013 and June 30, 2011,2012, did not contain an adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope, or accounting principles.
Also except as noted in Item 9A below, In connection with the audit of NetSol's financial statements for the fiscal years ended June 30, 20122013 and June 30, 20112012, 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 9A9A.. 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 not 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, 2012.2013. 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, 2012,2013, there was a material weakness in the Company’s internal control over financial reporting. Specifically, while in the performance of this assessment, management identified that its core accounting staff dodoes not have necessary technical accounting knowledge and training relating to accounting for complex U.S. GAAP matters. Based on this evaluation, management concluded that our internal control over financial reporting was not effective as of June 30, 2012.2013. Notwithstanding the existence of such material weakness in our internal controls over financial reporting, our management, including our Chief Executive Officer, believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.
On September 9, 2013, the Company appointed Roger Almond, C.P.A. to act as Chief Financial Officer of NetSol. Management is committedbelieves that Mr. Almond’s appointment as CFO results in the requisite technical accounting knowledge and training relating to remediatingaccounting for complex U.S. GAAP matters. Management believes that Mr. Almond’s appointment will result in the removal of the material weakness as quickly as possible and we will continue to encourage our current accounting staff to both further their continuing education and to sit for the Certified Public Accountant exam in the United States. Company is also focusing to hire additional accounting staff with necessary experience and training with respect to US GAAP.
Kabani & Company, Inc., our independent registered public accounting firm, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting.subsequent quarters.
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 2012,2013, 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)).
None.Departure and Arrival of Chief Financial Officer:
On September 9, 2013, Mr. Roger K. Almond was appointed to the position of Chief Financial Officer of NetSol Technologies, Inc. Mr. Almond replaces Mr. Boo-Ali Siddiqui who will assume the role of Chief Accounting Officer, while continuing his roles of Chief Financial Officer and Secretary of NetSol PK. There was no disagreement with Mr. Boo-Ali Siddiqui related to his departure as CFO of NetSol Technologies, Inc. Mr. Almond is being retained to provide his expertise and financial and accounting acumen to the finance department. His roles will include the preparation of all quarterly and annual financial statements, including ensuring that our financial statements are presented in compliance with U.S. GAAP. Additionally, Mr. Almond will assist our CEO with communications and interaction with the investor and financial communities. While acting as a consultant, Mr. Almond shall be paid on an hourly basis at the rate of $100 per hour with a minimum commitment of 20 hours per week. For further information about Mr. Almond, please see his biographical information on page 40 of this report. Mr. Almond’s Consulting Agreement dated effective September 9, 2013, is attached to this report as an exhibit.
Charters and Code of Conduct:
The Committees of the Board of Directors have reviewed the various charters and codes of conduct and have agreed that they be restated on September 10, 2013. These restated Charters and Codes of Conduct can be found on www.netsoltech.com/IR/corporate-governance. The updated charters and Code of Conduct are attached to this report as an exhibit.
ITEM 1010.. 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, 2012,2013, 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
Executive Officers
Mr. Salim Ghauri is CEO of NetSol Technologies Limited, a subsidiary of the Company located in Lahore, Pakistan. Mr. Naeem Ghauri is head of Global Sales and CEO of NetSol Technologies Europe, Ltd., the Company’s wholly owned UK subsidiary and Vroozi, Inc., a wholly owned subsidiary. In prior years, these individuals held titles at the Company level. A discussion of their compensation was included in the 10-K for the 2010-2011 fiscal year and in the Company’s proxy statement for the meeting held in August 2012. As Mr. Naeem Ghauri continues to act as a director, and as both individuals have family relationships with the CEO and Chairman of the Company, compensation packages shall continue to be reviewed and approved by the Company’s Compensation Committee.
Board of Directors
At the 20122013 Annual Shareholders Meeting, the Company’s current fivea seven 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, Mr. Eugen Beckert, Mr. Naeem U. Ghauri, Mr. Shahid Burki, Mr. Salim Ghauri, Mr. Mark Caton and, Mr. Mark Caton.Jeffrey Bilbrey.
Committees
The Audit committee is made up of Mr. Burki as Chairman, Mr. Caton, Mr. Beckert and Mr. BeckertBilbrey as members. The Compensation committee consists of Mr. Caton as its Chairman and Mr. Beckert, Mr. Burki and, Mr. BurkiBilbrey as its members. The Nominating and Corporate Governance Committee consists of Mr. Beckert as chairman and Mr. Burki, Mr. Caton and, Mr. Caton.Bilbrey.
The table below provides the membership for each of the committees during Fiscal Year 2012.2013. | | | | | | | | | | | | | | | | | | | Nominating | | | | | | | and Corporate | | | Audit | | Compensation | | Governance | | | Audit Committee | | | | Governance Committee | | | | | | | | | | | | | | | | Najeeb Ghauri | | | | | | | | | | | | | | Naeem Ghauri | | | | | | | | | | | | | | Salim Ghauri* | | | | | | | | | | | | | | Shahid J. Burki (I) | | | X | (C) | | | X | | | | X | | | Eugen Beckert (I) | | | X | | | | X | | | | X | (C) | | Mark Caton (I) | | | X | | | | X | (C) | | | X | | Alex ShakowJeffrey Bilbrey (I)* | | | X | | | | X | | | | X | |
| | | | (I) | | Denotes an independent director. | (C) * | | Denotes the Chairperson of the committee. The Company determined to changeadjust the number of current directors from 5 to 7 members. Mr. Bilbrey was appointed to 5 members.fill a vacancy in March 2013 and Mr. Salim Ghauri and Mr. Alex Shakow did not standstood for re-election.election to the board in July 2013. The board continues to consist of a majority of independent members. |
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 terms of one year or 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 | Year First Elected As an Officer or Director | Age | Position Held with the Registrant | Family Relationship | | Najeeb Ghauri | 1997 | 58 | Chief Executive Officer, Chairman and Director | Brother to Naeem Ghauri | 1997 | 59 | Chief Executive Officer, Chairman and Director | Brother to Naeem & Salim Ghauri | | Boo-Ali Siddiqui | 2009 | 38 | Chief Financial Officer | None | 2009 | 38 | Chief Financial Officer* | None | | Roger Almond | | 2013 | 48 | Chief Financial Officer* | None | | Patti L. W. McGlasson | 2004 | 47 | Secretary, General Counsel | None | 2004 | 48 | Sr. V.P., Legal and Corporate Affairs; Secretary, General Counsel | None | | Naeem Ghauri | 1999 | 55 | Director | Brother to Najeeb Ghauri | 1999 | 56 | Director | Brother to Najeeb & Salim Ghauri | | Shahid Javed Burki | 2000 | 72 | Director | None | 2000 | 74 | Director | None | | Salim Ghauri | | 1999** | 58 | Director | Brother to Najeeb & Naeem Ghauri | | Eugen Beckert | 2001 | 66 | Director | None | 2001 | 66 | Director | None | | Mark Caton | 2002 | 61 | Director | None | 2002 | 64 | Director | None | | Jeffrey Bilbrey | | 2013 | 42 | Director | None |
*Mr. Almond was appointed Chief Financial Officer of the Company on September 9, 2013. At that point, Mr. Boo-Ali Siddiqui stepped down as Company CFO but undertakes the position of Chief Accounting Officer and retains the positions of CFO and Company Secretary of NetSol Technologies, Ltd.
**Salim Ghauri, at his request. did not stand for re-election to the Board of Directors during fiscal year 2012-2013; he accepted his nomination to the board and was elected back on the board on May 2013 to serve for a one year term. Business Experience of Officers and Directors:
NAJEEB U. GHAURI is the Chief Executive Officer and Chairman of NetSol. Hethe Board of NetSol Technologies, Inc. Najeeb, has been a Director of the Company since 1997, Chairman since 2003 and Chief Executive Officer since October 2006. Mr. Ghauri2006; and is the founder of NetSol Technologies, Inc. He was responsible for
Najeeb oversees all seven subsidiaries of 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 servedas well as the Company's Chief Executive Officer from 1999parent company in seven different locations worldwide. He has successfully worked with management to 2001make NetSol a multi-national company listed on three different stock exchanges worldwide (NASDAQ, Karachi Stock Exchange and as the Chief Financial Officer from 2001 to 2005.NASDAQ Dubai). As CEO, Mr. Najeeb Ghauri is responsible for managing the day-to-day operations of the Company, as well as analyzing and developing plans to drive the Company's overall growth and expansion plan. nurture new business. With more than 1,100 employees worldwide, under his leadership, NetSol has matured into a well-recognized name in the industry.
Prior to joining the Company, Mr. GhauriNetSol, Najeeb 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. Ghaurimanager. Najeeb received his Bachelor of Science degree in Management/Economics from Eastern Illinois University in 1979, and his M.B.A. in Marketing Management from Claremont Graduate School in California in 1981. Mr. Ghauri
Najeeb was elected Vice Chairman of US Pakistan Business Council in 2006, a Washington D.C. based council of US Chamber of Commerce. HeNajeeb Ghauri served as Vice Chairman of US Pakistan Business Council for two terms in 2006 and 2012.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. Najeeb Ghauri has participated in NASDAQ opening and/or closing bell ceremonies in 2006, 2008 and 2009. The Nominating Committee determined that Mr. Ghauri’s long term experience with the Company and his direct experience with capital markets and investment community make him qualified to serve on our Board of Directors. Mr. Ghauri isholds a director ofseat in Atheeb NetSol Ltd., located in Saudi Arabia; NetSol Technologies, Ltd., Lahore, Pakistan; and DNA Health Corporation, a start-up health care business.business located in Maryland.
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 in 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.
BOO-ALI SIDDIQUI has served as NetSol's Chief Financial Officer sincefrom April 2009. He also2009 to September 2013.
From September 2013, Mr. Siddiqui serves as Chief Accounting Officer of the Company and will continue to serve as Chief Financial Officer and Company Secretary of NetSol Technologies Ltd. Located in Lahore, managing the finances of all companies in the Asia group, a position he has held since 2005.
Prior to joining NetSol, he served as Deputy Registrar of Companies for the Securities & Exchange Commission of Pakistan (SECP) and as Senior Manager, Audit and Tax, for Ehtisham & Co., Chartered Accountants.
Mr. Siddiqui holds a Bachelor of Commerce from Hailey College of Commerce, Lahore, University of The Punjab, Pakistan, is a Fellow Member of the Institute of Chartered Accountants of Pakistan (FCA), the Institute of Chartered Secretaries & Managers (FICS) and the Pakistan Institute of Public Finance Accountants (FPFA). He is also member of the Institute for Internal Controls USA and the Institute of Forensic Accountants of Pakistan. He completed his four years articleship from Ford Rhodes Sidat Hyder & Company a renowned accounting firm in Pakistan representing Ernest Young International.
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 more than 22 years of experience in corporate law, mergers and acquisitions, business and cross-border transactions and securities law. Prior to joining NetSol, Ms. McGlassonPatti practiced at Vogt & Resnick, law corporation, where her practice focused on corporate, securities, business and cross-border transactions. 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.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.
Naeem Ghauri serves as the Managing Director of NetSol (UK) Ltd., a wholly owned subsidiary of the Company located in London, England. He is also the director of the Global Sales group. WhileNaeem has been instrumental in numerous transactions, his most significant contribution to the revenue of the Company was his role in closing the TiGprofitable acquisitions worldwide including VLS, Vroozi™ and NetSol Joint Venture in 2005. Technologies Europe, Ltd. .
Prior to joining the Company, Mr. GhauriNaeem was Project Director for Mercedes-Benz Finance Ltd., from 1994-1999. Mr. GhauriNaeem supervised over 200 project managers, developers, analysis and users in nine European Countries. Mr. GhauriNaeem earned his degree in Computer Science from Brighton University, England. Mr. Ghauri serves on the board of NetSol Technologies Europe, Ltd., a subsidiary of the Company. The Nominating Committee determined that Mr. Ghauri’s experience in auto finance, a significant portion of our revenues, and his experience in developing new business opportunities and relationships for the Company make him qualified to serve on our Board of Directors.
SALIM GHAURI was elected a member of the Board of Directors by shareholders on May 29, 2013 after taking a sabbatical from the board membership in 2012 for a period of one year. Salim is a founding member of NetSol Technologies, Inc. and is the CEO and Chairman of NetSol Technologies Ltd. located Lahore.
Salim oversees the day to day operation and business affairs in the Asia/Pacific region of the Company. Under his leadership, the Company has become and instantly recognizable name in that region. In his role as CEO of NetSol Technologies Ltd., Salim has led the Asia/Pacific software development team and has been responsible for maintaining as well as developing new relationships with Asia/Pacific companies in the industry.
Salim received his BS degree in Computer Science from the University of Punjab in Lahore, Pakistan. Before establishing NetSol Technologies Ltd., he was a successful IT consultant in Australia. His last assignment was with BHP Steel in Sydney. As a systems integrator, he was responsible for software and hardware solutions. From 1988-89, he consulted with the State Rail Authority of NSW Australia for its MIS reporting. Prior to moving to Australia, he resided in Saudi Arabia, where he started his IT career at Citibank, Riyadh in 1979. Salim Ghauri is credited with setting up the first IT based training institute and a software house in Damam, Saudi Arabia.
In 2007, Mr. Salim Ghauri was appointed as an Honorary Consul for Australia-Punjab Region.
EUGEN BECKERT was appointed to the Board of Directors in August 2001. A native of Germany,
Early in his career, Mr. Beckert received his mastersworked in Engineeringthe technologies and Economics from the University of Karlsruhe, Germany. Mr. Beckert was withsystems development at Mercedes-Benz AG/Daimler Benz AG from 1973, working in technology and systems development.AG. 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 havingin the development of NetSol’s LeaseSoft products of NetSol developed(now NFS) and introduced inits introduction to several countries as a pilot customer.customer. From 2001 to 2004, he served as Vice President inof the Japanese company of DCS.DaimlerChrysler Services. Mr. Beckert retired from DaimlerChrysler in November 2006.
A native of Germany, Mr. Beckert received his masters in Engineering and Economics from the University of Karlsruhe, Germany.
Mr. Beckert is chairman of the Nominating and Corporate Governance Committee and a member of the Audit and Compensation Committees. The Nominating Committee determined that Mr. Beckert’s experience in auto finance related IT, specifically as CIO for Debis Financial Services, together with his status as an independent director under Nasdaq rules makes him qualified to serve on our Board of Directors.
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
Mr. Burki enjoyed 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)(1981-1987); Director of China Department (1987-94)(1987-1994); and Vice President of Latin America and the Caribbean Region (1994-99)(1994-1999). Upon taking early retirement from the Bank, he took upbecame 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 therecontinued that tenure until 2005. He is currently Chairman of 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 includingincluding: 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); Pakistan Historical Dictionary, (London, Scare Crow Press); and, South Asia in the New World Order, (Routledge, London). 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. The Nominating Committee believes that Mr. Burki’s vast experience as an economist and entrepreneur with specialization on the Asia Pacific markets, his status as our financial expert and, finally, his status as an independent director under Nasdaq rules makes him qualified to serve on our Board of Directors. MARK CATON joined the board of directors in 2007. Mr. Mark Caton is currently Vice President of Ciena Financial Inc., a diversified financial services company. He is also the 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. CatonHe 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. The Nominating Committee believes
JEFFREY BILBREY joined the Board of Directors in March 2013 to fill a vacancy and was duly elected at the annual shareholders meeting on May 29, 2013. Jeffrey Bilbrey is currently Vice President of Information Services for Cancer Treatment Centers of America (CTCA) and is responsible for leading a highly talented IS group in providing technology solutions that Mr. Caton’s understandingimprove patient care and safety and assist in winning the fight against cancer every day. Prior to CTCA, Bilbrey served as Sr. Vice President, Technology Operations, for the Innovation Group where he was a member of the US IT market,technology board, guiding the strategic planning for technology products across seven countries. Additionally, his experience includes founding and leading a strategic IT consulting firm, advising on product launches, building an offshore outsourcing operation from the ground up, and leading multi-million multidisciplinary transformational programs. Jeffrey Bilbrey received his BS in human resources related issues, and his status as an independent director under Nasdaq rules qualifies him to serve on our BoardManagement Information System from University of Directors.
CORPORATE GOVERNANCEWisconsin, Eau Claire in 1994.
CORPORATE GOVERNANCE
Code of Business Conduct & Ethics The Company adopted on July 2, 2004,its Code of Business Conduct & Ethics, as amended and restated on July 22, 2007, a Code of EthicsSeptember 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 www.netsoltech.com/IR/corporate-governance.us/investors/corporate-governance/lang/en . Audit Committee The Company has an audit committee whose members are the independent directors of the Company, specifically, Mr. Beckert, Mr. Burki Mr. Caton and Mr. Caton.Bilbrey. 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 2011-20122012-2013 fiscal year are the following individuals: | Najeeb Ghauri | Chief Executive Officer | | Boo Ali | 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. 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. For purposes of determining executive compensation, as of the period covered by this report, we have not engaged consultants to help us analyze this data or to compare our compensation programs with the practices of the companies represented in the compensation data we review. However, the compensation committeeThe 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. 20122013 Executive Compensation Components
For the fiscal year ended June 30, 2012,2013, 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. 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. 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. Base salaries are adjusted annually by the Compensation Committee. As of June 30, 2011,2013, the annual review had not been completed and annual adjustments had not occurred. 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. During our fiscal year ended 2012,2013, none of the named executives were awarded cash bonuses. 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 executive officers. We maintain benefits and perquisites that are offered to all employees, including health insurance and dental insurance. Benefits and perquisites may vary in different country locations and are consistent with local practices and regulations. 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 third 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 third 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 second month 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 two months 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 first 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 first 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 $1,000,000 that is paid to certain individuals. We believe that compensation paid under the management incentive plans is generally fully deductible for federal income tax purposes. Accounting for Stock-Based Compensation Commencing on July 1, 2006, we began accounting for stock-based payments, including awards under our Employee Stock Option Plans, in accordance with the requirements of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, or SFAS 123(R). The following table shows the compensation for the fiscal year ended June 30, 20122013 and June 30, 2011,2012, earned by our Chairman and Chief Executive Officer, our Chief Financial Officer who is our Principal Financial and Accounting Officer, and others considered to be executive officers of the Company.
| Name and Principle Position | Fiscal Year Ended | | Salary ($) | | | Bonus ($) | | | Stock Awards ($) (1) | | | Option Awards ($) | | | All Other Compensation ($) | | | Total ($) | | Fiscal Year Ended | | Salary ($) | | | Bonus ($) | | | Stock Awards ($) (1) | | | Option Awards ($) | | | All Other Compensation ($) | | | Total ($) | | | Najeeb Ghauri | 2012 | | $ | 389,063 | | | $ | - | | | $ | 32,500 | | | $ | 168,820 | (2) | | $ | 78,884 | (3) | | $ | 669,267 | | 2013 | | $ | 393,750 | | | $ | - | | | $ | - | | | $ | 56,273 | | (2) | | $ | 75,141 | | (3) | | $ | 525,164 | | | CEO & Chairman | 2011 | | $ | 375,000 | | | $ | - | | | $ | 96,875 | | | $ | - | | | $ | 81,603 | (3) | | $ | 553,478 | | 2012 | | $ | 389,063 | | | $ | - | | | $ | 32,500 | | | $ | 168,820 | | (2) | | $ | 78,884 | | (3) | | $ | 669,267 | | | Boo Ali Siddiqui | 2012 | | $ | 90,300 | | | $ | - | | | $ | 17,875 | | | $ | - | | | $ | - | (4) | | $ | 108,175 | | | | Boo-Ali Siddiqui | | 2013 | | $ | 92,400 | | | $ | - | | | $ | 6,850 | | | $ | - | | | | $ | - | | | | $ | 99,250 | | | Chief Financial Officer | 2011 | | $ | 84,000 | | | $ | - | | | $ | 69,250 | | | $ | - | | | $ | - | (4) | | $ | 153,250 | | 2012 | | $ | 90,300 | | | $ | - | | | $ | 17,875 | | | $ | - | | | | $ | - | | | | $ | 108,175 | | | Patti L. W. McGlasson | 2012 | | $ | 139,750 | | | $ | - | | | $ | 17,875 | | | $ | - | | | $ | 23,863 | (5) | | $ | 181,488 | | 2013 | | $ | 143,000 | | | $ | - | | | $ | 6,850 | | | $ | - | | (2) | | $ | 23,947 | | (4) | | $ | 173,797 | | | Secretary, General Counsel | 2011 | | $ | 130,500 | | | $ | - | | | $ | 55,400 | | | $ | - | | | $ | 21,281 | (5) | | $ | 207,181 | | 2012 | | $ | 139,750 | | | $ | - | | | $ | 17,875 | | | $ | - | | (2) | | $ | 23,863 | | (4) | | $ | 181,488 | |
(1) The stock was awarded as compensation to the officers and related expense was recognized in the consolidated financial statements. (2) 500,00050,000 options were granted to officers during the periodlast year vesting quarterly starting from December 2012 quarter and related expense was recognized in the consolidated financial statements. (3) Consists of $36,000 and $36,000 paid for automobile and travel allowance, $16,758 and $16,758 on account of life insurance and $26,126$22,383 and $28,845$26,126 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, 20122013 and 2011,2012, respectively. (4) The amount paid to the officer was in aggregate less than $10,000 for the fiscal years ended June 30, 2012 and 2011, respectively. (5) Consists of $9,000 and $9,000 paid for automobile allowance and $14,863$14,947 and $12,281$14,863 paid for medical and dental insurance premiums for participation in the health insurance program for the fiscal year ended June 30, 20122013 and 20112012 respectively.
