SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x]X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES
FOR THE FISCAL YEAR ENDED JUNE 30, 2014
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-22773
NETSOL TECHNOLOGIES, INC.
(Name of small business issuer as specified in its charter)
| NEVADA | 95-4627685 | |
(State or other jurisdiction of | ||
incorporation or organization) | (I.R.S. Employer |
24025 Park Sorrento, Suite 410,
Calabasas, CA 91302
(Address of principal executive offices) (Zip code)
(818) 222-9195
(Issuer'sIssuer’s telephone number including area code)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
COMMON STOCK, $.001 PAR VALUE
THE NASDAQ CAPITAL MARKET
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes [ ] No [x ]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x][X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x][X] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§S-K(§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
| Large Accelerated Filer [ ] | Accelerated Filer [ ] | ||
| Non-accelerated Filer [ ] | Smaller reporting company [X] | ||
| (Do not check if a smaller reporting company) | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [x]
The aggregate market value of the Common Stock held by non-affiliates of the registrant was approximately $47,940,533$36,801,426 based upon the closing price of the stock as reported on NASDAQ Capital Market ($5.834.17 per share) on December 31, 2013,2014, the last business day of the registrant’s second quarter. As of September 5, 2014,10, 2015, there were 9,179,61510,312,326 shares of common stock outstanding and no shares of its Preferred Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(None)
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
TABLE OF CONTENTS AND CROSS REFERENCE SHEET
| PAGE | |||
| Business | 1 | ||
| Item 1A | Risk Factors | 11 | |
| Item 2 | Properties | 11 | |
| Item 3 | Legal Proceedings | 11 | |
| Item 4 | Mine Safety Disclosures | 11 | |
| Item 5 | 12 | ||
| 13 | |||
| 13 | |||
| 21 | |||
| 22 | |||
| 22 | |||
| 22 | |||
| PART III | |||
| 23 | |||
| 27 | |||
| 37 | |||
| 37 | |||
| 38 | |||
| PART IV | |||
| 39 | |||
NOTE ABOUT FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 relating to the development of the Company'sCompany’s products and services and future operation results, including statements regarding the Company that are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. The words "believe," "expect," "anticipate," "intend,"“believe,” “expect,” “anticipate,” “intend,” variations of such words, and similar expressions, identify forward looking statements, but their absence does not mean that the statement is not forward looking. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Factors that could affect the Company'sCompany’s actual results include the progress and costs of the development of products and services and the timing of the market acceptance. Forward looking statements may appear throughout this report, including without limitation, the following sections: Item 1 “Business,” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risk and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
As used herein, “NetSol,” “we”, “our,” and similar terms include NetSol Technologies, Inc. and its subsidiaries, unless the context indicates otherwise.
ITEM 1 - 1. BUSINESS
GENERAL
NetSol Technologies, Inc. (NasdaqCM:(NasdaqCM NTWK) is a worldwide provider of IT and enterprise software solutions. We believe that our solutions constitute mission critical applications for its clients, as they encapsulate end-to-end business processes, facilitating faster processing and increased transactions.
The Company’s primary source of revenue is the licensing, customization, enhancement and maintenance of its suite of financial applications under the brand name NFS™ (NetSol Financial Suite) and NFS AscentTM for leading businesses in the global lease and finance industry.
NetSol’s clients include Dow-Jones 30 Industrials and Fortune 500 manufacturers and financial institutions, global vehicle manufacturers, and enterprise technology providers, all of which are serviced by NetSol delivery locations around the globe.
Founded in 1997, NetSol is headquartered in Calabasas, California. While the Company follows a global strategy for sales and delivery of its portfolio of solutions and services, it continues to maintain regional offices in the following locations:
| North America | San Francisco Bay Area |
| ● | Europe | London Metropolitan area |
| ● | Asia | Lahore, Karachi, Bangkok, Beijing and Sydney |
The Company continues to maintain services, solutions and/or sales specific offices in the USA, England, Germany, Pakistan, Thailand, China, Australia and Japan.
OUR BUSINESS
Company Business Model
Success in a competitive and mature marketplace draws to a large extent from how a company manages its available resources to create a distinctive advantage for itself and unique value for its customers. NetSol has been able to leverage an effective business model based on a combination of cost arbitrage, subject matter expertise, domain experience, scalability and proximity with its global and regional customers.
Niche Market Focus
By specializing in dynamic leasing and financing solutions, we have gained footholds in several global locations and a market leading position in the captive auto-finance segment in Asia Pacific.
Subject Matter Expertise
NetSol’s dual expertise in enterprise technology implementation and financial application development has helped it emerge as a global contender in the lease and finance industry, and secure a broad footprint across Asia Pacific and a strengthening presence in North America and Europe. We have been able to develop and leverage this expertise in Asia Pacific through organic growth in the fast developing leasing automation industry, which is still nascent by Western standards.
Domain Experience
NetSol has a strong presence in the captive auto-finance domain, especially in Asia Pacific. In China, we have been able to secure leading auto finance companies as customers. With a collective experience of almost two decades in Asia Pacific and over three decades in North America and Europe (through its acquisitions), NetSol is one of a few global competitors in this niche industry.
Proximity with Global and Regional Customers
The Company has offices across the world, located strategically to maintain close contact and proximity with its customers in various key markets. It has helped in strengthening customer relationships and building a deeper understanding of local market dynamics. Simultaneously, the Company is able to extend services and even development support through a combination of local/onsite and central/off-site resources, using its time tested BestShoring® approach. This approach allows the Company to offer blended rates to its customers by employing a unique and cost effective global development model. For its customers, it ensures that “BestShoring® delivers BestSolution™”.
While our business model is built around the development, implementation and maintenance of our suite of financial applications, under NFS™, NetSol has employed the same facilities and competencies to extend its offerings into related segments, including:
| IT consulting & services |
| ● | business intelligence |
| ● | information security |
| ● | independent system review |
| ● | outsourcing services and software process improvement consulting |
| ● | maintenance and support of existing systems |
| ● | project |
Our global operation is broken down into three regions: North America, Europe and Asia Pacific. All of the subsidiaries are seamlessly integrated to function effectively with global delivery capabilities, cross selling to multinational captives’ finance companies, centralized marketing organization and a network of employees connected across the globe to support local and global customers and partners.
| 2 |
OUR SOLUTIONS
NetSol Financial Suite™
NetSol’s offerings include its flagship global solution, NFS™. A robust suite of fivefour software applications itthat is an end-to-end solution for the lease and finance industry covering the complete leasing and finance cycle starting from quotation origination through end of contract transactions. The fivefour software applications under NFS™ have been designed and developed for a highly flexible setting and are capable of dealing with multinational, multi-company, multi-asset, multi-lingual, multi-distributor and multi-manufacturer environments. Each application is a complete system in itself and can be used independently to address specific sub-domains of the leasing/financing cycle. When used together, they fully automate the entire leasing/financing cycle for companies of any size, company including those with multi-billion dollar portfolios.
On October 24, 2013, we announced the introduction and global release of NFS Ascent™, the Company’s next generation platform, offering a technologically advanced solution for the auto and equipment finance and leasing industry. NFS Ascent’s™ architecture and user interfaces were designed based on the Company’s collective experience with global Fortune 500 companies over the past 3040 years. The platform’s framework allows auto captive and asset finance companies to rapidly transform legacy driven technology into a state-of-the-art IT and business process environment. At the core of the NFS Ascent™ platform is a lease accounting and contract processing engine, which allows for an array of interest calculation methods, as well as robust accounting of multi-billion dollar lease portfolios underin compliance with various generally accepted accounting principles (GAAP), as well as international financial reporting standards (IFRS).regulatory standards. NFS Ascent™, with its distributed and clustered deployment across parallel application and high volume data servers, enables finance companies to process voluminous data in a hyper speed environment.
NFS Ascent™ has been developed using the latest tools and technologies and its n-tier SOA architecture allows the system to dramaticallygreatly improve a myriad of areas including, but not limited to, scalability, performance, fault tolerance and security. We believe that the transition from NFS™ to NFS Ascent™ allows:
| ● | Improvement in overall productivity throughout the delivery organization: | ||
| ● | The functionalities, like Business Process Manager, Workflow Engine and Business Rule Engine, will provide flexibility to our clients allowing them to configure certain parts of the application themselves rather than requesting customization. | ||
| ● | The NFS Ascent™ platform and the SOA architecture allow us to develop portals and mobile applications |
| ● | The n-tier architecture allows us to better distribute the tasks among various team |
| ● | Improvement in talent acquisition and retention: |
| Because NFS Ascent™ has been developed using the latest technologies and tools available in the market, it is helping us in attracting and retaining top engineers. |
| ● | Better customer satisfaction: |
| As a result of the powerful NFS Ascent™ platform and improvement in the talent acquisition and retention, the quality of our deliverables should increase. |
NFS™ and NFS Ascent™ have the following as their constituent applications:
Loan Origination System (LOS)
·Point of Sale (POS).
POS is a front office processing system for companies in the financial sector. It provides a quotation system which also incorporates a simulation for all kinds of financial products using a powerful built-in loan calculator.
·Credit Application Processing System (CAP).
CAP provides companies in the financial sector with an environment to handle the incoming credit applications from dealers, agents, brokers and the direct sales force. CAP automatically gathers information from different interfaces like credit rating agencies, evaluation guides, and contract management systems and scoresgives the applications a score against user defined scorecards.point scoring system. This automated workflow permits the credit team members to make their decisions more quickly and accurately. CAP is a database independent online system developed in Microsoft's Microsoft’s.Net framework. It can be run from any PCcomputer system with normal specifications, which is a key benefit for clients.
·Contract Management System (CMS).
CMS provides comprehensive business functionality that enables its users to effectively and smoothly manage and maintain a contract with the most comprehensive details throughout its life cycle. It provides interfaces with companyexternal systems such as banks and accounting systems. CMS effectively maintains details of all business partners that do business with the company including, but not limited to, customers, dealers, debtors, guarantors, insurance companies and banks.
·Wholesale Finance System (WFS).
WFS automates and manages the floor plan/bailment activities of dealerships through a finance company. The design of the system is based on the concept of one asset/one loan to facilitate asset tracking and costing. The system covers credit limit, payment of loan, billing and settlement, stock auditing, online dealer and auditor access, and ultimately the pay-off functions.
· Dealer Auditor Access System (DAS). DAS is a web-based solution that can be used in conjunction with WFS or any third party wholesale finance system. It addresses the needs of dealer, distributor and auditor access in a wholesale financing arrangement.
FMS is designed to efficiently handle all fleet management needs. FMS is easily integrated with CMS and WFS as well as with any third party contract management system to ensure a single comprehensive system. FMS key features include: a detailed tracking of information on every driver and vehicle; customizable reports; periodic reporting on fleet related aspects; internet based access to information; integration with third party software; and, linkage to GPS for real time tracking.
Dealer Auditor Access System (DAAS)
DAAS is a new, platform agnostic, mobile technology applicationweb-based solution that can be used in conjunction with WFS or any third party wholesale finance system. It addresses the needs of dealer, distributor and auditor access in a wholesale financing arrangement.
NFS Mobility
NetSol launched NFS mobility in 2014. It enables a sales force for use by our NFS™ customers. The first mobility solution is focused on an IOS platform with plans to provide Androidthe finance and MicroSoft platforms to our existing and new customers. The first project has been initiated for Mercedes Benz Finance China focusing on iPads. The initial application permits our customers to use theleasing company across different channels like point of sale, functionality focusing currentlyfield investigation and auditing as well as allowing end customers to access their contract details through a self-service mobile application.
Mobile Account
mAccount is a self-service mobile solution. It empowers the dealer with a powerful backend system and allows the customer to setup a secured account and view information 24/7 to keep track of contract status, reducing inbound calls for customer queries and improving turnaround time for repayments.
Mobile Point of Sale
mPOS application is a web and mobile enabled platform featuring a customizable home screen dashboard along with multiple quotation, application submission, work queues and detailed reporting to empower dealer networks in making the right decisions at the right time, in turn optimizing productivity.
Mobile Dealer
mDealer provides a mobile platform that delivers more visibility and control over inventories – with minimal effort. Dealers can view their use of floorplan facility, stock status and financial conditions, while entering settlement requests or relocating assets.
Mobile Auditor
mAuditor schedules visits, records audit exceptions and tracks assets for higher levels of transparency, in real time.
Mobile Field Investigator
mFI (Mobile Field Investigator) includes powerful features that permits applicant detail verification on the origination portion ofgo. The application features a reporting dashboard that displays progress stats, action items and latest notifications, enabling the lending lifecycle by enabling sales users at the dealerships. Our future strategy could include enabling dealership sales users in later releasesclient to cover additional functionality.
Regional NFS™ Offerings
While NFS Ascent™ is designed to be a truly global solution ready for customization in any market, the Company has historically provided products tailored to the various markets. It offersAs such, we offer the following additional regional products in various markets:
LeasePak
In North America, NTA has and continues to develop the LeasePak Productivity modules as an additional companion set of products to operate in conjunction with the LeasePak base system licensed software. LeasePak streamlines the lease management lifecycle, while maintaining customer service and reducing operating costs. It is web-enabled and can be configured to run on HP-UX, SUN/Solaris or Linux, as well as for Oracle and Sybase users. It is easily scalable from a basic offering to a collection of highly specialized add on modules for systems, portfolios and accrual methods for virtually all sizes and varying complexity of operations. It is part of the vehicle leasing infrastructure at leading Fortune 500 banks and manufacturers, as well as for some of the industry’s leading independent lessors. It handles every aspect of the lease or loan lifecycle, including credit application origination, credit adjudication, pricing, documentation, booking, payments, customer service, collections, midterm adjustments, and end-of-term options and asset disposition. Recently, it has beenIt is also integrated with Vertex Series O.
LeasePak-SaaS
NTA’s solutions range includes the LeasePak Software-as-a-Service (“SaaS”) business line, which provides an enhanced performance, while reducing the overall cost of ownership. SaaS offers a new deployment option whereby customers only require access to the internet and web browser to use the software. Customers pay for the use of the system through a monthly subscription fee. The monthly fee covers, use of the software, maintenance, support, hosting and other various items that reduce the overall cost and processing time of finance companies. The LeasePak-SaaS targets small and mid-sized leasing and finance companies. The product dramatically reduces the customer’s IT spend by minimizing the cost of acquiring and maintaining expensive IT infrastructure and related administrative staff.
LeaseSoft
In addition to offering all NetSol products, NetSol TechnologiesNFS Ascent™ to the Europe Ltd. (“NTE”)market, NTE has some regional offerings, including:
LeaseSoft | ||
| ● | LoanSoft – similar to LeaseSoft, but optimized for the |
| 5 |
NFS™ Implementation Process
The implementation process can span from three to six months depending upon the complexity and scope. For NFS™ Ascent, it is expected to be longer as the new technology is deployed and fine-tuned.customized for each client. The implementation process also includes related software services such as configuration, data migration, training and any other additional third party interfaces. Even after implementation, customers seek enhancements and additions to improve their business processes. NetSol charges these efforts in a man-day rate. Post implementation, NetSol consultants may remain at the client site for a while to assist the customer in smooth operations. After this phase, the regular maintenance and support services phase for the implemented software begins. In addition to the daily rate paid by the customer for each consultant, the customer also pays for all the transportation related expenses, boarding of the consultants, and a living allowance. NetSol’s involvement in all of the above steps is priced to bring value to our customers and increase our profitability from our interactions.
Pricing and Revenue Streams
The Company’s NFS™ revenue streams occur through the following three main areas:
| Product licensing |
| ● | Implementation related services |
| ● | Maintenance and support related services |
License fees can vary generally between $100,000 for SaaS minimal modules to overmore than $2,000,000 for more robust multiple module implementations. There are various attributes which determine the level of complexity, a few of which are: number of contracts; size of the portfolio; business strategy of the customer; internal business processes followed by the customer; number of business users; and branch network of the customer. The Company recognizes revenue from license contracts without major customization when a non-cancelable, non-contingent license agreement has been signed, delivery of the software has occurred, the fee is fixed or determinable, and collectability is probable. However, revenue from sale of licenses with major customization, modification, and development is recognized on a percentpercentage of completion basis. Implementation related services, including configuration, data migration and third party interfaces are recognized in accordance with the percentage of completion method. Maintenance and support related services are then provided on a continued basis. The annual maintenance fee, which typically is an agreed upon percentage of overall monetary value of the license, then becomes an ongoing revenue stream realized on yearly basis. Revenue from software services includes fixed price contracts and is recognized in accordance with the percentage of completion method using the output measure of “Unit of Work Completed.”
Joint Ventures
NetSol-Innovation
In November 2004, the Company entered into a joint venture agreement with the Innovation Group calledforming NetSol-Innovation (Pvt) Ltd., (“NetSol-Innovation”), a Pakistani company. NetSol-Innovation provides support services enabling the Innovation Group to scale solution delivery operations in key growth markets. NetSol-Innovation operations are centered in NetSol’s delivery center in Lahore, Pakistan. NetSol owns a majority of the venture. The entities share in the profits of the joint venture on the basis of their shareholding. The outsourcing model between the Innovation Group and NetSol involves services pertaining to business analyses, configuration, testing, software quality assurance, technical communication as well as project management for development of software for the Innovation Group. Today, NetSol has developed extensive expertise across the insurance domain making it a center of excellence.
Initiated with a 10 person outsourcing team in Lahore in February 2005, this arrangement has extended to 165over 200 persons with the additional resources catering to the increased influx of outsourcing of configuration and testing assignments from the Innovation Group. Prominent Innovation Group’s customers being serviced from Lahore include GuideOne USA, Homesite USA, UPC USA, MDU UK and Real Australia.
Virtual Lease Services
Virtual Lease Services (VLS) is a joint venture partnership with NTE and Investec Bank in London, UK. VLS provides an asset finance services proposition complementing our core solutions offerings. VLS provides three core services, covering business process outsourcing (BPO), provision of standby servicing to the securitization markets, and audit services. The cornerstone of VLS’s range of services is the BPO offering which provides portfolio management to a range of businesses, including start-ups, growth businesses, and those in run down mode. The BPO service also supports portfolio acquirers. VLS carries a Fitch ABS Primary Servicer Rating of “ABPS3”, upgraded from “ABPS3-” in October 2014.
Alliances
Daimler Financial Services (“DFS”) Asia Pacific has established an “Application Support Centre (ASC)” in Singapore to facilitate the regional companies in NFS™ related matters. This ASC is powered by highly qualified technical and business personnel. ASC NFS in conjunction with our Asia Pacific Region are supporting DFS companies in seven different countries in Asia and this list can increase as other DFS companies from other countries also opt for NFS™. In July 2008, the Company entered into a Frame Agreement with Daimler Financial Services AG (“DFS”) for the Asia Pacific and Africa regions. This agreement was renewed in October 2010 for an additional 3 year term and renewed again in 2013. The agreement serves as a base line for use of the NFS™ products by DFS companies and affiliated companies.
Technical Affiliations
The Company is a Microsoft Certified GOLDSilver Partner and an Oracle Certified Partner.
Marketing and Selling
NetSol management continues its optimism that the Company will experience ever increasing opportunities for its product and services offerings in 20152016 and beyond. The objective of the Company'sCompany’s marketing program is to create and sustain preference and loyalty for NetSol as a leading provider of enterprise solutions, e-services consulting, software solutions and business process outsourcing.NetSol. Marketing is performed at the corporate and business unit levels. The corporate marketing department has overall responsibility for communications, advertising, public relations and the website. In addition, Corporate Marketingcorporate marketing oversees engineers as well as central marketing and communications programs for use by each of the business units.
Our dedicated marketing personnel, within the regions, undertake a variety of marketing activities, including sponsoring focused client events to demonstrate our skills and products, sponsoring and participating in targeted conferences and holding private briefings with individual companies. We believe that the industry focus of our sales professionals and our business unit marketing personnel enhances their knowledge and expertise in these industries and will generate additional client engagements.
The Markets
NetSol provides its services primarily to clients in global commercial industries. In the global commercial area, the Company'sCompany’s service offerings are marketed to clients in a wide array of industries including, automotive, chemical, textiles, Internet marketing, software, medical, banks, higher education and telecommunication associations and financial services.
The Asian continent, including Australia and New Zealand, from the perspective of marketing, are targeted by the Asia Pacific Region from its Bangkok, Beijing and Lahore facilities. The marketing for our core offerings in the Americas and Europe is carried out from our San Francisco Bay Area and London Metropolitan area offices.
People and Culture
The Company believes it has developed a strong corporate culture that is critical to its success. Its key values are delivering world-class quality software, client-focused timely delivery, leadership, long-term relationships, creativity, openness and transparency and professional growth. The services provided by NetSol require proficiency in many fields, such as software engineering, project management, business analysis, technical writing, sales and marketing, and communication and presentation skills.
Due to the growing demand for our core offerings and IT services, retention of technical and management personnel is essential. We have enhanced the compensation structure for our technical teams and senior management to stay ahead of global and regional competition. As a result, we have improved IT employee turnover from almost 20% in 2012 to less than 8%10% today. This is a significant milestone towards building capacity and driving revenue growth. In addition, we are committed to improving key performance indicators such as efficiency, productivity and revenue per employee.
To encourage all employees to build on our core values, we reward teamwork and promote individuals that demonstrate these values. We believe that our growth and success are attributable in large part to the high caliber of our employees and our commitment to maintain the values on which our success has been based. NetSol is an equal opportunity employer with over 25% female employees with the biggest concentration in Lahore and our U.S. headquarters.
NetSol believes it should give back to the community and employees as much as possible. Certain of our subsidiaries are located in regions where basic services are not readily available. Where possible, NetSol acts to not only improve the quality of life of its employees but also the standard of living in these regions. Examples of such programs are:
| Humanitarian |
| ● | Literacy |
| ● | Noble Cause |
| ● | Day Care |
| ● | Preventative Health Care |
There is significant competition for employees with the skills required to perform the services we offer. The Company runs an elaborate training program for different cadre of employees to cover technical skills and business domain knowledge, as well as communication, management and leadership skills. The Company believes that it has been successful in its efforts to attract and retain the highest level of talent available, in part because of the emphasis on core values, training and professional growth. We intend to continue to recruit, hire and promote employees who share our vision.
As of June 30, 2014,2015, we had 1,379 full-time employees and 10 part-timeapproximately 1,590 employees; comprised of 1,0421,195 IT project and technical personnel; and 347395 non-IT personnel. The non-ITIT project and technical personnel include 36870 employees in management, 63dedicated to NFS and NFS Ascent™, 195 employees in salesdedicated to the joint venture with The Innovation Group and marketing, 36130 employees in accounting, 40 in customer support,supporting the regional offerings as well as IT consulting and 172 in general and administration.services, None of our employees are subject to a collective bargaining agreement.
Competition
Neither a single company, nor a small number of companies, dominate the IT market in the space in which the Company competes. A substantial number of companies offer services that overlap and are competitive with those offered by NetSol. Some of these are large industrial firms, includinginclude computer manufacturers and computer consulting firms that have greater financial resources than NetSol and, in some cases, may have greater capacity to perform services similar to those provided by NetSol.
In the NFS™ business space, the barriers to entry are getting higher. The products are becoming more cutting-edge while richness in functionality is paramount. Older companies have prolonged the life of their legacy products by creating web-based front ends, while the core of the systems has not been re-engineered. In the case of NFS™, we compete chiefly against leading suppliers of IT solutions to the financial industry, including names such as White Clarke, Fimasys, International Decision Systems (IDS), Data Scan, CHP Consulting, 3i Infotech, Finnone and Nucleus Software.
In the IT based business services areas, we compete with both smaller local firms and many global IT services providers, including names such as Wipro, InfoSys, Satyam Infoway, HCL and TCS (Tata Consulting).
Many of the competitors of NetSol have longer operating history, larger client bases, and longer relationships with clients, greater brand or name recognition and significantly greater financial, technical, and public relations resources than NetSol. Existing or future competitors may develop or offer services that are comparable or superior to ours at a lower price, which could have a material adverse effect on our business, financial condition and results of operations.
| 8 |
Customers
NetSol customers include world renowned auto manufacturers through their finance arms and large regional banks. In addition, NetSol provides offshore development and testing services to Innovation Group Plc UK and their blue chip global insurance giants like Allstate, Cendent, etc.customers through the NetSol-Innovation joint venture, which contributes to about 13.7%12% of NetSol’s revenues. NetSol is also a strategic business partner for Daimler (which consists of a group of many companies in different countries), which accounts for 17.42%13% of our revenue. Toyota Motors (which consists of a group of many companies in different countries) accounts for 7.24% of our revenues. Nissan Auto Finance (which consists of a group of many companies in different countries) accounts for 6.3% of our revenues.
Global Operations and Geographic Data
The Company divides its operations into three regionsregions: the Americas, Europe and Asia Pacific. The regions consist of individual subsidiaries which operate as autonomous companies and are strategically managed on a regional basis.
The Americas
At NetSol Technologies Americas, Inc. (“NTA”), the operations are led by Farooq Ghauri. Mr. Farooq Ghauri is a technology industry expert with a 10 year proven track record in driving the rapid expansion of an industry leading global software organization. He has been working in NTA since 2008 as an active member of the management team. He has worked in NetSol’s Pakistan, China, Australia, Thailand and US offices providing him with the complete understanding of NetSol’s global operations in an industry that is rapidly expanding and changing.