Grants of Plan-Based Awards In July, 2012, Mr. Najeeb Ghauri, Mr. Naeem GhauriBoo-Ali Siddiqui and Mr. Salim GhauriMs. McGlasson were each granted, in November 2011, 50,000, 40,000 and 40,000 options, respectively, to acquire1,250 shares of common stock of the Company. The optionsshares vest quarterlyimmediately and were approved by the Compensation Committee as an incentive for Messrs. Ghauri.the named officers. 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 employment agreement with the Company were the result of negotiations between the Company and the executives and were approved by our Compensation Committee and Board of Directors. The terms of Ms. McGlasson’s and Mr. Siddiqui’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 and Board of Directors. 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 and again January 1, 2010.on July 25, 2013. 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 from the date of the CEO Agreement through December 31, 2012.Officer. The term of employment automatically renews for 36 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 $393,750$474,000 and is eligible for annual bonuses at the discretion of the Compensation Committee. Pursuant to the terms The bonuses are payable in shares of common stock of the amendment, Mr. Ghauri was entitled toCompany based on the following bonuses. A bonus of One Hundred Thirty Three Thousand Dollars ($133,000) is payable upon achieving the minimum bonus benchmark of: company-widegross revenue of $30,000,000 for the fiscal year 2009-2010;ending June 31, 2014 of: 25,000 at $56,000,000 and earnings per share25,000 at $62,000,000. Mr. Ghauri also earns 5,000 shares of $0.05 (the “Minimum Bonus Benchmark”). An additional bonus may be earned if an “accelerator goal” is achieved. The bonus is accelerated to a totalcommon stock for each quarter of Two Hundred Thousand Dollars ($200,000) if revenueservice commencing with the first quarter ended September 30, 2013 through the end of $33,000,000 is attained together with earnings per share of $0.10. the fiscal year. Mr. Ghauri is entitled to participate in the Company's stock option plans, is entitled to threefour weeks of paid vacation per calendar year, is to receive 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 36 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 36 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. Employment Agreement with Boo-Ali Siddiqui Effective April 1, 2010, the Company entered into an Employment Agreement with our Chief Financial Officer, Mr. Boo-Ali Siddiqui. Pursuant to the Employment Agreement between Ms.Mr. Siddiqui and the Company (the "CFO Agreement"), the Company agreed to employoriginal term of Mr. Siddiqui as its CFOSiddiqui’s agreement was automatically extended for 30 day periods from the date of the CFO Agreement through March 31, 2011. According to the terms of the CFO Agreement, the term of the agreementit automatically extends for an additional thirty day periods unless notice of intent to terminate is received by either party at least two weeks prior to the end of the term. This Agreement was amended on July 25, 2013. Under the CFO Agreement, as amended, Mr. Siddiqui is entitled to an annualized base salary of $92,400$125,000 and is eligible for annual bonuses at the discretion of the Chief Executive Officer. Mr. Siddiqui shall also receive a total of 50,00010,000 shares of common stock to be granted in 25% tranches upon each completion of a quarter of service duringcommencing with the term of his CFO Agreement.quarter ending September 30, 2013 and continuing until June 30, 2014. The CFO Agreement also includes provisions respecting severance, non-solicitation, non-competition, and confidentiality obligations. Pursuant to the CFO Agreement, if shehe terminates herhis 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, shehe shall be entitled to all remaining salary from the termination date until 2 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 2 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. Siddiqui. 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 10-Q for the quarter ended December 31, 2009. The above summary of the amendment to the CFO Agreement is qualified in its entirety by reference to the full text, a copy of which was filed as an exhibit to the Company’s 8-K filed on July 26, 2013. Employment Agreement with Patti L. W. McGlasson Effective May 1, 2006, the Company entered into an Employment Agreement with our Secretary and General Counsel, Ms. Patti L. W. McGlasson. Pursuant to the Employment Agreement 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 March 31, 2013. According to the terms of the General Counsel Agreement, the term of the agreement automatically extends for an additional one year periods unless notice of intent to terminate is received by either party at least 6 months prior to the end of the term. Under theThe General Counsel Agreement was amended on July 25, 2013 (the General Counsel Agreement and all amendments referred to as the “GC Agreement”) Under the GC Agreement, Ms. McGlasson wasis entitled to an annualized base salary of $143,000, 50,000$171,600, 20,000 shares of common stock to be granted in 25% tranches after each quarter of service, 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 four 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 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. 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 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. 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, 2012,2013, 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 | | NUMBER OF SECURITIES UNDERLYING OPTIONS (#) EXERCISABLE | | NUMBER OF SECURITIES UNDERLYING OPTIONS (#) UNEXERCISABLE | | OPTION EXERCISE PRICE ($) | | OPTION EXPIRATION DATE | | Najeeb Ghauri | | | 10,000 | | | | | 22.10 | | 1/1/14 | | | 25,000 | | | | | 25.00 | | 6/2/16 | | | | | 10,000 | | | | | 37.50 | | 1/1/14 | | | | | | 5,000 | | | | | 50.00 | | 1/1/14 | | | | | | 2,000 | | | | | 26.40 | | 3/26/14 | | | | | | 3,000 | | | | | 50.00 | | 3/26/14 | | | | | | 37,423 | | | | | 19.40 | | 4/1/15 | | | | | | 50,000 | | | | | 29.10 | | 4/1/15 | | | | | | 16,721 | | | | | 18.30 | | 6/2/16 | | | | | | 25,000 | | | | | 25.00 | | 6/2/16 | | | 30,000 | | | | | 6.50 | | 2/12/19 | | | | | 55,000 | | | | | 6.50 | | 2/12/19 | | | 50,000 | | | | | 7.50 | | 11/7/21 | | | | | 50,000 | | | | | 7.50 | | 11/7/21 | | | | | | | | | | | | Boo-Ali Siddiqui | | | - | | | | | - | | | | | - | | | | | - | | | | | | | - | | | | | - | | | | | - | | | | | - | | | | Patti L. W. McGlasson | | | 1,000 | | | | | 30.00 | | 1/1/14 | | | 1,000 | | | | | 30.00 | | 1/1/14 | | | | | 2,000 | | | | | 26.40 | | 3/26/14 | | | 2,000 | | | | | 26.40 | | 3/26/14 | | | | | 3,000 | | | | | 50.00 | | 3/26/14 | | | 3,000 | | | | | 50.00 | | 3/26/14 | | | | | 2,000 | | | | | 16.50 | | 7/7/15 | | | 2,000 | | | | | 16.50 | | 7/7/15 | | | | | 2,000 | | | | | 22.50 | | 7/7/15 | | | 2,000 | | | | | 22.50 | | 7/7/15 | | | | | 1,000 | | | | | 16.00 | | 7/23/17 | | | 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, 2012,2013, the last day of our most recently completed fiscal year. | BENEFITS AND PAYMENTS | | CHANGE OF CONTROL | | | TERMINATION UPON DEATH OR DISABILITY | | | TERMINATION BY US WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON | | | | | | | | | | | | | | Base Salary | | $ | 1,181,250 | | | $ | - | | | $ | 1,181,250 | | | Bonus | | | - | | | | | | | | | | | Salary Multiple Pay-out | | | 1,177,313 | | | | | | | | | | | Bonus or Revenue One-time Pay-Out | | | 398,127 | | | | | | | | | | | Net Cash Value of Options | | | 4,893,302 | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 7,649,992 | | | $ | - | | | $ | 1,181,250 | |
42
| BENEFITS AND PAYMENTS | | CHANGE OF CONTROL | | | TERMINATION UPON DEATH OR DISABILITY | | | TERMINATION BY US WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON | | | | | | | | | | | | | | Base Salary | | $ | 1,181,250 | | | $ | - | | | $ | 1,181,250 | | | Bonus | | | - | | | | | | | | | | | Salary Multiple Pay-out | | | 1,177,313 | | | | | | | | | | | Bonus or Revenue One-time Pay-Out | | | 507,972 | | | | | | | | | | | Net Cash Value of Options | | | 1,195,000 | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 4,061,535 | | | $ | - | | | $ | 1,181,250 | |
Boo-Ali Siddiqui, Chief Financial Officer In the event that Mr. Siddiqui 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 6 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 six (6) months (the “Change of Control Termination Payment”). The following table summarizes the potential payments to Mr. Siddiqui assuming his employment with us was terminated or a change of control occurred on June 30, 2012,2013, the last day of our most recently completed fiscal year. | BENEFITS AND PAYMENTS | | CHANGE OF CONTROL | | | TERMINATION UPON DEATH OR DISABILITY | | | TERMINATION BY US WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON | | | CHANGE OF CONTROL | | | TERMINATION UPON DEATH OR DISABILITY | | | TERMINATION BY US WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON | | | | | | | | | | | | | | | | | | | | | | | Base Salary | | $ | 46,200 | | | $ | - | | | $ | 46,200 | | | $ | 46,200 | | | $ | - | | | $ | 46,200 | | | Bonus | | | - | | | | | | | | | | | | - | | | | | | | | | | | Salary Multiple Pay-out | | | 138,138 | | | | | | | | | | | | 138,138 | | | | | | | | | | | Bonus or Revenue One-time Pay-Out | | | 199,064 | | | | | | | | | | | | 253,986 | | | | | | | | | | | Net Cash Value of Options | | | - | | | | | | | | | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 383,402 | | | $ | - | | | $ | 46,200 | | | $ | 438,324 | | | $ | - | | | $ | 46,200 | |
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; 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, she shall so notify the Company of her intent. 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, 2012,2013, the last day of our most recently completed fiscal year. | BENEFITS AND PAYMENTS | | CHANGE OF CONTROL | | | TERMINATION UPON DEATH OR DISABILITY | | | TERMINATION BY US WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON | | | CHANGE OF CONTROL | | | TERMINATION UPON DEATH OR DISABILITY | | | TERMINATION BY US WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON | | | | | | | | | | | | | | | | | | | | | | | Base Salary | | $ | 143,000 | | | $ | - | | | $ | 143,000 | | | $ | 143,000 | | | $ | - | | | $ | 143,000 | | | Bonus | | | - | | | | | | | | | | | | - | | | | | | | | | | | Salary Multiple Pay-out | | | 427,570 | | | | | | | | | | | | 417,853 | | | | | | | | | | | Bonus or Revenue One-time Pay-Out | | | 199,064 | | | | | | | | | | | | 253,986 | | | | | | | | | | | Net Cash Value of Options | | | 326,800 | | | | | | | | | | | | 326,800 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 1,096,434 | | | $ | - | | | $ | 143,000 | | | $ | 1,141,639 | | | $ | - | | | $ | 143,000 | |
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, 2012,2013, other than Najeeb Ghauri and Naeem Ghauri who are otherwise employed by the Company or its subsidiaries. | NAME | | FEES EARNED OR PAID IN CASH ($) | | | SHARES AWARDS ($) (1) | | | TOTAL ($) | | | FEES EARNED OR PAID IN CASH ($) | | | SHARES AWARDS ($) (1) | | | TOTAL ($) | | | Eugen Beckert | | | 25,000 | | | | 10,000 | | | | 35,000 | | | | 31,250 | | | | - | | | | 31,250 | | | Shahid Javed Burki | | | 31,000 | | | | 10,000 | | | | 41,000 | | | | 38,750 | | | | - | | | | 38,750 | | | Mark Caton | | | 28,000 | | | | 10,000 | | | | 38,000 | | | | 35,000 | | | | - | | | | 35,000 | | | Alexander Shakow | | | 18,000 | | | | 10,000 | | | | 28,000 | | | | 4,500 | | | | - | | | | 4,500 | | | Jeffrey M. Bilbrey | | | | 6,000 | | | | - | | | | 6,000 | |
| (1) | During the fiscal year ended June 30, 2012, 40,0002013, no shares were issued out of which 20,000 shares were accrued to be issued last yearissued. |
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, 2012.2013. | BOARD ACTIVITY | | CASH PAYMENTS | | | Board Member Fee | | $ | 48,000 | | | Committee Membership | | $ | 18,000 | | | Chairperson for Audit Committee | | $ | 15,000 | | | Chairperson for Compensation Committee | | $ | 12,000 | | | Chairperson for Nominating and Corporate Governance Committee | | $ | 9,000 | |
| BOARD ACTIVITY | | CASH PAYMENTS | | | Board Member Fee | | $ | 52,000 | | | Committee Membership | | $ | 18,500 | | | Chairperson for Audit Committee | | $ | 18,750 | | | Chairperson for Compensation Committee | | $ | 15,000 | | | Chairperson for Nominating and Corporate Governance Committee | | $ | 11,250 | |
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. Compensation Committee Interlocks and Insider Participation The current members of the Compensation Committee are Messrs. Caton (Chairman), Mr. Beckert, Mr. Burki and Mr. Burki.Bilbrey. During the fiscal year ended June 30, 2012,2013, the Chairman of the Compensation Committee was Mr. Caton. There were no other members of the committee during the fiscal year ended June 30, 2012.2013. All current members of the Compensation Committee are "independent directors" as defined under the NASDAQ Listing Rules. None of these individuals were at any time during the fiscal year ended June 30, 2012,2013, or at any other 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 200,000177,413 options have been granted. The grant prices range between $7.50 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 200,000193,000 have been granted. The grant prices range between $6.50 and $5.00.$50.00.
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 500,000403,843 have been granted. The grant prices range between $6.50 and $30.00.$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 500,000439,837 have been granted. The grant prices range between $6.50 and $25.50.
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 343,399499,821 have been granted. The grant prices range between $3.00 and $16.70.
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 4, 2012,10, 2013, 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:
| | | | | | Percentage | | | | | | Percentage | | | | | | | | | | | | | | | | | Najeeb Ghauri (3) | | | 511,998 | | | | 6.76 | % | | | 428,091 | | | | 4.76 | % | | Naeem Ghauri (3) | | | 392,459 | | | | 5.18 | % | | | 262,315 | | | | 2.92 | % | | Salim Ghauri (3) | | | | 306,144 | | | | 3.41 | % | | Eugen Beckert (3) | | | 50,890 | | | | * | | | | 32,800 | | | | * | | | Jeffrey Bilbrey | | | | 12 | | | | * | | | Shahid Javed Burki (3) | | | 51,200 | | | | * | | | | 50,650 | | | | * | | | Mark Caton (3) | | | 23,770 | | | | * | | | | 23,800 | | | | * | | | Patti L. W. McGlasson (3) | | | 34,300 | | | | * | | | | 26,550 | | | | * | | | Boo-Ali Siddiqui (3) | | | 10,750 | | | | * | | | | 12,000 | | | | * | | | Salim Ghauri (3) | | | 458,163 | | | | 6.50 | % | | | Roger Almond | | | | 0 | | | | * | | | Newland Capital Management LLC (5) | | | 373,036 | | | | 5.05 | % | | | 665,905 | | | | 7.41 | % | | All officers and directors | | | | | | | | | | | as a group (seven persons) | | | 1,075,367 | | | | 14.20 | % | | | The Tail Wind Fund Ltd. (6) | | | | 689,574 | | | | 7.67 | % | All officers and directors as a group (seven persons) | | | | 1,142,362 | | | | 12.71 | % |
* 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 4, 2012,10, 2013, 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. Includes shares issuable upon exercise of options exercisable within 60 days, as follows: Mr. Najeeb Ghauri, 264,144;95,000; Mr. Naeem Ghauri, 134,815;75,962; Mr. Salim Ghauri, 238,644;67,500; Mr. Eugen Beckert, 15,000; Mr. Shahid Burki, 15,000; and Ms. Patti McGlasson, 11,000.2,000. Share numbers have been adjusted to reflect the 1 for 10 reverse stock split effective August 13, 2012. (3) Address c/o NetSol Technologies, Inc. at 24025 Park Sorrento, Suite 410, Calabasas, CA 91302. (4) Shares issued and outstanding as of August 31, 2012September 3, 2013 were 7,572,088.8,985,923. (5) Pursuant to a form 13G/A13G filed on April 25, 2012February 1, 2013 and relying upon the authenticity of the information contained therein, the following persons have shared voting power over 3,730,359665,905 shares of common stock of the Company: Newland Capital Management, LLC (as to 3,730,359665,905 shares), Newland Master Fund, Ltd. (as to 3,730,359)665,905 shares), Ken Brodkowitz (as to 3,730,359665,905 shares) and Michael Vermut (as to 3,764,259 shares)669,295 shares of which 3,390 he has sole voting power and 665,905 he has shared voting power). Newland Capital Management, LLC, Ken Brodkowitz and Michael Vermut with addresses c/o Newland Capital Management LLC, 350 Madison Avenue, 11th8th Floor, New York, New York, 10017; Newland Master Fund, Ltd., address is c/o Goldman Sachs (CAYMAN) Trust, Limited, P.O. Box 896, Gardenia Court, Suite 3307, 45 Market St., Camana Bay, Cayman Islands KY1-1103. (6) Pursuant to a form 13G filed on February 14, 2013, and relying on the authenticity of the information contained therein, the Tail Wind Fund Ltd. has sole voting power over a total of 689,574 shares consisting of 537,525 shares of common stock of the Company and 152,049 shares of common stock issuable upon exercise of a warrant to purchase common stock. Tail Wind Fund Ltd. with address c/o CIM Investment Management Limited, 4th Floor, 8 Waterloo Place, London SW1Y 4BE. ITEM 1313. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
In July 2011, 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 50. See the discussion of Director Independence beginning on page 36.
ITEM 1414. PRINCIPAL ACCOUNTANT FEES AND SERVICES Audit Fees Kabani & Co. audited the Company’s financial statements for the fiscal years ended June 30, 20122013 and June 30, 2011.2012. 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, 20122013 was $191,000$240,000 and for the year ended June 30, 20112012 was $182,744.$191,000. Tax Fees Tax fees for fiscal year 2013 were $15,000 and consisted of the preparation of the Company’s federal and state tax returns for the fiscal years 2012. Tax fees for fiscal year 2012 were $15,000 and consisted of the preparation of the Company’s federal and state tax returns for the fiscal yearsyear 2011. Tax fees for fiscal year 2011 were $15,000 and consisted of the preparation of the Company’s federal and state tax returns for the fiscal year 2010. All Other Fees During the fiscal year 2012, a fee of $100,000 was paid to Kabani & Co. for S-3 related due diligence for the investors. No other fees were paid to Kabani & Co. during the fiscal year 2013. 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.
ITEM 15 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
| (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 (1)*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 | | Lease Agreement for Calabasas executive offices dated December 3, 2003 incorporated by reference as Exhibit 99.1 to NetSol’s Current Report filed on Form 8-K filed on December 24, 2003.* | | 10.2 | | 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.* | | 10.3 | | 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* | | 10.4 | | Company 2003 Incentive and Nonstatutory incorporated by reference as Exhibit 99.1 to NetSol’s Definitive Proxy Statement filed February 6, 2004.* | | 10.5 | | 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.* | | 10.6 | | Company 2008 Equity Incentive Plan incorporated by reference as Annex A to NetSol’s Definitive Proxy Statement filed May 28, 2008.* | | 10.6 | | Frame Agreement by and between DaimlerChrysler Services AG and NetSol Technologies dated June 4, 2004 incorporated by reference as Exhibit 10.13 to NetSol’s Annual Report for the year ended June 30, 2005 on Form 10-KSB filed on September 15, 2005.* | | 10.7 | | Share Purchase Agreement dated as of January 19, 2005 by and between the Company and the shareholders of CQ Systems Ltd. incorporated by reference as Exhibit 2.1 to NetSol’s Current Report filed on form 8-K on January 25, 2005.* | | 10.8 | | 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.* | | 10.9 | | 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.* | 10.1110.11. | | 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.* | | 10.12 | | 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.* | | 10.13 | | Employment Agreement by and between the Company and Salim 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.* | | 10.14 | | Employment Agreement by and between the Company and Tina Gilger dated August 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.* | | 10.15 | | Amendment to Employment Agreement by and between Company and Najeeb Ghauri dated effective January 1, 2007.* |
| 10.16 | | Amendment to Employment Agreement by and between Company and Naeem Ghauri dated effective January 1, 2007. * | | 10.17 | | Amendment to Employment Agreement by and between Company and Salim Ghauri dated effective January 1,* | | 10.18 | | Lease Agreement by and between McCue Systems, Inc. and Sea Breeze 1 Venture dated April 29, 2003*. | | 10.19 | | Amendment to Lease Agreement by and between McCue Systems, Inc. and Sea Breeze 1 Venture dated June 25, 2007 filed as Exhibit 10.19 to the Company’s Annual Report filed on Form 10-KSB for the year ended June 30, 2007. * | | 10.20 | | Lease Agreement by and between NetSol Pvt Limited and Civic Centres Company (PVT) Limited dated May 28, 2001 incorporated by this reference as Exhibit 10.23 to NetSol’s Annual Report on form 10-KSB dated September 18, 2006.* | | 10.21 | | Lease Agreement by and between NetSol Pvt Limited and Mrs. Rameeza Zobairi dated December 5, 2005 incorporated by this reference as Exhibit 10.24 to NetSol’s Annual Report on form 10-KSB dated September 18, 2006.* | | 10.22 | | Lease Agreement by and between NetSol Pvt Limited and Mr. Nisar Ahmed dated May 4, 2006 incorporated by this reference as Exhibit 10.25 to NetSol’s Annual Report on form 10-KSB dated September 18, 2006.* | | 10.23 | | Lease Agreement by and between NetSol Technologies, Ltd. and Argyll Business Centres Limited dated April 28, 2006 incorporated by this reference as Exhibit 10. 26 to NetSol’s Annual Report on form 10-KSB dated September 18, 2006.* | | 10.24 | | 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.* | | 10.25 | | Company 2005 Stock Option Plan incorporated by reference as Exhibit 99.1 to NetSol’s Definitive Proxy Statement filed on March 3, 2006.* | | 10.26 | | Company 2004 Stock Option Plan incorporated by reference as Exhibit 99.1 to NetSol’s Definitive Proxy Statement filed on February 7, 2005.* | | 10.27 | | Working area sublease by and between NetSol Technologies, Ltd. and Toyota Leasing (Thailand) Co. Ltd., dated June 21, 2007 filed as Exhibit 10.24 to the Company’s Annual Report filed on Form 10-KSB for the year ended June 30, 2007.* | | 10.28 | | Lease Agreement by and between NetSol Technologies, Inc. and NetSol Technologies North America, Inc. and NOP Watergate LLC dated April 3, 2008.* | | 10.29 | | Lease Amendment Number Three by and between NetSol Technologies, Inc. and Century National Properties, Inc. dated December 12, 2007. * | | 10.30 | | Rent Agreement by and between Mr. Tahir Mehmood Khan and NetSol Technologies Ltd. Dated January 21, 2008. * | | 10.31 | | Amendment to Employment Agreement by and between Company and Najeeb Ghauri dated effective January 1, 2010. * | | 10.32 | | Amendment to Employment Agreement by and between Company and Naeem Ghauri dated effective January 1, 2010.* | | 10.33 | | Amendment to Employment Agreement by and between Company and Salim Ghauri dated effective January 1, 2010.* | | 10.34 | | Lease Amendment No. 4 by and between NetSol Technologies, Inc. and Century National Properties, Inc. dated October 7, 2009.* | | 10.35 | | Office Lease by and between NetSol Technologies North America, Inc. and Legacy Partners I Alameda Mariner Loop, LLC dated November 27, 2009.* | | 10.36 | | Amendment to Employment Agreement by and between Company and Patti L. W. McGlasson dated effective April 1, 2010.* | | 10.37 | | Employment Agreement by and between Company and Boo-Ali Siddiqui dated effective April 1, 2010.* | | 10.38 | | Amendment to Employment Agreement between NetSol Technologies, Inc. and Najeeb Ghauri dated effective July 25, 2013.* | | 10.39 | | Amendment to Employment Agreement between NetSol Technologies, Inc. and Boo-Ali Siddiqui dated effective July 25, 2013.* | | 10.40 | | Amendment to Employment Agreement between NetSol Technologies, Inc. and Patti L.W. McGlasson dated effective July 25, 2013.* | | 10.41 | | Restated Charter of the Compensation Committee dated effective September 10, 2013(1) | | 10.42 | | Restated Charter of the Nominating and Corporate Governance Committee dated effective September 10, 2013.(1) | | 10.43 | | Restated Charter of the Audit Committee dated effective September 10, 2013(1) | | 10.44 | | Restated Code of Business Conduct & Ethics dated effective September 10, 2013(1) | | 10.45 | | Consulting Agreement between Roger Almond and NetSol Technologies, Inc. dated September 9, 2013.(1) |
| 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 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 5, 201212, 2013 | BY: | /S/ NAJEEB GHAURI | | | | BY: /S/ NAJEEB GHAURI
Najeeb Ghauri | | | | Chief Executive Officer | | | | | | | Date: September 12, 2013 | BY: | /S/ BOO-ALI SIDDIQUI | | | | Boo-Ali Siddiqui | | | | Chief Accounting Officer | | | | | | | | | Najeeb Ghauri | | | Chief Executive Officer | | | | Date: September 5, 201212, 2013 | BY: | BY: /S/ Boo-Ali Siddiqui
| | ROGER K. ALMOND | | | | | Boo-Ali SiddiquiRoger K. Almond | | | | | Chief Financial Officer | | | | | Principal Accounting Officer | |
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 5, 201212, 2013 | BY: | BY: /S/ NAJEEB U. GHAURI
| | | | | Najeeb U. Ghauri | | | | | Chief Executive Officer | | | | | Director, Chairman | | | | | | Date: September 5, 201212, 2013 | BY: | BY: /S/BOO-ALI SIDDIQUI
| | | | | Boo-Ali Siddiqui | | | | Chief Accounting Officer | | | | | | | | | | | Date: September 12, 2013 | BY: | /S/ROGER K. ALMOND | | | | Roger K. Almond | | | | | Chief Financial Officer | | | | | Principal Accounting Officer | | | | | | Date: September 5, 201212, 2013 | BY: | BY: /S/ NAEEM GHAURI
| | | | | Naeem Ghauri | | | | President, EMEA | | | | Director | | | | | | Date: September 5, 201212, 2013 | BY: | /S/ SALIM GHAURI | | BY: /S/ EUGEN BECKERT
| | | Eugen Beckert | | | | Director | | | | | | Date: September 5, 201212, 2013 | BY: | /S/ EUGEN BECKERT | | | | Eugen Beckert | | | | Director | | | | | | | Date: September 12, 2013 | BY: | /S/ SHAHID JAVED BURKI | | | | | Shahid Javed Burki | | | | | Director | | | | | | Date: September 5, 201212, 2013 | BY: | /S/ MARK CATON | | | | | Mark Caton | | | | | Director | | | | | | | Date: September 12, 2013 | BY: | /S/ JEFFREY BILBREY | | | | Jeffrey Bilbrey | | | | Director | |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS | Description | Page | | | | | Report of Independent Registered Public Accounting Firm | F-2 | | | | Consolidated Financial Statements | | Consolidated Balance Sheets as of June 30, 20122013 and 20112012 | F-5F-3 | | | | Consolidated Statements of Operations and Comprehensive LossIncome (Loss) for the Years Ended June 30, 20122013 and 20112012 | F-6F-4 | | | | StatementsConsolidated Statement of Equity for the Years Ended June 30, 20122013 and 20112012 | F-7F-5 | | | | Consolidated Statements of Cash Flows for the Years Ended June 30, 20122013 and 20112012 | F-9F-7 | | | | | Notes to Consolidated Financial Statements | F-11F-9 |
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, 20122013 and 2011,2012, and the related consolidated statements of operations and comprehensive losses,income (loss), stockholders’ equity and cash flows for each of the years in the two-year 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, 20122013 and 20112012 and the results of its consolidatedtheir operations and comprehensive loss, equity andtheir cash flows for each of the years in the two-year period then ended in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), NetSol Technologies, Inc. and subsidiaries’ internal control over financial reporting as of June 30, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated September 5, 2012 expressed an adverse opinion.
Los Angeles, CA September 5, 201212, 2013 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
NetSol Technologies, Inc. and its subsidiaries
Calabasas, California
We have audited NetSol Technologies, Inc. and its subsidiaries’ (the “Company”) internal control over financial reporting as of June 30, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.
A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. The Company did not maintain effective controls over ensuring that accounting staff and the Company’s CFO had sufficient technical accounting knowledge relating to U.S. GAAP financial reporting. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2012 consolidated financial statements, and this report does not affect our report dated September 5, 2012 on those consolidated financial statements.
In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, NetSol Technologies, Inc. and its subsidiaries has not maintained effective internal control over financial reporting as of June 30, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Los Angeles, CA
September 5, 2012
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets As of June 30, | ASSETS | | 2012 | | | 2011 | | | 2013 | | | 2012 | | | Current assets: | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 7,599,607 | | | $ | 4,172,802 | | | $ | 7,874,318 | | | $ | 7,599,607 | | | Restricted cash | | | 141,231 | | | | 5,700,000 | | | | 1,875,237 | | | | 141,231 | | | Accounts receivable, net | | | 13,757,637 | | | | 15,062,502 | | | | 14,684,212 | | | | 13,757,637 | | | Revenues in excess of billings | | | 12,131,329 | | | | 7,601,230 | | | | 15,367,198 | | | | 12,131,329 | | | Other current assets | | | 2,648,302 | | | | 2,053,904 | | | | 2,273,314 | | | | 2,648,302 | | | Total current assets | | | 36,278,106 | | | | 34,590,438 | | | | 42,074,279 | | | | 36,278,106 | | | Investment under equity method | | | | 545,483 | | | | - | | | Property and equipment, net | | | 16,912,795 | | | | 16,014,461 | | | | 20,978,369 | | | | 16,912,795 | | | | | | | | | | | | | | Intangible assets, net | | | 28,502,983 | | | | 25,602,195 | | | | 29,452,654 | | | | 28,502,983 | | | Goodwill | | | 9,653,330 | | | | 9,439,285 | | | | 9,653,330 | | | | 9,653,330 | | | Total intangibles | | | 38,156,313 | | | | 35,041,480 | | | | Total assets | | $ | 91,347,214 | | | $ | 85,646,379 | | | $ | 102,704,115 | | | $ | 91,347,214 | | | | | | | | | | | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | | | | | | | | | Current liabilities: | | | | | | | | | | | | | | | | | | Accounts payable and accrued expenses | | $ | 3,869,355 | | | $ | 4,730,027 | | | $ | 3,923,921 | | | $ | 3,869,355 | | | Current portion of loans and obligations under capitalized leases | | | 1,896,238 | | | | 7,062,535 | | | | 3,326,465 | | | | 1,631,687 | | | Other payables - acquisitions | | | 103,226 | | | | 103,226 | | | | 103,226 | | | | 103,226 | | | Unearned revenues | | | 2,704,661 | | | | 2,653,460 | | | | 2,446,018 | | | | 2,704,661 | | | Convertible notes payable , current portion | | | 2,809,093 | | | | 2,745,524 | | | | Convertible notes payable, current portion | | | | - | | | | 2,809,093 | | | Loans payable, bank | | | 2,116,402 | | | | 2,319,377 | | | | 1,982,161 | | | | 2,116,402 | | | Common stock to be issued | | | 105,575 | | | | 400,700 | | | | 88,325 | | | | 105,575 | | | Total current liabilities | | | 13,604,550 | | | | 20,014,849 | | | | 11,870,116 | | | | 13,339,999 | | Obligations under capitalized leases, less current maturities | | | 260,107 | | | | 285,472 | | | | Convertible notes payable less current maturities | | | 936,364 | | | | - | | | | - | | | | 936,364 | | Long term loans; less current maturities | | | 1,551,541 | | | | 434,884 | | | Long term loans and obligations under capitalized leases; less current maturities | | | | 1,412,212 | | | | 2,076,199 | | | Total liabilities | | | 16,352,562 | | | | 20,735,205 | | | | 13,282,328 | | | | 16,352,562 | | | Commitments and contingencies | | | | | | | | | | | | | | | | | | Stockholders' equity: | | | | | | | | | | | | | | | | | Common stock, $.01 par value; 9,500,000 shares authorized; 7,513,745 & 5,553,186 issued and outstanding as of June 30, 2012 and 2011 | | | 75,137 | | | | 55,532 | | | Common stock, $.01 par value; 15,000,000 shares authorized; 8,929,523 & 7,513,745 issued and outstanding as of June 30, 2013 and 2012 | | | | 89,295 | | | | 75,137 | | | Additional paid-in-capital | | | 106,101,165 | | | | 97,886,492 | | | | 114,292,510 | | | | 106,101,165 | | | Treasury stock | | | (415,425 | ) | | | (396,008 | ) | | | (415,425 | ) | | | (415,425 | ) | | Accumulated deficit | | | (31,684,399 | ) | | | (34,130,944 | ) | | | (23,821,256 | ) | | | (31,684,399 | ) | | Stock subscription receivable | | | (2,119,488 | ) | | | (2,198,460 | ) | | | (2,280,488 | ) | | | (2,119,488 | ) | | Other comprehensive loss | | | (12,361,759 | ) | | | (8,805,922 | ) | | | (15,714,112 | ) | | | (12,361,759 | ) | | Total NetSol shareholders' equity | | | 59,595,231 | | | | 52,410,690 | | | | Total NetSol stockholders' equity | | | | 72,150,524 | | | | 59,595,231 | | | Non-controlling interest | | | 15,399,421 | | | | 12,500,484 | | | | 17,271,263 | | | | 15,399,421 | | | Total stockholders' equity | | | 74,994,652 | | | | 64,911,174 | | | | 89,421,787 | | | | 74,994,652 | | | Total liabilities and stockholders' equity | | $ | 91,347,214 | | | $ | 85,646,379 | | | $ | 102,704,115 | | | $ | 91,347,214 | |
The accompanying notes are an integral part of these consolidated financial statements. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Income (Loss) For the year endedYears Ended June 30, | | | 2013 | | | 2012 | | | Net Revenues: | | | | | | | | License fees | | | 17,756,447 | | | | 13,369,701 | | | Maintenance fees | | | 9,550,471 | | | | 7,866,930 | | | Services | | | 23,490,243 | | | | 18,538,893 | | | Total net revenues | | | 50,797,161 | | | | 39,775,524 | | | Cost of revenues: | | | | | | | | | | Salaries and consultants | | | 13,051,360 | | | | 10,236,109 | | | Travel | | | 1,710,561 | | | | 1,273,259 | | | Repairs and maintenance | | | 485,070 | | | | 373,359 | | | Insurance | | | 179,959 | | | | 145,351 | | | Depreciation and amortization | | | 4,147,347 | | | | 3,528,229 | | | Other | | | 3,379,636 | | | | 2,721,716 | | | Total cost of revenues | | | 22,953,933 | | | | 18,278,023 | | | Gross profit | | | 27,843,228 | | | | 21,497,501 | | | Operating expenses: | | | | | | | | | | Selling and marketing | | | 3,556,997 | | | | 3,130,379 | | | Depreciation and amortization | | | 1,555,402 | | | | 1,113,758 | | | Bad debt expense | | | 415,482 | | | | 124,291 | | | Salaries and wages | | | 5,078,278 | | | | 4,191,593 | | | Professional services, including non-cash compensation | | | 907,844 | | | | 993,058 | | | General and administrative | | | 4,662,127 | | | | 4,679,840 | | | Total operating expenses | | | 16,176,130 | | | | 14,232,919 | | | Income from operations | | | 11,667,098 | | | | 7,264,582 | | | Other income and (expenses) | | | | | | | | | | Gain (loss) on sale of assets | | | 3,682 | | | | (18,979 | ) | | Interest expense | | | (664,025 | ) | | | (823,684 | ) | | Interest income | | | 185,343 | | | | 82,039 | | | Gain on foreign currency exchange transactions | | | 1,367,448 | | | | 404,708 | | | Share of net income (loss) from equity investment | | | 482,664 | | | | (300,000 | ) | | Amortization of financing costs | | | (635,882 | ) | | | (179,576 | ) | | Other income | | | 147,153 | | | | 275,565 | | | Total other income (expenses) | | | 886,383 | | | | (559,927 | ) | | Net income before income taxes | | | 12,553,481 | | | | 6,704,655 | | | Income taxes | | | (465,426 | ) | | | (55,384 | ) | | Net income after tax | | | 12,088,055 | | | | 6,649,271 | | | Non-controlling interest | | | (4,224,912 | ) | | | (4,202,727 | ) | | Net income attributable to NetSol | | | 7,863,143 | | | | 2,446,544 | | | | | | | | | | | | | Other comprehensive income (loss): | | | Translation adjustment | | | (4,725,022 | ) | | | (5,308,958 | ) | | Comprehensive income (loss) | | | 3,138,121 | | | | (2,862,414 | ) | | Comprehensive loss attributable to non-controlling interest | | | (1,372,669 | ) | | | (1,754,573 | ) | | Comprehensive income (loss) attributable to NetSol | | | 4,510,790 | | | | (1,107,841 | ) | | | | | | | | | | | | Net income per share: | | | | | | | | | | Basic | | $ | 0.96 | | | $ | 0.39 | | | Diluted | | $ | 0.95 | | | $ | 0.39 | | | Weighted average number of shares outstanding | | | Basic | | | 8,201,247 | | | | 6,217,842 | | | Diluted | | | 8,288,951 | | | | 6,244,185 | |
The accompanying notes are an integral part of these consolidated financial statements. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders’ Equity For the Years Ended June 30, 2013 and 2012 | | | 2012 | | | 2011 | | | Net Revenues: | | | | | | | | License fees | | $ | 13,369,701 | | | $ | 11,284,472 | | | Maintenance fees | | | 7,866,930 | | | | 7,488,388 | | | Services | | | 18,538,893 | | | | 17,774,714 | | | Total net revenues | | | 39,775,524 | | | | 36,547,574 | | | Cost of revenues: | | | | | | | | | | Salaries and consultants | | | 10,236,109 | | | | 8,716,495 | | | Travel | | | 1,273,259 | | | | 1,044,766 | | | Repairs and maintenance | | | 373,359 | | | | 307,115 | | | Insurance | | | 145,351 | | | | 126,584 | | | Depreciation and amortization | | | 3,528,229 | | | | 3,108,286 | | | Other | | | 2,721,716 | | | | 1,500,880 | | | Total cost of revenues | | | 18,278,023 | | | | 14,804,126 | | | Gross profit | | | 21,497,501 | | | | 21,743,448 | | | Operating expenses: | | | | | | | | | | Selling and marketing | | | 3,130,379 | | | | 3,016,402 | | | Depreciation and amortization | | | 1,113,758 | | | | 1,180,226 | | | Bad debt expense | | | 124,291 | | | | 367,064 | | | Salaries and wages | | | 4,191,593 | | | | 3,347,896 | | | Professional services, including non-cash compensation | | | 993,058 | | | | 806,212 | | | Lease abandonment charges | | | - | | | | (858,969 | ) | | General and adminstrative | | | 4,679,840 | | | | 3,719,796 | | | Total operating expenses | | | 14,232,919 | | | | 11,578,627 | | | Income from operations | | | 7,264,582 | | | | 10,164,821 | | | Other income and (expenses) | | | | | | | | | | Loss on sale of assets | | | (18,979 | ) | | | (21,461 | ) | | Interest expense | | | (823,684 | ) | | | (863,707 | ) | | Interest income | | | 82,039 | | | | 154,856 | | | Gain on foreign currency exchange transactions | | | 404,708 | | | | 1,115,647 | | | Share of net loss from equity investment | | | (300,000 | ) | | | (220,506 | ) | | Beneficial conversion feature | | | (179,576 | ) | | | (453,989 | ) | | Other (expense) | | | 275,565 | | | | (52,149 | ) | | Total other income (expenses) | | | (559,927 | ) | | | (341,309 | ) | | Net income before income taxes | | | 6,704,655 | | | | 9,823,512 | | | Income taxes | | | (55,384 | ) | | | (120,542 | ) | | Net income after tax | | | 6,649,271 | | | | 9,702,970 | | | Non-controlling interest | | | (4,202,726 | ) | | | (3,974,882 | ) | | Net income attibutable to NetSol | | | 2,446,545 | | | | 5,728,088 | | | | | | | | | | | | | Other comprehensive income (loss): | | | Translation adjustment | | | (5,308,958 | ) | | | 293,766 | | | Comprehensive income (loss) | | | (2,862,413 | ) | | | 6,021,854 | | | Comprehensive loss attributable to non controlling interest | | | (1,753,122 | ) | | | (116,071 | ) | | Comprehensive income (loss) attributable to NetSol | | $ | (1,109,291 | ) | | $ | 6,137,925 | | | | | | | | | | | | | Net income per share: | | | | | | | | | | Basic | | $ | 0.39 | | | $ | 1.18 | | | Diluted | | $ | 0.39 | | | $ | 1.16 | | | Weighted average number of shares outstanding | | | Basic | | | 6,217,842 | | | | 4,854,320 | | | Diluted | | | 6,244,185 | | | | 4,956,819 | | | | | | | | | | | | | Amounts attributable to NetSol common shareholders | | | Net income / (loss) | | $ | 2,446,545 | | | $ | 5,728,088 | |
| | | Common Stock | | | | | | Treasury | | | Accumulated | | | | | | Shares to | | | | | | | | | | | | | | Shares | | | Amount | | | Capital | | | Shares | | | Deficit | | | Receivable | | | be Issued | | | Loss | | | Interest | | | Equity | | | | | 5,553,186 | | | $ | 55,532 | | | $ | 97,886,492 | | | $ | (396,008 | ) | | $ | (34,130,944 | ) | | $ | (2,198,460 | ) | | $ | - | | | $ | (8,805,922 | ) | | $ | 12,500,484 | | | | 64,911,174 | | Excercise of common stock options | | | 231,259 | | | | 2,312 | | | | 964,465 | | | | - | | | | - | | | | 78,972 | | | | (125,000 | ) | | | - | | | | - | | | | 920,749 | | | Common stock issued for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash | | | 1,667,500 | | | | 16,675 | | | | 5,503,067 | | | | - | | | | - | | | | - | | | | | | | | - | | | | - | | | | 5,519,742 | | | Services | | | 49,300 | | | | 493 | | | | 386,078 | | | | - | | | | - | | | | - | | | | (170,125 | ) | | | - | | | | - | | | | 216,446 | | | Settlement of liabilities | | | 12,500 | | | | 125 | | | | 49,875 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 50,000 | | Purchase of Treasury Shares | | | - | | | | - | | | | - | | | | (19,417 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (19,417 | ) | Equity component shown as current liability at | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | June 30, 2011 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 400,700 | | | | - | | | | - | | | | 400,700 | | | June 30, 2012 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (105,575 | ) | | | - | | | | - | | | | (105,575 | ) | Fair market value of options issued | | | - | | | | - | | | | 1,291,523 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,291,523 | | Acqusition of non controlling interest in subsidiary | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 792,351 | | | | 792,351 | | Dividend to non controlling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (341,567 | ) | | | (341,567 | ) | | Beneficial conversion feature | | | - | | | | - | | | | 19,665 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 19,665 | | Foreign currency translation adjusts | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (3,555,837 | ) | | | (1,754,573 | ) | | | (5,310,410 | ) | | Net income for the year | | | - | | | | - | | | | - | | | | - | | | | 2,446,545 | | | | - | | | | - | | | | | | | | 4,202,726 | | | | 6,649,271 | | | | | 7,513,745 | | | $ | 75,137 | | | $ | 106,101,165 | | | $ | (415,425 | ) | | $ | (31,684,399 | ) | | $ | (2,119,488 | ) | | $ | - | | | $ | (12,361,759 | ) | | $ | 15,399,421 | | | $ | 74,994,652 | |