Europe
NTE is headed by Jeffrey Andrews,Paul Stevens as Operations Director, Tony Langford as head of sales in the U.K.CIO Europe and Tim O'SullivanO’Sullivan as headHead of sales, Europe.
VLS is led by Louise Ikonomides. As Managing Director and founding shareholder of VLS, Ms. Ikonomides has been with VLS since its inception in 1999 and with NetSol since the VLS acquisition.
Asia Pacific Region
NetSol Technologies, Ltd., a majority owned subsidiary of parent company is located in Lahore, Pakistan and is headed by Salim Ghauri as its CEO. Mr. Ghauri is a co-founder of NetSol Technologies and has been with the Company since 1996.
NetSol Beijing is headed by Naeem Aftab. He has been with NetSol for over 1011 years where he has gained valuable experience in both technology and management.
NetSol Thai is headed by Asad Ghauri as President of Asia Pacific Region which is run from our Bangkok office. Mr. Asad Ghauri has been with NetSol for almost 1011 years and was elected for the first time to NetSol’s board of directors in June 2014.
The Global Sales Division is headed by Naeem Ghauri as President of Sales from the NetSol Thai offices located in Bangkok. Mr. Naeem Ghauri has been with NetSol since 1999 and has over 2526 combined years of experience in business and IT. He is also a member of the board of directors of the parent Company.
The Asia Pacific region including Australia/New Zealand and the Middle East, is targeted from the Asia Pacific region offices located in Beijing China; Bangkok, Thailand; Lahore and Lahore,Karachi, Pakistan. While Lahore continues to be a mainstay of the Company’s delivery and research and development, Bangkok’s expanded deliverysales operation and research and developmentclient relations facility has grown into a vibrant delivery center as well as a back-up to the Lahore facility. With the continued growth of the Chinese market, our Beijing office continues to expand as both a sales and support facility. Finally, the Asia Pacific region maintains and will establish offices through the region as is necessary to support its customers and to explore potential markets.
Our Asia Pacific Region accounted for approximately 69.06%75% of our revenues in 20142015 and our North America and European regions together accounted for approximately 30.94%25% of our revenues in 2014.2015. Information regarding financial data by geographic areas is set forth in Item 7 and Item 8 of this Annual Report on form 10-K. See note 17 of Notes to Consolidated Financial Statements under Item 8.
The Company is committed to regaining and extending the advantages of its direct model approach by moving even greater volumes of product sales, service and support to the Internet. The Internet provides greater convenience and efficiency to customers and, in turn, to the Company. The company maintains its corporate website at www.netsoltech.com. NetSol’s software development and SQA team as well as its clients use its web based customer relationship management solution (HelpDesk) for timely and direct communication, as part of providing ongoing support and maintenance services. More details can be found on http://www.netsolhelp.com.
The Company relies upon a combination of nondisclosure and other contractual arrangements, as well as common law trade secret, copyright and trademark laws to protect its proprietary rights. The Company enters into confidentiality agreements with its employees, generally requires its consultants and clients to enter into these agreements, and limits access to and distribution of its proprietary information. The NetSol logo and name, as well as the NFS logo and product name have been copyrighted and trademark registered in Pakistan. The NetSol logo and BestShoring® name has been registered with the U.S. Patent and Trademark Office. An application has been filed to trademark the NFS Ascent™ with the U.S. Patent and Trademark Office and is currently being processed. The Company intends to trademark and copyright its intellectual property as necessary and in the appropriate jurisdictions.
Governmental Approval and Regulation
Current Company operations do not require specific governmental approvals. Like all companies, including those with multinational subsidiaries, we are subject to the laws of the countries in which the Company maintains subsidiaries and conducts operations. Pakistani law allows a tax exemption on income from exports of IT services and products up to 2016. While foreign based companies may invest in Pakistan, repatriation of their investment, in the form of dividends or other methods, requires approval of the State Bank of Pakistan.
Available Information
Our website is located atwww.netsoltech.com, and our investor relations website is located athttp://www.netsoltech.com/IR/ir.netsoltech.com. The following filings are available through our investor relations website after we file with the SEC: Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and our Proxy Statements for our annual meetings of stockholders. These filings are also available for download free of charge on our investor relations website. We also provide a link to the section of the SEC’s website atwww.sec.gov that has all of our public filings, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, our Proxy Statements and other ownership related filings. Further, a copy of this Annual Report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases, and blogs as part of our investor relations website. Investors and others can receive notifications of new information posted on our investor relations website by signing up for e-mail alerts. Further corporate governance information, including our committee charters and code of conduct, is also available on our investor relations website athttp://www.netsoltech.com/us/investors/corporate-governance/lang/en.ir.netsoltech.com/governance-docs. The content of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
Not applicable
ITEM 2 - 2. PROPERTIES
Our corporate headquarters are located in an approximatelyCalabasas, California where we lease 7,210 square foot building that we lease at 24025 Park Sorrento, Suite 410, Calabasas, CA 91302.
ITEM 3 - 3. LEGAL PROCEEDINGS
OnAs previously disclosed, on July 25, 2014, a Federal Securitiespurported class action lawsuit entitled lawsuits were filed in the U.S. District Court for the Central District of California against the Company and three of its current or former officers and/or directors, which have been consolidated under the captionRand-Heart of New York, Inc. v. NetSol Technologies, Inc., Najeeb Ghauri, Naeem Ghauri,et al., Case No. 2:14-cv-05787 PA (SHx). Plaintiffs subsequently filed a consolidated complaint, which asserted claims under Sections 10(b) and Salim Ghauri was filed in Central District20(a) of California. The action generally alleges the Company violated certain federal securities laws bySecurities Exchange Act of 1934 premised on allegedly issuing false and misleading statements regarding the Company’s product and business prospect of that product. Specifically, the complaint alleges the next generation product, did not exist as ofNFS Ascent, and whether it was truly available on a global basis when stated. After several successful motions by the Company, the Court granted the plaintiff a final opportunity to amend the complaint on a narrowed basis. The amended complaint was filed which contained a much narrowed class period from October 2013 to November 8, 20112013, eliminated all but one of the individual defendants from the suit, and there was no reasonable basis for stating that there was a growing interest or serious interest inlimited the product;scope of the product had been gaining momentum or that it had been well received.alleged claims. The plaintiffCompany has allegedfiled an answer to this final amended complaint.
The Company continues to believe the class periodamended allegations are meritless and intends to be between November 12, 2009 and November 8, 2013. The complaint initially alleges damages of $1,000,000.vigorously defend all claims asserted. The Company has engaged counsel and believeshas liability insurance. Given the lawsuit to be meritless and intends to vigorously defend the action including but not limited to motions to dismiss. Asearly stage of the datelitigation, however, at this time the Company is unable to form a professional judgment that an unfavorable outcome is either probable or remote, and it is not possible to assess whether or not the outcome of this report,these proceedings will or will not have a class had not yet been established.
ITEM 4 – 4. MINE SAFETY DISCLOSURES
Not applicable.
| 11 |
ITEM 5 - 5. MARKET FOR REGISTRANT'SREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITY
(a) MARKET FOR REGISTRANT'SREGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION - Common stock of NetSol Technologies, Inc. is listed and traded on NASDAQ Capital Market under the ticker symbol "NTWK"“NTWK”.
The table shows the high and low intra-day prices of the Company'sCompany’s common stock as reported on the composite tape of the NASDAQ for each quarter during the last two fiscal years. Stock prices have been adjusted to reflect the Company’s 1 for 10 reverse stock split on August 13, 2012.
| Fiscal Year 2014 | High | Low | ||||||
| First Quarter | $ | 12.10 | $ | 9.70 | ||||
| Second Quarter | $ | 10.45 | $ | 4.25 | ||||
| Third Quarter | $ | 7.09 | $ | 4.40 | ||||
| Fourth Quarter | $ | 4.82 | $ | 3.60 | ||||
| Fiscal Year 2013 | High | Low | ||||||
| First Quarter | $ | 6.95 | $ | 4.00 | ||||
| Second Quarter | $ | 6.75 | $ | 5.45 | ||||
| Third Quarter | $ | 13.74 | $ | 5.88 | ||||
| Fourth Quarter | $ | 14.01 | $ | 9.14 | ||||
| Fiscal Year 2015 | High | Low | ||||||
| First Quarter | $ | 4.19 | $ | 2.68 | ||||
| Second Quarter | $ | 4.5 | $ | 2.81 | ||||
| Third Quarter | $ | 6.4 | $ | 3.91 | ||||
| Fourth Quarter | $ | 6.5 | $ | 5.05 | ||||
| Fiscal Year 2014 | High | Low | ||||||
| First Quarter | $ | 12.1 | $ | 9.7 | ||||
| Second Quarter | $ | 10.45 | $ | 4.25 | ||||
| Third Quarter | $ | 7.09 | $ | 4.4 | ||||
| Fourth Quarter | $ | 4.82 | $ | 3.6 | ||||
RECORD HOLDERS - As of September 5, 2014,4, 2015, the number of holders of record of the Company'sCompany’s common stock was 169.
DIVIDENDS - The Company has not paid dividends on its Common Stock in the past two fiscal years.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLAN
The table shows information related to our equity compensation plans as of June 30, 2014:
Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) | |
Equity Compensation Plans approved by Security holders | 920,586(1) | $6.76(2) | 780,620(3) |
Equity Compensation Plans not approved by Security holders | None | None | None |
| Total | 920,586 | $6.76 | 780,620 |
| Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) | ||||||||||
| Equity Compensation Plans approved by Security holders | 708,133 | (1) | $ | 6.84 | (2) | 1,668,619 | (3) | |||||
| Equity Compensation Plans not approved by Security holders | None | None | None | |||||||||
| Total | 708,133 | $ | 6.84 | 1,668,619 | ||||||||
| (1) | Consists of 1,000 under the 2003 Incentive and Nonstatutory Stock Option Plan; 11,000 under the 2004 Incentive and Nonstatutory Stock Option Plan; 115,462 under the 2005 Incentive and Nonstatutory Stock Option Plan; 130,000 under the 2011 Incentive and Nonstatutory Stock Option Plan; and |
| (2) | The weighted average of the options is |
| (3) | Represents 87 available for issuance under the 2002 Incentive and Nonstatutory Stock Option Plan; 2,000 under the 2003 Incentive and Nonstatutory Stock Option Plan; 39,474 under the 2004 Incentive and Nonstatutory Stock Option Plan; 59,053 under the 2005 Incentive and Nonstatutory Stock Option |
(b) RECENT SALES OF UNREGISTERED SECURITIES
In April 2014,2015, the Company issued 25,00065,997 shares of common stock to employees as part3 non-US resident accredited investors at a per share price of their compensation for services rendered for the quarter ended March 31, 2014.$4.35. The shares were issued basedin reliance on an exemption from registrationavailable under Rule 4(6)Regulation S of the Securities Act of 1933, as amended.
In April 2014,May 2015, the Company issued 1,72522,727 shares of common stock to its independent directors as part1 non-US resident accredited investor at a per share price of their compensation for services rendered for the quarter ended March 31, 2014.$4.40. The shares were issued basedin reliance on an exemption from registrationavailable under Rule 4(6)Regulation S of the Securities Act of 1933, as amended.
In May 2015, the Company issued 10,000 shares of common stock to 1 non-US resident accredited investor at a per share price of $4.46. The shares were issued in reliance on an exemption available under Regulation S of the Securities Act of 1933. The proceeds were used to fund working capital.
In June 2015, the Company issued 14,961 shares of common stock to 1 non-US resident accredited investor at a per share price of $4.34. The shares were issued in reliance on an exemption available under Regulation S of the Securities Act of 1933. The proceeds were used to fund working capital.
ITEM 6 – 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7- MANAGEMENT'S7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATIONS
The following discussion is intended to assist in an understanding of NetSol’s financial position and results of operations for the year ended June 30, 2014.2015. It should be read together with our consolidated financial statements and related notes included under Item 8 of this Annual Report on Form 10-K.
A few of our highlighthighlights for 2013-20142014-2015 were:
NetSol PK signed an agreement valued at more than $16 million over a period of five years to implement NFS AscentTM. The | ||
| ● | NetSol China signed an agreement with |
| ● | NetSol PK signed an agreement to implement NFS™ at a |
| ● | Signed an agreement with Tesla Financial Services GmbH to license LeaseSoft and provide business process outsourcing services; | |
| ● | Added 50 additional licenses to a leading automotive manufacturer’s current LeasePak portfolio; and | |
| ● | NTA signed an upgrade project for LeasePak 6.5 with a major automotive captive in the U.S. |
Our success, in the near term, will depend, in large part, on the Company'sCompany’s ability to: (a) continue to grow revenues and improve profits, (b) adequately capitalize for growth in various markets and verticals; (c) make progress in the North American and European markets and, (d) continue to streamlineincrease sales and marketing efforts in every market we operate. However, management'smanagement’s outlook for the continuing operations, which has been consolidated and has been streamlined, remains optimistic.
Marketing and Business Development Activities
Management has developed, and the board of directors has ratified, an aggressive 3-5 year growth strategy aimed at increasing competitiveness, enhancing global delivery capabilities and increasing financial strength to become a leading global IT institution in the leasing and finance space.
The growth strategy contemplates the following enhanced activities and initiatives to accomplish these goals:
| Continue to advance infrastructure and systems in Lahore, Bangkok, Beijing and San Francisco locations. |
| ● | Strengthen the NetSol brand in the Americas and Europe and further |
| ● | Hire and retain the best available talent to develop the next line of managers for our growing demand. |
| ● | Maximize penetration into new and existing smaller markets by increasing the sales activities for our legacy version of NFS™ in emerging markets in Latin America, APAC, and the Middle Eastern where the legacy product is better suited to middle market companies with limited IT budgets yet growing leasing volumes. | |
| ● | Develop the sales and delivery capabilities for the Americas markets, in particular the growth in the |
| ● | Maintain the quality of our delivery, after delivery support, and client relationships. | |
| ● | Further penetration of NFS Ascent™ into the leasing and financing sectors in China, APAC, Europe and North America by focusing on multi-national auto captive Fortune 500 companies. | |
| ● | Continue to develop new tools, systems and processes to further enhance productivity, efficiencies and operating margins. |
Growth Prospects for NFS™
Growth prospects for NFS™ are linked to the maturing of the product portfolio and its growing customer base across different geographic and product markets. NetSol is eyeing key international markets for growth in sales. Its sales strategy now carefully balances expansion into new geographic markets, including North and South America, and further penetration of our leading position in Asia Pacific.
Growth in North America is expected to come from the huge potential market for replacement of legacy systems. NFS Ascent™ is aimed at providing a highly flexible solution based on latest technology and advanced architecture for the North American customers looking to replace their legacy systems.
Growth in Europe will come from the introduction of NFS AscentTM, which will allow NTE to support larger organizations than those typically selecting the existing LeaseSoft product set, and also opens the door for European expansion. This will attract larger license and professional services revenues across a wider geography. In addition, leveraging the core strengths of NFS AscentTM will increasingly provide opportunities in the automotive sector where NTE is currently underrepresented.
Growth in NetSol’s traditionally strong base in Asia Pacific is expected through diversification across market segments, to include new customers in related banking and commercial lending areas. At the same time, the existing customer base is tapped for increased service and maintenance revenues by offering enhanced features and new solutions to emerging customer needs. In addition, there is a potential for NFS AscentTM in Asia Pacific in the form of existing customers who are looking for replacement of their current system.
In China, NetSol is a leader in the leasing and finance enterprise solution domain. With this position, NetSol continues to enjoy demand for the current NFS™ solution, as well as NFS Ascent™. NetSol will continue strengthening its position within existing multinational auto manufacturers, as well as, local Chinese captive finance and leasing companies.
In Thailand, NetSol established an alternate development, delivery and sales center transferring key personal and knowledge to the region. Our operation in Bangkok serves a very robust and growing market for leasing companies and regional banks.
| 14 |
MATERIAL TRENDS AFFECTING NETSOL
Management has identified the following material trends affecting NetSol.
Positive trends:
| Improving |
| ● | China to invest $46 billion in Pakistan on energy and infrastructure projects. | |
| ● | Improving Pakistan economy after years of stagnation. | |
| ● | According to IHS Automotive research, US Auto manufactures estimate nearly 17 million units of new car sales in 2015, the highest in a decade. | |
| ● | Improving economic environment in the |
| ● | New emerging markets and IT destinations in Thailand, Malaysia, Indonesia, China and Australia. |
| ● | Continued interest from Fortune 500 multinational auto captives and global companies in |
| ● | Continued interest from existing clients in |
| ● | Growing demand for NFS Ascent™ by existing Tier One auto |
| ● | Higher caliber and quality talent joining NetSol, globally. | |
| ● | Reduced employee turnover to under 10% from 20% in 2014. |
Negative trends:
| ● | Geopolitical unrest in the Middle |
| ● | Restricted liquidity and financial burden due to tighter internal processes and limited budgets might cause delays in the receivables from some clients. |
| ● | The threats of conflict between the |
| Political challenges in Pakistan | ||
| ● | Uncertainty about the stability of the Chinese market. |
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).
Vendor 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.
COST OF REVENUES
Cost of revenues includes salaries and benefits for technical employees, consultant costs, amortization of capitalized computer software development costs, depreciation of computer and equipment, travel costs, and indirect costs such as rent and insurance.
INTANGIBLE ASSETS
Intangible assets consist of product licenses, renewals, enhancements, copyrights, trademarks, trade names, and customer lists. Intangible assets with finite lives are amortized over the estimated useful life and are evaluated for impairment at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We assess recoverability by determining whether the carrying value of such assets will be recovered through the discounted expected future cash flows. If the future discounted cash flows are less than the carrying amount of these assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.
SOFTWARE DEVELOPMENT COSTS
Costs incurred to internally develop computer software products or to enhance an existing product are recorded as research and development costs and expensed when incurred until technological feasibility for the respective product is established. Thereafter, all software development costs are capitalized and reported at the lower of unamortized cost or net realizable value. Capitalization ceases when the product or enhancement is available for general release to customers.
The Company makes on-going evaluations of the recoverability of its capitalized software projects by comparing the amount capitalized for each product to the estimated present value of future net income from the product. If such evaluations indicate that the unamortized software development costs exceed the present value of expected future net income, the Company writes off the amount which the unamortized software development costs exceed such present value. Capitalized and purchased computer software development costs are being amortized ratably based on the projected revenue associated with the related software or on a straight-line basis.
GOODWILL
Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase businesses combination. Goodwill is reviewed for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the carrying amount of goodwill may be impaired. The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. 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 source of the Company’s goodwill relates to the acquisition of four companies. NetSol PK operates in the Asia Pacific region; CQ Systems (now NetSol Technologies Europe Limited) and VLS both operate in Europe; and McCue Systems ( now(now NetSol Technologies Americas, Inc.) operates in the North American region. All these geographies are considered as different reporting segments. Goodwill arising from the acquisition of these companies has been allocated to their respective geographical segments to which they relate. While identifying reporting segments, we take into consideration the reports reviewed by the CEO (chief operating decision maker). As our financial reports are analyzed on this regional basis, we have defined this as segment reporting for purposes of goodwill impairment testing. The reporting unit detail of goodwill as of June 30, 2014 and 2013 is given below:
As of June 30, 2013 | Impairment | As of June 30, 2014 | ||||||||||
| NetSol PK | $ | 1,166,610 | $ | - | $ | 1,166,610 | ||||||
| NetSol Omni | 136,762 | (136,762 | ) | - | ||||||||
| NTE | 3,471,814 | - | 3,471,814 | |||||||||
| VLS | 214,044 | - | 214,044 | |||||||||
| NTA | 4,664,100 | - | 4,664,100 | |||||||||
| Total | $ | 9,653,330 | $ | (136,762 | ) | $ | 9,516,568 | |||||
RESULTS OF OPERATIONS
THE YEAR ENDED JUNE 30, 20142015 COMPARED TO THE YEAR ENDED JUNE 30, 2013
The following table sets forth the items in our consolidated statement of operations for the years ended June 30, 20142015 and 20132014 as a percentage of revenues.