The accompanying notes are an integral part of these consolidated financial statements. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders’ Equity For the Years Ended June 30, 2013 and 2012 | | | Common Stock | | | | | | Treasury | | | Accumulated | | | | | | Shares to | | | | | | | | | | | | | | Shares | | | Amount | | | Capital | | | Shares | | | Deficit | | | Receivable | | | be Issued | | | Loss | | | Interest | | | Equity | | | | | 7,513,745 | | | $ | 75,137 | | | $ | 106,101,165 | | | $ | (415,425 | ) | | $ | (31,684,399 | ) | | $ | (2,119,488 | ) | | $ | - | | | $ | (12,361,759 | ) | | $ | 15,399,421 | | | | 74,994,652 | | Excercise of common stock options | | | 451,985 | | | | 4,519 | | | | 2,568,181 | | | | - | | | | - | | | | (161,000 | ) | | | - | | | | - | | | | - | | | | 2,411,700 | | Excercise of subsidiary common stock options | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 107,945 | | | | 107,945 | | Excercise of common stock warrants | | | 67,749 | | | | 678 | | | | 125,335 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 126,013 | | | Common stock issued for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | | | - | | | | - | | | | - | | | Services | | | 12,300 | | | | 123 | | | | 55,917 | | | | - | | | | - | | | | - | | | | (17,250 | ) | | | - | | | | - | | | | 38,790 | | Conversion of convertible note | | | 811,360 | | | | 8,114 | | | | 3,991,886 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 4,000,000 | | Payment of interest on convertible note | | | 72,428 | | | | 724 | | | | 390,387 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 391,111 | | Payment of Fractional shares | | | (44 | ) | | | - | | | | (194 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (194 | ) | Equity component shown as current liability at | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | June 30, 2012 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 105,575 | | | | - | | | | - | | | | 105,575 | | | June 30, 2013 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (88,325 | ) | | | - | | | | - | | | | (88,325 | ) | Fair market value of options issued | | | - | | | | - | | | | 678,494 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 678,494 | | Acqusition of non controlling interest in subsidiary | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (699,349 | ) | | | (699,349 | ) | Dividend to non controlling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (388,997 | ) | | | (388,997 | ) | | Beneficial conversion feature | | | - | | | | - | | | | 381,339 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 381,339 | | Foreign currency translation adjusts | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (3,352,353 | ) | | | (1,372,669 | ) | | | (4,725,022 | ) | | Net income for the year | | | - | | | | - | | | | - | | | | - | | | | 7,863,143 | | | | - | | | | - | | | | | | | | 4,224,912 | | | | 12,088,055 | | | | | 8,929,523 | | | $ | 89,295 | | | $ | 114,292,510 | | | $ | (415,425 | ) | | $ | (23,821,256 | ) | | $ | (2,280,488 | ) | | $ | - | | | $ | (15,714,112 | ) | | $ | 17,271,263 | | | $ | 89,421,787 | |
The accompanying notes are an integral part of these consolidated financial statements. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of EquityCash Flows For the year endedYears Ended June 30, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Stock | | | | | | Other | | | | | | | | | | | | | | | | | Additional | | | | | | | | | Sub- | | | | | | Compre- | | | Non | | | Total | | | | | Common Stock | | | Paid-in | | | Treasury | | | Accumulated | | | scriptions | | | Shares to | | | hensive | | | Controling | | | Stockholders' | | | | | Shares | | | Amount | | | Capital | | | Shares | | | Deficit | | | Receivable | | | be Issued | | | Loss | | | Interest | | | Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 3,710,339 | | | $ | 37,104 | | | $ | 86,002,647 | | | $ | (396,008 | ) | | $ | (39,859,032 | ) | | $ | (2,007,960 | ) | | $ | - | | | $ | (8,396,085 | ) | | $ | 10,422,554 | | | | 45,803,220 | | Excercise of common stock options | | | 177,100 | | | | 1,771 | | | | 1,361,779 | | | | - | | | | - | | | | (183,500 | ) | | | 125,000 | | | | - | | | | - | | | | 1,305,050 | | Excercise of common stock warrants | | | 338,439 | | | | 3,384 | | | | 306,616 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 310,000 | | | Common stock issued for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash | | | 510,676 | | | | 5,107 | | | | 4,101,143 | | | | - | | | | - | | | | (7,000 | ) | | | - | | | | - | | | | - | | | | 4,099,250 | | | Services | | | 90,306 | | | | 903 | | | | 849,140 | | | | - | | | | - | | | | - | | | | 36,175 | | | | - | | | | - | | | | 886,218 | | Conversion of convertible note | | | 700,810 | | | | 7,008 | | | | 4,796,331 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 4,803,339 | | Payment of interest on convertible note | | | 25,516 | | | | 255 | | | | 191,553 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 191,808 | | Equity component shown as current liability at | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | June 30, 2010 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 239,525 | | | | - | | | | - | | | | 239,525 | | | June 30, 2011 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (400,700 | ) | | | - | | | | - | | | | (400,700 | ) | Fair market value of options issued | | | - | | | | - | | | | 459,174 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 459,174 | | Acqusition of non controlling interest in subsidiary | | | - | | | | - | | | | (181,891 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (489,569 | ) | | | (671,460 | ) | Dividend to non controlling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,291,313 | ) | | | (1,291,313 | ) | Foreign currency translation adjusts | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (409,837 | ) | | | (116,070 | ) | | | (525,907 | ) | | Net income for the year | | | - | | | | - | | | | - | | | | - | | | | 5,728,088 | | | | - | | | | - | | | | - | | | | 3,974,882 | | | | 9,702,970 | | | | | 5,553,186 | | | $ | 55,532 | | | $ | 97,886,492 | | | $ | (396,008 | ) | | $ | (34,130,944 | ) | | $ | (2,198,460 | ) | | $ | - | | | $ | (8,805,922 | ) | | $ | 12,500,484 | | | $ | 64,911,174 | |
| | | 2013 | | | 2012 | | | Cash flows from operating activities: | | | | | | | | Net income | | $ | 12,088,055 | | | $ | 6,649,271 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | Depreciation and amortization | | | 5,702,749 | | | | 4,641,987 | | | Provision for bad debts | | | 415,482 | | | | 192,250 | | | Gain on settlement of finance lease | | | - | | | | (110,990 | ) | | Share of net (income) loss from investment under equity method | | | (482,664 | ) | | | 300,000 | | | (Gain) loss on sale of assets | | | (3,682 | ) | | | 18,979 | | | Stock issued for interest on notes payable | | | 211,111 | | | | - | | | Stock issued for services | | | 38,790 | | | | 216,446 | | | Fair market value of warrants and stock options granted | | | 678,494 | | | | 453,100 | | | Amortization of financing costs | | | 635,882 | | | | 179,577 | | | Changes in operating assets and liabilities: | | | | | | | | | | (Increase) decrease in accounts receivable | | | (2,124,884 | ) | | | 1,774,837 | | | Increase in other current assets | | | (3,590,104 | ) | | | (5,124,497 | ) | | Increase (decrease) in accounts payable and accrued expenses | | | 276,590 | | | | (1,078,245 | ) | | Net cash provided by operating activities | | | 13,845,819 | | | | 8,112,715 | | | Cash flows from investing activities: | | | | | | | | | | Purchases of property and equipment | | | (8,958,876 | ) | | | (4,912,322 | ) | | Sales of property and equipment | | | 118,432 | | | | 44,690 | | | Purchase of treasury stock | | | - | | | | (19,417 | ) | | Investment under equity method | | | - | | | | (100,000 | ) | | Purchase of non-controlling interest in subsidiaries | | | (799,349 | ) | | | - | | | Acquisition, net of cash acquired | | | - | | | | (253,192 | ) | | Increase in intangible assets | | | (4,832,459 | ) | | | (6,167,105 | ) | | Net cash used in investing activities | | | (14,472,252 | ) | | | (11,407,346 | ) | | Cash flows from financing activities: | | | | | | | | | | Proceeds from sale of common stock | | | - | | | | 5,743,300 | | | Proceeds from the exercise of stock options and warrants | | | 2,537,712 | | | | 728,500 | | | Payment to common shareholders against fractional shares | | | (194 | ) | | | - | | | Proceeds from exercise of subsidiary options | | | 111,330 | | | | - | | | Proceeds from convertible notes payable | | | - | | | | 4,000,000 | | | Payments on convertible notes payable | | | - | | | | (2,758,330 | ) | | Restricted cash | | | (1,734,006 | ) | | | 5,558,769 | | | Dividend Paid | | | (388,997 | ) | | | (341,657 | ) | | Bank overdraft | | | - | | | | 59,913 | | | Proceeds from bank loans | | | 1,795,663 | | | | 4,190,395 | | | Payments on capital lease obligations and loans - net | | | (630,714 | ) | | | (8,089,139 | ) | | Net cash provided by financing activities | | | 1,690,794 | | | | 9,091,751 | | | Effect of exchange rate changes in cash | | | (789,650 | ) | | | (2,370,315 | ) | | Net increase in cash and cash equivalents | | | 274,711 | | | | 3,426,805 | | | Cash and cash equivalents, beginning of year | | | 7,599,607 | | | | 4,172,802 | | | Cash and cash equivalents, end of year | | $ | 7,874,318 | | | $ | 7,599,607 | |
The accompanying notes are an integral part of these consolidated financial statements. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of EquityCash Flows For the year endedYears Ended June 30, | | | | | | | | | | | | | | | | | | Stock | | | | | | Other | | | | | | | | | | | | | | | | | Additional | | | | | | | | | Sub- | | | | | | Compre- | | | Non | | | Total | | | | | Common Stock | | | Paid-in | | | Treasury | | | Accumulated | | | scriptions | | | Shares to | | | hensive | | | Controling | | | Stockholders' | | | | | Shares | | | Amount | | | Capital | | | Shares | | | Deficit | | | Receivable | | | be Issued | | | Loss | | | Interest | | | Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 5,553,186 | | | $ | 55,532 | | | $ | 97,886,492 | | | $ | (396,008 | ) | | $ | (34,130,944 | ) | | $ | (2,198,460 | ) | | $ | - | | | $ | (8,805,922 | ) | | $ | 12,500,484 | | | | 64,911,174 | | Excercise of common stock options | | | 231,259 | | | | 2,312 | | | | 964,465 | | | | - | | | | - | | | | 78,972 | | | | (125,000 | ) | | | - | | | | - | | | | 920,749 | | | Common stock issued for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash | | | 1,667,500 | | | | 16,675 | | | | 5,503,067 | | | | - | | | | - | | | | - | | | | | | | | - | | | | - | | | | 5,519,742 | | | Services | | | 49,300 | | | | 493 | | | | 386,078 | | | | - | | | | - | | | | - | | | | (170,125 | ) | | | - | | | | - | | | | 216,446 | | Settlement of liabilities | | | 12,500 | | | | 125 | | | | 49,875 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 50,000 | | Purchase of Treasury Shares | | | - | | | | - | | | | - | | | | (19,417 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (19,417 | ) | Equity component shown as current liability at | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | June 30, 2011 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 400,700 | | | | - | | | | - | | | | 400,700 | | | June 30, 2012 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (105,575 | ) | | | - | | | | - | | | | (105,575 | ) | Fair market value of options issued | | | - | | | | - | | | | 1,291,523 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,291,523 | | Acqusition of non controlling interest in subsidiary | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 792,351 | | | | 792,351 | | Dividend to non controlling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (341,567 | ) | | | (341,567 | ) | | Beneficial conversion feature | | | - | | | | - | | | | 19,665 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 19,665 | | Foreign currency translation adjusts | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (3,555,837 | ) | | | (1,745,573 | ) | | | (5,310,410 | ) | | Net income for the year | | | - | | | | - | | | | - | | | | - | | | | 2,446,545 | | | | - | | | | - | | | | | | | | 4,202,726 | | | | 6,649,271 | | | | | 7,513,745 | | | $ | 75,137 | | | $ | 106,101,165 | | | $ | (415,425 | ) | | $ | (31,684,399 | ) | | $ | (2,119,488 | ) | | $ | - | | | $ | (12,361,759 | ) | | $ | 15,399,421 | | | $ | 74,994,652 | |
| | | 2013 | | | 2012 | | | SUPPLEMENTAL DISCLOSURES: | | | | | | | | Cash paid during the period for: | | | | | | | | Interest | | $ | 510,026 | | | $ | 822,267 | | | Taxes | | $ | 25,191 | | | $ | 29,943 | | | | | | | | | | | | | NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | | | | | | | | Stock issued against the payment of vendors | | $ | - | | | $ | 50,000 | | | Stock issued for the conversion of convertible notes payable | | $ | 4,000,000 | | | $ | - | | | Stock issued for the conversion of interest payable | | $ | 391,111 | | | $ | - | |
The accompanying notes are an integral part of these consolidated financial statements. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the year ended June 30,
| | | 2012 | | | 2011 | | | Cash flows from operating activities: | | | | | | | | Net income | | $ | 6,649,271 | | | $ | 9,702,970 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | Depreciation and amortization | | | 4,641,987 | | | | 4,288,512 | | | Provision for bad debts | | | 192,250 | | | | 367,064 | | | Gain on settlement of finance lease | | | (110,990 | ) | | | - | | | Share of net loss from investment under equity method | | | 300,000 | | | | 220,506 | | | Loss on sale of assets | | | 18,979 | | | | 21,462 | | | Gain on settlement of lease abandonment provision | | | - | | | | (858,969 | ) | | Stock issued for interest on notes payable | | | - | | | | 191,808 | | | Stock issued for services | | | 216,446 | | | | 886,218 | | | Fair market value of warrants and stock options granted | | | 453,100 | | | | 459,174 | | | Beneficial conversion feature | | | 179,577 | | | | 453,989 | | | Changes in operating assets and liabilities: | | | | | | | | | | Decrease (increase) in accounts receivable | | | 1,774,837 | | | | (3,422,252 | ) | | (Increase) decrease in other current assets | | | (5,124,497 | ) | | | 1,987,996 | | | Decrease in accounts payable and accrued expenses | | | (1,078,245 | ) | | | (376,287 | ) | | Net cash provided by operating activities | | | 8,112,715 | | | | 13,922,191 | | | Cash flows from investing activities: | | | | | | | | | | Purchases of property and equipment | | | (4,912,322 | ) | | | (9,085,148 | ) | | Sales of property and equipment | | | 44,690 | | | | 313,935 | | | Purchase of treasury stock | | | (19,417 | ) | | | - | | | Purchase of non-controlling interest in subsidiary | | | - | | | | (671,460 | ) | | Short-term investments held for sale | | | - | | | | (256,522 | ) | | Investment under equity method | | | (100,000 | ) | | | - | | | Acquisition, net of cash acquired | | | (253,192 | ) | | | - | | | Increase in intangible assets | | | (6,167,105 | ) | | | (8,096,401 | ) | | Net cash used in investing activities | | | (11,407,346 | ) | | | (17,795,596 | ) | | Cash flows from financing activities: | | | | | | | | | | Proceeds from sale of common stock | | | 5,743,300 | | | | 4,099,250 | | | Proceeds from the exercise of stock options and warrants | | | 728,500 | | | | 1,615,050 | | | Proceeds from convertible notes payable | | | 4,000,000 | | | | - | | | Payments on convertible notes payable | | | (2,758,330 | ) | | | - | | | Restricted cash | | | 5,558,769 | | | | - | | | Dividend Paid | | | (341,657 | ) | | | (1,291,313 | ) | | Bank overdraft | | | 59,913 | | | | 39,026 | | | Proceeds from bank loans | | | 4,190,395 | | | | 2,969,146 | | | Payments on bank loans | | | - | | | | (46,033 | ) | | Payments on capital lease obligations & loans - net | | | (8,089,139 | ) | | | (3,118,344 | ) | | Net cash provided by financing activities | | | 9,091,751 | | | | 4,266,782 | | | Effect of exchange rate changes in cash | | | (2,370,315 | ) | | | (296,121 | ) | | Net increase in cash and cash equivalents | | | 3,426,805 | | | | 97,256 | | | Cash and cash equivalents, beginning of year | | | 4,172,802 | | | | 4,075,546 | | | Cash and cash equivalents, end of year | | $ | 7,599,607 | | | $ | 4,172,802 | |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the year ended June 30,
| | | For the Year | | | | | Ended June 30, | | | | | 2012 | | | 2011 | | | SUPPLEMENTAL DISCLOSURES: | | | | | | | | Cash paid during the period for: | | | | | | | | Interest | | $ | 822,267 | | | $ | 1,043,065 | | | Taxes | | $ | 29,943 | | | $ | 5,725 | | | | | | | | | | | | | NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | | | | | | | | Stock issued against the payment of vendors | | $ | 50,000 | | | $ | - | | | Stock issued for the conversion of notes payable | | $ | - | | | $ | 4,803,339 | | | Purchase of property and equipment under capital lease | | $ | - | | | $ | 492,567 | |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 NOTE 1 –ORGANIZATION AND DESCRIPTION OF BUSINESS NetSol Technologies, Inc. and subsidiaries(collectively, the “Company”), formerly known as NetSol International, Inc. and Mirage Holdings, Inc., was incorporated under the laws of the State of Nevada on March 18, 1997. During November 1998, Mirage Collections, Inc., a wholly owned and non-operating subsidiary, was dissolved. 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 NetSol Technologies, Inc. and subsidiaries (collectively, the “Company”) as follows: Wholly-owned Subsidiaries NetSol Technologies North America, Inc. (“NTNA”) NetSol Technologies Limited (“NetSol UK”) NetSol-Abraxas Australia Pty Ltd. (“Abraxas”) NetSol Technologies Europe Limited (“NTE”) NTPK (Thailand) Co. Limited (“NTPK Thailand”) NetSol Connect (Private), Ltd. (“Connect”) Vroozi, Inc. (“Vroozi”)
NetSol Technologies (Beijing) Co. Ltd. (NetSol Beijing) Majority-owned Subsidiaries NetSol Technologies, Ltd. (“NetSol PK”) NetSol Innovation (Private) Limited (“NetSol Innovation”) Vroozi, Inc. (“Vroozi”) Virtual Lease Services Holdings Limited (“VLSH”) Virtual Lease Services Limited (“VLS”) Virtual Lease Services (Ireland) Limited (VLSIL) formerly Hanover Asset Finance (Ireland) Limited (“HAFL”)
The Company consolidates any variable interest entities of which it is the primary beneficiary. Equity investments through which we exercisethe Company exercises significant influence over but dodoes not control the investee and areis not the primary beneficiary of the investee’s activities are accounted for using the equity method. Investments through which we arethe 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. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 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”). 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 and Cash Concentrations |
For purposes of the consolidated statement of cash flows, cash equivalents include all highly liquid debt instruments with original maturities of three months or less which are not securing any corporate obligations. The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company has certificates of deposits (“CD”s)CDs”) in various configurations and maturity dates with Habib American Bank. A portion of these CDs are restricted as collateral to secure outstanding balances on an existing line of credit, and become unrestricted to the extent that they are not required for collateralization purposes. As of June 30, 20122013, the outstanding balance on the line of credit was $51,231,$1,785,237, with a corresponding restriction to the CDCDs balances. The line of credit has a maximum available balance of $2,000,000. In addition, the companyCompany has also placed $90,000 in saving account with HSBC as collateral against standby letter of credit issued in by the bank in favor of land lordthe landlord of the new office space. One of Company’s subsidiary also has certificates of deposits with Habib American Bank. These CDs are restricted as collateral to secure outstanding balances on an existing line of credit, and become unrestricted to the extent that they are not required for collateralization purposes. As of June 30, 20122013, the outstanding balance on the line of credit was $Nil, with a corresponding restriction to the CDCDs balances. The line of credit has a maximum available balance of $500,000. | (F) | 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, 20122013 and 2011,2012, the Company had recorded allowance for doubtful accounts of $977,933$922,633 and $2,717,745,$977,933, respectively. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 | (G) | 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 under the percentage of completion method. As the customer is billed under the terms of their contract, the corresponding amount is transferred from this account to “Accounts Receivable.” | (H) | 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 tentwenty 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.” Costs incurred during the preliminary project and post-implementation stages are charged to general and administrative expense as incurred. | (I) | 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. 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 assessThe Company assesses recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If the future undiscounted cash flows are less than the carrying amount of these assets, we recognizethe Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. | (K) | 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. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 The Company makes on-going evaluations of the recoverability of its capitalized software projects by comparing the amount capitalized for each product to the estimated net realizable value of the product. If such evaluations indicate that the unamortized software development costs exceed the net realizable value, the Company writes off the amount which the unamortized software development costs exceed net realizable value. Capitalized and purchased computer software development costs are being amortized ratably based on the projected revenue associated with the related software or on a straight-line basis, whichever method results in a higher level of amortization.basis. Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase businesses combination. Goodwill is reviewed for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the carrying amount of goodwill may be impaired. The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. | (M) | Fair Value of Financial Instruments |
The Company applies the provisions of ASC 820-10, “Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. AssetsValue Measurements and liabilities measured atDisclosures.” ASC 820-10 defines fair value, are categorized based on whether or not the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial assets and liabilities within theestablishes a three-level valuation hierarchy is based upon the lowest levelfor disclosures of input that is significant to the fair value measurement. The Company'smeasurement that enhances disclosure requirements for fair value measures. For certain financial instruments, primarily consist ofincluding cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accounts payable.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: As of the balance sheet dates, the estimated fair values of the financial instruments were not materially different from their carrying values as presented on the balance sheet. This is primarily attributed to the short maturities of these instruments.| 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. |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 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. The Company recognizes revenue from license contracts without major customization when a non-cancelable, non-contingent license agreement has been signed, delivery of the software has occurred, the fee is fixed or determinable, and collectability is probable. Revenue from the sale of licenses with major customization, modification, and development is recognized on a percentage of completion method. Revenue from the implementation of software is recognized on a percentage of completion method. Revenue from consulting services is recognized as the services are performed for time-and-materials contracts. Revenue from training and development services is recognized as the services are performed. Revenue from maintenance agreements is recognized ratably over the term of the maintenance agreement, which in most instances is one year. | (O) | Multiple Element Arrangements |
WeThe 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 (multiple-element arrangements).