For the Year Ended June 30, | ||||||||||||||||
| 2014 | % | 2013 | % | |||||||||||||
| Net Revenues: | ||||||||||||||||
| License fees | $ | 5,433,053 | 14.93 | % | $ | 17,756,447 | 35.62 | % | ||||||||
| Maintenance fees | 10,527,216 | 28.93 | % | 9,550,471 | 19.16 | % | ||||||||||
| Services | 15,453,740 | 42.7 | % | 18,807,962 | 37.73 | % | ||||||||||
| Services-related party | 4,970,794 | 13.66 | % | 3,734,583 | 7.49 | % | ||||||||||
| Total net revenues | 36,384,803 | 100.00 | % | 49,849,463 | 100.00 | % | ||||||||||
| Cost of revenues: | ||||||||||||||||
| Salaries and consultants | 15,621,806 | 42.93 | % | 11,256,982 | 22.58 | % | ||||||||||
| Travel | 1,705,554 | 4.69 | % | 1,673,988 | 3.36 | % | ||||||||||
| Depreciation and amortization | 6,844,588 | 18.81 | % | 3,666,102 | 7.35 | % | ||||||||||
| Other | 3,548,392 | 9.75 | % | 3,704,667 | 7.43 | % | ||||||||||
| Total cost of revenues | 27,720,340 | 76.19 | % | 20,301,739 | 40.73 | % | ||||||||||
| Gross profit | 8,664,463 | 23.81 | % | 29,547,724 | 59.27 | % | ||||||||||
| Operating expenses: | ||||||||||||||||
| Selling and marketing | 4,572,108 | 12.57 | % | 3,387,803 | 6.80 | % | ||||||||||
| Depreciation and amortization | 1,886,148 | 5.18 | % | 1,555,402 | 3.12 | % | ||||||||||
| General and administrative | 15,046,328 | 41.35 | % | 10,994,053 | 22.05 | % | ||||||||||
| Research and development cost | 249,712 | 0.69 | % | 158,821 | 0.32 | % | ||||||||||
| Total operating expenses | 21,754,296 | 59.79 | % | 16,096,079 | 32.29 | % | ||||||||||
| Income (loss) from operations | (13,089,833 | ) | -35.98 | % | 13,451,645 | 26.98 | % | |||||||||
| Other income and (expenses) | ||||||||||||||||
| Gain (loss) on sale of assets | (229,805 | ) | -0.63 | % | 3,682 | 0.01 | % | |||||||||
| Interest expense | (255,677 | ) | -0.70 | % | (663,967 | ) | -1.33 | % | ||||||||
| Interest income | 261,251 | 0.72 | % | 185,343 | 0.37 | % | ||||||||||
| Gain on foreign currency exchange transactions | 50,777 | 0.14 | % | 1,367,448 | 2.74 | % | ||||||||||
| Share of net income (loss) from equity investment | (545,483 | ) | -1.50 | % | 482,664 | 0.97 | % | |||||||||
| Amortization of financing costs | - | 0.00 | % | (635,882 | ) | -1.28 | % | |||||||||
| Other income | 50,578 | 0.14 | % | 148,298 | 0.30 | % | ||||||||||
| Total other income (expenses) | (668,359 | ) | -1.84 | % | 887,586 | 1.78 | % | |||||||||
| Net income (loss) before income taxes | (13,758,192 | ) | -37.81 | % | 14,339,231 | 28.77 | % | |||||||||
| Income tax provision | (338,282 | ) | -0.93 | % | (465,426 | ) | -0.93 | % | ||||||||
| Net income (loss) from continuing operations | (14,096,474 | ) | -38.74 | % | 13,873,805 | 27.83 | % | |||||||||
| Income (loss) from discontinued operations net of gain on disposal | 1,158,752 | 3.18 | % | (1,785,750 | ) | -3.58 | % | |||||||||
| Net income (loss) | (12,937,722 | ) | -35.56 | % | 12,088,055 | 24.25 | % | |||||||||
| Non-controlling interest | 1,581,675 | 4.35 | % | (4,224,912 | ) | -8.48 | % | |||||||||
| Net income attributable to NetSol | $ | (11,356,047 | ) | -31.21 | % | $ | 7,863,143 | 15.77 | % | |||||||
| For the Year | ||||||||||||||||
| Ended June 30, | ||||||||||||||||
| 2015 | % | 2014 | % | |||||||||||||
| Net Revenues: | ||||||||||||||||
| License fees | $ | 6,328,989 | 12.40 | % | $ | 5,433,053 | 14.93 | % | ||||||||
| Maintenance fees | 12,196,073 | 23.89 | % | 10,034,681 | 27.58 | % | ||||||||||
| Services | 24,827,822 | 48.64 | % | 15,230,708 | 41.86 | % | ||||||||||
| Maintenance fees - related party | 395,951 | 0.78 | % | 492,535 | 1.35 | % | ||||||||||
| Services - related party | 7,299,743 | 14.30 | % | 5,193,826 | 14.27 | % | ||||||||||
| Total net revenues | 51,048,578 | 100.00 | % | 36,384,803 | 100.00 | % | ||||||||||
| Cost of revenues: | ||||||||||||||||
| Salaries and consultants | 19,289,536 | 37.79 | % | 15,621,806 | 42.93 | % | ||||||||||
| Travel | 2,374,864 | 4.65 | % | 1,705,554 | 4.69 | % | ||||||||||
| Depreciation and amortization | 8,336,857 | 16.33 | % | 6,844,588 | 18.81 | % | ||||||||||
| Other | 3,020,107 | 5.92 | % | 3,548,392 | 9.75 | % | ||||||||||
| Total cost of revenues | 33,021,364 | 64.69 | % | 27,720,340 | 76.19 | % | ||||||||||
| Gross profit | 18,027,214 | 35.31 | % | 8,664,463 | 23.81 | % | ||||||||||
| Operating expenses: | ||||||||||||||||
| Selling and marketing | 6,092,530 | 11.93 | % | 4,572,108 | 12.57 | % | ||||||||||
| Depreciation and amortization | 2,006,957 | 3.93 | % | 1,886,148 | 5.18 | % | ||||||||||
| General and administrative | 14,778,641 | 28.95 | % | 15,046,328 | 41.35 | % | ||||||||||
| Research and development cost | 314,892 | 0.62 | % | 249,712 | 0.69 | % | ||||||||||
| Total operating expenses | 23,193,020 | 45.43 | % | 21,754,296 | 59.79 | % | ||||||||||
| Loss from operations | (5,165,806 | ) | -10.12 | % | (13,089,833 | ) | -35.98 | % | ||||||||
| Other income and (expenses) | ||||||||||||||||
| Loss on sale of assets | (64,598 | ) | -0.13 | % | (229,805 | ) | -0.63 | % | ||||||||
| Interest expense | (166,962 | ) | -0.33 | % | (255,677 | ) | -0.70 | % | ||||||||
| Interest income | 331,432 | 0.65 | % | 261,251 | 0.72 | % | ||||||||||
| Gain (loss) on foreign currency exchange transactions | (453,770 | ) | -0.89 | % | 50,777 | 0.14 | % | |||||||||
| Share of net loss from equity investment | - | 0.00 | % | (545,483 | ) | -1.50 | % | |||||||||
| Other income | 684,030 | 1.34 | % | 50,578 | 0.14 | % | ||||||||||
| Total other income (expenses) | 330,132 | 0.65 | % | (668,359 | ) | -1.84 | % | |||||||||
| Net loss before income taxes | (4,835,674 | ) | -9.47 | % | (13,758,192 | ) | -37.81 | % | ||||||||
| Income tax provision | (413,498 | ) | -0.81 | % | (338,282 | ) | -0.93 | % | ||||||||
| Net loss from continuing operations | (5,249,172 | ) | -10.28 | % | (14,096,474 | ) | -38.74 | % | ||||||||
| Income from discontinued operations | - | 0.00 | % | 1,158,752 | 3.18 | % | ||||||||||
| Net loss | (5,249,172 | ) | -10.28 | % | (12,937,722 | ) | -35.56 | % | ||||||||
| Non-controlling interest | (299,646 | ) | -0.59 | % | 1,581,675 | 4.35 | % | |||||||||
| Net loss attributable to NetSol | $ | (5,548,818 | ) | -10.87 | % | $ | (11,356,047 | ) | -31.21 | % | ||||||
Net revenues for the years ended June 30, 2015 and 2014 by each subsidiary and corresponding geographical region:
| 2014 | 2013 | |||||||||||||||
| Revenue | % | Revenue | % | |||||||||||||
| Corporate headquarters | $ | - | 0.00 | % | $ | - | 0.00 | % | ||||||||
| North America: | ||||||||||||||||
| NTA | 4,729,908 | 13.00 | % | 5,796,484 | 11.63 | % | ||||||||||
| 4,729,908 | 13.00 | % | 5,796,484 | 11.63 | % | |||||||||||
| Europe: | ||||||||||||||||
| NTE | 4,471,175 | 12.29 | % | 6,183,202 | 12.40 | % | ||||||||||
| VLS | 2,058,136 | 5.66 | % | 1,655,440 | 3.32 | % | ||||||||||
| 6,529,311 | 17.95 | % | 7,838,642 | 15.72 | % | |||||||||||
| Asia-Pacific: | ||||||||||||||||
| NetSol PK | 14,609,179 | 40.15 | % | 22,605,831 | 45.35 | % | ||||||||||
| Netsol-Innovation | 4,970,794 | 13.66 | % | 3,734,583 | 7.49 | % | ||||||||||
| Connect | 863,620 | 2.37 | % | 760,795 | 1.53 | % | ||||||||||
| Abraxas | 639,218 | 1.76 | % | 1,359,322 | 2.73 | % | ||||||||||
| NTPK Thailand | 1,106,887 | 3.04 | % | 7,433,758 | 14.91 | % | ||||||||||
| NetSol Beijing | 2,935,886 | 8.07 | % | 320,048 | 0.64 | % | ||||||||||
| 25,125,584 | 69.06 | % | 36,214,337 | 72.65 | % | |||||||||||
| Total | $ | 36,384,803 | 100.00 | % | $ | 49,849,463 | 100.00 | % | ||||||||
| 2015 | 2014 | |||||||||||||||
| Revenue | % | Revenue | % | |||||||||||||
| North America | 5,535,183 | 10.84 | % | 4,729,908 | 13.00 | % | ||||||||||
| Europe | 7,359,204 | 14.42 | % | 6,529,311 | 17.95 | % | ||||||||||
| Asia-Pacific | 38,154,191 | 74.74 | % | 25,125,584 | 69.06 | % | ||||||||||
| Total | $ | 51,048,578 | 100.00 | % | $ | 36,384,803 | 100.00 | % | ||||||||
Revenues
License fees
License fees for the year ended June 30, 20142015 were $5,433,053$6,328,989 compared to $17,756,447$5,433,053 for the year ended June 30, 20132014 reflecting a decreasean increase of $12,323,394.$895,936. During the fiscal year ended June 30, 2013,2015, we signed 10 licensing deals in excessmaintained our license revenues through sales of $1MM recognizing approximately $13.7MM in licensing revenue compared to two licensing deals in excess of $1MM recognizing approximately $2.2MM for the fiscal year ended June 30, 2014.
TM during the fiscal year 2015.
Maintenance fees for the year ended June 30, 20142015 were $10,527,216$12,592,024 compared to $9,550,471$10,527,216 for the year ended June 30, 20132014 reflecting an increase of $976,745.$2,064,808. Maintenance fees begin once a customer has “gone live” with our product. The increase was due to the start of new maintenance agreements from customers who went live with our product during the latter stages of fiscal year 20132014 and into fiscal year 2014. During the fiscal year ended June 30, 2014, we added new customers representing approximately $870,000 in new maintenance fees.2015. We anticipate maintenance fees to remain flat untilgradually increase as we are able to licenseimplement NFS Ascent™ to new customers.
Services
Services income for the year ended June 30, 20142015 were $20,424,534$32,127,565 compared to $22,542,545$20,424,534 for the year ended June 30, 20132014 reflecting a decreasean increase of $2,118,011. Service$11,703,031. Included in the services revenue are services provided to related parties of $7,299,743 for the year ended June 30, 2015 compared to $5,193,826 for the same period last year. The increase is due to services provided to new customers both for the implementation of the legacy systems and for the implementation of NFS Ascent as well as additional services provided to existing customers on account of customization and enhancement requests. Services revenue is derived from services provided to both current customers as well as services provided to new customers as part of the implementation process. DuringMoving forward, with the implementation of new projects of NFS AscentTM, we anticipate this element of our revenue to increase more compared to the license fee.
Gross Profit
The gross profit was $18,027,214, for the year ended June 30, 2014, our current customers continued to request changes/customizations for their current systems. However, due to the decline in license revenue, the services associated2015 as compared with implementing new systems declined significantly, which adversely impacted our services revenue for the year.
Salaries and consultant fees increased by $4,364,824$3,667,730 from $11,256,982 for the year ended June 30, 2013 to $15,621,806 for the year ended June 30, 2014.2014 to $19,289,536 for the year ended June 30, 2015. The increase in salaries and consultant fees is due to the hiring and training of technical employees at key locations including Pakistan, Thailand, China, UK and North America as we anticipate new projects associated with NFS Ascent™. In order to prepare for growth with our new product NFS AscentTM, we have continued to focus on hiring technical personnel. We had 657, 832, 1,042 and 1,0421,195 technical employees as of June 30, 2012, 2013, 2014 and 2014,2015, respectively. As a percentage of sales, salaries and consultant expense increaseddecreased from 22.58% for the year ended June 30, 2013 to 42.93% for the year ended June 30, 2014. We anticipate hiring approximately 150 technical employees during fiscal2014 to 37.79% for the year ended June 30, 2015.
Depreciation and amortization expense increased to $6,844,588$8,336,857 compared to $3,666,102$6,844,588 for the year ended June 30, 20132014 or an increase of $3,178,486.$1,492,269. Depreciation and amortization expense increased as we began amortizing the product licenses costs that had been capitalized related to the NFS Ascent™ development. Due to our emphasis on NFS Ascent™, we decided to discontinue two softwaremarketing three of our older products, and we fully amortized themthese products as of June 30, 2014. Included in the $6.8MM depreciation and2015, which added an additional $1.18 million of amortization expense is approximately $1.4MMto our cost of amortization for these products.
Operating Expenses
Operating expenses were $23,193,020 for the year ended June 30, 2015 as compared to $21,754,296, for the year ended June 30, 2014 as compared to $16,096,079, for the year ended June 30, 2013 or an increase of 35.15%6.61% or $5,658,217.$1,438,724. As a percentage of sales, it increaseddecreased from 32.29%59.79% to 59.79%45.43%. The increase in operating expenses was primarily due to the increase in selling and marketing expenses of $1,184,305$1,520,422 or 34.96% and an increase in general and administrative expenses of $3,915,513 or 36%33.25%.
The increase in selling and marketing expenses is due to the increase in our salaries and commissions, travel expenses, and business development costs to market and sell NFS Ascent™ globally. We increased the number of sales and marketing employees from 5263 at June 30, 2013 to 6383 at June 30, 2014.
General and administrative expenses is primarily due an increase in salaries of approximately $2.4MM due to annual raises, hiring of additional employees, cash bonuses, share grants, and options, an increase in bad debts of approximately $608,000, an increase in legal fees of approximately $360,000 and an impairment of goodwill of $137,000.
Income/Loss from Operations
Loss from operations was $5,165,806 for the year ended June 30, 20142015 compared to $13,089,833 for the year ended June 30, 2014. This represents a decrease of $7,924,027 for the year ended June 30, 2015 compared with the year ended June 30, 2013.2014. As a percentage of sales, net loss from operations was 10.12% for the year ended June 30, 2015 compared to 35.98% for the year ended June 30, 2014 compared to net income of 26.98% for the year ended June 30, 2013.
Other expenses were $668,359 for the year ended June 30, 2014 compared to income of $887,586 for the year ended June 30, 2013. The main reason for this shift to expense compared to other income in 2013 is the strength of the foreign currencies against the US dollar. For the year ended June 30, 2013, the Pak Rupee and the Thai Baht, along with other currencies, had greatly depreciated against the US dollar, and as a result, we recorded an exchange gain of $1,367,448 whereas the overall exchange gain remained at $50,777 for the year ended June 30, 2014.
For the year ended June 30, 2014, net income from discontinued operations after adjusting the gain on disposal was $1,158,752 compared to a loss of $1,785,750 for the year ended June 30, 2013.$1,158,752. On March 31, 2014, we sold 100% of our stock in Vroozi, Inc. for a purchase price of $2,716,050 and recognized a $1,870,871 gain on the sale. We reclassified Vroozi’s net loss for the periods presented from continuing operations to discontinued operations.
Net Income/Loss
Net loss was $5,548,818 for the year ended June 30, 2015 compared to $11,356,047 for the year ended June 30, 2014 compared to net income of $7,863,143 for the year ended June 30, 2013.2014. This is a decrease of $19,219,190$5,807,229 compared to the prior year. Net loss per share, basic and diluted, was $0.57 for the year ended June 30, 2015 compared to $1.25 for the year ended June 30, 2014 compared to net income per share, basic and diluted, of $0.96 and $0.95 for the year ended June 30, 2013.
LIQUIDITY AND CAPITAL RESOURCES
Our cash position was $14,168,957 at June 30, 2015, compared to $11,462,695 at June 30, 2014, compared to $7,874,318 at June 30, 2013.
Net cash provided by operating activities was $5,078,282 for the year ended June 30, 2015 compared to $18,634,902 for the year ended June 30, 2014 compared to $13,845,819 for the year ended June 30, 2013.2014. At June 30, 2014,2015, we had current assets of $26,862,560$31,510,665 and current liabilities of $14,613,515.$14,834,565. We had accounts receivable of $9,972,243 at June 30, 2015 compared to $7,635,775 at June 30, 2014 compared to $14,684,212 at June 30, 2013.2014. We had revenues in excess of billings of $5,267,275 at June 30, 2015 compared to $2,377,367 at June 30, 2014 compared to $15,367,198 at June 30, 2013.2014. During the year ended June 30, 2014,2015, our revenues in excess of billings were reclassified to accounts receivable pursuant to billing requirements detailed in each contract. The combined totals for accounts receivable and revenues in excess of billings decreased $20,038,268increased $5,226,376 from $30,051,410 at June 30, 2013 to $10,013,142 at June 30, 2014.2014 to $15,239,518 at June 30, 2015. The decreaseincrease is due to our efforts to collect these balances as they become due and a decreasethe increase in license and service revenue.revenues during FY 2015. Accounts payable and accrued expenses, and current portions of loans and lease obligations amounted to $5,234,887$5,952,561 and $5,791,258,$3,896,353, respectively at June 30, 2014.2015. The average days sales outstanding for the years ended June 30, 2015 and 2014 were 91 and 2013 were 201 days for each year.respectively. The days sales outstanding have been calculated by taking into consideration the average combined balances of accounts receivable and revenue in excess of billings.
Net cash used by investing activities amounted to $3,033,319 for the year ended June 30, 2015, compared to $14,739,798 for the year ended June 30, 2014, compared to $14,472,252 for the year ended June 30, 2013.2014. We had net purchases of property and equipment of $13,236,136$3,558,712 compared to $8,958,876$13,236,136 for the comparable period last fiscal year. The increase in intangible assets which represents amounts capitalized for the development of new products was $nil for the year ended June 30, 2015 and $3,385,151 for the year ended June 30, 2014 and $4,832,459 for the year ended June 30, 2013.2014. The company also received $1,810,700 for the sale of Vroozi.
Net cash provided by financing activities was $1,461,230 and the net cash used in financing activities was $233,144 and the net cash provided by financing activities was $1,690,794 for the years ended June 30, 2014,2015, and 2013,2014, respectively. The year ended June 30, 20142015 included the cash inflow of $709,436$191,400 from the exercising of stock options and warrants compared to $2,537,712$709,436 for the year ended June 30, 2013.2014. During the year ended June 30, 2014,2015, we had net payments for bank loans and capital leases of $2,880,840$2,668,861 compared to $630,714net proceeds of $363,542 for the year ended June 30, 2013.2014. We are operating in various geographical regions of the world through its various subsidiaries. Those subsidiaries have financial arrangements from various financial institutions to meet both their short and long term funding requirements. These loans will become due at different maturity dates as described in Note No. 12 of the financial statements. We are in compliance with the covenants of the financial arrangements and there is no default whatsoever, which may lead to early payment of these obligations. We anticipate paying back all these obligations on their respective due dates from its own sources.
We typically fund the cash requirements for our operations in the U.S. through our license, services, and maintenance agreements, intercompany charges for corporate services, and through the exercise of options and warrants. As of June 30, 2015, we had approximately $14.17 million of cash, cash equivalents and marketable securities of which approximately $8.97 million is held by our foreign subsidiaries. As of June 30, 2014, we had approximately $11.46 million of cash, cash equivalents and marketable securities of which approximately $8.4 million is held by our foreign subsidiaries. As of June 30, 2013, we had approximately $7.87 million of cash, cash equivalents and marketable securities of which approximately $4.77 million is held by our foreign subsidiaries. We intend to permanently reinvest these funds outside the U.S., and therefore, we do not anticipate repatriating undistributed earnings from our non-U.S. operations. If funds from foreign operations are required to fund U.S. operations in the future and if U.S. tax has not previously been provided, we would be required to accrue and pay additional U.S. taxes to repatriate these funds.
We remain open to strategic relationships that would provide value added benefits. The focus will remain on continuously improving cash reserves internally and reduced reliance on external capital raise.
As a growing company, we have on-going capital expenditure needs based on our short term and long term business plans. Although our requirements for capital expenses vary from time to time, for the next 12 months, we anticipate needing working capital of $2.5$2 to $3.5$3 million for APAC, US and Europe new business development activities and infrastructure enhancements.
While there is no guarantee that any of these methods will result in raising sufficient funds to meet our capital needs or that even if available will be on terms acceptable to us, we will be very cautious and prudent about any new capital raise given the global market uncertainties. However, we are very conscious of the dilutive effect and price pressures in raising equity-based capital.
Financial Covenants
Our UK based subsidiary, NTE, has an approved overdraft facility of £300,000 ($511,440) 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 ($1,704,800) 1,704,800) 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 PK has an approved facility for both export refinance and term finance from Askari Bank Limited amounting to Rupees 262.5300 million ($3,018,000)2,892,960) which requires NTPK to maintain a long term debt equity ratio of 60:40 and the current ratio of 1:1.
As of the date of this report, we are in compliance with the financial covenants associated with our borrowings. The maturity dates of the borrowings of respective subsidiaries may accelerate if they do not comply with these covenants. In case of any change in control in subsidiaries, they may have to repay their respective credit facilities.
Dividends and Redemption
It has been our policy to invest earnings in growth rather than distribute earnings as common stock dividends. This policy, under which common stock dividends have not been paid since our inception is expected to continue, but is subject to regular review by the Board of Directors.
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Contractual Obligations
Our 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 | $ | 632,527 | $ | 253,011 | $ | 253,011 | $ | 126,505 | $ | - | ||||||||||
| HSBC Loan | 835,899 | 346,138 | 489,761 | 0 | - | |||||||||||||||
| D&O Insurance | 54,547 | 54,547 | - | - | - | |||||||||||||||
| Habib Bank Line of Credit | 2,438,844 | 2,438,844 | - | - | - | |||||||||||||||
| Bank Overdraft Facility | - | - | - | - | - | |||||||||||||||
| Bank Loan | 2,024,087 | 2,024,087 | - | - | - | |||||||||||||||
| Loan from Related Party | 322,600 | 194,740 | 127,860 | |||||||||||||||||
| Capital Lease Obligations | - | |||||||||||||||||||
| Subsidiary Capital Leases | 1,014,834 | 479,891 | 534,943 | - | ||||||||||||||||
| - | ||||||||||||||||||||
| Operating Lease Obligations | - | |||||||||||||||||||
| Non-cancellable operating lease | 3,092,282 | 896,624 | 1,518,149 | 429,605 | 247,904 | |||||||||||||||
| - | ||||||||||||||||||||
| Total | $ | 10,415,620 | $ | 6,687,882 | $ | 2,923,724 | $ | 556,110 | $ | 247,904 | ||||||||||
| Payment due by period | ||||||||||||||||||||
| Contractual Obligation | Total | Less than 1 year | 1-3 Years | 3-5 Years | More than 5 years | |||||||||||||||
| Debt Obligations | ||||||||||||||||||||
| HSBC Loan | $ | 447,161 | $ | 322,349 | $ | 124,812 | $ | - | $ | - | ||||||||||
| D&O Insurance | 79,872 | 79,872 | - | - | - | |||||||||||||||
| Bank Loan | 2,892,961 | 2,892,961 | - | - | - | |||||||||||||||
| Loan from Related Party | 129,979 | 129,979 | - | - | ||||||||||||||||
| Capital Lease Obligations | - | |||||||||||||||||||
| Subsidiary Capital Leases | 833,872 | 471,192 | 362,680 | - | - | |||||||||||||||
| - | ||||||||||||||||||||
| Operating Lease Obligations | - | |||||||||||||||||||
| Non-cancellable operating lease | 2,713,419 | 971,890 | 1,145,700 | 351,186 | 244,643 | |||||||||||||||
| - | ||||||||||||||||||||
| Total | $ | 7,097,264 | $ | 4,868,243 | $ | 1,633,192 | $ | 351,186 | $ | 244,643 | ||||||||||
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in currency exchange rates and interest rates.
Foreign Currency Exchange Risk
Economic Exposure
We transact business in various foreign currencies and have significant international revenues, as well as costs denominated in foreign currencies. This exposes us to the risk of fluctuations in foreign currency exchange rates. Since the majority of the Company’s operations of the company are based in the Asia Pacific region where the 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 the 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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements that constitute Item 8 are included at the end of this report on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NetSol’s financial statements for the fiscal years ended June 30, 20142015 and June 30, 2013,2014, did not contain an adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope, or accounting principles.
In connection with the audit of NetSol'sNetSol’s financial statements for the fiscal years ended June 30, 20142015 and June 30, 2013,2014, there were no disagreements, disputes, or differences of opinion with Kabani & Company on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures, which, if not resolved to the satisfaction of Kabani & Company would have caused Kabani & Company to make reference to the matter in its report.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-K. Based upon that evaluation, the Chief Financial Officer and Chief Executive Officer concluded that our disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Our management has the responsibility to establish and maintain adequate internal controls over our financial reporting, as defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934. Our internal controls are designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our external financial statements in accordance with generally accepted accounting principles (GAAP).
Due to inherent limitations of any internal control system, management acknowledges that there are limitations as to the effectiveness of internal controls over financial reporting and therefore recognize that only reasonable assurance can be gained from any internal control system. Accordingly, our internal control system may not detect or prevent material misstatements in our financial statements and projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and participation of management, including the Chief Executive Officer and Chief Financial Officer, we have performed an assessment of the effectiveness of our internal controls over financial reporting as of June 30, 2014.2015. 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, 20142015, the Company’s internal control over financial reporting is effective.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal controls over financial reporting during the fourth quarter of fiscal year 2014,2015, 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)).
ITEM 9B. OTHER INFORMATION
NONE
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that the Company'sCompany’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"(“SEC”). Executive officers, directors and beneficial owners of more than 10% of the Company'sCompany’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, 2014,2015, all Section 16(a) filing requirements applicable to its executive officers, directors and beneficial owners of more than 10% of its Common Stock were complied with.
CHANGE IN MANAGEMENT AND BOARD OF DIRECTORS
Board of Directors
At the 20142015 Annual Shareholders Meeting, a 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 (Chairman of the Board) Mr. Eugen Beckert, Mr. Naeem U. Ghauri, Mr. Shahid Burki, Mr. Mark Caton, Mr. Jeffrey Bilbrey and Mr. Asad Ghauri.
Committees
The Audit committee is made up of Mr. Burki as Chairman, and Mr. Caton, Mr. Beckert and Mr. Bilbrey as members. The Compensation committee consists of Mr. Caton as its Chairman and Mr. Beckert, Mr. Burki and, Mr. Bilbrey as its members. The Nominating and Corporate Governance Committee consists of Mr. Beckert as Chairmanchairman and Mr. Burki, Mr. Caton and Mr. Bilbrey as its members.
The table below provides the membership for each of the committees during Fiscal Year 2014.
| Nominating and Corporate | ||||||||||||
| Audit | Compensation | Governance | ||||||||||
| Director | Committee | Committee | Committee | |||||||||
| Najeeb Ghauri | ||||||||||||
| Naeem Ghauri | ||||||||||||
| Asad Ghauri | ||||||||||||
| Shahid J. Burki (I) | X | (C) | X | X | ||||||||
| Eugen Beckert (I) | X | X | X | (C) | ||||||||
| Mark Caton (I) | X | X | (C) | X | ||||||||
| Jeffrey Bilbrey (I) | X | X | X |
| (I) | Denotes an independent director. | |
(C) | Denotes the Chairperson of the committee. |
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DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of the current directors and executive officers of the Company, the principal offices and positions with the Company held by each person and the date such person became a director or executive officer of the Company. The Board of Directors elects the executive officers of the Company annually. Each year the stockholders elect the Board of Directors. The executive officers serve terms varying terms until their death, resignation or removal by the Board of Directors. In addition, there was no arrangement or understanding between any executive officer and any other person pursuant to which any person was selected as an executive officer.