VSOEVendor specific objective evidence (“VSOE”) of fair value for each element is based on the price for which the element is sold separately. We determineThe Company determines the VSOE of fair value of each element based on historical evidence of ourthe 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.
Net revenues by our various products and services provided for the year ended NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 20122013 and 2011 are as follows:2012 | | | 2012 | | | 2011 | | | Licensing Fees | | $ | 13,369,701 | | | $ | 11,284,472 | | | Maintenance Fees | | | 7,866,930 | | | | 7,488,388 | | | Services | | | 18,538,893 | | | | 17,774,714 | | | Total | | $ | 39,775,524 | | | $ | 36,547,574 | |
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 $2,704,661$2,446,018 and $2,653,460$2,704,661 as of June 30, 20122013 and June 30, 20112012, respectively. The Company expenses the cost of advertising as incurred. Advertising costs for the years ended June 30, 2013 and 2012 were $244,498 and 2011 were $225,870, and $246,254 respectively. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| (R) | Share-Based Compensation |
The Company measures stock-based compensation cost at the grant date based on the fair value of the award and recognize it as expense over the applicable vesting period of the stock award (generally four to five years) using the straight-line method. 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. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012
| (T) | Foreign Currency Translation |
Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are recorded to other comprehensive income. | (U) | 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 balance sheet. 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 geographic locations of its subsidiaries (see Note 20). Certain 20112012 balances have been reclassified to conform to the 20122013 presentation. | (X) | New Accounting Pronouncements |
Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists: An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. For example, an entity should not evaluate whether the deferred tax asset expires before the statute of limitations on the tax position or whether the deferred tax asset may be used prior to the unrecognized tax benefit being settled. The amendments in this Update do not require new recurring disclosures. ASU Topic No. 2013 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements. Accounting Standards Update No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity: This ASU addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. ASU Topic No. 2013-05 is effective for our fiscal year 2014, although early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements. In December 2011,July 2012, the Financial Accounting Standards Board issued Accounting Standards Update 2012-02 (“ASU 2012-02”), Intangibles — Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The purpose of ASU 2012-02, which amends the guidance to Topic 350, Intangibles — Goodwill and Other, is to simplify the guidance for testing the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill. ASU 2012-02 allows an entity to perform a qualitative assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar in approach to the qualitative goodwill impairment test. The amendments in ASU 2012-02 permit an entity to first assess qualitatively whether it is more likely than not (more than 50%) that an indefinite-lived intangible asset is impaired, thus necessitating that it perform the quantitative impairment test. An entity is not required to calculate the fair value of an indefinite lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not that the asset is impaired. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s financial statements. In March 2013, the FASB issued guidance on offsetting (netting)a parent’s accounting for the cumulative translation adjustment upon derecognition of a subsidiary or group of assets and liabilities. Entities are required to disclose both gross information andwithin a foreign entity. This new guidance requires that the parent release any related cumulative translation adjustment into net information about both instruments and transactions eligible for offsetincome only if the sale or transfer results in the statementcomplete or substantially complete liquidation of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement.the foreign entity in which the subsidiary or group of assets had resided. The new guidance iswill be effective for annual periodsthe Company beginning after JanuaryJuly 1, 2013.2014. The adoption of this standard is not expected to have a material impact on the Company’s financial statements. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 In SeptemberDecember 2011, the FASB issued guidance on testing goodwill for impairment. The new guidance providesASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” This ASU requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the optioneffect of those arrangements on its financial position. In January 2013, this guidance was amended by ASU 2013-01, “Clarifying the Scope of Disclosure about Offsetting Assets and Liabilities,” which limits the scope of ASU No. 2011-11 to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairmentcertain derivatives, repurchase and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines that the fair value of a reporting unit is less than its carrying amount, the two-step goodwill impairment test is not required. The newreverse repurchase agreements, and securities borrowing and lending transactions. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal yearsreporting periods beginning on or after December 15, 2011, with earlyJanuary 1, 2013. The adoption permitted.of this standard is not expected to have a material impact on the Company’s financial statements. In June 2011, the FASB issued guidance on presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity will be required to present either a continuous statement of net income and other comprehensive income or in two separate but consecutive statements. The new guidance is effective for annual periods beginning after December 15, 2011. In December 2011, the FASB issued a deferral of certain portion of this guidance.
In May 2011, the FASB issued guidance to amend the accounting and disclosure requirements on fair value measurements. The new guidance limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, the new guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. The new guidance is effective for annual periods beginning after December 15, 2011.
NOTE 3 –ACQUISITION On October 4, 2011, NTE, a wholly owned subsidiary of the Company, entered into an agreement with Investec Asset Finance PLC (“Investec”) a UK corporation, in which the Company obtained a 51% controlling interest in a newly-formed entity, Virtual Lease Services Holdings Limited (“VLSH”), which in turn acquired a 100% interest in Virtual Lease Services Limited (“VLS”). The purchase price paid in this transaction was entirely in the form of cash in the amount of $1,008,859. At the time of acquisition the fair value of assets and liabilities acquired were as follows: | Cash | | $ | 755,667 | | | Accounts Receivable | | | 469,970 | | | Fixed Assets | | | 200,579 | | | Customer List | | | 248,320 | | | Technology | | | 242,702 | | | Liabilities | | | (330,071 | ) | | Noncontrolling interest | | | (792,351 | ) | | Net Assets Acquired | | | 794,815 | | | | | | | | | Proceeds | | | 1,008,859 | | | Goodwill | | $ | 214,044 | |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The acquisition of VLS is in alignment with the Company’s strategic plans and contributes to the continued expansion into technology markets through membership and practice acquisitions. The amounts of acquired entities revenue and net income included in the Company’s consolidated statements of operations for the year ended June 30, 2012, and the revenue and net income (loss) of the combined entity had the date of acquisitions been July 1, 2011, or July 1, 2010, are as follows:
| | | Revenue | | | Net income (loss) | | | | | | | | | | | Actual for the year from date of acquisition to June 30, 2012 | | | 39,775,524 | | | | 2,446,545 | | | | | | | | | | | | | Supplemental pro forma from Jul 1, 2011 through June 30-2012 | | | 40,258,724 | | | | 2,503,109 | | | | | | | | | | | | | Supplemental pro forma from Jul 1, 2010 through June 30-2011 | | | 38,089,359 | | | | 5,793,219 | |
NOTE 4 –EARNINGS PER SHARE Basic earnings per share is 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. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 The components of basic and diluted earnings per share were as follows: | For the year ended June 30, 2012 | | Net Income | | | Shares | | | Per Share | | | | For the year ended June 30, 2013 | | | Net Income | | | Shares | | | Per Share | | | Basic income per share: | | $ | 2,446,545 | | | | 6,217,842 | | | $ | 0.39 | | | | | | | | | | | | Net income available to common shareholders | | | $ | 7,863,143 | | | | 8,201,247 | | | $ | 0.96 | | | Effect of dilutive securities | | | | | | | | | | | | | | | | | | | | | | | | | | Stock options | | | | | | | - | | | | | | | | - | | | | 47,168 | | | | - | | | Warrants | | | | | | | 26,343 | | | | | | | | - | | | | 40,536 | | | | - | | | Diluted loss per share | | $ | 2,446,545 | | | | 6,244,185 | | | $ | 0.39 | | | | Diluted income per share | | | $ | 7,863,143 | | | | 8,288,951 | | | $ | 0.95 | |
| | | | | | | | | | | | | | | | For the year ended June 30, 2011 | | Net Income | | | Shares | | | Per Share | | | | For the year ended June 30, 2012 | | | Net Income | | | Shares | | | Per Share | | | Basic income per share: | | $ | 5,728,088 | | | | 4,854,320 | | | $ | 1.18 | | | | | | | | | | | | | | | Net income available to common shareholders | | | $ | 2,446,544 | | | | 6,217,842 | | | $ | 0.39 | | | Effect of dilutive securities | | | | | | | | | | | | | | | | | | | | | | | | | | Stock options | | | | | | | 89,960 | | | | | | | | - | | | | - | | | | - | | | Warrants | | | | | | | 12,539 | | | | | | | | - | | | | 26,343 | | | | - | | | Diluted income per share | | $ | 5,728,088 | | | | 4,956,819 | | | $ | 1.16 | | | $ | 2,446,544 | | | | 6,244,185 | | | $ | 0.39 | |
NOTE 5 –OTHER COMPREHENSIVE INCOME &AND FOREIGN CURRENCY The accounts of NetSol UK, NTE, VLSH and VLS use the British Pound; HAFLVLSIL uses the Euro; NetSol PK, Connect, and NetSol Innovation use Pakistan Rupees; NTPK Thailand uses Thai Baht; Abraxas uses the Australian dollar; and NetSol Beijing uses Chinese Yuan as the functional currencies. NetSol Technologies, Inc., and its subsidiaries, NTNA and Vroozi, use the U.S. dollar as the functional currency. Assets and liabilities are translated at the exchange rate on the balance sheet date, whereas operating results are translated at the average exchange rate throughout the period. Accumulated translation losses are classified as an item of accumulated other comprehensive loss in the stockholders’ equity section of the consolidated balance sheet were $12,361,759$15,714,112 and $8,805,922$12,361,759 as of June 30, 20122013 and 20112012, respectively. During the year ended June 30, 20122013 and 2011,2012, comprehensive loss in the consolidated statements of operations included Netsol’sNetSol’s share of translation loss of $3,555,836$3,352,353 and translation gain of $409,837$3,555,837, respectively. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 6 –MAJOR CUSTOMERS During fiscal year ended June 30, 2012,2013, there was no single customer who represented 10% or more of the Company’s total revenue. 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 19.72%21.86% and 20.58%19.72% of revenue, Toyota Motors (which consists of a group of many companies in different countries) accounts for approximately 2.62%3.47% and 5.40%2.62% of revenue, and Nissan (which consists of a group of many companies in different countries) accounts for approximately 7.31%6.23% and 4.10%7.31% of revenue for the fiscal yearyears ended June 30, 2013 and 2012, respectively. Accounts receivable at June 30, 2013 for these companies were $2,382,837, $388,759 and 2011,$1,040,248, respectively. Accounts receivable at June 30, 2012 for these companies were $4,016,335, $257,867 and $918,333, respectively. Accounts receivable at June 30, 2011 for these companies were $1,526,762, $1,080,318 and $820,206. NOTE 7 –OTHER CURRENT ASSETS
Other current assets consisted of the following:
| | | As of June 30 | | | As of June 30 | | | | | 2012 | | | 2011 | | | | | | | | | | | Prepaid Expenses | | $ | 596,180 | | | $ | 245,194 | | | Advance Income Tax | | | 763,147 | | | | 726,979 | | | Employee Advances | | | 24,026 | | | | 53,404 | | | Security Deposits | | | 178,428 | | | | 161,263 | | | Tender Money Receivable | | | 111,437 | | | | 133,166 | | | Other Receivables | | | 505,746 | | | | 535,597 | | | Other Assets | | | 469,338 | | | | 198,301 | | | Total | | $ | 2,648,302 | | | $ | 2,053,904 | |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 NOTE 87 –PROPERTY AND EQUIPMENT OTHER CURRENT ASSETS Property and equipment, net,Other current assets consisted of the following:
| | | As of June 30 | | | As of June 30 | | | | | 2012 | | | 2011 | | | | | | | | | | | Office furniture and equipment | | $ | 1,917,221 | | | $ | 1,179,993 | | | Computer equipment | | | 14,986,148 | | | | 13,463,560 | | | Assets under capital leases | | | 1,877,145 | | | | 2,024,282 | | | Building | | | 2,133,174 | | | | 2,337,758 | | | Land | | | 2,044,003 | | | | 2,240,036 | | | Capital work in progress | | | 4,163,730 | | | | 2,659,750 | | | Autos | | | 648,305 | | | | 794,617 | | | Improvements | | | 230,759 | | | | 162,896 | | | Subtotal | | | 28,000,485 | | | | 24,862,892 | | | Accumulated depreciation | | | (11,087,690 | ) | | | (8,848,431 | ) | | | | $ | 16,912,795 | | | $ | 16,014,461 | |
| | | | | | | | | | | | | | | | | Prepaid Expenses | | $ | 559,217 | | | $ | 596,180 | | | Advance Income Tax | | | 887,893 | | | | 763,147 | | | Employee Advances | | | 43,794 | | | | 24,026 | | | Security Deposits | | | 189,382 | | | | 178,428 | | | Tender Money Receivable | | | 106,398 | | | | 111,437 | | | Other Receivables | | | 222,609 | | | | 511,466 | | | Other Assets | | | 197,915 | | | | 463,618 | | | Due From Related Party | | | 66,106 | | | | - | | | Total | | $ | 2,273,314 | | | $ | 2,648,302 | |
NOTE 8 – PROPERTY AND EQUIPMENT Property and equipment consisted of the following: | | | | | | | | | | | | | | | | | Office furniture and equipment | | $ | 2,508,975 | | | $ | 1,917,221 | | | Computer equipment | | | 19,987,480 | | | | 14,986,148 | | | Assets under capital leases | | | 1,126,860 | | | | 1,877,145 | | | Building | | | 2,391,550 | | | | 2,133,174 | | | Land | | | 2,460,144 | | | | 2,044,003 | | | Capital work in progress | | | 5,104,283 | | | | 4,163,730 | | | Autos | | | 689,440 | | | | 648,305 | | | Improvements | | | 513,044 | | | | 230,759 | | | Subtotal | | | 34,781,776 | | | | 28,000,485 | | | Accumulated depreciation | | | (13,803,407 | ) | | | (11,087,690 | ) | | Property and equipment, net | | $ | 20,978,369 | | | $ | 16,912,795 | |
For the years ended June 30, 20122013 and 2011,2012, depreciation expense totaled $2,875,883$3,627,862 and $2,013,388,$2,875,883, respectively. Of these amounts, $1,879,358$2,242,339 and $1,450,723$1,879,358 are reflected as part of cost of revenues as offor the years ended June 30, 20122013 and 2011,2012, respectively. The Company’s capital work in progress consists of ongoing enhancements to its facilities and infrastructure as necessary to meet the Company’s expected long-term growth needs. The Company recorded capitalized interest of $292,390 and $331,145 and 278,308 as ofduring the period ended June 30, 20122013 and 2011,2012, respectively. Assets acquired under capital leases were $1,877,145$1,126,860 and $2,024,282$1,877,145 as of June 30, 20122013 and 2011,2012, respectively. Accumulated amortization related to these leases were $900,790$350,048 and $807,562$900,790 for the years ended June 30, 20122013 and 2011,2012, respectively. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 NOTE 9 –INTANGIBLE ASSETS Intangible assets consisted of the following: | | | As of June 30, | | | As of June 30, | | | | | 2012 | | | 2011 | | | Product licenses | | $ | 42,072,045 | | | $ | 38,226,400 | | | Customer lists | | | 6,052,377 | | | | 5,804,057 | | | Technology | | | 242,702 | | | | - | | | | | | 48,367,124 | | | | 44,030,457 | | | Accumulated amortization | | | (19,864,141 | ) | | | (18,428,262 | ) | | Intangible assets, net | | $ | 28,502,983 | | | $ | 25,602,195 | |
| | | | | | | | | Product licenses | | $ | 44,837,558 | | | $ | 42,072,045 | | | Customer lists | | | 6,052,377 | | | | 6,052,377 | | | Technology | | | 242,702 | | | | 242,702 | | | | | | 51,132,637 | | | | 48,367,124 | | | Accumulated amortization | | | (21,679,983 | ) | | | (19,864,141 | ) | | Intangible assets, net | | $ | 29,452,654 | | | $ | 28,502,983 | |
Product licenses include internally-developed original license issues, renewals, enhancements, copyrights, trademarks, and trade names. Product licenses include unamortized software development and enhancement costs of $18,412,165.$22,088,020. Product licenses are being amortized on a straight-line basis over their respective lives, which is currently a weighted average of approximately 8 years. Amortization expense for the yearyears ended June 30, 2013 and 2012 was $1,905,008 and 2011 was $1,536,819, and $1,769,149, respectively. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On October 31, 2008, the Company entered into an agreement to purchase the rights to the customer list of Ciena Solutions, LLC, a California limited liability company (“Ciena”). Under the terms of the agreement, the total consideration for these rights included an initial payment of $350,000 (plus interest of $2,963), and deferred consideration to be paid in cash and the Company’s common stock based on the operational results of Ciena, and certain other factors, over a four-year fiscal period. Each fiscal period is measured from July 1 to June 30 with fiscal period one being the period from July 1, 2008 to June 30, 2009. No other assets or liabilities were acquired by the Company as a result of this transaction. As a result of operational losses of Ciena in the first three fiscal periods, 2009, 2010 and 2011, respectively, the first three annual deferred consideration installment payments were determined to be zero. On October 4, 2011, the companyCompany entered into an agreement to acquire a UK based company “Virtual Leasing Services Limited” through one of its subsidiaries. As a result of this acquisition, the Company recorded $248,320 of an existing customer list. Customer lists are being amortized based on a straight-line basis, which approximates the anticipated rate of attrition, which is currently a weighted average of approximately 5 years. Amortization expense for the yearyears ended June 30, 2013 and 2012 was $120,804 and 2011 was $145,808, respectively. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and $501,860, respectively.2012 On October 4, 2011, the companyCompany entered into an agreement to acquire a UK based company, Virtual Leasing Services Limited, through one of its subsidiaries. As a result of this acquisition, the Company recorded $242,702 of existing technology. Technology assets are being amortized on a straight-line basis over their respective lives, which is currently a weighted average of approximately 5 years. Amortization expense for the yearyears ended June 30, 2013 and 2012 was $49,075 and 2011 was $36,405, and Nil.respectively. Estimated amortization expense of intangible assets over the next five years is as follows: Year ended;ended: | | | | June 30, 2013 | | | 2,105,639 | | | June 30, 2014 | | | 1,949,2001,871,509 | | | June 30, 2015 | | | 1,556,0801,483,795 | | | June 30, 2016 | | | 1,052,804989,890 | | | June 30, 2017 | | | 827,466776,539 | | | June 30, 2018 | | | 746,068 | | | Thereafter | | | 21,095,27023,584,853 | |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 10 –GOODWILL Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in prior period businesses combinations. Goodwill was comprised of the following amounts: | | | As of June 30 | | | As of June 30 | | | | | 2012 | | | 2011 | | | Asia Pacific | | $ | 1,303,372 | | | $ | 1,303,372 | | | Europe | | | 3,685,858 | | | | 3,471,813 | | | North America | | | 4,664,100 | | | | 4,664,100 | | | | | | | | | | | | | Total | | $ | 9,653,330 | | | $ | 9,439,285 | |
| | | | | | | | | Asia Pacific | | $ | 1,303,372 | | | $ | 1,303,372 | | | Europe | | | 3,685,858 | | | | 3,685,858 | | | North America | | | 4,664,100 | | | | 4,664,100 | | | | | | | | | | | | | Total | | $ | 9,653,330 | | | $ | 9,653,330 | |
On October 4, 2011, the Company entered into an agreement to acquire a UK based company, Virtual Leasing Services Limited, through one of its subsidiaries. As a result of this acquisition, the Company recorded goodwill of $214,044. The Company has determined that there was no impairment of the goodwill for either period presented..presented. NOTE 11 –INVESTMENT UNDER EQUITY METHOD On April 10, 2009, the Company entered into an agreement to form a joint venture with the Atheeb Trading Company, a member of the Atheeb Group (“Atheeb”). The joint venture entity Atheeb NetSol Saudi Company Ltd. is a company organized under the laws of the Kingdom of Saudi Arabia. The venture was formed with an initial capital contribution of $268,000 by the Company and $266,930 by Atheeb with a profit sharing ratio of 50.1:49.9, respectively. The final formation of the company was completed on March 7, 2010. Since currently the Company does not have control over the operational and financial matters of Atheeb Netsol, therefore, it is considered as an associated company and accounted for under equity method. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 The Company's investment in equity for the yearyears ended June 30, 20122013 and 20112012 is as follows: | | | | | | Net book value at June 30, 2010 | | $ | 200,506 | | | | | | | | | Net loss for the year ended June 30, 2011 | | | (542,929 | ) | | NetSol's share (50.1%) | | | (272,007 | ) | | Loss adjusted against investment | | | (200,506 | ) | | | | | | | | Net book value at June 30, 2011 | | $ | - | | | | | | | | | Investment during the period | | | 100,000 | | | Net loss for the year ended June 30, 2012 | | | (503,303 | ) | | NetSol's share (50.1%) | | | (252,155 | ) | | Unabsorbed losses brought forward | | | (51,731 | ) | | Total loss | | | (303,886 | ) | | Loss adjusted against investment | | | (100,000 | ) | | Loss adjusted against advance to investee | | | (200,000 | ) | | Net book value at June 30, 2012 | | $ | - | |
| Investment during the period | | | 100,000 | | | Net loss for the year ended June 30, 2012 | | | (503,303 | ) | | NetSol's share (50.1%) | | | (252,155 | ) | | Unabsorbed losses brought forward | | | (51,502 | ) | | Total loss | | | (303,657 | ) | | Loss adjusted against investment | | | (100,000 | ) | | Loss adjusted against advance to investee | | | (200,000 | ) | | Net book value at June 30, 2012 | | $ | - | | | | | | | | | Investment during the period | | | - | | | Net income for the year ended June 30, 2013 | | | 1,096,086 | | | NetSol's share (50.1%) | | | 549,140 | | | Unabsorbed losses brought forward | | | (3,657 | ) | | Total income | | | 545,483 | | | Income adjusted against investment | | | 545,483 | | | Net book value at June 30, 2013 | | $ | 545,483 | |
NOTE 12 –ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consisted of the following: | | | As of June 30 | | | As of June 30 | | | | | 2012 | | | 2011 | | | | | | | | | | | Accounts Payable | | $ | 1,278,452 | | | $ | 1,348,453 | | | Accrued Liabilities | | | 1,778,414 | | | | 2,364,233 | | | Accrued Payroll | | | 17,097 | | | | 148,565 | | | Accrued Payroll Taxes | | | 158,626 | | | | 216,485 | | | Interest Payable | | | 326,746 | | | | 380,808 | | | Deferred Revenues | | | 32,463 | | | | 32,066 | | | Taxes Payable | | | 277,557 | | | | 239,417 | | | Total | | $ | 3,869,355 | | | $ | 4,730,027 | |
| | | | | | | | | | | | | | | | | Accounts Payable | | $ | 825,025 | | | $ | 1,278,452 | | | Accrued Liabilities | | | 2,055,066 | | | | 1,778,414 | | | Accrued Payroll | | | 25,529 | | | | 17,097 | | | Accrued Payroll Taxes | | | 218,084 | | | | 158,626 | | | Interest Payable | | | 71,872 | | | | 326,746 | | | Deferred Revenues | | | 937 | | | | 32,463 | | | Taxes Payable | | | 727,408 | | | | 277,557 | | | Total | | $ | 3,923,921 | | | $ | 3,869,355 | |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 NOTE 13 –DEBTS | (A) | Loans and Leases Payable |
Notes and leases payable consisted of the following: | | | As of June 30 | | | Current | | | Long-Term | | | | Name | | 2012 | | | Maturities | | | Maturities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | D&O Insurance | | $ | 89,996 | | | $ | 89,996 | | | $ | - | | | | (1 | ) | | $ | 88,292 | | | $ | 88,292 | | | $ | - | | | Habib Bank Line of Credit | | | 51,231 | | | | 51,231 | | | | - | | | | (2 | ) | | | 1,785,237 | | | | 1,785,237 | | | | - | | | Bank Overdraft Facility | | | 308,013 | | | | 308,013 | | | | - | | | | (3 | ) | | | 312,139 | | | | 312,139 | | | | - | | | HSBC Loan | | | 1,367,644 | | | | 345,203 | | | | 1,022,441 | | | | (4 | ) | | | 1,047,014 | | | | 336,339 | | | | 710,675 | | | Term Finance Facility | | | 1,058,201 | | | | 264,550 | | | | 793,651 | | | | (5 | ) | | | 867,195 | | | | 495,540 | | | | 371,655 | | | Subsidiary Capital Leases | | | 832,801 | | | | 572,694 | | | | 260,107 | | | | (6 | ) | | | 638,800 | | | | 308,918 | | | | 329,882 | | | | | $ | 3,707,886 | | | $ | 1,631,687 | | | $ | 2,076,199 | | | | | | | $ | 4,738,677 | | | $ | 3,326,465 | | | $ | 1,412,212 | |
| Name | | | | | | | As of June 30 2012 | | | | | | | | | | | | | | | | | | | | | | | | | | | D&O Insurance | | | (1 | ) | | $ | 89,996 | | | $ | 89,996 | | | $ | - | | | Habib Bank Line of Credit | | | (2 | ) | | | 51,231 | | | | 51,231 | | | | - | | | Bank Overdraft Facility | | | (3 | ) | | | 308,013 | | | | 308,013 | | | | - | | | HSBC Loan | | | (4 | ) | | | 1,367,644 | | | | 345,203 | | | | 1,022,441 | | | Term Finance Facility | | | (5 | ) | | | 1,058,201 | | | | 264,550 | | | | 793,651 | | | Subsidiary Capital Leases | | | (6 | ) | | | 832,801 | | | | 572,694 | | | | 260,107 | | | | | | | | | $ | 3,707,886 | | | $ | 1,631,687 | | | $ | 2,076,199 | |
| | | As of June 30 | | | Current | | | Long-Term | | | Name | | 2011 | | | Maturities | | | Maturities | | | | | | | | | | | | | | D&O Insurance | | $ | 21,429 | | | $ | 21,429 | | | $ | - | | | Habib Bank Line of Credit | | | 5,404,608 | | | | 5,404,608 | | | | - | | | Bank Overdraft Facility | | | 254,502 | | | | 254,502 | | | | - | | | Term Finance Facility | | | 869,767 | | | | 434,883 | | | | 434,884 | | | Subsidiary Capital Leases | | | 1,232,585 | | | | 947,113 | | | | 285,472 | | | | | $ | 7,782,891 | | | $ | 7,062,535 | | | $ | 720,356 | |
(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 0.42%0.40% and 0.49%0.42% as of June 30, 20122013 and 2011,2012, respectively. Interest paid during the periodperiods ended June 30, 2013 and 2012 and 2011 was nominalnominal. (2) In April 2008, the Company entered into an agreement with Habib American Bank to secure a line of credit to be collateralized by Certificates of Deposit held at the bank. The interest rate on this line of credit is variable and was 1.99%1.5% and 2%1.99% as of June 30, 20122013 and 2011,2012, respectively. Interest paid during the yearyears ended June 30, 2013 and 2012 was $26,702 and 2011 was $41,140, and $118,148, respectively. During the period ended June 30, 2012, the Company redeemed its certificates of deposits and paid off the majority of line of credit. In February 2012, the companyCompany entered into agreement with HSBC for the issuance of stand by letter of credit worth $90,000 in favor of landlord against the new office space. The companyCompany has deposited $90,000 in a saving account with HSBC as collateral against this letter of credit. In June 2012, the Company’s subsidiary, NTNA entered into an agreement with Habib American Bank to secure a line of credit up to $500,000 to be collateralized by Certificates of Deposit of same value held at the bank. The interest rate on this line of credit is variable and was 1.5% and 1.99% as of June 30, 2012. No interest was2013 and 2012 respectively. Interest paid during the year as line of credit was unused by the end ofyears ended June 30, 2012.2013 and 2012 was $3,341 and Nil, respectively. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 (3) During the year ended June 30, 2008, the Company’s subsidiary, NTE entered into an overdraft facility with HSBC Bank plc whereby the bank would cover any overdrafts up to £200,000, or approximately $312,340. The annual interest rate is 4.7% over the bank’s sterling base rate, which was 5.2% and 5.00%5.20% as of June 30, 20122013 and 2011,2012, respectively. (4) In October 2011, the Company’s subsidiary, NTE, entered into a loan agreement with HSBC Bank to finance the acquisition of 51% of controlling interest in Virtual Leasing Services Limited. HSBC Bank guaranteed the loan up to a limit of £1,000,000, or approximately $1,561,700$1,521,600 for a period of 5 years with monthly payments of £18,420, or $28,767 approximately.approximately $28,028. The interest rate was 4% which is 3.5% above the bank sterling base rate. The loan is securitized agaisnt debenture comprising of fixed and floating charges over all the assets and undertaking of NTE including all present and future freehold and leasehold property book and other debts, chattels, goodwill and uncalled capital, both present and future. As of June 30, 3012, the subsidiary had used this facility up to $1,367,644, of which $1,022,441, was shown as long term and the remaining $345,203, as current maturity. As of June 30, 2013, the subsidiary has used this facility up to £875,741, or $1,367,644,$1,047,015, of which £654,698, or $1,022,441,$710,675, was shown as long term and the remaining £221,043, or $345,203,$336,339, as current maturity. Interest expense, for the periodyears ended June 30, 2013 and 2012, was £29,184, or $36,744.$81,347 and $36,744, respectively. (5) The Company’s subsidiary, NetSol PK, entered into atwo different term finance facilityfacilities from Askari Bank to finance the construction of a new building. The total aggregate amount of the facility isthese facilities are Rs. 162,500,000112,500,000 or approximately $1,719,577 (secured$1,114,965(secured by the first charge of Rs. 580 million or approximately $6.13$5.75 million over the land, building and equipment of the company). The interest rate is 2.75% above the six-month Karachi Inter Bank Offering Rate. As on June 30, 2011, the subsidiary had used Rs. 75,000,000 or approximately $869,767 of which $434,484 was shown as long term liabilities and the remainder of $434,483 as current maturity. As of the year ended June 30, 2012, the Company has used a total of Rs. 100,000,000 or approximately $1,058,201 of which $793,651 is shown as long term liabilities and the remainder of $264,550 as current maturity. As of the year ended June 30, 2013, the Company has used a total of Rs.87,500,000 or approximately $867,195 of which $371,655 is shown as long term liabilities and the remainder of $495,540 as current maturity. Following table represents future payments of loans described in above sub notes 1 to 5 | | | | | | Loan Payments | | | | | Due FYE 6/30/14 | | $ | 2,981,014 | | | Due FYE 6/30/15 | | | 559,818 | | | Due FYE 6/30/16 | | | 448,673 | | | Due FYE 6/30/17 | | | 110,372 | | | Total Loan Payments | | | 4,099,877 | | | Less: Current portion | | | (3,017,547 | ) | | Non-Current portion | | $ | 1,082,330 | |
(6) The Company leases various fixed assets under capital lease arrangements expiring in various years through 2016. 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, 20122013 and 2011. Following is the aggregate minimum future lease payments under capital leases for the years-ended June 30, 2012 and 2011:
| | | As of June 30 | | | As of June 30 | | | | | 2012 | | | 2011 | | | Minimum Lease Payments | | | | | | | | Due FYE 6/30/12 | | $ | - | | | $ | 1,010,836 | | | Due FYE 6/30/13 | | | 629,251 | | | | 209,260 | | | Due FYE 6/30/14 | | | 215,953 | | | | 115,346 | | | Due FYE 6/30/15 | | | 71,218 | | | | - | | | Total Minimum Lease Payments | | | 916,422 | | | | 1,335,442 | | | Interest Expense relating to future periods | | | (83,621 | ) | | | (102,857 | ) | | Present Value of minimum lease payments | | | 832,801 | | | | 1,232,585 | | | Less: Current portion | | | (572,694 | ) | | | (947,113 | ) | | Non-Current portion | | $ | 260,107 | | | $ | 285,472 | |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 Following is the aggregate minimum future lease payments under capital leases for the year-ended June 30, 2013: | | | | | | Minimum Lease Payments | | | | | Due FYE 6/30/14 | | $ | 364,325 | | | Due FYE 6/30/15 | | | 231,434 | | | Due FYE 6/30/16 | | | 86,368 | | | Due FYE 6/30/17 | | | 11,926 | | | Due FYE 6/30/18 | | | 35,777 | | | Total Minimum Lease Payments | | | 729,830 | | | Interest Expense relating to future periods | | | (91,030 | ) | | Present Value of minimum lease payments | | | 638,800 | | | Less: Current portion | | | (308,918 | ) | | Non-Current portion | | $ | 329,882 | |
Following is a summary of property and equipment held under capital leases as of June 30, 20122013 and 2011:2012: | | | As of June 30 | | | As of June 30 | | | | | 2012 | | | 2011 | | | Computer Equipment and Software | | $ | 702,637 | | | $ | 518,911 | | | Furniture and Fixtures | | | 403,439 | | | | 769,106 | | | Vehicles | | | 468,853 | | | | 434,049 | | | Building Equipment | | | 302,216 | | | | 302,216 | | | | | | | | | | | | | Total | | | 1,877,145 | | | | 2,024,282 | | | Less: Accumulated Depreciation | | | (900,790 | ) | | | (807,562 | ) | | Net | | $ | 976,355 | | | $ | 1,216,720 | |
| | | | | | | | | Computer Equipment and Software | | $ | 454,002 | | | $ | 702,637 | | | Furniture and Fixtures | | | 951 | | | | 403,439 | | | Vehicles | | | 671,907 | | | | 468,853 | | | Building Equipment | | | - | | | | 302,216 | | | Total | | | 1,126,860 | | | | 1,877,145 | | | Less: Accumulated Depreciation | | | (350,048 | ) | | | (900,790 | ) | | Net | | $ | 776,812 | | | $ | 976,355 | |
Interest expense for the yearyears ended June 30, 2013 and 2012 was $79,098 and 2011 was $69,236, and $46,720, respectively. The Company’s subsidiary, NetSol Technologies Limited,PK, has a loan with a bank, secured by the Company’s assets. ThisThe loan consistedis a revolving loan that matures every six months. The balance of the following as ofloan at June 30, 2013 and 2012 & 2011: Forwas $1,982,161 and $2,116,402, respectively. The interest rate for the yearloans was 9.40% and 11.00% at June 30, 2013 and 2012, respectively. Interest expense for the years ended June 30, 2012:
| | | | | | | | | TYPE OF | MATURITY | | INTEREST | | BALANCE | | | LOAN | DATE | | RATE | | USD | | | | | | | | | | | | Export Refinance | Every 6 months | | | 11.00 | % | | $ | 2,116,402 | | | | | | | | | | | | | | Total | | | | | | | $ | 2,116,402 | |
For the year ended June 30, 2011:
| | | | | | | | | | | TYPE OF | MATURITY | | INTEREST | | BALANCE | | | LOAN | DATE | | RATE | | USD | | | | | | | | | | | | | | Export Refinance | Every 6 months | | | 11.00 | % | | $ | 2,319,378 | | | | | | | | | | | | | | Total | | | | | | | $ | 2,319,378 | |
NOTE 14 –OTHER PAYABLE AND COMMON STOCK TO BE ISSUED On June 30, 2006, the Company acquired McCue Systems, Inc. (“McCue”), a California corporation (subsequently renamed as NetSol Technologies North America, Inc.) The total purchase price was $7,080,385, including $3,784,635 of cash and 171,233 shares of the Company’s common stock. Of the total purchase price, the accompanying consolidated financial statements include certain amounts payable to McCue shareholders that have not been located as of the date of this report. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 As of the yearyears ended June 30, 20122013 and June 30, 2011,2012, the remaining cash due of $103,226 is shown as “Other Payable” and the remaining stock to be issued of 4,670 shares at an average price of $18.90 is shown in “Common stock to be issued” in the accompanying consolidated financial statements. NOTE 15 –CONVERTIBLE NOTE PAYABLE The net outstanding balance of convertible notes as of June 30, 2012 and 2011 is as follows:
| Issue Date | | Balance net of BCF @ 6/30/12 | | | Current Portion | | | Long Term | | Maturity Date | | | | | | | | | | | | | | Sep-11 | | | 3,745,457 | | | | 2,809,093 | | | | 936,364 | | Sep-13 | | | | | | | | | | | | | | | | | Total | | | 3,745,457 | | | | 2,809,093 | | | | 936,364 | | |
| | | | | | | | | | | | | Issue Date | | Balance net of BCF @ 6/30/11 | | | Current Portion | | | Long Term | | Maturity Date | | | | | | | | | | | | | | | | | Jul-08 | | | 2,745,524 | | | | 2,745,524 | | | | - | | Jul-11 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 2,745,524 | | | | 2,745,524 | | | | - | | |
For the year-ended June 30, 2012 and 2011, total interest accrued on convertible notes was $461,262 and $628,801, respectively.
Principle commitments related to the convertible notes for the next five years is as follows:
| FYE 6-30-2013 | | $ | 2,809,093 | | | FYE 6-30-2014 | | $ | 936,364 | |
(A) | 2008 Convertible Debt |
In July 2008, the Company issued $6,000,000 of 7% convertible debt maturing in 3 years (the “2008 Notes”), with a conversion price of $3.00 per share.
In January 2009, the 2008 Notes were amended to remove certain anti-dilution protection provisions and participation rights in future filings in exchange for a reduction in the conversion rate to $0.78, and $1,000,000 in cash, payable to the debt holders in 4 quarterly installments. Pursuant to the terms of the amendment, the Company recorded a beneficial conversion feature (“BCF”) in the amount of $230,769 which is being amortized as a component of interest expense over the maturity period. The related liability of $1,000,000 was recorded as a component of interest expense for the year-ended June 30, 2009.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In August 2009, the Company amended the 2008 Notes by reducing the conversion rate to $6.3, and recorded an additional BCF of $715,518, which is being amortized as a component of interest expense over the maturity period. During the year-ended June 30, 2010, Holders of the 2008 Notes elected to convert principal and interest due thereon into a total of 251,311 shares of common stock. These conversions reduced the total principal of the 2008 Notes to $4,450,000. During the year ended June 30, 2011, Holders of the 2008 Note further elected to convert the principal and interest due thereon into a total of 274,404 shares of common stock. These conversions reduced the principal of the 2008 Note to $2,758,330 and unamortized balance of BCF was $12,806 as of June 30, 2011.
During the year ended June 30, 2012, the remaining balance of 2008 Note was fully paid along with interest due thereon out of the proceeds of a new 2011 Convertible Note.