The directors and executive officers of the Company are as follows:
| Name | Year First Elected As an Officer or Director | Age | Position Held with the Registrant | Family Relationship |
| Najeeb Ghauri | 1997 | 60 | Chief Executive Officer, Chairman and Director | Brother to Naeem Ghauri |
| Roger Almond | 2013 | 49 | Chief Financial Officer | None |
| Patti L. W. McGlasson | 2004 | 49 | Sr. V.P., Legal and Corporate Affairs; Secretary, General Counsel | None |
| Naeem Ghauri | 1999 | 57 | Director | Brother to Najeeb Ghauri |
| Boo-Ali Siddiqui | 2009 | 39 | Chief Accounting Officer | None |
| Shahid Javed Burki | 2000 | 75 | Director | None |
| Eugen Beckert | 2001 | 67 | Director | None |
| Mark Caton | 2002 | 65 | Director | None |
| Jeffrey Bilbrey | 2013 | 43 | Director | None |
| Asad Ghauri* | 2014 | 37 | Director | Nephew of Najeeb & Naeem Ghauri |
| Name | Year First Elected As an Officer or Director | Age | Position Held with the Registrant | Family Relationship | ||||
| Najeeb Ghauri | 1997 | 61 | Chief Executive Officer, Chairman and Director | Brother to Naeem Ghauri | ||||
| �� | ||||||||
| Roger Almond | 2013 | 50 | Chief Financial Officer | None | ||||
| Patti L. W. McGlasson | 2004 | 50 | Sr. V.P., Legal and Corporate Affairs; Secretary, General Counsel | None | ||||
| Naeem Ghauri | 1999 | 58 | Director | Brother to Najeeb Ghauri | ||||
| Shahid Javed Burki | 2000 | 76 | Director | None | ||||
| Eugen Beckert | 2001 | 68 | Director | None | ||||
| Mark Caton | 2002 | 66 | Director | None | ||||
| Jeffrey Bilbrey | 2013 | 44 | Director | None | ||||
| Asad Ghauri | 2014 | 38 | Director | Nephew of Najeeb & Naeem Ghauri |
*Mr. Salim Ghauri did not stand for re-election to the board. Mr. Asad Ghauri was elected to the board in June 2014.
NAJEEB U. GHAURIis the Chief Executive Officer and Chairman of the Board of NetSol Technologies, Inc. Najeeb,NetSol. He has been a Director of the Company since 1997, Chairman since 2003 and Chief Executive Officer since October 2006, and2006. Mr. Ghauri is the founder of NetSol Technologies, Inc.
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ROGER ALMOND was appointed Chief Financial Officer on September 9, 2013.
Since 2007, Roger Almond held the position of Senior Manager at Pickard & Green Certified Public Accountants where he and his team was responsible for assisting national and international companies inwith 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 served as NetSol’s Chief Accounting Officer since September 2013 to present and as NetSol's Chief Financial Officer from April 2009 to September 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, Patti practiced at Vogt & Resnick, law corporation. Ms. McGlasson was admitted to practice in California in 1991.
She received her Bachelor of Arts in Political Science in 1987 from the University of California, San Diego and, her Juris Doctor and Masters in Law in Transnational Business from the University of the Pacific, McGeorge School of Law, in 1991 and 1993, respectively. As part of her Masters in Law in Transnational Business, she interned at the law firm of Loeff Claeys Verbeke in Rotterdam, the Netherlands in 1991.
NAEEM GHAURI has been a Director of the Company since 1999 and was the Company’s Chief Executive Officer from August 2001 to October 2006.
EUGEN BECKERT was appointed to the Board of Directors in August 2001.
SHAHID JAVED BURKIwas first appointed to the Board of Directors in February 2003.
MARK CATON joined the board of directors in 2007.
JEFFREY BILBREY joined the Boardboard of Directorsdirectors in March 2013 to fill a vacancy and was duly elected atto the annual shareholders meeting on May 29, 2013.
ASAD GHAURIwas elected to the board of directors in June 2014.
CORPORATE GOVERNANCE
Code of Business Conduct & Ethics
The Company adopted its Code of Business Conduct & Ethics, as amended and restated on September 9, 2013, applicable to every officer, director and employee of the Company, including, but not limited to the Company’s principal executive officer, principal financial officer, and principal accounting officer or controller, or persons performing similar functions. Our Code of Business Conduct & Ethics has been posted on our website and may be viewed atwww.netsoltech.com/us/investors/corporate-governance/lang/enhttp://ir.netsoltech.com/governance-docs.
Audit Committee
The Company has an audit committee whose members are the independent directors of the Company, specifically, Mr. Beckert, Mr. Burki Mr. Caton and Mr. 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.
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ITEM 11- 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
NetSol Technologies’ Named Executive Officers, a group comprised of the Chief Executive Officer, the Chief Financial Officer the Chief Accounting Officer and the Secretary and General Counsel in the 2013-20142014-2015 fiscal year are the following individuals:
| Najeeb Ghauri | Chief Executive Officer | |
| Roger K. Almond | Chief Financial Officer | |
| Patti L. W. McGlasson | Sr. V.P. Legal and Corporate Affairs, Secretary and General Counsel |
Compensation Philosophy and Objectives
The Compensation Committee believes that the most effective executive compensation program is one that is designed to reward the achievement of specific annual, long-term and strategic goals by the Company, and which aligns executives’ interests with those of the stockholders by rewarding performance at or above established goals, with the ultimate objective of increasing stockholder value. The philosophy of the Compensation Committee is to evaluate both performance and compensation to ensure that we maintain our ability to attract and retain superior employees in key positions and that compensation provided to key employees remains competitive relative to the compensation paid to similarly situated executives of our peer companies. To that end, the Compensation Committee believes executive compensation packages should include both cash and equity-based compensation that reward performance as measured against established goals.
Setting Executive Compensation
Management develops our compensation plans by utilizing publicly available compensation data in the media services and technology industries. We believe that the practices of these groups of companies provide us with appropriate compensation benchmarks, because these groups of companies are in similar businesses and tend to compete with us for executives and other employees. For benchmarking executive compensation, we typically review the compensation data we have collected from these groups of companies, as well as a subset of the data from those companies that have a similar number of employees as the Company. The Compensation Committee has determined to utilize the services of a consultant for purposes of comparing our compensation program with similarly situated companies in like industries. The recommendations of these consultants will be utilized by the Committee in determining the appropriate compensation packages. While these consultants may make general recommendations about the size and components of compensation, we anticipate our philosophy to continue on the basis of a pay-for-performance philosophy.
Based on management'smanagement’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'sexecutive’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'sexecutive’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'sofficer’s compensation are derived from employment agreements negotiated between the Company and the executive. Each executive'sexecutive’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'sCompany’s Chief Executive Officer.
2015 Executive Compensation Components
For the fiscal year ended June 30, 2014,2015, the principal components of compensation that our named executive officers were eligible to receive were:
| ● | Base salary; | |
| ● | Long Term Equity Incentive Compensation; | |
| ● | Performance-based incentive compensation (discretionary bonus); and, | |
| ● | Perquisites and other personal benefits. |
The Company’s executive compensation (discretionary bonus);program is intended to promote and
Base Salary
An executive'sexecutive’s base salary is evaluated together with components of the executive'sexecutive’s other compensation to ensure that the executive'sexecutive’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.
Annual Bonus
Our compensation program includes eligibility for bonuses as rewarded by the Compensation Committee. All executives are eligible for annual performance-based cash bonuses in accordance with Company policies. The compensation committee takes into consideration the executive’s performance during the previous year to determine eligibility for discretionary bonuses. Further, the compensation committee will review, if applicable, the performance criteria set forth in an executive’s previous year’s agreement and will determine if the executive has met such criteria in order to achieve the bonus. The Company’s bonus criteria at the executive management level, is typically based on a gross revenue and per share profit targets.
Long-Term Equity Incentive Compensation
We believe that long-term performance is achieved through an ownership culture that encourages long-term participation by our executives in equity-based awards. Our various Employee Stock Option Plans allow us to grant stock options to employees. We currently make initial equity awards of stock options to new executives and certain non-executive employees in connection with their employment with the Company. Annual grants of options, if any, are approved by the Compensation Committee.
.
Equity Incentives. Executives, certain non-executive employees, and directors who join us may be awarded stock awards and/or stock option grants after they join the Company. These grants have an exercise price equal to the fair market value of our common stock on the grant date. Such awards are intended to provide the executive with incentive to build value in the organization over an extended period of time. The size of the stock option award is also reviewed in light of the executive'sexecutive’s track record, base salary, other compensation and other factors to ensure that the executive'sexecutive’s total compensation is in line with our overall compensation philosophy. A review of all components of compensation is conducted when determining equity awards to ensure that total compensation conforms to our overall philosophy and objectives.
Equity incentives provided to executives are determined by the Fair Market Value of our common stock on the grant date were provided to the executives as an adjustment of their overall compensation while taking in to account the need to continue to incentivize the executive to build value in the organization. Each executive’s stock award was based on an analysis of the Compensation Committee of an appropriate overall cash compensation for each individual taking into account their position and compensation at similarly situated companies. Each executive’s stock award was based on a desired overall compensation cash value less the base salary as approved by the Compensation Committee.
Perquisites and Other Personal Benefits
We provide named executive officers with perquisites and other personal benefits that we believe are reasonable and consistent with our overall compensation program to better enable the Company to attract and retain superior employees for key positions. The Compensation Committee periodically reviews the levels of perquisites and other personal benefits provided to NetSol’s executive officers.
We maintain benefits and perquisites that are offered to all employees, including health 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 fourth anniversary of the date of termination, and (b) the continuation by the Company of medical and dental insurance coverage for him and his family until the end of the employment term and through the end of the fourth anniversary of the date of termination. Provided, however, if such benefits cannot be continued for this extended period, the Executive shall receive cash (including a tax-equivalency payment for Federal, state and local income and payroll taxes assuming Executive is in the maximum tax bracket for all such purposes) where such benefits may not be continued. These agreements further provide for vesting of all options and restrictive stock grants, if any.
Our Chief AccountingFinancial 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 secondfirst 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 secondfirst anniversary from the date of termination. Provided, however, if such benefits cannot be continued for this extended period, the Executive shall receive cash (including a tax-equivalency payment for Federal, state and local income and payroll taxes assuming Executive is in the maximum tax bracket for all such purposes) where such benefits may not be continued. These agreements further provide for vesting of all options and restrictive stock grants, if any.
The Secretary of the Company has an employment agreement that provides, if she is terminated without cause or if the executive terminates the agreement with Good Reason, she is entitled to (a) all remaining salary to the end of the date of termination, plus salary from the end of the employment term through the end of the second anniversary of the date of termination, and (b) the continuation by the Company of medical and dental insurance coverage for her and her family until the end of the employment term and through the end of the second anniversary of the date of termination. Provided, however, if such benefits cannot be continued for this extended period, the Executive shall receive cash (including a tax-equivalency payment for Federal, state and local income and payroll taxes assuming Executive is in the maximum tax bracket for all such purposes) where such benefits may not be continued. These agreements further provide for vesting of all options and restrictive stock grants, if any.
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Tax and Accounting Implications
Deductibility of Executive Compensation
As part of its role, the Compensation Committee reviews and considers the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code, which provides that we may not deduct compensation of more than $1,000,000 that is paid to certain individuals. We believe that compensation paid under the management incentive plans is generally fully deductible for federal income tax purposes.
Accounting for Stock-Based Compensation
Commencing on July 1, 2006, we began accounting for stock-based payments, including awards under our Employee Stock Option Plans, in accordance with the of Financial Accounting Standards Board’s Accounting Standards Codification Topic 718,Compensation – Stock Compensation.
Summary Compensation
The following table shows the compensation for the fiscal year ended June 30, 20142015 and June 30, 2013,2014, earned by our Chairman and Chief Executive Officer, our Chief Financial Officer who is our Principal Financial and Accounting Officer, and others considered to be executive officers of the Company.
| Name and Principle Position | Fiscal Year Ended | Salary ($) | Bonus ($) | Stock Awards ($) (1) | Option Awards ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||||||
| Najeeb Ghauri | 2014 | $ | 474,000 | $ | 166,667 | $ | 407,600 | $ | 248,996 | (2) | $ | 68,139 | (3) | $ | 1,365,402 | ||||||||||||
| CEO & Chairman | 2013 | $ | 393,750 | $ | - | $ | - | (2) | $ | 75,141 | (3) | $ | 468,891 | ||||||||||||||
| 2012 | $ | 389,063 | $ | - | $ | 32,500 | $ | 225,093 | $ | 78,884 | $ | 725,540 | |||||||||||||||
| Roger K Almond | 2014 | $ | 90,400 | $ | - | $ | 19,400 | $ | - | $ | - | $ | 109,800 | ||||||||||||||
| Chief Financial Officer | 2013 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||
| 2012 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||||||
| Boo-Ali Siddiqui | 2014 | $ | 125,000 | $ | - | $ | 145,600 | $ | - | $ | - | $ | 270,600 | ||||||||||||||
| Chief Accounting Officer | 2013 | $ | 92,400 | $ | - | $ | 6,850 | $ | - | $ | - | $ | 99,250 | ||||||||||||||
| 2012 | $ | 90,300 | $ | - | $ | 17,875 | $ | - | $ | - | $ | 108,175 | |||||||||||||||
| Patti L. W. McGlasson | 2014 | $ | 171,600 | $ | 5,000 | $ | 168,150 | $ | - | $ | 23,270 | (4) | $ | 368,020 | |||||||||||||
| Secretary, General Counsel | 2013 | $ | 143,000 | $ | - | $ | 6,850 | $ | - | $ | 23,947 | (4) | $ | 173,797 | |||||||||||||
| 2012 | $ | 139,750 | $ | - | $ | 17,875 | $ | - | $ | 23,863 | (4) | $ | 181,488 | ||||||||||||||
| Name and Principle Position | Fiscal Year Ended | Salary ($) | Bonus ($) | Stock Awards ($) (1) | Option Awards ($) | All Other Compensation ($) | Total ($) | |||||||||||||||||||||
| Najeeb Ghauri | 2015 | $ | 497,700 | $ | - | $ | - | $ | - | (2) | $ | 65,724 | (3) | $ | 563,424 | |||||||||||||
| CEO & Chairman | 2014 | $ | 474,000 | $ | 166,667 | $ | 407,600 | $ | 248,996 | (2) | $ | 68,139 | (3) | $ | 1,365,402 | |||||||||||||
| 2013 | $ | 393,750 | $ | - | $ | - | (2) | $ | 75,141 | (3) | $ | 468,891 | ||||||||||||||||
| Roger K Almond | 2015 | $ | 128,433 | $ | - | $ | 60,000 | $ | 3,485 | (4) | $ | 191,918 | ||||||||||||||||
| Chief Financial Officer | 2014 | $ | 90,400 | $ | - | $ | 19,400 | $ | - | $ | - | (4) | $ | 109,800 | ||||||||||||||
| 2013 | $ | - | $ | - | $ | - | $ | - | $ | - | (4) | $ | - | |||||||||||||||
| Patti L. W. McGlasson | 2015 | $ | 188,180 | $ | - | $ | - | $ | 17,616 | (5) | $ | 205,796 | ||||||||||||||||
| Secretary, General Counsel | 2014 | $ | 171,600 | $ | 5,000 | $ | 168,150 | $ | - | $ | 23,270 | (5) | $ | 368,020 | ||||||||||||||
| 2013 | $ | 143,000 | $ | - | $ | 6,850 | $ | - | $ | 23,947 | (5) | $ | 173,797 | |||||||||||||||
(1) The stock was awarded as compensation to the officers. See also Grants of Plan Based Awards.
(2) Consists of nil options, 200,000 options nil options and 50,000nil granted during fiscal years ended 2015, 2014 2013 and 20122013 respectively. The options vest quarterly over one year.
(3) Consists of $36,000, $36,000 and $36,000 paid for automobile and travel allowance, $16,758, $16,758 and $16,758 on account of life insurance and $12,966, $15,381 $22,383 and $26,126$22,383 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, 2015, 2014 and 2013, and 2012, respectively.
(4) Consists of $9,000, $9,000$3,485, $nil and $9,000 paid for automobile allowance and $14,270, $14,947 and $14,863$nil paid for medical and dental insurance premiums for participation in the health insurance program for the fiscal year ended June 30, 2015, 2014 and 2013, respectively.
(5) Consists of $4,855, $9,000 and 2012,$9,000 paid for automobile allowance and $12,761, $14,270 and $14,947 paid for medical and dental insurance premiums for participation in the health insurance program for the fiscal year ended June 30, 2015, 2014 and 2013, respectively.
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Grants of Plan-Based Awards
In March, 2015, Mr. Roger Almond was granted 10,000 shares of common stock of the Company, which vest quarterly. The shares were approved by the Compensation Committee as an incentive for the named officer.
In June, 2014, Mr. Najeeb Ghauri was granted 50,000 shares of common stock of the Company, which vest quarterly. The shares were approved by the Compensation Committee as an incentive for the named officer.
In June, 2014, Mr. Roger Almond was granted 5,000 shares of common stock of the Company. The shares vested immediately and were approved by the Compensation Committee as an incentive for the named officer.
In June, 2014, Ms. McGlasson was granted 5,000 shares of common stock of the Company vesting immediately.
In July, 2012, Mr. Boo-Ali Siddiqui andJune, 2014, Ms. McGlasson were eachwas granted 1,2505,000 shares of common stock of the Company. The shares vested immediately and were approved by the Compensation Committee as an incentive for the named officers.
In July, 2013, Ms. McGlasson was granted 10,000 shares of common stock of the Company. The shares vested quarterly and were approved by the Compensation Committee as an incentive for the named officer.
Discussion of Summary Compensation Table
The terms of our executive officers'officers’ compensation are derived from our employment agreements with them and the annual performance review by our Compensation Committee. The terms of Mr. Najeeb Ghauri’s employment agreement with the Company were the result of negotiations between the Company and the executive and were approved by our Compensation Committee and Board of Directors. The terms of Ms. McGlasson’s and Mr. Siddiqui’sAlmond’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. The terms of Mr. Almond’s consulting agreement with the Company were the result of negotiations between our Chief Executive Officer, Mr. Almond and were approved by our Compensation Committee.
Employment Agreement with Najeeb Ghauri
Effective January 1, 2007, the Company entered into an Employment Agreement with our Chief Executive Officer, Najeeb Ghauri (the “CEO Agreement”). The CEO Agreement was amended effective January 1, 2008, January 1, 2010 July 25, 2013 and again on June 30, 2014. Changes made in the June 30, 2014 amendment are effective July 1, 2014. Pursuant to the CEO Agreement, as amended, between Mr. Ghauri and the Company (the "CEO Agreement"“CEO Agreement”), the Company agreed to employ Mr. Ghauri as its Chief Executive Officer for a five year term. The term of employment automatically renews for 12 additional months unless notice of intent to terminate is received by either party at least 6 months prior to the end of the term. Under the CEO Agreement, Mr. Ghauri is entitled to an annualized base salary of $497,700 and is eligible for annual bonuses at the discretion of the Compensation Committee.
Bonuses may be paid in cash or shares of common stock. Mr. Ghauri also earnsearned 12,500 shares of common stock for each quarter of service commencing with the first quarter ended September 30, 2014 through the end of the fiscal year.June 30, 2015. Mr. Ghauri was granted options to purchase 200,000 shares common stock of which 25% of these options vest at the completion of each quarter. Mr. Ghauri is entitled to six weeks of paid vacation per calendar year, receives a car allowance totaling $3,000 per month for the term of the CEO Agreement, and the Company shall pay premiums not to exceed $16,600 (or $4,150 quarterly) for life insurance for the Executive.
The CEO Agreement also includes provisions respecting severance, non-solicitation, non-competition, and confidentiality obligations. Pursuant to the CEO Agreement, if he terminates his employment for Good Reason (as described below), or, is terminated prior to the end of the employment term by the Company other than for Cause (as described below) or death, he shall be entitled to all remaining salary from the termination date until 48 months thereafter, at the rate of salary in effect on the date of termination, immediate vesting of all options and, continuation of all health related plan benefits for a period of 48 months. He shall have no obligation to seek other employment and any income so earned shall not reduce the foregoing amounts. If he is terminated by the Company for Cause (as described below), or at the end of the employment term, he shall not be entitled to further compensation. Under the CEO Agreement, Good Reason includes the assignment of duties inconsistent with his title, a material reduction in salary and perquisites, the relocation of the Company'sCompany’s principal office by 30 miles, if the Company asks him to perform any act which is illegal, including the commission of a crime or act of moral turpitude, or a material breach of the CEO Agreement by the Company. Under the CEO Agreement, Cause includes conviction of crime involving moral turpitude, failure to perform his duties to the Company, engaging in activities which are directly competitive to or intentionally injurious to the Company, or any material breach of the CEO Agreement by Mr. Ghauri.
The above summary of the CEO Agreement is qualified in its entirety by reference to the full text of the CEO Agreement, a copy of which was filed as an exhibit to the Company’s 10-KSB for the fiscal year ended June 30, 2007. The above summary of the First Amendment is qualified in its entirety by reference to the full text of the Amendment, a copy of which was filed as an exhibit to the Company’s 10-KSB for the fiscal year ended June 30, 2008. The above summary of the Second Amendment is qualified in its entirety by reference to the full text of the Amendment, a copy of which was filed as an exhibit to the Company’s 10-Q for the fiscal year ended December 31, 2009. The above summary of the Third Amendment is qualified in its entirety by reference to the full text of the Amendment, a copy of which was filed as an exhibit to the Company’s 8-K filed on July 26, 2013. The above summary of the Fourth Amendment is qualified in its entirety by reference to the full text of the Amendment, a copy of which was filed as an exhibit to the Company’s 8-K filed on July 3, 2014.
Employment Agreement with Roger K. Almond
Effective AprilMarch 1, 2010,2015, the Company entered into an Employment Agreement with our Chief AccountingFinancial Officer, Mr. Boo-Ali Siddiqui.Roger K. Almond. Pursuant to the Employment Agreement, between Mr. SiddiquiAlmond and the Company (the "CAO Agreement"“CFO Agreement”), the original termCompany agreed to employ Mr. Almond as its Chief Financial Officer from the date of Mr. Siddiqui’s agreement was automatically extended for 30 day periods from March 31, 2011.the CFO Agreement through February 28, 2017. According to the terms of the CAOCFO Agreement, as amended, itthe term of the agreement automatically extends for an additional thirty-six monthone year period unless notice of intent to terminate is received by either party at least two weeks6 months prior to the end of the term. This Agreement was amended on July 25, 2013 and again on June 30, 2014. Changes made in the June 30, 2014 amendment are effective July 1, 2014. Under the CAOCFO Agreement, as amended, Mr. SiddiquiAlmond is entitled to an annualized base salary of $125,000$175,000 per annum, 10,000 shares of common stock to be granted in 25% tranches after each quarter of service through February 28, 2016, and is eligible for annual bonuses at the discretion of the Chief Executive Officer. In addition, Mr. Siddiqui shall also receive a totalAlmond is entitled to participate in the Company’s stock option plans and is entitled to four weeks of 10,000 shares of common stock to be granted in 25% tranches upon each completion of a quarter of service commencing with the quarter ending September 30, 2014 and continuing until June 30, 2015.
The CAOCFO Agreement also includes provisions respecting severance, non-solicitation, non-competition, and confidentiality obligations. Pursuant to the CAOCFO 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 2412 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 2412 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 CAOCFO Agreement, Good Reason includes the assignment of duties inconsistent with his title, a material reduction in salary and perquisites, the relocation of the Company'sCompany’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 CAOCFO Agreement by the Company. Under the CAOCFO 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 CAOCFO Agreement by Mr. Siddiqui.
The above summary of the CAOCFO Agreement is qualified in its entirety by reference to the full text of the CAO 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 and the amendment filed as an exhibit to the Company’s 8-K filed on July 3, 2014.
Employment Agreement with Patti L. W. McGlasson
Effective May 1, 2006, the Company entered into an Employment Agreement with our Secretary, General Counsel and Sr. Vice President, Legal and Corporate Affairs, Ms. Patti L. W. McGlasson. Pursuant to the Employment Agreement and its related amendments, between Ms. McGlasson and the Company (the "General“General Counsel Agreement"Agreement”), the Company agreed to employ Ms. McGlasson as its Secretary and General Counsel from the date of the General Counsel Agreement through June 30, 2017. According to the terms of the General Counsel Agreement, the term of the agreement automatically extends for an additional one year period unless notice of intent to terminate is received by either party at least 6 months prior to the end of the term. The General Counsel Agreement was amended on July 25, 2013 and again on June 30, 2014 (the General Counsel Agreement and all amendments referred to as the “GC Agreement”). Changes made in the June 30, 2014 amendment are effective July 1, 2014. Under the GC Agreement, Ms. McGlasson is entitled to an annualized base salary of $180,180 per annum, 10,000 shares of common stock to be granted in 25% tranches after each quarter of service through June 30, 2015, and is eligible for annual bonuses at the discretion of the Chief Executive Officer. In addition, Ms. McGlasson is entitled to participate in the Company'sCompany’s stock option plans and, is entitled to six weeks of paid vacation per calendar year.