(B) | 2011 Convertible Debt |
On September 13, 2011, NetSol Technologies, Inc. entered into a purchase agreement to sell convertible notes with a total principal value of $4,000,000 and warrants to purchase shares of common stock to an investment fund managed by CIM Investment Management Limited and another accredited investor. The notes havehad a 2 year maturity date and arewere convertible into shares of common stock at the initial conversion price of $8.95 per share. The warrants entitleentitled the investors to acquire a total of 140,845 shares of common stock, havehad a 5 year term, and havehad an initial exercise price of $8.95 per share. The Notesconvertible notes and Warrantwarrant terms containcontained standard anti-dilution protection. The Company raised new capital through a follow on offering under its registered shelf offering on form S-3 in March 2012 and as a result, the conversion price of the convertible note and exercise price of warrants hashad been adjusted downward from $8.95 to $7.73. Resultantly, the number of warrants hashad also been increased to 163,021. The proceeds of the Noteconvertible note were assigned between warrants and convertible note per ASC 470-20. The Company recorded $401,648 as capitalized financing cost and discount of $19,665 on shares to be issued upon conversion of the convertible note into equity. This On September 13, 2012, the parties replaced the convertible note with a new convertible note for the same principal amount, an elimination of a shareholders’ receivable condition, a decrease in the interest rate and a decrease in the conversion price from $7.73 to $4.93. From July 1, 2012 to the date of exchange, the Company accrued interest amounting to $144,000 at the default rate due to non-compliance of one of the convertible note provisions. The Company amortized the remaining capitalized financefinancing cost and discount willof $254,543 related to the old convertible note at the date of replacement and recorded a further discount of $381,339 which would be amortized over the remaining life of new convertible note. Due to the note.reduction in conversion price, the number of warrants was adjusted to 168,943. During the year ended June 30, 2013, the investors converted $4,000,000 of principal into 811,360 shares of common stock at the rate of $4.93. They also converted $391,111 of interest into 72,428 shares of common stock at the rate of $5.40. Upon the conversion of the new convertible note, the Company expensed the $381,339 of capitalized finance cost. For the years-ended June 30, 2013 and 2012, total interest expensed on convertible notes was $251,278 and $461,262, respectively. NOTE 16 –INCOME TAXES The Company is incorporated in the State of Nevada and registered to do business in the State of California and has operations in primarily three tax jurisdictions - the United Kingdom (“UK”), Pakistan and the United States (“US”). Consolidated pre-tax income as of June 30, 2012 and 2011 consists of the following:
| | | 2012 | | | 2011 | | | US operations | | $ | (3,614,853 | ) | | $ | (17,122 | ) | | Foreign operations | | | 10,319,508 | | | | 9,840,633 | | | | | $ | 6,704,655 | | | $ | 9,823,511 | |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 Consolidated pre-tax income (loss) consists of the following: | | | Years Ended June 30, | | | | | 2013 | | | | 2012 | | | US operations | | | (2,878,018 | ) | | | (3,614,853 | ) | | Foreign operation | | | 15,431,499 | | | | 10,406,380 | | | | | $ | 12,553,481 | | | $ | 6,791,527 | |
The components of the provision for income taxes as of June 30, 2012 and 2011 are as follows:
| | | 2012 | | | 2011 | | | Current: | | | | | | | | Federal | | $ | - | | | $ | 14,762 | | | State and Local | | | - | | | | 21,788 | | | Foreign | | | 55,384 | | | | 83,992 | | | Deferred: | | | | | | | | | | Federal | | | - | | | | - | | | State and Local | | | - | | | | - | | | Foreign | | | - | | | | - | | | Provision for income taxes | | $ | 55,384 | | | $ | 120,542 | |
| | | Years Ended June 30, | | | | 2013 | | | 2012 | | | Current: | | | | | | | | Federal | | $ | - | | | $ | - | | | State and Local | | | - | | | | - | | | Foreign | | | 465,426 | | | | 55,384 | | | | | | | | | | | | | Deferred: | | | | | | | | | | Federal | | | - | | | | - | | | State and Local | | | - | | | | - | | | Foreign | | | - | | | | - | | | Provision for income taxes | | $ | 465,426 | | | $ | 55,384 | |
A reconciliation of taxes computed at the statutory federal income tax rate to income tax expense (benefit) as of June 30, 2012 and 2011 is as follows: | | | 2012 | | | | | | 2011 | | | | | | Income taxes (benefit) at statutory rate | | $ | 2,309,119 | | | | 34.0 | % | | $ | 1,988,533 | | | | 34.0 | % | | State income taxes, net of federal tax benefit | | | 418,384 | | | | 6.2 | % | | | 103,375 | | | | 1.8 | % | | Foreign earnings taxed at different rates | | | (3,615,004 | ) | | | -52.7 | % | | | (1,336,651 | ) | | | -22.9 | % | | Change in valuation allowance for deferred tax assets | | | 356,979 | | | | 5.3 | % | | | (1,163,238 | ) | | | -19.9 | % | | Non-deductible expenses | | | 585,906 | | | | 8.06 | % | | | 513,760 | | | | 8.8 | % | | Alternative minimum tax | | | - | | | | 0.0 | % | | | 14,763 | | | | 0.3 | % | | Provision for income taxes | | $ | 55,384 | | | | 0.86 | % | | $ | 120,542 | | | | 2.1 | % |
| | | Years Ended June 30, | | | | | | | | 2013 | | | | | | 2012 | | | | | | Income taxes at statutory rate | | | 4,268,184 | | | | 34.0 | % | | | 2,309,119 | | | | 34.0 | % | | State income (benefit) taxes, net of federal tax benefit | | | (114,630 | ) | | | -0.91 | % | | | 418,384 | | | | 6.2 | % | | Foreign earnings taxed at different rates | | | (4,781,284 | ) | | | -38.1 | % | | | (3,615,004 | ) | | | -53.2 | % | | Change in valuation allowance for deferred tax assets | | | 1,056,139 | | | | 8.4 | % | | | 356,979 | | | | 5.3 | % | | Other | | | 37,017 | | | | 0.3 | % | | | 585,906 | | | | 8.6 | % | | Provision for income taxes | | | 465,426 | | | | 3.7 | % | | | 55,384 | | | | 0.82 | % |
Deferred income tax assets and liabilities as of June 30, 20112013 and 20102012 consist of tax effects of temporary differences related to the following: | Deferred tax asset: | | 2012 | | | 2011 | | | Other | | $ | 88,590 | | | $ | 102,356 | | | Fixed Assets | | | (33,080 | ) | | | (148,278 | ) | | AMT Credit | | | 14,763 | | | | 14,763 | | | Intangible assets | | | (40,322 | ) | | | (70,564 | ) | | Net operating loss carry forwards | | | 10,493,537 | | | | 10,268,233 | | | Net deferred tax assets | | | 10,523,488 | | | | 10,166,510 | | | Valuation allowance for deferred tax assets | | | (10,523,488 | ) | | | (10,166,510 | ) | | Net deferred tax assets | | $ | - | | | $ | - | |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 | | | Years Ended June 30, | | | | 2013 | | | 2012 | | | Net operating loss carry forwards | | $ | 11,396,640 | | | $ | 10,493,537 | | | Other | | | 182,987 | | | | 29,951 | | | Net deferred tax assets | | | 11,579,627 | | | | 10,523,488 | | | Valuation allowance for deferred tax assets | | | (11,579,627 | ) | | | (10,523,488 | ) | | Net deferred tax assets | | $ | - | | | $ | - | |
| (A) | United States of America |
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 decreasedincreased by $470,734$1,056,139 for the year ended June 30, 20122013 mainly due to adjusting the Company's net operating loss carry forwards for the current year operating loss. At June 30, 2012,2013, federal and state net operating loss carry forwards were $29,028,547$31,594,869 and $3,114,464$4,486,769 respectively. Federal net operating loss carry forwards begin to expire in 2020, while state net operating loss carry forwards begin to expire in 2015.2014. 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. As of June 30, 2012,2013, 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, 20092010 through 2012. 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 $32,403,645$43,672,745 as of June 30, 2012.2013. 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. As of June 30, 20112013 the Company's Pakistan subsidiaries had net operating loss carry forwards which can be carried forward six years to offset future taxable income. The deferred tax assets for the Pakistan subsidiaries at June 30, 20112013 and 2012 consists mainly of net operating loss carry forwards in which the Company established a full valuation allowance as the management believes it is more likely than not that these assets will not be realized in the future. | | | 2012 | | | 2011 | | | Net operating loss carry forward | | $ | 619,549 | | | $ | 276,452 | | | Total deferred tax assets | | | 216,842 | | | | 96,758 | | | Less : valuation allowance | | | (216,842 | ) | | | (96,758 | ) | | Net deferred tax assets | | $ | - | | | $ | - | |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 | Components of deferred tax asset - Pakistan | | | | | | | | | | Years Ended June 30, | | | | 2013 | | | 2012 | | | Net operating loss carry forwards | | $ | 615,324 | | | $ | 619,549 | | | Total deferred tax assets | | | 215,363 | | | | 216,842 | | | Less: valuation allowance | | | (215,363 | ) | | | (216,842 | ) | | Net deferred tax asset | | $ | - | | | $ | - | |
As of June 30, 20122013 the Company's UK subsidiaries had net operating loss carry forwards which can be carried forward indefinitely to offset future taxable income. The deferred tax assets for the UK Subsidiariessubsidiaries at June 30, 2013 and 2012 consists mainly of net operating loss carry forwards in which the Company established a full valuation allowance as the management believes it is more likely than not that these assets will not be realized in the future. | | | 2012 | | | 2011 | | | Net operating loss carry forward | | $ | 438,900 | | | $ | 398,449 | | | Total deferred tax assets | | | 131,670 | | | | 119,535 | | | Less : valuation allowance | | | (131,670 | ) | | | (119,535 | ) | | Net deferred tax assets | | $ | - | | | $ | - | |
| Components of deferred tax asset - UK | | | | | | | | | | Years Ended June 30, | | | | 2013 | | | 2012 | | | Net operating loss carry forwards | | $ | 278,993 | | | $ | 438,900 | | | Total deferred tax assets | | | 83,698 | | | | 131,670 | | | Less: valuation allowance | | | (83,698 | ) | | | (131,670 | ) | | Net deferred tax asset | | $ | - | | | $ | - | |
NOTE 17 –STOCKHOLDERS’ EQUITY | (A) | TREASURY STOCKTreasury Stock |
On November 11, 2011, the Company announced that it had authorized a stock repurchase program permitting the Company to repurchase up to 250,000 of its shares of common stock over the following 6 months. The shares are to be repurchased from time to time in open market transactions or privately negotiated transactions in the Company’s discretion. The Company has repurchased 4,430 shares of common stock from open market against cash consideration of $19,417 during the year ended June 30,until December 31, 2012. The repurchase plan expired by its own terms in May, 2012. The balance as of June 30, 2013 and 2012 and 2011 was $415,425 and $396,008 respectively.$415,425. | (B) | Shares Issued for Services to Related Parties |
During the year ended June 30, 20122013 and 2011,2012, the Company issued a total of 26,0005,000 and 44,25026,000 shares of restricted common stock for services rendered by the officers of the company.Company. The issuances were approved by both the compensation committee and the boardBoard of directors.Directors. These shares were valued at the fair market value of $159,325$25,200 and $528,900,$159,325 as of June 30, 20122013 and 2011,2012, respectively. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 The Company recorded an expense of $133,250$13,700 and $389,200$133,250 against the services rendered by officers during the yearyears ended June 30, 20122013 and 2011.2012. During the year ended June 30, 2012, and 2011, the Company issued a total of 16,000 and 9,000 shares of restricted common stock for services rendered by the independent members of the Board of Directors as part of their board compensation. The issuances were approved by both the compensation committee and the boardBoard of directors.Directors. These shares were valued at the fair market value of $173,600and $135,300,$173,600 as of June 30, 2012 and 2011, respectively.2012. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company recorded an expense of $40,000 and $135,300 for services rendered by the independent members of the Board of Directors as part of their board compensation during the year ended June 30, 2012 and 2011.2012. During the yearyears ended June 30, 20122013 and 2011,2012, the Company issued a total of 2,500 and 3,2702,500 shares of its common stock to employees as required according to the terms of their employment agreements valued at $12,600 and $12,125, respectively. The Company recorded an expense of $6,850 and $33,300, respectively.$17,875 as part of compensation to employees as required according to the terms of their employment agreements during the years ended June 30, 2013 and 2012. | (C) | Share-Based Payment Transactions |
During the yearyears ended June 30, 20122013 and 2011,2012, the Company issued a total of 17,3004,800 and 33,78617,300 shares of its common stock for provision of services to unrelated consultants valued at $91,520$18,420 and $152,543,$91,520, respectively. | (D) | SHARESHARES ISSUED AGAINST CASH PAYMENTS |
During the year ended June 30, 2012, the Company issued 1,667,500 new shares through secondarya follow on offering under an S3 registration statement against net proceeds of $5,743,300. The shares were issued at the offering price of $4.0 per share. Aegis Capital Corp. acted as sole book-running manager and underwriters for the offering. The Company also offered Aegis Capital Corp., the right to exercise 5% warrants at an exercise price of 125% of the offering price. On August 6, 2012, the shareholders of the Company authorized the Board of Directors to conduct a reverse split of the common stock of the Company in a range from 5 to 15 shares into one. Pursuant to the authority granted, the Board approved the ratio of 10:1 for the reverse split which was effectuated on August 13, 2012. All figures have been presented on the basis of reverse split where ever applicable for all the periods presented in these financial statements. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 NOTE 18 –INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN Common stock purchase options and warrants consisted of the following: | OPTIONS: | | | | | | | | | | | | | | Issued by the Company | | # of shares | | | Weighted Ave Exericse Price | | | Weighted Average Remaining Contractual Life (in years) | | | Aggregated Intrinsic Value | | | | | | | | | | | | | | | | | Outstanding and exercisable, June 30, 2011 | | | 691,932 | | | $ | 21.90 | | | | 4.48 | | | $ | 1,637,459 | | | Granted | | | 351,259 | | | $ | 5.20 | | | | | | | | | | | Exercised | | | (231,259 | ) | | $ | 4.20 | | | | | | | | | | | Expired / Cancelled | | | (8,499 | ) | | $ | 19.30 | | | | | | | | | | | Outstanding and exercisable, June 30, 2012 | | | 803,433 | | | $ | 19.73 | | | | 3.69 | | | $ | - | | | Granted | | | 362,747 | | | $ | 5.51 | | | | | | | | | | | Exercised | | | (449,285 | ) | | $ | 5.70 | | | | | | | | | | | Expired / Cancelled | | | (405,433 | ) | | $ | 25.87 | | | | | | | | | | | Outstanding and exercisable, June 30, 2013 | | | 311,462 | | | $ | 15.65 | | | | 3.3 | | | $ | 523,125 | | | | | | | | | | | | | | | | | | | | | WARRANTS: | | | | | | | | | | | | | | | | | | Outstanding and exercisable, June 30, 2011 | | | 17,823 | | | $ | 6.60 | | | | 3.69 | | | $ | 219,119 | | | Granted | | | 246,396 | | | $ | 6.80 | | | | | | | | | | | Exercised | | | - | | | | - | | | | | | | | | | | Expired | | | (2,500 | ) | | | | | | | | | | | | | | Outstanding and exercisable, June 30, 2012 | | | 261,719 | | | $ | 6.59 | | | | 4.24 | | | $ | - | | | Granted / adjusted | | | 5,922 | | | $ | 0.27 | | | | | | | | | | | Exercised | | | (104,517 | ) | | $ | 5.12 | | | | | | | | | | | Expired | | | - | | | | - | | | | | | | | | | | Outstanding and exercisable, June 30, 2013 | | | 163,124 | | | $ | 7.29 | | | | 3.19 | | | $ | 451,519 | |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 The following table summarizes information about stock options and warrants outstanding and exercisable as of June 30, 2012: | OPTIONS: | | | | | Exercise | | | Aggregated | | | | | # of shares | | | Price | | | Intrinsic Value | | | | | | | | | | | | | | Outstanding and exercisable, June 30, 2010 | | | 770,692 | | | $ | 3.00 to $50.00 | | | $ | - | | | Granted | | | 147,100 | | | $ | 6.50 to $12.50 | | | | | | | Exercised | | | (177,100 | ) | | $ | 6.50 to $12.50 | | | | | | | Expired / Cancelled | | | (48,760 | ) | | | | | | | | | | Outstanding and exercisable, June 30, 2011 | | | 691,932 | | | $ | 30.00 to $50.00 | | | $ | 1,637,459 | | | Granted | | | 351,259 | | | $ | 3.00 to $7.50 | | | | | | | Exercised | | | (231,259 | ) | | $ | 3.00 to $12.50 | | | | | | | Expired / Cancelled | | | (8,499 | ) | | $ | 7.50 to $16.50 | | | | | | | Outstanding and exercisable, June 30, 2012 | | | 803,433 | | | $ | 30.00 to $50.00 | | | $ | - | | | | | | | | | | | | | | | | | WARRANTS: | | | | | | | | | | | | | | Outstanding and exercisable, June 30, 2010 | | | 476,332 | | | $ | 16.50 to $37.00 | | | $ | - | | | Granted | | | | | | | | | | | | | | Exercised | | | (387,903 | ) | | $ | 3.10 | | | | | | | Expired | | | (70,606 | ) | | $ | 16.80 to $37.00 | | | | | | | Outstanding and exercisable, June 30, 2011 | | | 17,823 | | | $ | 3.10 to $37.00 | | | $ | 219,119 | | | Granted | | | 246,396 | | | $ | 5.00 to $7.73 | | | | | | | Exercised | | | | | | | | | | | | | | Expired | | | (2,500 | ) | | $ | 18.50 to $37.00 | | | | | | | Outstanding and exercisable, June 30, 2012 | | | 261,719 | | | $ | 3.10 to $7.73 | | | $ | (30,105 | ) |
The average life remaining on the options and warrants as of June 30, 2012 is as follows:2013:
| OPTIONS: | | | | | | | | | | | Issued by the Company | | | | | | | | | | | $0.10 - $9.90 | | | 270,000 | | | | 5.45 | | | | 6.98 | | | $10.00 - $19.90 | | | 187,433 | | | | 3.15 | | | | 18.94 | | | $20.00 - $29.90 | | | 282,000 | | | | 2.84 | | | | 26.98 | | | $30.00 - $50.00 | | | 64,000 | | | | 1.55 | | | | 43.83 | | | | | | | | | | | | | | | | | Totals | | | 803,433 | | | | 3.69 | | | | 19.73 | | | | | | | | | | | | | | | | | WARRANTS: | | | | | | | | | | | | | | $3.10 - $7.73 | | | 261,719 | | | | 4.24 | | | | 6.59 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Totals | | | 261,719 | | | | 4.24 | | | | 6.59 | |
| Exercise Price | | | Number Outstanding and Exercisable | | | Weighted Average Remaining Contractual Life | | | Weighted Ave Exericse Price | | | OPTIONS: | | | | | | | | | | | | | | | | | | | | | | | | $0.10 | - | $9.90 | | | | 183,462 | | | | 3.96 | | | | 7.21 | | | $10.00 | - | $19.90 | | | | 15,000 | | | | 2.56 | | | | 18.07 | | | $20.00 | - | $29.90 | | | | 95,000 | | | | 2.64 | | | | 25.27 | | | $30.00 | - | $50.00 | | | | 18,000 | | | | 0.65 | | | | 48.89 | | | | | | | | | | | | | | | | | | | Totals | | | | 311,462 | | | | 3.30 | | | | 15.65 | | | | | | | | | | | | | | | | | | | WARRANTS: | | | | | | | | | | | | | | | $3.10 | - | $7.73 | | | | 163,124 | | | | 3.19 | | | | 7.29 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Totals | | | | 163,124 | | | | 3.19 | | | | 7.29 | |
All options and warrants granted are vested and are exercisable as of June 30, 2012.2013. During the fiscal yearyears 2013 and 2012, and 201, the company granted 351,259362,747 and 147,100351,259 stock options to its employees at the weighted average grant date fair value of $1.41 and $2.26, and $3.0 respectively. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| (A) | Incentive and Non-Statutory Stock Option Plan |
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. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 During the quarter ended September 30, 2011,2012, the Company granted 33,00028,572 options to two employees with an exercise price of $5.0$3.50 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $63,763$20,036 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions: Risk-free interest rate 3.13%- 0.07% Expected life - 1 month Expected volatility 100%- 27.27% Expected dividend - 0% During the quarter ended December 31, 2011,September 30, 2012, the Company granted 20,00016,350 options to one employee with an exercise price of $5.0$4.00 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $13,797 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions: NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Risk-free interest rate 0.3%
Expected life 1 month
Expected volatility 99.85%
During the quarter ended December 31, 2011, the Company granted 32,000 options to one employee with an exercise price of $4.0 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $24,890$4,209 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions:
Risk-free interest rate 0.3%- 0.08% Expected life - 1 month Expected volatility 83.08%- 28.43% Expected dividend - 0% During the quarter ended December 31, 2011,September 30, 2012, the Company granted 130,00050,000 options to three of its officerstwo employees with an exercise price of $7.50 per share and an expiration date of 5 Years, vesting quarterly. Using the Black-Scholes method to value the options, the Company will record a total of $585,241 in compensation expense for these options on quarterly bases out of which $146,310 was recorded in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions: Risk-free interest rate 0.9%
Expected life 5 Years
Expected volatility 213.21%
During the quarter ended March 31, 2012, the Company granted 20,000 options to one of its employee with an exercise price of $5.0$4.75 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $4,897$55,040 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions:
Risk-free interest rate 0.3%- 0.1% Expected life - 1 month Expected volatility 42.44%- 26.58% Expected dividend - 0% During the quarter ended MarchDecember 31, 2012, the Company granted 83,33370,000 options to five of itssix employees with an exercise price of $3.0$4.75 per share and an expiration date of 1 month,3 months, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $76,385$73,478 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions: Risk-free interest rate 0.05%- 0.11% Expected life 1 month- 3 months Expected volatility 59.81%- 32.23% Expected dividend - 0% NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 During the quarter ended June 30,December 31, 2012, the Company granted 7,75920,000 options to one of its employee with an exercise price of $3.0$5.00 per share and an expiration date of 3 months, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $5,706 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions: NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Risk-free interest rate 0.08%
Expected life 3 month
Expected volatility 35.66%