The General Counsel Agreement also includes provisions respecting severance, non-solicitation, non-competition, and confidentiality obligations. Pursuant to the General Counsel Agreement, if she terminates her employment for Good Reason (as described below), or, is terminated prior to the end of the employment term by the Company other than for Cause (as described below) or death, she shall be entitled to all remaining salary from the termination date until 24 months thereafter, at the rate of salary in effect on the date of termination, immediate vesting of all options and, continuation of all health related plan benefits for a period of 24 months. She shall have no obligation to seek other employment and any income so earned shall not reduce the foregoing amounts. If she is terminated by the Company for Cause (as described below), or at the end of the employment term, she shall not be entitled to further compensation. Under the General Counsel Agreement, Good Reason includes the assignment of duties inconsistent with her title, a material reduction in salary and perquisites, the relocation of the Company'sCompany’s principal office by 60 miles, if the Company asks her to perform any act which is illegal, including the commission of a crime or act of moral turpitude, or a material breach of the General Counsel Agreement by the Company. Under the General Counsel Agreement, Cause includes conviction of crime involving moral turpitude, failure to perform her duties to the Company, engaging in activities which are directly competitive to or intentionally injurious to the Company, or any material breach of the General Counsel Agreement by Ms. McGlasson.
The above summary of the General Counsel Agreement is qualified in its entirety by reference to the full text of the General Counsel Agreement, a copy of which was filed as an exhibit to the Company’s 10-KSB for the fiscal year ended June 30, 2006 on September 27, 2006. The above summary is also qualified in its entirety by reference to the full text of the Amendment to the General Counsel Agreement, a copy of which was filed as an exhibit to the Company’s 10-Q for the quarter ended March 31, 2010. The above summary is also qualified in its entirety by reference to the full text of the Second Amendment to the General Counsel Agreement, a copy of which was filed as an exhibit to the Company’s 8-K filed on July 26, 2013. The above summary is also qualified in its entirety by reference to the full text of the Third Amendment to the General Counsel Agreement, a copy of which was filed as an exhibit to the Company’s 8-K filed on July 3, 2014.
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, 2014,2015, the last day of our fiscal year, to each of the individuals named in the Summary Compensation Table.
| NAME | NUMBER OF SECURITIES UNDERLYING OPTIONS (#) EXERCISABLE | NUMBER OF SECURITIES UNDERLYING OPTIONS (#) UNEXERCISABLE | OPTION EXERCISE PRICE ($) | OPTION EXPIRATION DATE |
| Najeeb Ghauri | 30,000 | 6.50 | 2/12/19 | |
| 50,000 | 7.50 | 11/7/21 | ||
| 200,000 | 3.88 | 6/30/16 | ||
| Roger K Almond | - | - | ||
| - | - | |||
| Boo-Ali Siddiqui | - | - | ||
- | - | |||
| Patti L. W. McGlasson | 1,000 | 16.50 | 7/7/15 | |
| 1,000 | 16.00 | 7/23/17 |
| NAME | NUMBER OF SECURITIES UNDERLYING OPTIONS (#) EXERCISABLE | NUMBER OF SECURITIES UNDERLYING OPTIONS (#) UNEXERCISABLE | OPTION EXERCISE PRICE ($) | OPTION EXPIRATION DATE | ||||||||||||
| Najeeb Ghauri | 180,671 | 3.88 | 6/30/16 | |||||||||||||
| 30,000 | 6.50 | 2/12/19 | ||||||||||||||
| 50,000 | 7.50 | 11/7/21 | ||||||||||||||
| Roger K. Almond | - | - | ||||||||||||||
| - | - | |||||||||||||||
| Patti L. W. McGlasson | 1,000 | 16.50 | 7/7/15 | |||||||||||||
| 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'sofficer’s employment terminates, he is entitled to receive amounts earned during his term of employment. Such amounts include the portion of the executive'sexecutive’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, 2014,2015, 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 | $ | 1,422,000 | $ | - | $ | 1,422,000 | ||||||
| Bonus | - | |||||||||||
| Salary Multiple Pay-out | 1,417,260 | |||||||||||
| Bonus or Revenue One-time Pay-Out | 363,848 | |||||||||||
| Net Cash Value of Options | 1,346,000 | |||||||||||
| Total | $ | 4,549,108 | $ | - | $ | 1,422,000 | ||||||
| BENEFITS AND PAYMENTS | TERMINATION AFTER CHANGE OF CONTROL | TERMINATION UPON DEATH OR DISABILITY | TERMINATION BY US WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON | |||||||||
| Base Salary Continuance | $ | 1,990,800 | $ | 82,950 | $ | 1,990,800 | ||||||
| Health Related Benefits | 51,888 | - | 51,888 | |||||||||
| Bonus | - | - | - | |||||||||
| Salary Multiple Pay-out | 1,488,123 | - | - | |||||||||
| Bonus or Revenue One-time Pay-Out | 510,486 | - | - | |||||||||
| Net Cash Value of Options | 1,271,003 | - | - | |||||||||
| Total | $ | 5,312,300 | $ | 82,950 | $ | 2,042,688 | ||||||
Roger Almond, Chief AccountingFinancial Officer
In the event that Mr. SiddiquiAlmond 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 612 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)twelve (12) months (the “Change of Control Termination Payment”).
The following table summarizes the potential payments to Mr. SiddiquiAlmond assuming his employment with us was terminated or a change of control occurred on June 30, 2014,2015, the last day of our most recently completed fiscal year.
| BENEFITS AND PAYMENTS | TERMINATION AFTER CHANGE OF CONTROL | TERMINATION UPON DEATH OR DISABILITY | TERMINATION BY US WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON | |||||||||
| Base Salary Continuance | $ | 175,000 | $ | 29,167 | $ | 175,000 | ||||||
| Health related benefits | 18,708 | - | 18,708 | |||||||||
| Bonus | - | - | - | |||||||||
| Salary Multiple Pay-out | 384,015 | - | - | |||||||||
| Bonus or Revenue One-time Pay-Out | 255,243 | - | - | |||||||||
| Net Cash Value of Options | - | - | - | |||||||||
| Total | $ | 832,966 | $ | 29,167 | $ | 193,708 | ||||||
| 34 |
| BENEFITS AND PAYMENTS | CHANGE OF CONTROL | TERMINATION UPON DEATH OR DISABILITY | TERMINATION BY US WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON | |||||||||
| Base Salary | $ | 62,500 | $ | - | $ | 62,500 | ||||||
| Bonus | - | |||||||||||
| Salary Multiple Pay-out | 186,875 | |||||||||||
| Bonus or Revenue One-time Pay-Out | 181,924 | |||||||||||
| Net Cash Value of Options | - | |||||||||||
| Total | $ | 431,299 | $ | - | $ | 62,500 | ||||||
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 fullmonths (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, 2014,2015, 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 | $ | 171,600 | $ | - | $ | 171,600 | ||||||
| Bonus | - | |||||||||||
| Salary Multiple Pay-out | 513,084 | |||||||||||
| Bonus or Revenue One-time Pay-Out | 181,924 | |||||||||||
| Net Cash Value of Options | 32,500 | |||||||||||
| Total | $ | 899,108 | $ | - | $ | 171,600 | ||||||
| BENEFITS AND PAYMENTS | TERMINATION AFTER CHANGE OF CONTROL | TERMINATION UPON DEATH OR DISABILITY | TERMINATION BY US WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON | |||||||||
| Base Salary Continuance | $ | 360,360 | $ | 30,030 | $ | 360,360 | ||||||
| Health related benefits | 25,512 | - | 25,512 | |||||||||
| Bonus | - | - | - | |||||||||
| Salary Multiple Pay-out | 538,738 | - | - | |||||||||
| Bonus or Revenue One-time Pay-Out | 255,243 | - | - | |||||||||
| Net Cash Value of Options | - | - | - | |||||||||
| Total | $ | 1,179,853 | $ | 30,030 | $ | 385,872 | ||||||
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'sCompany’s compensation policies for the fiscal year ended June 30, 2014,2015, other than Najeeb Ghauri, Naeem Ghauri and Asad Ghauri who are paid as part of their employment agreements with the Company or its subsidiaries and not as directors.
| NAME | FEES EARNED OR PAID IN CASH ($) | SHARES AWARDS ($) (1) | TOTAL ($) | |||||||||
| Eugen Beckert | 40,200 | 18,028 | 58,228 | |||||||||
| Shahid Javed Burki | 46,900 | 21,029 | 67,929 | |||||||||
| Mark Caton | 43,548 | 19,608 | 63,156 | |||||||||
| Jeffrey M. Bilbrey | 33,500 | 15,016 | 48,516 | |||||||||
| NAME | FEES EARNED OR PAID IN CASH ($) | SHARES AWARDS ($) (1) | TOTAL ($) | |||||||||
| Eugen Beckert | 42,210 | 38,800 | 81,010 | |||||||||
| Shahid Javed Burki | 49,245 | 38,800 | 88,045 | |||||||||
| Mark Caton | 45,725 | 38,800 | 84,525 | |||||||||
| Jeffrey M. Bilbrey | 35,175 | 38,800 | 73,975 | |||||||||
| (1) | During the fiscal year ended June 30, |
| 35 |
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, 2014.
| BOARD ACTIVITY | CASH PAYMENTS | |||
| Board Member Fee | $ | 134,000 | ||
| Chairperson for Audit Committee | $ | 13,400 | ||
| Chairperson for Compensation Committee | $ | 10,048 | ||
| Chairperson for Nominating and Corporate Governance Committee | $ | 6,700 | ||
| 164,148 | ||||
| BOARD ACTIVITY | CASH PAYMENTS | |||
| Board Member Fee | $ | 140,700 | ||
| Chairperson for Audit Committee | 14,070 | |||
| Chairperson for Compensation Committee | 10,550 | |||
| Chairperson for Nominating and Corporate Governance Committee | 7,035 | |||
| $ | 172,355 | |||
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. Bilbrey. During the fiscal year ended June 30, 2014. There were no other members of the committee during the fiscal year ended June 30, 2014.2015. All current members of the Compensation Committee are "independent directors"“independent directors” as defined under the NASDAQ Listing Rules. None of these individuals were at any time during the fiscal year ended June 30, 2014,2015, or at any other relevant time, an officer or employee of the Company.
No executive officer of the Company serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of the Company'sCompany’s Board of Directors or Compensation Committee.
Employee Stock Option Plans
The 2001 plan authorizes the issuance of up to 200,000 options to purchase common stock of which 200,000 have been granted. The grant prices range between $7.50 and $25.00.
The 2002 plan authorizes the issuance of up to 200,000 options to purchase common stock of which 199,913 options have been granted. The grant prices range between $3.00 and $50.00.
In March 2004, our shareholders approved the 2003 stock option plan. This plan authorizes up to 200,000 options to purchase common stock of which 198,000 have been granted. The grant prices range between $5.00 and $50.00.
In March 2005, our shareholders approved the 2004 stock option plan. This plan authorizes up to 500,000 options to purchase common stock of which 460,526 have been granted. The grant prices range between $3.00 and $28.90.
In April 2006, our shareholders approved the 2005 stock option plan. This plan authorizes up to 500,000 options to purchase common stock of which 440,947 have been granted. The grant prices range between $3.00 and $26.20.
In June 2008, our shareholders approved the 2008 Equity incentive plan. This plan authorizes up to 100,000 grants and/or options of common stock of which 100,000 have been granted. The grant prices range between $3.20 and $23.20.
In May 2011, our shareholders approved the 2011 Equity Incentive Plan.incentive plan. This plan authorizes up to 500,000 grants and/or options of common stock of which 500,000 have been granted. The grant prices range between $3.00 and $16.70.
In July 2013, our shareholders approved the 2013 Equity Incentive Plan.incentive plan. This plan authorizes up to 1,250,000 grants and/or options of common stock of which 69,994931,995 have been granted. The grant price wasprices range between $2.90 and $10.68.
In May 2015, our shareholders approved the 2015 Equity incentive plan. This plan authorizes up to 1,250,000 grants and/or options of common stock of which nil have been granted.
| 36 |
ITEM 12- 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'sCompany’s Common Stock, its only class of outstanding voting securities as of September 5, 2014,10, 2015, 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'sCompany’s present directors and officers, and (iii) all officers and directors as a group:
| Name of Beneficial Owner | Number of Shares Beneficial Owned | Percentage | ||||||||
| Najeeb Ghauri | (3 | ) | 485,296 | 5.02 | % | |||||
| Naeem Ghauri | (3 | ) | 350,981 | 3.68 | % | |||||
| Eugen Beckert | (3 | ) | 34,044 | * | ||||||
| Jeffery Bilbrey | (3 | ) | 5,114 | * | ||||||
| Shahid Javed Burki | (3 | ) | 52,686 | * | ||||||
| Mark Caton | (3 | ) | 29,429 | * | ||||||
| Asad Ghauri | (3 | ) | 52,334 | * | ||||||
| Patti McGlasson | (3 | ) | 47,384 | * | ||||||
| Boo-Ali Siddiqui | (3 | ) | 27,834 | * | ||||||
| Roger Almond | (3 | ) | 5,000 | * | ||||||
| All officers and directors as a group (ten persons) | 1,090,102 | 11.40 | % | |||||||
| Number of Shares | |||||||||||
| Name of Beneficial Owner | Beneficially Owned | Percentage | |||||||||
| Najeeb Ghauri | (3 | ) | 753,294 | 6.81 | % | ||||||
| Naeem Ghauri | (3 | ) | 479,315 | 4.44 | % | ||||||
| Eugen Beckert | (3 | ) | 36,288 | * | |||||||
| Jeffery Bilbrey | (3 | ) | 11,428 | * | |||||||
| Shahid Javed Burki | (3 | ) | 75,500 | * | |||||||
| Mark Caton | (3 | ) | 35,636 | * | |||||||
| Asad Ghauri | (3 | ) | 62,500 | * | |||||||
| Patti McGlasson | (3 | ) | 49,550 | * | |||||||
| Roger Almond | (3 | ) | 11,667 | * | |||||||
| All officers and directors as a group (ten persons) | 1,515,178 | 13.98 | % | ||||||||
* 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 11, 2014, 4, 2015,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, 85,000; Mr. Naeem Ghauri, 75,962; Mr. Eugen Beckert, 10,000; Mr. Shahid Burki, 10,000; and Ms. Patti McGlasson, 2,000.
(3) Address c/o NetSol Technologies, Inc. at 24025 Park Sorrento, Suite 410, Calabasas, CA 91302.
(4) Shares issued and outstanding as of September 5, 20144, 2015 were 9,179,615.10,312,326.
| 37 |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
In July 2011,2014, the board approved compensation for service on the Audit, Compensation and Nominating and Corporate Governance Committees. This compensation is discussed in the sections entitled “Directors’ Compensation” beginning on page 40.37. See the discussion of Director Independence beginning on page 26.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
Kabani & Co. audited the Company’s financial statements for the fiscal years ended June 30, 20142015 and June 30, 2013.2014. 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, 20142015 was $255,000$250,000 and for the year ended June 30, 20132014 was $240,000.
Tax Fees
Tax fees for fiscal year 2015 were $15,000 and consisted of the preparation of the Company’s federal and state tax returns for the fiscal years 2014. Tax fees for fiscal year 2014 were $15,000 and consisted of the preparation of the Company’s federal and state tax returns for the fiscal yearsyear 2013. 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 year 2012.
All Other Fees
No other fees were paid to Kabani & Co. during the fiscal year 20142015 and 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 -15. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
| 3.1 | Articles of Incorporation of Mirage Holdings, Inc., a Nevada corporation, dated March 18, 1997,incorporated by reference as Exhibit 3.1 to NetSol’s Registration Statement No. 333-28861 filed on Form SB-2 filed June 10, 1997.* |
| 3.2 | Amendment to Articles of Incorporation dated May 21, 1999, incorporated by reference as Exhibit 3.2 to NetSol’s Annual Report for the fiscal year ended June 30, 1999 on Form 10K-SB filed September 28, 1999.* |
| 3.3 | Amendment to the Articles of Incorporation of NetSol International, Inc. dated March 20, 2002 incorporated by reference as Exhibit 3.3 to NetSol’s Annual Report on Form 10-KSB/A filed on February 2, 2001.* |
| 3.4 | Amendment to the Articles of Incorporation of NetSol Technologies, Inc. dated August 20, 2003 filed as Exhibit A to NetSol’s Definitive Proxy Statement filed June 27, 2003.* |
| 3.5 | Amendment to the Articles of Incorporation of NetSol Technologies, Inc. dated March 14, 2005 filed as Exhibit 3.0 to NetSol’s quarterly report filed on Form 10-QSB for the period ended March 31, 2005.* |
| 3.6 | Amendment to the Articles of Incorporation dated October 18, 2006 filed as Exhibit 3.5 to NetSol’s Annual Report for the fiscal year ended June 30, 2007 on Form 10-KSB.* |
| 3.7 | Amendment to Articles of Incorporation dated May 12, 2008* |
| 3.8 | Bylaws of Mirage Holdings, Inc., as amended and restated as of November 28, 2000 incorporated by reference as Exhibit 3.3 to NetSol’s Annual Report for the fiscal year ending in June 30, 2000 on Form 10K-SB/A filed on February 2, 2001.* |
| 3.9 | Amendment to the Bylaws of NetSol Technologies, Inc. dated February 16, 2002 incorporated by reference as Exhibit 3.5 to NetSol’s Registration Statement filed on Form S-8 filed on March 27, 2002.* |
| 4.1 | Form of Common Stock Certificate* |
| 4.2 | Form of Warrant*. |
| 4.3 | Form of Series A 7% Cumulative Preferred Stock filed as Annex E to NetSol’s Definitive Proxy Statement filed September 18, 2006*. |
| 10.1 | Company Stock Option Plan dated May 18, 1999 incorporated by reference as Exhibit 10.2 to the Company’s Annual Report for the Fiscal Year Ended June 30, 1999 on Form 10K-SB filed September 28, 1999.* |
| 10.2 | Company Stock Option Plan dated April 1, 1997 incorporated by reference as Exhibit 10.5 to NetSol’s Registration Statement No. 333-28861 on Form SB-2 filed June 10, 1997* |
| 10.3 | Company 2003 Incentive and Nonstatutory incorporated by reference as Exhibit 99.1 to NetSol’s Definitive Proxy Statement filed February 6, 2004.* |
| 10.4 | Company 2001 Stock Options Plan dated March 27, 2002 incorporated by reference as Exhibit 5.1 to NetSol’s Registration Statement on Form S-8 filed on March 27, 2002.* |
| 10.5 | Company 2008 Equity Incentive Plan incorporated by reference as Annex A to NetSol’s Definitive Proxy Statement filed May 28, 2008.* |
| 10.6 | Stock Purchase Agreement dated May 6, 2006 by and between the Company, McCue Systems, Inc. and the shareholders of McCue Systems, Inc. incorporated by reference as Exhibit 2.1 to NetSol’s Current Report filed on form 8-K on May 8, 2006.* |
| 10.7 | Employment Agreement by and between NetSol Technologies, Inc. and Patti L. W. McGlasson dated May 1, 2006 incorporated by reference as Exhibit 10.20 to NetSol’s Annual Report on form 10-KSB dated September 18, 2006.* |
| 10.8 | Employment Agreement by and between the Company and Najeeb Ghauri dated January 1, 2007 filed as Exhibit 10.11 to the Company’s Annual Report filed on Form 10-KSB for the year ended June 30, 2007.* |
| 10.9 | Employment Agreement by and between the Company and Naeem Ghauri dated January 1, 2007 filed as Exhibit 10.11 to the Company’s Annual Report filed on Form 10-KSB for the year ended June 30, 2007.* |
| 10.10 | 10.15 Amendment to Employment Agreement by and between Company and Najeeb Ghauri dated effective January 1, 2007.* |
| 10.11 | Amendment to Employment Agreement by and between Company and Naeem Ghauri dated effective January 1, 2007. * |
| 10.12 | Tenancy Agreement by and between NetSol Technologies, Ltd. and Beijing Lucky Goldstar Building Development Co. Ltd. dated June 26, 2007 filed as Exhibit 10.21 to the Company’s Annual Report filed on Form 10-KSB for the year ended June 30, 2007.* |
| 10.13 | Company 2005 Stock Option Plan incorporated by reference as Exhibit 99.1 to NetSol’s Definitive Proxy Statement filed on March 3, 2006.* |
| 10.14 | Company 2004 Stock Option Plan incorporated by reference as Exhibit 99.1 to NetSol’s Definitive Proxy Statement filed on February 7, 2005.* |
| 10.15 | Rent Agreement by and between Mr. Tahir Mehmood Khan and NetSol Technologies Ltd. Dated January 21, 2008. * |
| 10.16 | Amendment to Employment Agreement by and between Company and Najeeb Ghauri dated effective January 1, 2010. * |
| 10.17 | Amendment to Employment Agreement by and between Company and Naeem Ghauri dated effective January 1, 2010.* |
| 10.18 | Office Lease by and between NetSol Technologies North America, Inc. and Legacy Partners I Alameda Mariner Loop, LLC dated November 27, 2009.* |
| 10.19 | Amendment to Employment Agreement by and between Company and Patti L. W. McGlasson dated effective April 1, 2010.* |
| 10.20 | Employment Agreement by and between Company and Boo-Ali Siddiqui dated effective April 1, 2010.* |
| 10.21 | Amendment to Employment Agreement between NetSol Technologies, Inc. and Najeeb Ghauri dated effective July 25, 2013.* |
| 10.22 | Amendment to Employment Agreement between NetSol Technologies, Inc. and Boo-Ali Siddiqui dated effective July 25, 2013.* |
| 10.23 | Amendment to Employment Agreement between NetSol Technologies, Inc. and Patti L.W. McGlasson dated effective July 25, 2013.* |
| 10.24 | Restated Charter of the Compensation Committee dated effective September 10, 2013* |
| 10.25 | Restated Charter of the Nominating and Corporate Governance Committee dated effective September 10, 2013.* |
| 10.26 | Restated Charter of the Audit Committee dated effective September 10, 2013* |
| 10.27 | Restated Code of Business Conduct & Ethics dated effective September 10, 2013* |
| 10.28 | Consulting Agreement between Roger Almond and NetSol Technologies, Inc. dated September 9, 2013.* |
| 10.29 | Amendment to Consulting Agreement between Roger Almond and NetSol Technologies, Inc. dated September 9, 2014(1)* |
10.30 | Fourth amendment to Employment Agreement between NetSol Technologies, Inc. and Najeeb Ghauri dated effective June 30,2014 incorporated by reference as exhibit 10.38 to the Current Report filed on Form 8-K on July 3, 2014.* | |
10.31 | Third amendment to Employment Agreement between NetSol Technologies, Inc. and Patti L. W. McGlasson dated effective June 30,2014 incorporated by reference as exhibit 10.40 to the Current Report filed on Form 8-K on July 3, 2014.* | |
| 10.32 | Employment Agreement between NetSol Technologies, Inc. and Roger K. Almond dated effective March 1, 2015, incorporated by reference as exhibit 10.46 to the Current Report filed on form 8-K on March 3, 2015.* | |
| 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 15, | BY: | / |
| Najeeb Ghauri | ||
| Chief Executive Officer | ||
| Date: September 15, | BY: | /S/ ROGER K. ALMOND |
| Roger K. Almond | ||
| Chief Financial Officer | ||
| Principal Financial 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 15, | BY: | / | |
| Najeeb U. Ghauri | |||
| Chief Executive Officer | |||
| Director, Chairman | |||
| Date: September 15, | BY: | /S/ ROGER K. ALMOND | |
| Roger K. Almond | |||
| Chief Financial Officer | |||
| Principal | |||
| Date: September 15, | BY: | ||
| /S/ NAEEM GHAURI | |||
| Naeem Ghauri | |||
| Director | |||
| Date: September 15, 2015 | BY: | /S/ ASAD GHAURI | |
| Asad Ghauri | |||
| Director | |||
| Date: September 15, | BY: | /S/ EUGEN BECKERT | |
| Eugen Beckert | |||
| Director | |||
| Date: September 15, | BY: | /S/ SHAHID JAVED BURKI | |
| Shahid Javed Burki | |||
| Director | |||
| Date: September 15, | BY: | /S/ MARK CATON | |
| Mark Caton | |||
| Director | |||
| Date: September 15, | BY: | /S/ JEFFREY BILBREY | |
| Jeffrey Bilbrey | |||
| Director |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Description | Page | |
| F-2 | ||
| Consolidated Balance Sheets as of June 30, | F-3 | |
| F-4 | ||
| F-6 | ||
| F-8 | ||
| F-10 |
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Director
NetSol Technologies, Inc. and subsidiaries
Calabasas, California
We have audited the accompanying consolidated balance sheets of NetSol Technologies, Inc. and subsidiaries (The(the “Company”) as of June 30, 20142015 and 2013,2014, and the related consolidated statements of operations, and comprehensive income (loss), stockholders’ equity and cash flows for each of the two 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, 20142015 and 20132014 and the results of their operations and their cash flows for each of the two years in the two-year period then ended in conformity with accounting principles generally accepted in the United States of America.
Los Angeles, CA
September 15,
| F-2 |
| ASSETS | 2014 | 2013 | ||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 11,462,695 | $ | 7,874,318 | ||||
| Restricted cash | 2,528,844 | 1,875,237 | ||||||
| Accounts receivable, net | 5,403,165 | 12,761,375 | ||||||
| Accounts receivable, net-related party | 2,232,610 | 1,922,837 | ||||||
| Revenues in excess of billings | 2,377,367 | 15,367,198 | ||||||
| Other current assets | 2,857,879 | 2,273,314 | ||||||
| Total current assets | 26,862,560 | 42,074,279 | ||||||
| Investment under equity method | - | 545,483 | ||||||
| Property and equipment, net | 29,721,128 | 20,978,369 | ||||||
| Intangible assets, net | 28,803,018 | 29,452,654 | ||||||
| Goodwill | 9,516,568 | 9,653,330 | ||||||
| Total assets | $ | 94,903,274 | $ | 102,704,115 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 5,234,887 | $ | 4,027,147 | ||||
| Current portion of loans and obligations under capitalized leases | 5,791,258 | 5,308,626 | ||||||
| Unearned revenues | 3,239,852 | 2,446,018 | ||||||
| Common stock to be issued | 347,518 | 88,325 | ||||||
| Total current liabilities | 14,613,515 | 11,870,116 | ||||||
Long term loans and obligations under capitalized leases; less current maturities | 1,532,080 | 1,412,212 | ||||||
| Total liabilities | 16,145,595 | 13,282,328 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders' equity: | ||||||||
| Preferred stock, $.01 par value; 500,000 authorized | - | - | ||||||
Common stock, $.01 par value; 14,500,000 shares authorized; 9,150,889 and 8,929,523 issued and outstanding as of June 30, 2014 and 2013 | 91,509 | 89,295 | ||||||
| Additional paid-in-capital | 115,394,097 | 114,292,510 | ||||||
| Treasury stock | (415,425 | ) | (415,425 | ) | ||||
| Accumulated deficit | (35,177,303 | ) | (23,821,256 | ) | ||||
| Stock subscription receivable | (2,280,488 | ) | (2,280,488 | ) | ||||
| Other comprehensive loss | (14,979,223 | ) | (15,714,112 | ) | ||||
| Total NetSol stockholders' equity | 62,633,167 | 72,150,524 | ||||||
| Non-controlling interest | 16,124,512 | 17,271,263 | ||||||
| Total stockholders' equity | 78,757,679 | 89,421,787 | ||||||
| Total liabilities and stockholders' equity | $ | 94,903,274 | $ | 102,704,115 | ||||
| 2015 | 2014 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 14,168,957 | $ | 11,462,695 | ||||
| Restricted cash | 90,000 | 2,528,844 | ||||||
| Accounts receivable, net of allowance of 524,565 and 1,088,172 | 6,480,344 | 5,219,275 | ||||||
| Accounts receivable, net - related party | 3,491,899 | 2,416,500 | ||||||
| Revenues in excess of billings | 5,267,275 | 2,377,367 | ||||||
| Other current assets | 2,012,190 | 2,857,879 | ||||||
| Total current assets | 31,510,665 | 26,862,560 | ||||||
| Property and equipment, net | 25,119,634 | 29,721,128 | ||||||
| Intangible assets, net | 22,815,467 | 28,803,018 | ||||||
| Goodwill | 9,516,568 | 9,516,568 | ||||||
| Total assets | $ | 88,962,334 | $ | 94,903,274 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 5,952,561 | $ | 5,234,887 | ||||
| Current portion of loans and obligations under capitalized leases | 3,896,353 | 5,791,258 | ||||||
| Unearned revenues | 4,897,327 | 3,239,852 | ||||||
| Common stock to be issued | 88,324 | 347,518 | ||||||
| Total current liabilities | 14,834,565 | 14,613,515 | ||||||
| Long term loans and obligations under capitalized leases;less current maturities | 487,492 | 1,532,080 | ||||||
| Total liabilities | 15,322,057 | 16,145,595 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $.01 par value; 500,000 shares authorized; | - | - | ||||||
| Common stock, $.01 par value; 14,500,000 shares authorized; 10,307,826 shares issued and 10,280,547 outstanding as of June 30, 2015 and 9,150,889 shares issued and 9,123,610 outstanding as of June 30, 2014 | 103,078 | 91,509 | ||||||
| Additional paid-in-capital | 119,209,807 | 115,394,097 | ||||||
| Treasury stock (27,279 shares) | (415,425 | ) | (415,425 | ) | ||||
| Accumulated deficit | (40,726,121 | ) | (35,177,303 | ) | ||||
| Stock subscription receivable | (1,204,603 | ) | (2,280,488 | ) | ||||
| Other comprehensive loss | (17,167,100 | ) | (14,979,223 | ) | ||||
| Total NetSol stockholders’ equity | 59,799,636 | 62,633,167 | ||||||
| Non-controlling interest | 13,840,641 | 16,124,512 | ||||||
| Total stockholders’ equity | 73,640,277 | 78,757,679 | ||||||
| Total liabilities and stockholders’ equity | $ | 88,962,334 | $ | 94,903,274 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
Consolidated Statements of Operations
For the Years Ended June 30,
| 2014 | 2013 | |||||||
| Net Revenues: | ||||||||
| License fees | $ | 5,433,053 | $ | 17,756,447 | ||||
| Maintenance fees | 10,527,216 | 9,550,471 | ||||||
| Services | 15,453,740 | 18,807,962 | ||||||
| Services-related party | 4,970,794 | 3,734,583 | ||||||
| Total net revenues | 36,384,803 | 49,849,463 | ||||||
| Cost of revenues: | ||||||||
| Salaries and consultants | 15,621,806 | 11,256,982 | ||||||
| Travel | 1,705,554 | 1,673,988 | ||||||
| Depreciation and amortization | 6,844,588 | 3,666,102 | ||||||
| Other | 3,548,392 | 3,704,667 | ||||||
| Total cost of revenues | 27,720,340 | 20,301,739 | ||||||
| Gross profit | 8,664,463 | 29,547,724 | ||||||
| Operating expenses: | ||||||||
| Selling and marketing | 4,572,108 | 3,387,803 | ||||||
| Depreciation and amortization | 1,886,148 | 1,555,402 | ||||||
| General and administrative | 15,046,328 | 10,994,053 | ||||||
| Research and development cost | 249,712 | 158,821 | ||||||
| Total operating expenses | 21,754,296 | 16,096,079 | ||||||
| Income (loss) from operations | (13,089,833 | ) | 13,451,645 | |||||
| Other income and (expenses) | ||||||||
| Gain (loss) on sale of assets | (229,805 | ) | 3,682 | |||||
| Interest expense | (255,677 | ) | (663,967 | ) | ||||
| Interest income | 261,251 | 185,343 | ||||||
| Gain on foreign currency exchange transactions | 50,777 | 1,367,448 | ||||||
| Share of net income (loss) from equity investment | (545,483 | ) | 482,664 | |||||
| Amortization of financing costs | - | (635,882 | ) | |||||
| Other income | 50,578 | 148,298 | ||||||
| Total other income (expenses) | (668,359 | ) | 887,586 | |||||
| Net income (loss) before income taxes | (13,758,192 | ) | 14,339,231 | |||||
| Income tax provision | (338,282 | ) | (465,426 | ) | ||||
| Net income (loss) from continuing operations | (14,096,474 | ) | 13,873,805 | |||||
| Income (loss) from discontinued operations net of gain on disposal | 1,158,752 | (1,785,750 | ) | |||||
| Net income (loss) | (12,937,722 | ) | 12,088,055 | |||||
| Non-controlling interest | 1,581,675 | (4,224,912 | ) | |||||
| Net income (loss) attributable to NetSol | $ | (11,356,047 | ) | $ | 7,863,143 | |||
| Amount attributable to NetSol common shareholders: | ||||||||
| Income (loss) from continuing operations | $ | (12,514,799 | ) | $ | 9,648,893 | |||
| Income (loss) from discontinued operations | 1,158,752 | (1,785,750 | ) | |||||
| Net income (loss) | $ | (11,356,047 | ) | $ | 7,863,143 | |||
| Net income (loss) per share: | ||||||||
| Net income (loss) per share from continuing operations: | ||||||||
| Basic | $ | (1.38 | ) | $ | 1.18 | |||
| Diluted | $ | (1.38 | ) | $ | 1.16 | |||
| Net income (loss) per share from discontinued operations: | ||||||||
| Basic | $ | 0.13 | $ | (0.22 | ) | |||
| Diluted | $ | 0.13 | $ | (0.22 | ) | |||
| Net income (loss) per common share | ||||||||
| Basic | $ | (1.25 | ) | $ | 0.96 | |||
| Diluted | $ | (1.25 | ) | $ | 0.95 | |||
| Weighted average number of shares outstanding | ||||||||
| Basic | 9,063,345 | 8,201,247 | ||||||
| Diluted | 9,063,345 | 8,288,951 | ||||||
| 2015 | 2014 | |||||||
| Net Revenues: | ||||||||
| License fees | $ | 6,328,989 | $ | 5,433,053 | ||||
| Maintenance fees | 12,196,073 | 10,034,681 | ||||||
| Services | 24,827,822 | 15,230,708 | ||||||
| Maintenance fees - related party | 395,951 | 492,535 | ||||||
| Services - related party | 7,299,743 | 5,193,826 | ||||||
| Total net revenues | 51,048,578 | 36,384,803 | ||||||
| Cost of revenues: | ||||||||
| Salaries and consultants | 19,289,536 | 15,621,806 | ||||||
| Travel | 2,374,864 | 1,705,554 | ||||||
| Depreciation and amortization | 8,336,857 | 6,844,588 | ||||||
| Other | 3,020,107 | 3,548,392 | ||||||
| Total cost of revenues | 33,021,364 | 27,720,340 | ||||||
| Gross profit | 18,027,214 | 8,664,463 | ||||||
| Operating expenses: | ||||||||
| Selling and marketing | 6,092,530 | 4,572,108 | ||||||
| Depreciation and amortization | 2,006,957 | 1,886,148 | ||||||
| General and administrative | 14,778,641 | 15,046,328 | ||||||
| Research and development cost | 314,892 | 249,712 | ||||||
| Total operating expenses | 23,193,020 | 21,754,296 | ||||||
| Loss from operations | (5,165,806 | ) | (13,089,833 | ) | ||||
| Other income and (expenses) | ||||||||
| Loss on sale of assets | (64,598 | ) | (229,805 | ) | ||||
| Interest expense | (166,962 | ) | (255,677 | ) | ||||
| Interest income | 331,432 | 261,251 | ||||||
| Gain (loss) on foreign currency exchange transactions | (453,770 | ) | 50,777 | |||||
| Share of net loss from equity investment | - | (545,483 | ) | |||||
| Other income | 684,030 | 50,578 | ||||||
| Total other income (expenses) | 330,132 | (668,359 | ) | |||||
| Net loss before income taxes | (4,835,674 | ) | (13,758,192 | ) | ||||
| Income tax provision | (413,498 | ) | (338,282 | ) | ||||
| Net loss from continuing operations | (5,249,172 | ) | (14,096,474 | ) | ||||
| Income from discontinued operations | - | 1,158,752 | ||||||
| Net loss | (5,249,172 | ) | (12,937,722 | ) | ||||
| Non-controlling interest | (299,646 | ) | 1,581,675 | |||||
| Net loss attributable to NetSol | $ | (5,548,818 | ) | $ | (11,356,047 | ) | ||
| Amount attributable to NetSol common shareholders: | ||||||||
| Loss from continuing operations | $ | (5,548,818 | ) | $ | (12,514,799 | ) | ||
| Income from discontinued operations | - | 1,158,752 | ||||||
| Net loss | $ | (5,548,818 | ) | $ | (11,356,047 | ) | ||
| Net loss per share: | ||||||||
| Net loss per share from continuing operations: | ||||||||
| Basic | $ | (0.57 | ) | $ | (1.38 | ) | ||
| Diluted | $ | (0.57 | ) | $ | (1.38 | ) | ||
| Net income per share from discontinued operations: | ||||||||
| Basic | $ | - | $ | 0.13 | ||||
| Diluted | $ | - | $ | 0.13 | ||||
| Net loss per common share | ||||||||
| Basic | $ | (0.57 | ) | $ | (1.25 | ) | ||
| Diluted | $ | (0.57 | ) | $ | (1.25 | ) | ||
| Weighted average number of shares outstanding | ||||||||
| Basic | 9,728,122 | 9,063,345 | ||||||
| Diluted | 9,728,122 | 9,063,345 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended June 30,
| 2014 | 2013 | |||||||
| Net Income (loss) | $ | (11,356,047 | ) | $ | 7,863,143 | |||
| Other comprehensive income (loss): | ||||||||
| Translation adjustment | 1,129,441 | (4,725,022 | ) | |||||
| Comprehensive income (loss) | (10,226,606 | ) | 3,138,121 | |||||
| Comprehensive income (loss) attributable to non-controlling interest | 394,552 | (1,372,669 | ) | |||||
| Comprehensive income (loss) attributable to NetSol | $ | (10,621,158 | ) | $ | 4,510,790 | |||
| For the Year | ||||||||
| Ended June 30, | ||||||||
| 2015 | 2014 | |||||||
| Net loss | $ | (5,548,818 | ) | $ | (11,356,047 | ) | ||
| Other comprehensive income (loss): | ||||||||
| Translation adjustment | (3,239,086 | ) | 1,129,441 | |||||
| Comprehensive income (loss) | (8,787,904 | ) | (10,226,606 | ) | ||||
| Comprehensive income (loss) attributable to non-controlling interest | (1,051,209 | ) | 394,552 | |||||
| Comprehensive income (loss) attributable to NetSol | $ | (7,736,695 | ) | $ | (10,621,158 | ) | ||
The accompanying notes are an integral part of these consolidated financial statements.
| F-5 |
| Common Stock | Additional Paid-in | Treasury | Accumulated | Stock Sub- scriptions | Shares to | Other Compre- | Non Controlling | Total Stockholders' | ||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Shares | Deficit | Receivable | be Issued | Loss | Interest | Equity | |||||||||||||||||||||||||||||||
Balance at June 30, 2012 | 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 | ||||||||||||||||||
Exercise of common stock options | 451,985 | 4,519 | 2,568,181 | - | - | (161,000 | ) | - | - | - | 2,411,700 | |||||||||||||||||||||||||||||
Exercise of subsidiary common stock options | - | - | - | - | - | - | - | - | 107,945 | 107,945 | ||||||||||||||||||||||||||||||
Exercise 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 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 adjustment | - | - | - | - | - | - | - | (3,352,353 | ) | (1,372,669 | ) | (4,725,022 | ) | |||||||||||||||||||||||||||
| Net income for the year | - | - | - | - | 7,863,143 | - | - | - | 4,224,912 | 12,088,055 | ||||||||||||||||||||||||||||||
Balance at June 30, 2013 | 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 | |||||||||||||||||
| Additional | Stock | Other | Non | Total | ||||||||||||||||||||||||||||||||||||
| Common Stock | Paid-in | Treasury | Accumulated | Subscriptions | Shares to | Comprehensive | Controlling | Stockholders’ | ||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Shares | Deficit | Receivable | be Issued | Loss | Interest | Equity | |||||||||||||||||||||||||||||||
| Balance at June 30, 2013 | 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 | ||||||||||||||||||
| Exercise of common stock options | 112,793 | 1,129 | 708,306 | - | - | - | - | - | - | 709,435 | ||||||||||||||||||||||||||||||
| Exercise of subsidiary common stock options | - | - | (823,048 | ) | - | - | - | - | - | 1,179,077 | 356,029 | |||||||||||||||||||||||||||||
| Common stock issued for: | ||||||||||||||||||||||||||||||||||||||||
| Services | 81,573 | 815 | 816,602 | - | - | - | 259,193 | - | - | 1,076,610 | ||||||||||||||||||||||||||||||
| Common stock issued for: | �� | |||||||||||||||||||||||||||||||||||||||
| accounts payable | 27,000 | 270 | 209,790 | - | - | - | - | - | - | 210,060 | ||||||||||||||||||||||||||||||
| Equity component shown as current liability at | ||||||||||||||||||||||||||||||||||||||||
| June 30, 2013 | - | - | - | - | - | - | 88,325 | - | - | 88,325 | ||||||||||||||||||||||||||||||
| June 30, 2014 | - | - | - | - | - | - | (347,518 | ) | - | - | (347,518 | ) | ||||||||||||||||||||||||||||
| Fair value of options issued | - | - | 189,937 | - | - | - | - | - | - | 189,937 | ||||||||||||||||||||||||||||||
| Acquisition of non controlling interest in subsidiary | - | - | - | - | - | - | - | - | (95,254 | ) | (95,254 | ) | ||||||||||||||||||||||||||||
| Dividend to non controlling interest | - | - | - | - | - | - | - | - | (1,008,543 | ) | (1,008,543 | ) | ||||||||||||||||||||||||||||
| Adjustment of financing cost | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||
| Sale of subsidiary | (34,908 | ) | (34,908 | ) | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | 734,889 | 394,552 | 1,129,441 | ||||||||||||||||||||||||||||||
| Net loss for the year | - | - | - | - | (11,356,047 | ) | - | - | (1,581,675 | ) | (12,937,722 | ) | ||||||||||||||||||||||||||||
| Balance at June 30, 2014 | 9,150,889 | $ | 91,509 | $ | 115,394,097 | $ | (415,425 | ) | $ | (35,177,303 | ) | $ | (2,280,488 | ) | $ | - | $ | (14,979,223 | ) | $ | 16,124,512 | $ | 78,757,679 | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-6 |
For the Years Ended June 30,
| Common Stock | Additional Paid-in | Treasury | Accumulated | Stock Sub- scriptions | Shares to | Other Compre- hensive | Non Controlling | Total Stockholders' | ||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Shares | Deficit | Receivable | be Issued | Loss | Interest | Equity | |||||||||||||||||||||||||||||||
Balance at June 30, 2013 | 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 | ||||||||||||||||||
Exercise of common stock options | 112,793 | 1,129 | 708,306 | - | - | - | - | - | - | 709,435 | ||||||||||||||||||||||||||||||
Exercise of subsidiary common stock options | - | - | (823,048 | ) | - | - | - | - | - | 1,179,077 | 356,029 | |||||||||||||||||||||||||||||
| Common stock issued for: | ||||||||||||||||||||||||||||||||||||||||
| Services | 81,573 | 815 | 816,602 | - | - | - | 259,193 | - | - | 1,076,610 | ||||||||||||||||||||||||||||||
| Common stock issued for: | ||||||||||||||||||||||||||||||||||||||||
| accounts payable | 27,000 | 270 | 209,790 | - | - | - | - | - | - | 210,060 | ||||||||||||||||||||||||||||||
Equity component shown as current liability at | ||||||||||||||||||||||||||||||||||||||||
| June 30, 2013 | - | - | - | - | - | - | 88,325 | - | - | 88,325 | ||||||||||||||||||||||||||||||
| June 30, 2014 | - | - | - | - | - | - | (347,518 | ) | - | - | (347,518 | ) | ||||||||||||||||||||||||||||
Fair value of options issued | - | - | 189,937 | - | - | - | - | - | - | 189,937 | ||||||||||||||||||||||||||||||
Acqusition of non controlling interest in subsidiary | - | - | - | - | - | - | - | - | (95,254 | ) | (95,254 | ) | ||||||||||||||||||||||||||||
Dividend to non controlling interest | - | - | - | - | - | - | - | - | (1,008,543 | ) | (1,008,543 | ) | ||||||||||||||||||||||||||||
| Adjustment of financing cost | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Sale of subsidiary | - | - | - | - | - | - | - | - | (34,908 | ) | (34,908 | ) | ||||||||||||||||||||||||||||
Foreign currency translation adjustsment | - | - | - | - | - | - | - | 734,889 | 394,552 | 1,129,441 | ||||||||||||||||||||||||||||||
| Net loss for the year | - | - | - | - | (11,356,047 | ) | - | - | (1,581,675 | ) | (12,937,722 | ) | ||||||||||||||||||||||||||||
Balance at June 30, 2014 | 9,150,889 | $ | 91,509 | $ | 115,394,097 | $ | (415,425 | ) | $ | (35,177,303 | ) | $ | (2,280,488 | ) | $ | - | $ | (14,979,223 | ) | $ | 16,124,512 | $ | 78,757,679 | |||||||||||||||||
| Additional | Stock | Other | Non | Total | ||||||||||||||||||||||||||||||||||||
| Common Stock | Paid-in | Treasury | Accumulated | Subscriptions | Shares to | Comprehensive | Controlling | Stockholders’ | ||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Shares | Deficit | Receivable | be Issued | Loss | Interest | Equity | |||||||||||||||||||||||||||||||
| Balance at June 30, 2014 | 9,150,889 | $ | 91,509 | $ | 115,394,097 | $ | (415,425 | ) | $ | (35,177,303 | ) | $ | (2,280,488 | ) | $ | - | $ | (14,979,223 | ) | $ | 16,124,512 | 78,757,679 | ||||||||||||||||||
| Exercise of common stock options | 49,329 | 493 | 190,907 | - | - | - | - | - | - | 191,400 | ||||||||||||||||||||||||||||||
| Exercise of subsidiary common stock options | - | - | (16,079 | ) | - | - | - | - | - | 28,264 | 12,185 | |||||||||||||||||||||||||||||
| Common stock issued for: | ||||||||||||||||||||||||||||||||||||||||
| Cash | 743,107 | 7,430 | 2,352,100 | - | - | (64,931 | ) | - | - | 2,294,599 | ||||||||||||||||||||||||||||||
| Services | 364,501 | 3,646 | 1,472,062 | - | - | 158,635 | (259,194 | ) | - | - | 1,375,149 | |||||||||||||||||||||||||||||
| Equity component shown as current liability at | ||||||||||||||||||||||||||||||||||||||||
| June 30, 2014 | - | - | - | - | - | - | 347,518 | - | - | 347,518 | ||||||||||||||||||||||||||||||
| June 30, 2015 | - | - | - | - | - | - | (88,324 | ) | - | - | (88,324 | ) | ||||||||||||||||||||||||||||
| Fair value of options issued | - | - | 622,488 | - | - | - | - | - | - | 622,488 | ||||||||||||||||||||||||||||||
| Acquisition of non controlling interest in subsidiary | - | - | 176,413 | - | - | - | - | - | (753,635 | ) | (577,222 | ) | ||||||||||||||||||||||||||||
| Dividend to non controlling interest | - | - | - | - | - | - | - | - | (806,937 | ) | (806,937 | ) | ||||||||||||||||||||||||||||
| Adjustment in subscription receivable | - | - | (982,181 | ) | - | - | 982,181 | - | - | - | - | |||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | (2,187,877 | ) | (1,051,209 | ) | (3,239,086 | ) | |||||||||||||||||||||||||||
| Net loss for the year | - | - | - | - | (5,548,818 | ) | - | - | 299,646 | (5,249,172 | ) | |||||||||||||||||||||||||||||
| Balance at June 30, 2015 | 10,307,826 | $ | 103,078 | $ | 119,209,807 | $ | (415,425 | ) | $ | (40,726,121 | ) | $ | (1,204,603 | ) | $ | - | $ | (17,167,100 | ) | $ | 13,840,641 | $ | 73,640,277 | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-7 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended June 30,
| 2014 | 2013 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | (12,937,722 | ) | $ | 12,088,055 | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 8,730,736 | 5,702,749 | ||||||
| Provision for bad debts | 1,023,796 | 415,482 | ||||||
| Share of net loss (income) from investment under equity method | 545,483 | (482,664 | ) | |||||
| (Gain) loss on sale of assets | 229,805 | (3,682 | ) | |||||
| Gain on sale of subsidiary | (1,870,871 | ) | - | |||||
| Stock issued for interest on notes payable | - | 211,111 | ||||||
| Stock issued for services | 1,076,610 | 38,790 | ||||||
| Fair market value of warrants and stock options granted | 189,937 | 678,494 | ||||||
| Impairment of goodwill | 136,762 | - | ||||||
| Amortization of financing costs | - | 635,882 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 7,094,977 | (2,024,814 | ) | |||||
| Accounts receivable-related party | (309,773 | ) | (100,070 | ) | ||||
| Revenue in excess of billing | 12,825,849 | (4,002,140 | ) | |||||
| Other current assets | 216,357 | 412,036 | ||||||
| Accounts payable and accrued expenses | 1,682,956 | 276,590 | ||||||
| Net cash provided by operating activities | 18,634,902 | 13,845,819 | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | (13,236,136 | ) | (8,958,876 | ) | ||||
| Sales of property and equipment | 88,641 | 118,432 | ||||||
| Sale of subsidiary | 1,810,700 | - | ||||||
| Purchase of non-controlling interest in subsidiaries | (17,852 | ) | (799,349 | ) | ||||
| Increase in intangible assets | (3,385,151 | ) | (4,832,459 | ) | ||||
| Net cash used in investing activities | (14,739,798 | ) | (14,472,252 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from the exercise of stock options and warrants | 709,435 | 2,537,712 | ||||||
| Payment to common shareholders for fractional shares | - | (194 | ) | |||||
| Proceeds from exercise of subsidiary options | 356,029 | 111,330 | ||||||
| Restricted cash | (653,607 | ) | (1,734,006 | ) | ||||
| Dividend paid by subsidiary to Non controlling interest | (1,008,543 | ) | (388,997 | ) | ||||
| Proceeds from bank loans | 3,244,382 | 1,795,663 | ||||||
| Payments on capital lease obligations and loans - net | (2,880,840 | ) | (630,714 | ) | ||||
| Net cash provided by (used in) financing activities | (233,144 | ) | 1,690,794 | |||||
| Effect of exchange rate changes | (73,583 | ) | (789,650 | ) | ||||
| Net increase in cash and cash equivalents | 3,588,377 | 274,711 | ||||||
| Cash and cash equivalents, beginning of the period | 7,874,318 | 7,599,607 | ||||||
| Cash and cash equivalents, end of period | $ | 11,462,695 | $ | 7,874,318 | ||||
| 2015 | 2014 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (5,249,172 | ) | $ | (12,937,722 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 10,343,814 | 8,730,736 | ||||||
| Provision for bad debts | (434,928 | ) | 1,023,796 | |||||
| Share of net loss from investment under equity method | - | 545,483 | ||||||
| Loss on sale of assets | 64,598 | 229,805 | ||||||
| Gain on sale of subsidiary | - | (1,870,871 | ) | |||||
| Stock issued for services | 1,375,149 | 1,076,610 | ||||||
| Fair market value of warrants and stock options granted | 622,488 | 189,937 | ||||||
| Impairment of goodwill | - | 136,762 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (871,959 | ) | 7,094,977 | |||||
| Accounts receivable - related party | (1,179,931 | ) | (309,773 | ) | ||||
| Revenues in excess of billing | (3,013,730 | ) | 12,825,849 | |||||
| Other current assets | 580,618 | 216,357 | ||||||
| Accounts payable and accrued expenses | 726,700 | 1,060,832 | ||||||
| Unearned revenue | 2,114,635 | 622,124 | ||||||
| Net cash provided by operating activities | 5,078,282 | 18,634,902 | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | (3,558,712 | ) | (13,236,136 | ) | ||||
| Sales of property and equipment | 1,102,615 | 88,641 | ||||||
| Sale of subsidiary | - | 1,810,700 | ||||||
| Purchase of non-controlling interest in subsidiaries | (577,222 | ) | (17,852 | ) | ||||
| Increase in intangible assets | - | (3,385,151 | ) | |||||
| Net cash used in investing activities | (3,033,319 | ) | (14,739,798 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from sale of common stock | 2,294,599 | - | ||||||
| Proceeds from the exercise of stock options and warrants | 191,400 | 709,435 | ||||||
| Proceeds from exercise of subsidiary options | 12,185 | 356,029 | ||||||
| Restricted cash | 2,438,844 | (653,607 | ) | |||||
| Dividend paid by subsidiary to Non controlling interest | (806,937 | ) | (1,008,543 | ) | ||||
| Proceeds from bank loans | 1,410,313 | 3,244,382 | ||||||
| Payments on capital lease obligations and loans - net | (4,079,174 | ) | (2,880,840 | ) | ||||
| Net cash provided by (used in) financing activities | 1,461,230 | (233,144 | ) | |||||
| Effect of exchange rate changes | (799,931 | ) | (73,583 | ) | ||||
| Net increase in cash and cash equivalents | 2,706,262 | 3,588,377 | ||||||
| Cash and cash equivalents, beginning of the period | 11,462,695 | 7,874,318 | ||||||
| Cash and cash equivalents, end of period | $ | 14,168,957 | $ | 11,462,695 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-8 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended June 30,
| 2014 | 2013 | |||||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 325,691 | $ | 510,026 | ||||
| Taxes | $ | 402,482 | $ | 25,191 | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Stock issued for the payment of vendors | $ | 210,060 | $ | - | ||||
| Stock issued for the conversion of convertible notes payable | $ | - | $ | 4,000,000 | ||||
| Stock issued for the conversion of interest payable | $ | - | $ | 391,111 | ||||
| For the Year | ||||||||
| Ended June 30, | ||||||||
| 2015 | 2014 | |||||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 162,904 | $ | 325,691 | ||||
| Taxes | $ | 503,924 | $ | 402,482 | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Stock issued for the payment of vendors | $ | - | $ | 210,060 | ||||
| Adjustment of uncollectable subscription receivable with additional paid in capital | $ | 982,181 | $ | - | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-9 |
Notes to Consolidated Financial Statements
June 30, 20142015 and 2013
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
NetSol Technologies, Inc. and subsidiaries(collectively,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”)Company as follows:
| Wholly-owned Subsidiaries | |
| NetSol Technologies Americas, Inc. (“NTA”) | |
| NetSol Technologies Limited (“NetSol UK”) | |
| NetSol Technologies Australia Pty Limited (“NetSol Australia”) | |
| NetSol Technologies Europe Limited (“NTE”) | |
| NTPK (Thailand) Co. Limited (“NTPK Thailand”) | |
| NetSol Technologies Thailand Limited (“NetSol Thai”) | |
| NetSol Connect (Private), Ltd. (“Connect”) | |
| NetSol Technologies (Beijing) Co. Ltd. (NetSol Beijing) | |
| NetSol Omni (Private) Ltd. (“Omni”) | |
| NetSol Technologies (GmbH) (“NTG”) |
| Majority-owned Subsidiaries | |
| NetSol Technologies, Ltd. (“NetSol PK”) | |
| NetSol Innovation (Private) Limited (“NetSol Innovation”) | |
| Vroozi, Inc. (“Vroozi”) – discontinued on March 31, 2014 | |
| Virtual Lease Services Holdings Limited (“VLSH”) | |
| Virtual Lease Services Limited (“VLS”) | |
| Virtual Lease Services (Ireland) Limited (VLSIL) |
The Company consolidates any variable interest entities of which it is the primary beneficiary. Equity investments through which the Company exercises significant influence over but does not control the investee and is not the primary beneficiary of the investee’s activities are accounted for using the equity method. Investments through which the Company is not able to exercise significant influence over the investee and which do not have readily determinable fair values are accounted for under the cost method. All material inter-company accounts have been eliminated in the consolidation.