During the quarter ended June 30, 2012, the Company granted 25,167 options to three of its employee with an exercise price of $3.0 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $17,688$16,860 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions:
Risk-free interest rate 0.08%- 0.11% Expected life - 3 months Expected volatility - 32.23% Expected dividend - 0% During the quarter ended March 31, 2013, the Company granted 50,000 options to two employees with an exercise price of $4.50 per share and an expiration date of 3 months, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $82,542 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions: Risk-free interest rate - 0.07% Expected life - 3 months Expected volatility - 18.72% Expected dividend - 0% During the quarter ended March 31, 2013, the Company granted 39,134 options to two employees with an exercise price of $6.00 per share and an expiration date of 3 months, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $12,139 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions: Risk-free interest rate - 0.07% Expected life - 3 months Expected volatility - 18.72% Expected dividend - 0% During the quarter ended March 31, 2013, the Company granted 8,000 options to two employees with an exercise price of $7.00 per share and an expiration date of 3 months, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $188 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions: Risk-free interest rate - 0.07% Expected life - 3 months Expected volatility - 18.72% Expected dividend - 0% NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 During the quarter ended March 31, 2013, the Company granted 8,000 options to one employee with an exercise price of $5.00 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $8,642 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions: Risk-free interest rate - 0.07% Expected life - 1 month Expected volatility 35.66%- 13.95% Expected dividend - 0% During the quarter ended March 31, 2013, the Company granted 1,200 options to one employee with an exercise price of $5.83 per share and an expiration date of 3 months, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $501 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions: Risk-free interest rate - 0.07% Expected life - 3 months Expected volatility - 18.72% Expected dividend - 0% During the quarter ended March 31, 2013, the Company granted 10,364 options to one employee with an exercise price of $5.50 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $6,018 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions: Risk-free interest rate - 0.05% Expected life - 1 month Expected volatility - 13.95% Expected dividend - 0% NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 During the quarter ended March 31, 2013, the Company granted 3,636 options to one employee with an exercise price of $5.50 per share and an expiration date of 3 months, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $2,251 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions: Risk-free interest rate - 0.08% Expected life - 3 months Expected volatility - 18.55% Expected dividend - 0% During the quarter ended March 31, 2013, the Company granted 5,000 options to one employee with an exercise price of $7.00 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $19,202 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions: Risk-free interest rate - 0.07% Expected life - 1 month Expected volatility - 31.27% Expected dividend - 0% During the quarter ended June 30, 2013, the Company granted 27,413 options to one employee with an exercise price of $9.12 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $111,036 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions: Risk-free interest rate - 0.06% Expected life - 1 month Expected volatility - 33.22% Expected dividend - 0% During the quarter ended June 30, 2013, the Company granted 27,778 options to two employees with an exercise price of $9.00 per share and an expiration date of 1 month, vesting immediately. Using the Black-Scholes method to value the options, the Company recorded $110,844 in compensation expense for these options in the accompanying consolidated financial statements. The Black-Scholes option pricing model used the following assumptions: Risk-free interest rate - 0.05% Expected life - 1 month Expected volatility - 29.50% Expected dividend - 0% NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 Warrants During the quarter ended September 30, 2011, the Company entered into an agreement to issue the 2011 Convertible Noteconvertible notes together with warrants to purchase 140,845 warrants of common stock at an initial exercise price of $8.95 per share with a life of five years. The Notesconvertible notes and Warrants terms containwarrants contained anti-dilution protection. The fair market value of these warrants was calculated as $446,480 by using the Black Scholes value method.model. Using this value, the proceeds of Convertible notethe convertible notes were allocated between warrants and the convertible notes based on their relative fair values. The Company recorded $401,648 of capitalized financing cost which will be amortized over the life of the note. As a result of new capital raised under the shelf registration on form S-3, the conversion price of notethe convertible notes and the exercise price of the warrants has beenwas adjusted downward from $8.95 to $7.73 and the number of warrants havehas been increased to 163,021. Moreover, the Company also offered Aegis Capital Corp., the right to exercise 5% warrants at an exercise price of 125% of the offering price. On March 7, 2013, 72,300 of the outstanding 83,375 warrants were exercised. On September 13, 2012, the parties replaced the note with a new note for the same principal amount, an elimination of a shareholders’ receivable condition, a decrease in the interest rate and a decrease in the conversion price from $7.73 to $4.93. Due to reduction in the note conversion price, the exercise price of warrants has been adjusted downward from $7.73 to $7.46 and the number of warrants has increased from 163,021 to 168,943. In May 2011, the shareholders approved the 2011 Equity Incentive Plan (the “2011 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 2011 Plan is 500,000 (the Share Reserve). The 2011 Plan contemplates the issuance of common stock upon exercise of options or other awards granted to eligible persons under the 2011 Plan. Shares issued under the 2011 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 2011 Plan, in whole or in part, the number of shares of common stock subject to such award again becomes available for grant under the 2011 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. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 Stock Options Options granted under the 2011 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 (the Code). 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 2011 Plan is ten years, provided that an incentive stock option granted to a Ten Percent Shareholder must have a term not exceeding five years. Performance Awards Under the 2011 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 ourthe 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 ourthe 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 2011 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, 2012, 9,4502013, 16,950 shares have been issued under this plan to non- officers employees. NOTE 19 –COMMITMENTS AND CONTINGENCIES | (A) | LeasesNon-cancellable operating leases |
The Company’s headquarters is located in California in approximately 7,210 rentable square feet and a rent of $20,417 | · | The Company’s headquarters is located in Calabasas, California in approximately 7,210 rentable square feet and a rent of $21,165 per month. The term of the lease is for five years and five months and expires on August 31, 2017. A security deposit of $23,821 was made and is included in other current assets in the accompanying consolidated financial statements. |
| · | The Australia lease was for six months expiring June 30, 2013 and is rented at the rate of $6,091 per month. |
| · | The Beijing lease is a three-year lease that expires in January 2014. The monthly rent is approximately $10,217. |
| · | The Bangkok lease is a three years lease expiring in November 2013 with monthly rent of approximately $8,140. |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 The Australia lease is a month to month lease and is rented at the rate of $175 per month. The Beijing lease is a three-year lease that expires in January 2014. The monthly rent is approximately $10,242. The Bangkok lease is a three years lease expiring in November 2013 with monthly rent of approximately $8,140. The NetSol Europe facilities, located in Horsham, United Kingdom, are leased until June 23, 2021 for an annual rent of approximately $109,319. VLS facilities, located in London, United Kingdom, are leased until October 2015 for an annual rent of approximately $54,660. NTNA relocated to Alameda, California location. The Alameda lease is about to end in November 2012. The monthly rent is $7,148. | · | The NetSol Europe facilities, located in Horsham, United Kingdom, are leased until June 23, 2021 for an annual rent of approximately $106,512. |
The NetSol Connect Karachi lease is a one-year lease that expires on December 2012 and currently is rented at the rate of approximately $1,323 per month. The NetSol Pindi office lease is a one year-lease that expires in April 2013 and currently is rented at the rate of approximately $529 | · | VLS facilities, located in London, United Kingdom, are leased until October 2015 for an annual rent of approximately $53,256. |
| · | NTNA relocated to Alameda, California location. The Alameda lease is about to end in November 2013. The monthly rent is $8,759. |
| · | The NetSol Pindi office lease is a one year-lease that expires in April 2014 and currently is rented at the rate of approximately $591 per month. |
Upon expiration of its leases, the Company does not anticipate any difficulty in obtaining renewals or alternative space. Rent expense amounted to $1,026,304$1,377,545 and $861,262$1,026,304 for the years ended June 30, 20122013 and 2011,2012, respectively. The total annual lease commitment for the next five years is as follows: | FYE 6/30/13 | | $ | 608,307 | | | FYE 6/30/14 | | | 553,805 | | | FYE 6/30/15 | | | 425,577 | | | FYE 6/30/16 | | | 396,986 | | | FYE 6/30/17 | | | 386,849 | |
| FYE 6/30/14 | | $ | 645,087 | | | FYE 6/30/15 | | | 421,367 | | | FYE 6/30/16 | | | 393,711 | | | FYE 6/30/17 | | | 384,042 | | | FYE 6/30/18 | | | 237,529 | |
As of June 30, 20122013, and 2011, to the best knowledge of the Company’s management and counsel, there is no material litigation pending or threatened against the Company. NOTE 20 –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. Our reportable segments are business units located in different global regions. Each business unit provides similar products and services; license fees for leasing and asset-based software, related maintenance fees, and implementation and IT consulting services. Separate management of each segment is required because each business unit is subject to 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. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 The following table presents a summary of operating information and certain year-end balance sheet information for the years ended June 30, 20122013 and 2011:2012: | | | 2012 | | | 2011 | | | Revenues from unaffiliated customers: | | | | | | | | North America | | $ | 4,552,173 | | | $ | 4,223,864 | | | Europe | | | 5,676,392 | | | | 7,158,145 | | | Asia - Pacific | | | 29,546,959 | | | | 25,165,565 | | | Consolidated | | $ | 39,775,524 | | | $ | 36,547,574 | | | | | | | | | | | | | Operating income (loss): | | | | | | | | | | Corporate headquarters | | $ | (3,408,483 | ) | | $ | (3,762,964 | ) | | North America | | | 123,979 | | | | 1,775,501 | | | Europe | | | (90,689 | ) | | | 2,705,583 | | | Asia - Pacific | | | 10,639,775 | | | | 9,446,701 | | | Consolidated | | $ | 7,264,582 | | | $ | 10,164,821 | | | | | | | | | | | | | Net income (loss) after taxes and before non-controlling interest: | | | | | | | Corporate headquarters | | $ | (4,470,462 | ) | | $ | (5,043,333 | ) | | North America | | | 236,865 | | | | 1,758,835 | | | Europe | | | (57,655 | ) | | | 2,601,842 | | | Asia - Pacific | | | 10,940,523 | | | | 10,385,625 | | | Consolidated | | $ | 6,649,271 | | | $ | 9,702,970 | | | | | | | | | | | | | Identifiable assets: | | | | | | | | | | Corporate headquarters | | $ | 14,059,781 | | | $ | 16,790,104 | | | North America | | | 2,814,769 | | | | 2,316,781 | | | Europe | | | 5,740,243 | | | | 4,590,556 | | | Asia - Pacific | | | 68,732,421 | | | | 61,948,938 | | | Consolidated | | $ | 91,347,214 | | | $ | 85,646,379 | | | | | | | | | | | | | Depreciation and amortization: | | | | | | | | | | Corporate headquarters | | $ | 82,074 | | | $ | 614,063 | | | North America | | | 397,508 | | | | 459,219 | | | Europe | | | 638,830 | | | | 710,022 | | | Asia - Pacific | | | 3,523,575 | | | | 2,505,206 | | | Consolidated | | $ | 4,641,987 | | | $ | 4,288,510 | | | | | | | | | | | | | Capital expenditures: | | | | | | | | | | Corporate headquarters | | $ | 18,230 | | | $ | - | | | North America | | | 24,693 | | | | 53,738 | | | Europe | | | 608,226 | | | | 1,013 | | | Asia - Pacific | | | 4,261,174 | | | | 9,030,397 | | | Consolidated | | $ | 4,912,322 | | | $ | 9,085,148 | |
| | | 2013 | | | 2012 | | | Revenues from unaffiliated customers: | | | | | | | | North America | | $ | 6,744,182 | | | $ | 4,552,173 | | | Europe | | | 7,838,642 | | | | 5,676,392 | | | Asia - Pacific | | | 36,060,287 | | | | 29,546,959 | | | Revenue from related party | | | 154,050 | | | | | | | Consolidated | | $ | 50,797,161 | | | $ | 39,775,524 | | | | | | | | | | | | | Operating income (loss): | | | | | | | | | | Corporate headquarters | | $ | (3,185,482 | ) | | $ | (3,408,483 | ) | | North America | | | 705,985 | | | | 123,979 | | | Europe | | | 1,076,963 | | | | (90,689 | ) | | Asia - Pacific | | | 13,069,632 | | | | 10,639,775 | | | Consolidated | | $ | 11,667,098 | | | $ | 7,264,582 | | | | | | | | | | | | | Net income (loss) after taxes and before non-controlling interest: | | | | | | | | | | Corporate headquarters | | $ | (3,695,617 | ) | | $ | (4,470,462 | ) | | North America | | | 666,677 | | | | 236,865 | | | Europe | | | 1,050,276 | | | | (57,655 | ) | | Asia - Pacific | | | 14,066,719 | | | | 10,940,523 | | | Consolidated | | $ | 12,088,055 | | | $ | 6,649,271 | | | | | | | | | | | | | Identifiable assets: | | | | | | | | | | Corporate headquarters | | $ | 14,450,760 | | | $ | 14,059,781 | | | North America | | | 2,997,145 | | | | 2,814,769 | | | Europe | | | 5,366,611 | | | | 5,740,244 | | | Asia - Pacific | | | 79,889,599 | | | | 68,732,420 | | | Consolidated | | $ | 102,704,115 | | | $ | 91,347,214 | | | | | | | | | | | | | Depreciation and amortization: | | | | | | | | | | Corporate headquarters | | $ | 136,541 | | | $ | 82,074 | | | North America | | | 646,076 | | | | 397,508 | | | Europe | | | 860,485 | | | | 638,830 | | | Asia - Pacific | | | 4,059,647 | | | | 3,523,575 | | | Consolidated | | $ | 5,702,749 | | | $ | 4,641,987 | | | | | | | | | | | | | Capital expenditures: | | | | | | | | | | Corporate headquarters | | $ | 7,992 | | | $ | 18,230 | | | North America | | | 51,741 | | | | 24,693 | | | Europe | | | 491,226 | | | | 608,226 | | | Asia - Pacific | | | 8,407,917 | | | | 4,261,174 | | | Consolidated | | $ | 8,958,876 | | | $ | 4,912,323 | | | | | | | | | | | | | Interest expense: | | | | | | | | | | Corporate headquarters | | $ | 358,308 | | | $ | 559,630 | | | North America | | | 42,293 | | | | 964 | | | Europe | | | 184,447 | | | | 119,963 | | | Asia - Pacific | | | 78,977 | | | | 143,127 | | | Consolidated | | $ | 664,025 | | | $ | 823,684 | | | | | | | | | | | | | Income tax expense: | | | | | | | | | | Europe | | $ | 7,606 | | | $ | (21,640 | ) | | Asia - Pacific | | | 457,820 | | | | 77,024 | | | Consolidated | | $ | 465,426 | | | $ | 55,384 | |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012
Geographic Information
Disclosed in the table below is geographic information for each country that comprised greater than five percent of our total revenues for fiscal 20122013 and 2011.2012. NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| | | June 30, 2012 | | | June 30, 2011 | | | June 30, 2013 | | June 30, 2012 | | | | Revenue | | | Long-lived Assets | | | Revenue | | | Long-lived Assets | | | Revenue | | | Long-lived Assets | | | Revenue | | | Long-lived Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | China | | $ | 10,795,330 | | | $ | 135,721 | | | $ | 11,063,164 | | | $ | 134,202 | | | $ | 10,156,476 | | | $ | 138,597 | | | $ | 10,795,330 | | | $ | 135,721 | | | Thailand | | | 5,639,182 | | | | 665,542 | | | | 5,127,971 | | | | 154,784.00 | | | | 7,104,115 | | | | 520,652 | | | | 5,639,182 | | | | 665,542.00 | | | USA | | | 5,777,841 | | | | 11,275,337 | | | | 5,829,118 | | | | 10,896,290 | | | | 5,961,587 | | | | 10,552,454 | | | | 5,777,841 | | | | 11,275,337 | | | UK | | | 6,544,662 | | | | 1,904,000 | | | | 5,300,942 | | | | 1,044,289 | | | | 6,882,417 | | | | 1,492,607 | | | | 6,544,662 | | | | 1,904,000 | | | Pakistan & India | | | 2,214,905 | | | | 41,087,552 | | | | 3,211,605 | | | | 38,824,246 | | | | 2,731,951 | | | | 47,379,603 | | | | 2,214,905 | | | | 41,087,552 | | | Australia & New Zealand | | | 1,914,654 | | | | 956 | | | | 1,995,786 | | | | 2,130 | | | | 6,030,646 | | | | 440 | | | | 1,914,654 | | | | 956 | | | Mexico | | | | 2,624,450 | | | | - | | | | 377,860 | | | | - | | | Other Countries | | | 6,888,950 | | | | - | | | | 4,018,988 | | | | - | | | | 9,305,519 | | | | - | | | | 6,511,090 | | | | - | | | Total | | $ | 39,775,524 | | | $ | 55,069,108 | | | $ | 36,547,574 | | | $ | 51,055,941 | | | $ | 50,797,161 | | | $ | 60,084,353 | | | $ | 39,775,524 | | | $ | 55,069,108 | |
NOTE 21 –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, 20122013 and 20112012 was as follows: | SUBSIDIARY | | Non Controlling Interest % | | | Non-Controlling Interest at June 30, 2012 | | | | | | | | | | | NetSol PK | | | 39.48 | % | | $ | 13,600,492 | | | NetSol-Innovation | | | 49.90 | % | | | 1,076,832 | | | VLS | | | 49.00 | % | | | 722,096 | | | | | | | | | | | | | Total | | | | | | $ | 15,399,421 | |
| SUBSIDIARY | | Non Controlling Interest % | | | Non-Controlling Interest at June 30, 2011 | | | Non Controlling Interest % | | | Non-Controlling Interest at June 30, 2013 | | | | | | | | | | | | | | | | | | | NetSol PK | | | 39.48 | % | | $ | 11,531,694 | | | | 34.81 | % | | $ | 15,593,585 | | | NetSol-Innovation | | | 49.90 | % | | | 968,790 | | | | 49.90 | % | | | 1,161,649 | | | VLS | | | | 49.00 | % | | | 481,121 | | | Vroozi | | | | 9.09 | % | | | 34,908 | | | | | | | | | | | | | | | | | | | | | Total | | | | | | $ | 12,500,484 | | | | | | | $ | 17,271,263 | |
(A) | NetSol Technologies, Limited (“NetSol PK”) |
| SUBSIDIARY | | Non Controlling Interest % | | | Non-Controlling Interest at June 30, 2012 | | | | | | | | | | | | | NetSol PK | | | 39.48 | % | | $ | 13,600,492 | | | NetSol-Innovation | | | 49.90 | % | | | 1,076,833 | | | VLS | | | 49.00 | % | | | 722,096 | | | | | | | | | | | | | Total | | | | | | $ | 15,399,421 | |
For the fiscal years ended June 30, 2012 and 2011, NetSol Technologies Ltd. (“NetSol PK”) had net income of $9,438,135 and $8,506,045. The related non-controlling interest was $3,736,175 and $3,469,710, respectively.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2013 and 2012 | (A) | NetSol Technologies, Limited (“NetSol PK”) |
NetSol PK is majority owned by the Company. During the year ended June 30, 2013, the Company purchased 4,071,400 shares of NetSol PK from the open market against the value of $799,349. After this purchase, the non-controlling interest in NetSol PK was reduced from 39.48% to 34.81%. For the fiscal years ended June 30, 2013 and 2012, NetSol Technologies Ltd. (“NetSol PK”) had net income of $11,284,696 and $9,438,135. The related non-controlling interest was $3,967,678 and $3,736,175, respectively. For the same period the Comprehensive loss attributable to non-controlling interest was $1,283,182 and $1,657,376, respectively. Employees of Netsol PK also exercised options to acquire 661,500 shares of the subsidiary valued at $107,945. | (B) | NetSol Innovation (Private) Limited (“NetSol Innovation”) |
For the fiscal years ended June 30, 20122013 and 2011,2012, NetSol Innovation (Private) Limited (“NetSol Innovation”) had net income of $1,102,318$1,108,214 and $1,012,368.$1,102,318. The related non-controlling interest was $550,057$556,455 and $505,172,$550,056, respectively. For the same period the Comprehensive loss attributable to non-controlling interest was $82,641 and $100,447 respectively. During the fiscal year-ended June 2012,2013, NetSol Innovation declared a cash dividend of $690,314,$786,170, of which the Company’s interest was $348,747.$397,173. The amount attributable to the non-controlling interest was $341,567$388,997 and is reflected in the accompanying consolidated financial statements. | (C) | VIRTUAL LEASE SERVICES “VLS”) |
For the periodfiscal years ended June 30, 2013 and 2012, VLS had a net loss of $477,814 and $150,013. The related, 49% non-controlling interest was $73,506. NOTE 22 –SUBSEQUENT EVENTS$234,129 and $73,506, respectively. For the same period the comprehensive loss attributable to non-controlling interest was $6,846 and comprehensive income $4,582 respectively.
(A) (D) | Reverse SplitVROOZI, INC. |
On August 6, 2012During the shareholdersquarter ended March 31, 2013, the subsidiary company issued shares worth of $100,000 to one employee against his services. As a result, the status of the Company authorizedsubsidiary has been changed from wholly owned subsidiary to majority owned subsidiary. For the boardyear ended June 30, 2013, Vroozi had a net loss of directors to conduct a reverse split$2,344,708 of the common stock of the Company in a range from 5 to 15 shares into one. Pursuant to the authority granted, the the board approved the ratio of 10:1 for the reverse split which was effectuated on August 13, 2012. All figures have$65,092 has been presented on the basis of reverse split where ever applicable for all the periods presented in these financial statements.recorded as non-controlling interest.
NOTE 22 – SUBSEQUENT EVENTS The Company issued a total of 3,7506,500 shares of common stock to employees as required according to the terms of their employment agreement valued at $17,250. These shares were included in “Shares to be issued” as of June 30, 2012 The Company issued a total of 2,400 shares of restricted common stock for services rendered by the consultant as required to service agreement.$69,420.
Employees of the companyCompany exercised options to acquire 44,92172,500 shares of common stock valued at $165,400. The company issued a total of 7,272 shares of common stock to its warrant holder against warrant exercise.
F-41 |