| F-10 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 20142015 and 2013
(B) Basis of Presentation
The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).
(C) Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(D) Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid debt instruments with original maturities of three months or less which are not securing any corporate obligations.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2015 and 2014
(E) Concentration of Credit Risk
Cash includes cash on hand and demand deposits in accounts maintained within the United States as well as in foreign countries. Certain financial instruments, which subject the Company to concentration of credit risk, consist of cash and restricted cash. The Company maintains balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for the banks located in the Unites States. Balances at financial institutions within certain foreign countries are not covered by insurance. As of June 30, 20142015 and 2013,2014, the Company had uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $8,399,136$8,969,443 and $4,774,715,$8,399,136, respectively. The Company has not experienced any losses in such accounts.
The Company’s operations are carried out globally. Accordingly, the Company'sCompany’s business, financial condition and results of operations may be influenced by the political, economic and legal environments of each country and by the general state of the country’s economy. The Company'sCompany’s operations in each foreign country are subject to specific considerations and significant risks not typically associated with companies in economically developed nations. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company'sCompany’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
(F) Restricted Cash
The Company has certificates of deposits (“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, 20142015 and 2013,2014, the outstanding balance on the line of credit was $1,990,984$nil and 1,785,237,$1,990,984, respectively, with a corresponding restriction to the CDs balances. The line of credit hashad a maximum available balance of $2,000,000.
In addition, the Company has also placed $90,000 in savinga savings account with HSBC as collateral against a standby letter of credit issued in by the bank in favor of the landlord of newfor office space.
One of the 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, 20142015 and 2013,2014, the outstanding balance on the line of credit was $447,860$nil and $0,$447,860, respectively, with a corresponding restriction to the CDs balances. The line of credit hashad a maximum available balance of $500,000.
| F-12 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 20142015 and 2013
(G) Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management regularly reviews the composition of accounts receivable and analyzes customer credit worthiness, customer concentrations, current economic trends and changes in customer payment patterns. Reserves are recorded primarily on a specific identification basis. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of June 30, 20142015 and 2013,2014, the Company had recorded allowance for doubtful accounts of $524,565 and $1,088,172, and $922,633, respectively.
(H) Revenues in Excess of Billings
Revenues in excess of billings represent the total of the project to be billed to the customer over the revenues recognized as per US GAAP. As the customer iscustomers are billed under the terms of their contract, the corresponding amount is transferred from this account to “Accounts Receivable.”
(I) Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation is computed using various methods over the estimated useful lives of the assets, ranging from three to twenty years.
| Category | Estimated Useful Life | |
| Computer Equipment | 3 to 5 Years | |
| Office furniture and equipment: | 5 to 10 Years | |
| Building | 20 Years | |
| Autos | 5 Years | |
| Assets under capital leases | 3 to 10 Years | |
| Improvements | 5 to 10 Years |
The Company capitalizes costs of materials, consultants, and payroll and payroll-related costs for employees incurred in developing internal-use computer software. These costs are included with “Computer equipment and software.”
(J) Impairment of Long-Lived Assets
The Company tests long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2015 and 2014
(K) Intangible Assets
Intangible assets consist of product licenses, renewals, enhancements, copyrights, trademarks, trade names, and customer lists. Intangible assets with finite lives are amortized over the estimated useful life and are evaluated for impairment at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company assesses recoverability by determining whether the carrying value of such assets will be recovered through the discounted expected future cash flows. If the future discounted cash flows are less than the carrying amount of these assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets.
(L) Software Development Costs
Costs incurred to internally develop computer software products or to enhance an existing product are recorded as research and development costs and expensed when incurred until technological feasibility for the respective product is established. Thereafter, all software development costs are capitalized and reported at the lower of unamortized cost or net realizable value. Capitalization ceases when the product or enhancement is available for general release to customers.
The Company makes on-going evaluations of the recoverability of its capitalized software projects by comparing the amount capitalized for each product to the estimated present value of expected future net income from the product. If such evaluations indicate that the unamortized software development costs exceed the present value of expected future net income, the Company writes off the amount which the unamortized software development costs exceed such present value. Capitalized and purchased computer software development costs are being amortized ratably based on the projected revenue associated with the related software or on a straight-line basis.
(M) Goodwill
Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase businesses combination. Goodwill is reviewed for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the carrying amount of goodwill may be impaired. The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value including goodwill. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test. Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. 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.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2015 and 2014
(N) Fair Value of Financial Instruments
The Company applies the provisions of ASC 820-10,“Fair Value Measurements and Disclosures.” ASC 820-10 defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. For certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and short-term debt, the carrying amounts approximate fair value due to their relatively short maturities. The carrying amounts of the long-term debt approximate their fair values based on current interest rates for instruments with similar characteristics.
The three levels of valuation hierarchy are defined as follows:
| Level 1: | Valuations consist of unadjusted quoted prices in active markets for identical assets and liabilities and has the highest |
| Level 2: | Valuations rely on quoted prices in markets that are not active or observable inputs over the full term of the asset or |
| Level 3: | Valuations are based on prices or third party or internal valuation models that require inputs that are significant to the fair value measurement and are less observable and thus have the lowest priority. |
Management analyzes all financial instruments with features of both liabilities and equity under ASC 480,“Distinguishing Liabilities From Equity”and ASC 815,“Derivatives and Hedging.”Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments. In addition, the fair values of freestanding derivative instruments such as warrant and option derivatives are valued using the Black-Scholes model.
(O) Revenue Recognition
The Company 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.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2015 and 2014
(P) Multiple Element Arrangements
The Company may enter into multiple element revenue arrangements in which a customer may purchase a number of different combinations of software licenses, consulting services, maintenance and support, as well as training and development.
Vendor specific objective evidence (“VSOE”) of fair value for each element is based on the price for which the element is sold separately. The Company determines the VSOE of fair value of each element based on historical evidence of the Company’s stand-alone sales of these elements to third-parties or from the stated renewal rate for the elements contained in the initial software license arrangement. When VSOE of fair value does not exist for any undelivered element, revenue is deferred until the earlier of the point at which such VSOE of fair value exists or until all elements of the arrangement have been delivered. The only exception to this guidance is when the only undelivered element is maintenance and support or other services, then the entire arrangement fee is recognized ratably over the performance period.
(Q) Unearned Revenue
Unearned revenue represents billings in excess of revenue earned on contracts and are recognized on a pro-rata basis over the life of the contract. Unearned revenue was $3,239,852$4,897,327 and $2,446,018$3,239,852 as of June 30, 2015 and 2014, and June 30, 2013, respectively.
(R) Cost of Revenues
Cost of revenues includes salaries and benefits for technical employees, consultant costs, amortization of capitalized computer software development costs, depreciation of computer and equipment, travel costs, and indirect costs such as rent and insurance.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES(S) Advertising Costs
The Company expenses the cost of advertising as incurred. Advertising costs for the years ended June 30, 2015 and 2014 were $250,801 and 2013 were $237,391, and $244,498, respectively.
(T) Share-Based Compensation
The Company measures stock-basedrecords stock compensation in accordance with ASC 718,Compensation – Stock Compensation. ASC 718 requires companies to measure compensation cost for stock employee compensation at fair value at the grant date based onand recognize the expense over the employee’s requisite service period. The Company recognizes in the statement of operations the grant-date fair value of the awardstock options and recognize it as expense over the applicable vesting period of the stock award using the straight-line method.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2015 and 2014
(U) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Applicable interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statements of operations.
We transact(V) Foreign Currency Translation
The Company transacts business in various foreign currencies. The accounts of NetSol UK, NTE, VLSH and VLS use the British Pound; VLSIL and NTG use the Euro; NetSol PK, Connect, Omni and NetSol Innovation use Pakistan Rupees; NTPK Thailand usesand NetSol Thai use Thai Baht; NetSol Australia uses the Australian dollar; and NetSol Beijing uses the Chinese Yuan as the functional currencies. NetSol Technologies, Inc., and its subsidiaries, NTA and Vroozi, use the U.S. dollar as the functional currency. Consequently, revenues and expenses of operations outside the United States are translated into U.S. Dollars using average exchange rates while assets and liabilities of operations outside the United States are translated into U.S. Dollars using exchange rates at the balance sheet date. The effects of foreign currency translation adjustments are recorded to other comprehensive income. Accumulated translation losses classified as an item of accumulated other comprehensive loss in the stockholders’ equity section of the consolidated balance sheetsheets were $14,979,223$17,167,100 and $15,714,112$14,979,223 as of June 30, 20142015 and 2013,2014, respectively. During the years ended June 30, 20142015 and 2013,2014, comprehensive income (loss) in the consolidated statements of operations included NetSol’s share of translation loss of $2,187,877 and gain of $734,889, and loss $3,352,353, respectively.
| F-17 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 20142015 and 2013
Net foreign exchange transaction gains (losses) included in non-operating income (expense) in the accompanying consolidated statements of operations were $50,777,$(453,770) and $1,367,448$50,777 for the years ended June 30, 2015 and 2014, and 2013, respectively.
(W) Statement of Cash Flows
The Company'sCompany’s cash flows from operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheet.
(X) Segment Reporting
The Company defines operating segments as components about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performances. The Company allocates its resources and assesses the performance of its sales activities based on the geographic locations of its subsidiaries (see Note 17).
(Y) Reclassifications
Certain 20132014 balances have been reclassified to conform to the 20142015 presentation.
(Z) New |
In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, "Presentation“Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360)."” ASU 2014-08 amends the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations or that have a major effect on the Company'sCompany’s operations and financial results should be presented as discontinued operations. This new accounting guidance is effective for annual periods beginning after December 15, 2014. The Company is currently evaluating the impact of adopting ASU 2014-08 on the Company'sCompany’s results of operations or financial condition.
In May 2014, the FASB(“FASB”) issued Accounting Standards Update No.(“ASU”) 2014-09,Revenue from Contracts with Customers(ASU 2014-09), which supersedes nearly all existingprovides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance under U.S. GAAP.guidance. The standard’s core principle of ASU 2014-09 is tothat a company will recognize revenuesrevenue when it transfers promised goods or services are transferred to customers in an amount that reflects the consideration to which an entitythe company expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required withinIn August 2015, the FASB deferred the effective date of the new revenue recognition process than are required under existing U.S. GAAP. The standard isby one year, which will make it effective for annual periods beginning after December 15, 2016, and interim periods therein, using eitherthe Company in the first quarter of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). Early adoption is not permitted.its fiscal year ending June 30, 2019. The Company is currently in the process of evaluating the impact of the pending adoption of this ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which it will adopt the standard beginning July 1, 2017.statements.
In June 2014, the FASB issued Accounting Standards Update No. 2014-12,Compensation — Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force) (ASU 2014-12). The guidance applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. For all entities, the amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The effective date is the same for both public business entities and all other entities. The Company is currently evaluating the impact of adopting ASU 2014-12 on the Company'sCompany’s results of operations or financial condition.
| F-18 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2015 and 2014
In August 2014, the FASB issued Accounting Standards Update No. 2014-15,Presentation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern (ASU(ASU 2014-15). The guidance in ASU 2014-15 sets forth management'smanagement’s responsibility to evaluate whether there is substantial doubt about an entity'sentity’s ability to continue as a going concern as well as required disclosures. ASU 2014-15 indicates that, when preparing financial statements for interim and annual financial statements, management should evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entity'sentity’s ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. This evaluation should include consideration of conditions and events that are either known or are reasonably knowable at the date the financial statements are issued or are available to be issued, as well as whether it is probable that management'smanagement’s plans to address the substantial doubt will be implemented and, if so, whether it is probable that the plans will alleviate the substantial doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods and annual periods thereafter. Early application is permitted. The adoption of this guidance is not expected to have a material impact on ourthe Company’s consolidated financial statements.
In January 2015, the FASB issued Accounting Standards Update No. 2015-01,Income Statement – Extraordinary and Unusual items(Subtopic 225-20), Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (ASU 2015-01). The amendment eliminates from U.S. GAAP the concept of extraordinary items. This guidance is effective for the Company in the first quarter of fiscal 2017. Early adoption is permitted and allows the Company to apply the amendment prospectively or retrospectively. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In February 2015, FASB issued ASU No. 2015-02, (Topic 810):Amendments to the Consolidation Analysis.ASU No. 2015-02 provides amendments to respond to stakeholders’ concerns about the current accounting for consolidation of certain legal entities. Stakeholders expressed concerns that GAAP might require a reporting entity to consolidate another legal entity in situations in which the reporting entity’s contractual rights do not give it the ability to act primarily on its own behalf, the reporting entity does not hold a majority of the legal entity’s voting rights, or the reporting entity is not exposed to a majority of the legal entity’s economic benefits or obligations. ASU No. 2015-02 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
| F-19 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 20142015 and 2013
In April 2015, FASB issued ASU No. 2015-03, (Subtopic 835-30):Simplifying the Presentation of Debt Issuance Costs.ASU No. 2015-03 provides guidance that will require debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU No. 2015-03 affects disclosures related to debt issuance costs but does not affect existing recognition and measurement guidance for these items. ASU No. 2015-03 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
In April 2015, FASB issued ASU No. 2015-05, (Subtopic 350-40):Customer’s Accounting for Fees Paid in a Cloud Computing Arrangements.ASU No. 2015-05 provides guidance on a customer’s accounting for fees paid in a cloud computing arrangement, which includes software as a service, platform as a service, infrastructure as a service, and other similar hosting arrangements. ASU No. 2015-05 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
No other recently issued accounting pronouncements are expected to have a material impact on the Company’s consolidated financial statements.
NOTE 3 – EARNINGS PER SHARE
Basic earnings per share isare 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.
| For the year ended June 30, 2014 | ||||||||||||
| Net Loss | Shares | Per Share | ||||||||||
| Basic loss per share: | ||||||||||||
| Net loss available to common shareholders | $ | (11,356,047 | ) | 9,063,345 | $ | (1.25 | ) | |||||
| Effect of dilutive securities | ||||||||||||
| Stock options | - | - | - | |||||||||
| Warrants | - | - | - | |||||||||
| Diluted loss per share | $ | (11,356,047 | ) | 9,063,345 | $ | (1.25 | ) | |||||
| For the year ended June 30, 2013 | ||||||||||||
| Net Income | Shares | Per Share | ||||||||||
| Basic income per share: | ||||||||||||
| Net income available to common shareholders | $ | 7,863,143 | 8,201,247 | $ | 0.96 | |||||||
| Effect of dilutive securities | ||||||||||||
| Stock options | - | 47,168 | - | |||||||||
| Warrants | - | 40,536 | - | |||||||||
| Diluted income per share | $ | 7,863,143 | 8,288,951 | $ | 0.95 | |||||||
As of June 30, 20142015 and 2013,2014, the following potential dilutive shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would be anti-dilutive.
| For the Years | ||||||||
| Ended June 30, | ||||||||
| 2015 | 2014 | |||||||
| Stock Options | 708,133 | 257,462 | ||||||
| Warrants | 163,124 | 163,124 | ||||||
| 871,257 | 420,586 | |||||||
| F-20 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 20142015 and 2013
| As of June 30, | ||||||||
| 2014 | 2013 | |||||||
| Stock Options | 232,059 | - | ||||||
| Warrants | 3,295 | - | ||||||
| 235,354 | - | |||||||
NOTE 4 –RELATED PARTY TRANSACTIONS
NetSol-Innovation
In November 2004, the Company entered into a joint venture agreement with the Innovation Group called NetSol-Innovation (Pvt) Ltd., (“NetSol-Innovation”), a Pakistani company.NetSol-Innovation. NetSol-Innovation provides support services to the Innovation Group. During the years ended June 30, 20142015 and 20132014, NetSol Innovation provided services of $4,970,794$6,043,617 and $3,734,583$4,970,794, respectively. Accounts receivable at June 30, 2015 and 2014 were $3,226,733 and 2013$2,232,610, respectively.
Investec Asset Finance
In October 2011, NTE entered into an agreement with Investec Asset Finance to acquire VLS. NTE and VLS provide support services to Investec. During the year ended June 30, 2015 and 2014, NTE and VLS provided maintenance and services of $1,652,077 and $715,567, respectively. Accounts receivable at June 30, 2015 and 2014 were $2,232,610$265,166 and $1,922,837, respectively
NOTE 5 – MAJOR CUSTOMERS
The Company is a strategic business partner for Daimler Financial Services (which consists of a group of many companies in different countries), which accounts for approximately 17.42%12.89% and 21.86% of revenue, Toyota Motors (which consists of a group of many companies in different countries) accounts for approximately 7.24% and 3.47% of revenue, Nissan (which consists of a group of many companies in different countries) accounts for approximately 6.30% and 6.23%17.42% of revenue, and The Innovation Group accounts for approximately 13.66%11.84% and 6.91%13.66% of revenue for the fiscal years ended June 30, 2015 and 2014, respectively. Accounts receivable at June 30, 2015 for these companies were $446,754 and 2013,$3,226,733, respectively. Accounts receivable at June 30, 2014 for these companies were $1,900,270, 703,036, $247,372 and $2,232,610, respectively. Accounts receivable at June 30, 2013 for these companies were $2,382,837, $388,759, $1,040,248, and 1,922,837 respectively.
NOTE 6 – OTHER CURRENT ASSETS
Other current assets consisted of the following:
As of June 30, 2014 | As of June 30, 2013 | ||||||||
| Prepaid Expenses | $ | 450,451 | $ | 559,217 | |||||
| Advance Income Tax | 918,300 | 887,893 | |||||||
| Employee Advances | 46,730 | 43,794 | |||||||
| Security Deposits | 189,905 | 189,382 | |||||||
| Tender Money Receivable | 81,420 | 106,398 | |||||||
| Other Receivables | 645,397 | 222,609 | |||||||
| Other Assets | 430,508 | 197,915 | |||||||
| Due From Related Party | (1) | 95,168 | 66,106 | ||||||
| Total | $ | 2,857,879 | $ | 2,273,314 | |||||
| As of | As of | |||||||||||
| June 30, 2015 | June 30, 2014 | |||||||||||
| Prepaid Expenses | $ | 452,314 | $ | 450,451 | ||||||||
| Advance Income Tax | 895,075 | 918,300 | ||||||||||
| Employee Advances | 36,816 | 46,730 | ||||||||||
| Security Deposits | 195,336 | 189,905 | ||||||||||
| Tender Money Receivable | 26,435 | 81,420 | ||||||||||
| Other Receivables | 322,647 | 645,397 | ||||||||||
| Other Assets | 83,567 | 430,508 | ||||||||||
| Due From Related Party | (1 | ) | - | 95,168 | ||||||||
| Total | $ | 2,012,190 | $ | 2,857,879 | ||||||||
(1) Due from related party as of June 30, 20142015 and 20132014 is a receivable from Atheeb NetSol Saudi Company LimitedLimited.
| F-21 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 20142015 and 2013
NOTE 7 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
As of June 30, 2014 | As of June 30, 2013 | |||||||
| Office furniture and equipment | $ | 2,628,814 | $ | 2,508,975 | ||||
| Computer equipment | 27,215,091 | 19,987,480 | ||||||
| Assets under capital leases | 1,861,445 | 1,126,860 | ||||||
| Building | 6,259,290 | 2,391,550 | ||||||
| Land | 3,351,316 | 2,460,144 | ||||||
| Capital work in progress | 2,812,181 | 5,104,283 | ||||||
| Autos | 999,277 | 689,440 | ||||||
| Improvements | 533,102 | 513,044 | ||||||
| Subtotal | 45,660,516 | 34,781,776 | ||||||
| Accumulated depreciation | (15,939,388 | ) | (13,803,407 | ) | ||||
| Property and equipment, net | $ | 29,721,128 | $ | 20,978,369 | ||||
| As of | As of | |||||||
| June 30, 2015 | June 30, 2014 | |||||||
| Office Furniture and Equipment | $ | 3,104,375 | $ | 2,628,814 | ||||
| Computer Equipment | 25,911,422 | 27,215,091 | ||||||
| Assets Under Capital Leases | 1,887,767 | 1,861,445 | ||||||
| Building | 8,743,130 | 6,259,290 | ||||||
| Land | 2,451,577 | 3,351,316 | ||||||
| Capital Work In Progress | 392,243 | 2,812,181 | ||||||
| Autos | 943,873 | 999,277 | ||||||
| Improvements | 204,779 | 533,102 | ||||||
| Subtotal | 43,639,166 | 45,660,516 | ||||||
| Accumulated Depreciation | (18,519,532 | ) | (15,939,388 | ) | ||||
| Property and Equipment, Net | $ | 25,119,634 | $ | 29,721,128 | ||||
For the years ended June 30, 20142015 and 2013,2014, depreciation expense totaled $5,035,922$5,671,155 and $3,627,862,$5,035,922, respectively. Of these amounts, $3,276,222$3,888,122 and $2,242,339$3,276,222 are reflected as part of cost of revenues for the years ended June 30, 2015 and 2014, and 2013, 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. Accumulated capitalized interest was $664,614,$nil and $1,015,095$664,614 as of June 30, 2015 and 2014, and 2013, respectively.
Following is a summary of fixed assets held under capital leases as of June 30, 2015 and 2014, and 2013, respectively:
| As of | As of | |||||||
| June 30, 2015 | June 30, 2014 | |||||||
| Computers and Other Equipment | $ | 590,625 | $ | 731,354 | ||||
| Furniture and Fixtures | 414,023 | 280,184 | ||||||
| Vehicles | 883,119 | 849,907 | ||||||
| Total | 1,887,767 | 1,861,445 | ||||||
| Less: Accumulated Depreciation - Net | (577,215 | ) | (469,336 | ) | ||||
| $ | 1,310,552 | $ | 1,392,109 | |||||
| F-22 |
As of June 30, 2014 | As of June 30, 2013 | |||||||
| Computer Equipment | $ | 731,354 | $ | 454,002 | ||||
| Furniture and Fixtures | 280,184 | 951 | ||||||
| Vehicles | 849,907 | 671,907 | ||||||
| Total | 1,861,445 | 1,126,860 | ||||||
| Less: Accumulated Depreciation | (469,336 | ) | (350,048 | ) | ||||
| Net | $ | 1,392,109 | $ | 776,812 | ||||
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 20142015 and 2013
NOTE 8 – INTANGIBLE ASSETS
Intangible assets consisted of the following:
| Product Licenses | Customer Lists | Technology | Total | |||||||||||||
| Intangible assets - June 30, 2012 - cost | $ | 42,072,047 | $ | 6,052,377 | $ | 242,702 | $ | 48,367,126 | ||||||||
| Additions | 4,669,512 | - | - | 4,669,512 | ||||||||||||
| Effect of translation adjustment | (1,904,001 | ) | - | - | (1,904,001 | ) | ||||||||||
| Accumulated amortization | (15,727,599 | ) | (5,867,437 | ) | (84,947 | ) | (21,679,983 | ) | ||||||||
| Net balance - June 30, 2013 | $ | 29,109,959 | $ | 184,940 | $ | 157,755 | $ | 29,452,654 | ||||||||
| Intangible assets - June 30, 2013 - cost | $ | 44,837,558 | $ | 6,052,378 | $ | 242,702 | $ | 51,132,638 | ||||||||
| Additions | 3,385,151 | - | - | 3,385,151 | ||||||||||||
| Deletion | (591,216 | ) | (591,216 | ) | ||||||||||||
| Effect of translation adjustment | 1,000,875 | - | - | 1,000,875 | ||||||||||||
| Accumulated amortization | (20,050,310 | ) | (5,940,633 | ) | (133,487 | ) | (26,124,430 | ) | ||||||||
| Net balance - June 30, 2014 | $ | 28,582,058 | $ | 111,745 | $ | 109,215 | $ | 28,803,018 | ||||||||
| Product Licenses | Customer Lists | Technology | Total | |||||||||||||
| Intangible assets - June 30, 2013 - cost | $ | 44,837,558 | $ | 6,052,378 | $ | 242,702 | $ | 51,132,638 | ||||||||
| Additions | 3,385,151 | - | - | 3,385,151 | ||||||||||||
| Deletion | (591,216 | ) | (591,216 | ) | ||||||||||||
| Effect of translation adjustment | 1,000,875 | - | - | 1,000,875 | ||||||||||||
| Accumulated amortization | (20,050,310 | ) | (5,940,633 | ) | (133,487 | ) | (26,124,430 | ) | ||||||||
| Net balance - June 30, 2014 | $ | 28,582,058 | $ | 111,745 | $ | 109,215 | $ | 28,803,018 | ||||||||
| Intangible Assets - June 30, 2014 - Cost | $ | 48,632,368 | $ | 6,052,377 | $ | 242,702 | $ | 54,927,447 | ||||||||
| Additions | - | - | - | - | ||||||||||||
| Effect of Translation Adjustment | (2,325,008 | ) | - | - | (2,325,008 | ) | ||||||||||
| Accumulated Amortization | (23,491,893 | ) | (6,052,377 | ) | (242,702 | ) | (29,786,972 | ) | ||||||||
| Net Balance - June 30, 2015 | $ | 22,815,467 | $ | - | $ | - | $ | 22,815,467 | ||||||||
(A)Product Licenses
Product licenses include internally-developed original license issues, renewals, enhancements, copyrights, trademarks, and trade names. Product licenses are amortized on a straight-line basis over their respective lives, and the unamortized amount of 28,582,058$22,815,467 will be amortized over the next 9.758.75 years. Amortization expense for the years ended June 30, 2015 and 2014 was $4,448,735 and 2013 was $3,568,366, and $1,905,008, respectively.
The Company discontinued two softwaredetermined to discontinue marketing three products during the fiscal year ended June 30, 20142015 and fully amortized themthe products as of June 30, 2014.2015. The amount of amortization related to these twothree products was $1,348,631$1,184,959 and is recorded under cost of revenues as depreciation and amortization expense in the accompanying consolidated statements of operations.
(B)Customer Lists
Customer lists arewere being amortized on a straight-line basis over five years, which approximates the anticipated rate of attrition. The unamortized balance of $111,745 will be amortized over the next 2.25 years. Amortization expense for the years ended June 30, 2015 and 2014 was $113,243 and 2013 was $75,578, and $120,804, respectively.
(C)Technology
Technology assets arewere being amortized on a straight-line basis over five years, which approximates the anticipated rate of attrition. The unamortized balance of $109,215 will be amortized over next 2.25 years. Amortization expense for the years ended June 30, 2015 and 2014 was $110,681 and 2013 was $50,870, and $49,075, respectively.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2015 and 2014
(D)Future Amortization
Estimated amortization expense of intangible assets over the next five years is as follows:
| Year ended | ||||
| June 30, 2015 | $ | 3,713,947 | ||
| June 30, 2016 | 3,289,184 | |||
| June 30, 2017 | 3,215,520 | |||
| June 30, 2018 | 3,190,976 | |||
| June 30, 2019 | 3,190,976 | |||
| Thereafter | 12,202,415 | |||
| $ | 28,803,018 | |||
| Year ended: | ||||
| June 30, 2016 | $ | 2,804,844 | ||
| June 30, 2017 | 2,804,844 | |||
| June 30, 2018 | 2,804,844 | |||
| June 30, 2019 | 2,804,844 | |||
| June 30, 2020 | 2,804,844 | |||
| Thereafter | 8,791,247 | |||
| $ | 22,815,467 | |||
NOTE 9 – 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, 2013 | Impairment | As of June 30, 2014 | ||||||||||
| NetSol PK | $ | 1,166,610 | $ | - | $ | 1,166,610 | ||||||
| NetSol Omni | 136,762 | (136,762 | ) | - | ||||||||
| NTE | 3,471,814 | - | 3,471,814 | |||||||||
| VLS | 214,044 | - | 214,044 | |||||||||
| NTA | 4,664,100 | - | 4,664,100 | |||||||||
| Total | $ | 9,653,330 | $ | (136,762 | ) | $ | 9,516,568 | |||||
| As of | As of | |||||||
| June 30, 2015 | June 30, 2014 | |||||||
| NetSol PK | $ | 1,166,610 | $ | 1,166,610 | ||||
| NTE | 3,471,814 | 3,471,814 | ||||||
| VLS | 214,044 | 214,044 | ||||||
| NTA | 4,664,100 | 4,664,100 | ||||||
| Total | $ | 9,516,568 | $ | 9,516,568 | ||||
The Company tests for goodwill impairment at each reporting unit. The Company had $136,762 of goodwill related to NetSol Omni, whose assets and business were consolidated into NetSol PK. As such, the goodwill was considered impaired at June 30, 2014 and the Company recorded an impairment of $136,762 which is recorded in general and administrative expenses on the accompanying consolidated statements of operations. There was no goodwill impairment for the year ended June 30, 2013.
2015. The Company recorded $136,762 as goodwill impairment for the year ended June 30, 2014.
NOTE 10 – 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. (“Atheeb NetSol”) 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.Currently theThe Company does not havehad no control over the operational and financial matters of Atheeb NetSol; therefore, it iswas considered as an associated company and accounted for under the equity method. Due to change in foreign laws and losses the Company has withdrawn from the joint venture. As a result, the net value of the investment in the accompanying financial statements as of June 30, 2015 & 2014 was $Nil.
| F-24 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 20142015 and 2013
| 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 | ||
| Investment during the period | - | |||
| Net loss for the year ended June 30, 2014 | (1,072,535 | ) | ||
| Net loss applicable to NetSol | (545,483 | ) | ||
| Total loss | (545,483 | ) | ||
| Loss adjusted against investment | (545,483 | ) | ||
| Net book value at June 30, 2014 | $ | - |
NOTE 11 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
As of June 30, 2014 | As of June 30, 2013 | |||||||
| Accounts Payable | $ | 1,642,325 | $ | 825,025 | ||||
| Accrued Liabilities | 2,956,686 | 2,056,003 | ||||||
| Accrued Payroll | 44,185 | 25,529 | ||||||
| Accrued Payroll Taxes | 261,261 | 218,084 | ||||||
| Interest Payable | 61,555 | 71,872 | ||||||
| Taxes Payable | 165,649 | 727,408 | ||||||
| Other Payable | 103,226 | 103,226 | ||||||
| Total | $ | 5,234,887 | $ | 4,027,147 | ||||
| As of | As of | |||||||
| June 30, 2015 | June 30, 2014 | |||||||
| Accounts Payable | $ | 1,514,841 | $ | 1,642,325 | ||||
| Accrued Liabilities | 3,978,435 | 2,956,686 | ||||||
| Accrued Payroll | 8,974 | 44,185 | ||||||
| Accrued Payroll Taxes | 282,572 | 261,261 | ||||||
| Interest Payable | 41,556 | 61,555 | ||||||
| Taxes Payable | 22,957 | 165,649 | ||||||
| Other Payable | 103,226 | 103,226 | ||||||
| Total | $ | 5,952,561 | $ | 5,234,887 | ||||
NOTE 12 – DEBTS
Notes and leases payable consisted of the following:
| As of June 30, 2015 | |||||||||||||
| Current | Long-Term | ||||||||||||
| Name | Total | Maturities | Maturities | ||||||||||
| D&O Insurance | (1) | $ | 79,872 | $ | 79,872 | $ | - | ||||||
| Habib Bank Line of Credit | (2) | - | - | - | |||||||||
| Bank Overdraft Facility | (3) | - | - | - | |||||||||
| HSBC Loan | (4) | 447,161 | 322,349 | 124,812 | |||||||||
| Term Finance Facility | (5) | - | - | - | |||||||||
| Loan Payable Bank | (6) | 2,892,961 | 2,892,961 | - | |||||||||
| Loan From Related Party | (7) | 129,979 | 129,979 | - | |||||||||
| 3,549,973 | 3,425,161 | 124,812 | |||||||||||
| Subsidiary Capital Leases | (8) | 833,872 | 471,192 | 362,680 | |||||||||
| $ | 4,383,845 | $ | 3,896,353 | $ | 487,492 | ||||||||
| As of June 30, 2014 | |||||||||||||
| Current | Long-Term | ||||||||||||
| Name | Total | Maturities | Maturities | ||||||||||
| D&O Insurance | (1) | $ | 54,547 | $ | 54,547 | $ | - | ||||||
| Habib Bank Line of Credit | (2) | 2,438,844 | 2,438,844 | - | |||||||||
| Bank Overdraft Facility | (3) | - | - | - | |||||||||
| HSBC Loan | (4) | 835,899 | 346,138 | 489,761 | |||||||||
| Term Finance Facility | (5) | 632,527 | 253,011 | 379,516 | |||||||||
| Loan Payable Bank | (6) | 2,024,087 | 2,024,087 | - | |||||||||
| Loan From Related Party | (7) | 322,600.00 | 194,740.00 | 127,860.00 | |||||||||
| 6,308,504 | 5,311,367 | 997,137 | |||||||||||
| Subsidiary Capital Leases | (8) | 1,014,834 | 479,891 | 534,943 | |||||||||
| $ | 7,323,338 | $ | 5,791,258 | $ | 1,532,080 | ||||||||
| F-25 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 20142015 and 2013
| As of June 30, 2014 | ||||||||||||||
| Name | Total | Current Maturities | Long-Term Maturities | |||||||||||
| D&O Insurance | (1) | $ | 54,547 | $ | 54,547 | $ | - | |||||||
| Habib Bank Line of Credit | (2) | 2,438,844 | 2,438,844 | - | ||||||||||
| Bank Overdraft Facility | (3) | - | - | - | ||||||||||
| HSBC Loan | (4) | 835,899 | 346,138 | 489,761 | ||||||||||
| Term Finance Facility | (5) | 632,527 | 253,011 | 379,516 | ||||||||||
| Loan Payable Bank | (6) | 2,024,087 | 2,024,087 | - | ||||||||||
| Loan From Related Party | (7) | 322,600 | 194,740 | 127,860 | ||||||||||
| 6,308,504 | 5,311,367 | 997,137 | ||||||||||||
| Subsidiary Capital Leases | (8) | 1,014,834 | 479,891 | 534,943 | ||||||||||
| $ | 7,323,338 | $ | 5,791,258 | $ | 1,532,080 | |||||||||
| As of June 30, 2013 | ||||||||||||||
| Name | Total | Current Maturities | Long-Term Maturities | |||||||||||
| D&O Insurance | (1) | $ | 88,292 | $ | 88,292 | $ | - | |||||||
| Habib Bank Line of Credit | (2) | 1,785,237 | 1,785,237 | - | ||||||||||
| Bank Overdraft Facility | (3) | 312,139 | 312,139 | - | ||||||||||
| HSBC Loan | (4) | 1,047,014 | 336,339 | 710,675 | ||||||||||
| Term Finance Facility | (5) | 867,195 | 495,540 | 371,655 | ||||||||||
| Loan Payable Bank | (6) | 1,982,161 | 1,982,161 | - | ||||||||||
| Loan From Related Party | (7) | - | - | - | ||||||||||
| 6,082,038 | 4,999,708 | 1,082,330 | ||||||||||||
| Subsidiary Capital Leases | (8) | 638,800 | 308,918 | 329,882 | ||||||||||
| $ | 6,720,838 | $ | 5,308,626 | $ | 1,412,212 | |||||||||
(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 0.55%0.49% and 0.40%0.55% as of June 30, 2015 and 2014, and 2013, respectively.
(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 1.5% and 1.5% as of June 30, 2015 and 2014, and 2013, respectively. Interest expense for the years ended June 30, 2014 and 2013 was $28,848 and $26,702, respectively.
(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 £300,000, or approximately $511,440.$471,550. The annual interest rate was 4.75% and 5.20% as of June 30, 2015 and 2014, and 2013, respectively.
This overdraft facility requires that the aggregate amount of invoiced trade debtors (net of provisions for bad and doubtful debts and excluding intra-group debtors) of NTE, not exceeding 90 days old, will not be less than an amount equal to 200% of the facility. As of June 30, 2014,2015, NTE was in compliance with this covenant.
(4) In October 2011, the Company’s subsidiary, NTE, entered into a loan agreement with HSBC Bank to finance the acquisition of 51% of a controlling interest in Virtual Leasing Services Limited. HSBC Bank guaranteed the loan up to a limit of £1,000,000, or approximately $1,704,800$1,571,833 for a period of 5 years with monthly payments of £18,420, or approximately $31,400.$28,953. The interest rate was 4% which is 3.5% above the bank sterling base rate. The loan is securitized against debenture comprising of fixed and floating charges over all the assets and undertakings of NTE including all present and future freehold and leasehold property, book and other debts, chattels, goodwill and uncalled capital, both present and future. Interest expense for the years ended June 30, 2015 and 2014 was $47,255 and 2013 was $70,667, and $81,347, respectively.
This facility requires that NTE’s adjusted tangible net worth would not be less than £600,000. For this purpose, adjusted tangible net worth means shareholders’ funds less intangible assets plus non-redeemable preference shares. In addition, NTE’s cash debt service coverage would not fall below 150% of the aggregate debt service cost. As of June 30, 2014,2015, NTE was in compliance with this covenant.
(5) The Company’s subsidiary, NetSol PK, entered into two different term finance facilities from Askari Bank to finance the construction of a new building. The total aggregate amount of these facilities areis Rs. 112,500,000, or approximately $1,138,550$1,084,860 (secured by the first charge of Rs. 580 million or approximately $5.87$5.59 million over the land, building and equipment of the company)NetSol PK). The interest rate was 12.90%9.79% and 12.13%12.39% as of June 30, 20142015 and 2013,2014, respectively, which is 2.75% above the six-month Karachi Inter Bank Offering Rate. During the year ended June 30, 2015, NetSol PK paid off the complete liability against this financing.
| F-26 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2015 and 2014
(6) The Company’s subsidiary, NetSol PK, has an export refinance facility with Askari Bank Limited, secured by the Company’sNetSol PK’s assets. This is a revolving loan that matures every six months. Total facility amount is Rs. 300,000,000 or $3,036,130. The$2,892,961.The interest rate for the loans was 7.5% and 9.4% at June 30, 2015 and 2014, and 2013.respectively. Interest expense for the yearsyear ended June 30, 2015 and 2014 was $146,264 and 2013 was $169,795, and $180,407, respectively.
Both term and export refinance facilities from Askari Bank Limited amounting to Rupees 262.5300 million ($3.182.89 million) require NetSol PK to maintain a long term debt equity ratio of 60:40 and the current ratio of 1:1. As of June 30, 2014,2015, NetSol PK was in compliance with this covenant.
(7) In October 2013, the Company’s subsidiary, NTE, entered into a loan agreement with Investec, a related party, to finance VLS. The loan amount was £100,000, or approximately $170,480,$157,183, for a period of 1 year with monthly payments of £8,676, or approximately $14,790.$13,637. The interest rate was 4.1%.
In March 2014, the Company’s subsidiary, VLS, entered into a loan agreement with Investec a related party.Investec. The loan amount was £150,000, or approximately $255,720,$235,775, for a period of 2two years with annual payments of £75,000, or approximately $127,860.$117,887. The interest rate was 3.13%. As of June 30, 2014, the subsidiary2015, VLS has used this facility up to $264,351$129,979 including interest due, of which $127,860and was shown as long term liabilities and remainder $136,491 asa current maturity including four months of accrued interest.
The following table represents future payments of loans described in the above sub notes 1 to 7
As of June 30, 2014 | ||||
| Loan Payments | ||||
| Due FYE 6/30/15 | $ | 5,311,367 | ||
| Due FYE 6/30/16 | 744,763 | |||
| Due FYE 6/30/17 | 252,374 | |||
| Total Loan Payments | 6,308,504 | |||
| Less: Current portion | (5,311,367 | ) | ||
| Non-Current portion | $ | 997,137 | ||
| As of | ||||
| June 30, 2015 | ||||
| Loan Payments | ||||
| Due FYE 6/30/16 | $ | 3,425,161 | ||
| Due FYE 6/30/17 | 124,812 | |||
| Total Loan Payments | 3,549,973 | |||
| Less: Current portion | (3,425,161 | ) | ||
| Non-Current portion | $ | 124,812 | ||
(8) The Company leases various fixed assets under capital lease arrangements expiring in various years through 2018. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are depreciated over the lesser of their related lease terms or their estimated useful lives and are secured by the assets themselves. Depreciation of assets under capital leases is included in depreciation expense for the years ended June 30, 20142015 and 2013.2014.
| F-27 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2015 and 2014
Following is the aggregate minimum future lease payments under capital leases for the year-endedyear ended June 30, 2014:
| Amount | ||||
| Minimum Lease Payments | ||||
| Due FYE 6/30/15 | $ | 575,020 | ||
| Due FYE 6/30/16 | 404,613 | |||
| Due FYE 6/30/17 | 171,178 | |||
| Due FYE 6/30/18 | 10,021 | |||
| Total Minimum Lease Payments | 1,160,832 | |||
| Interest Expense relating to future periods | (145,998 | ) | ||
| Present Value of minimum lease payments | 1,014,834 | |||
| Less: Current portion | (479,891 | ) | ||
| Non-Current portion | $ | 534,943 | ||
| Amount | ||||
| Minimum Lease Payments | ||||
| Due FYE 6/30/16 | $ | 531,827 | ||
| Due FYE 6/30/17 | 307,563 | |||
| Due FYE 6/30/18 | 76,621 | |||
| Total Minimum Lease Payments | 916,011 | |||
| Interest Expense relating to future periods | (82,139 | ) | ||
| Present Value of minimum lease payments | 833,872 | |||
| Less: Current portion | (471,192 | ) | ||
| Non-Current portion | $ | 362,680 | ||
NOTE 13 – INCOME TAXES
The Company is incorporated in the State of Nevada and registered to do business in the State of California. The following is a breakdown of income before the provision for income taxes:
Consolidated pre-tax income (loss) consists of the following:
| Years Ended June 30, | ||||||||
| 2014 | 2013 | |||||||
| US operations | $ | (3,478,331 | ) | $ | (2,878,018 | ) | ||
| Foreign operations | (10,279,861 | ) | 15,431,499 | |||||
| $ | (13,758,192 | ) | $ | 12,553,481 | ||||
| Years Ended June 30, | ||||||||
| 2015 | 2014 | |||||||
| US operations | $ | (3,621,392 | ) | $ | (3,478,331 | ) | ||
| Foreign operations | (1,214,282 | ) | (10,279,861 | ) | ||||
| $ | (4,835,674 | ) | $ | (13,758,192 | ) | |||
The components of the provision for income taxes are as follows:
| Years Ended June 30, | ||||||||
| 2015 | 2014 | |||||||
| Current: | ||||||||
| Federal | $ | - | $ | - | ||||
| State and Local | - | - | ||||||
| Foreign | 413,498 | 338,282 | ||||||
| Deferred: | ||||||||
| Federal | - | - | ||||||
| State and Local | - | - | ||||||
| Foreign | - | - | ||||||
| Provision for income taxes | $ | - | $ | 338,282 | ||||
| F-28 |
| Years Ended June 30, | ||||||||
| 2014 | 2013 | |||||||
| Current: | ||||||||
| Federal | $ | - | $ | - | ||||
| State and Local | - | - | ||||||
| Foreign | 338,282 | 465,426 | ||||||
| Deferred: | ||||||||
| Federal | - | - | ||||||
| State and Local | - | - | ||||||
| Foreign | - | - | ||||||
| Provision for income taxes | $ | 338,282 | $ | 465,426 | ||||
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2015 and 2014
A reconciliation of taxes computed at the statutory federal income tax rate to income tax expense (benefit) is as follows:
| Years Ended June 30, | ||||||||||||||||
| 2014 | 2013 | |||||||||||||||
| Income tax (benefit) provision at statutory rate | $ | (4,677,785 | ) | 34.0 | % | $ | 4,268,184 | 34.0 | % | |||||||
| State income (benefit) taxes, net of federal tax benefit | (67,583 | ) | 0.5 | % | (114,630 | ) | -0.9 | % | ||||||||
| Foreign earnings taxed at different rates | 2,223,746 | -16.2 | % | (4,781,284 | ) | -38.1 | % | |||||||||
| Change in valuation allowance for deferred tax assets | 2,584,235 | -18.8 | % | 1,056,139 | 8.4 | % | ||||||||||
| Share of net (income) loss in equity method investee | 217,266 | -1.6 | % | (192,245 | ) | -1.5 | % | |||||||||
| Other | 58,403 | -0.42 | % | 229,262 | 1.8 | % | ||||||||||
| Provision for income taxes | $ | 338,282 | -2.5 | % | $ | 465,426 | 3.7 | % | ||||||||
| Years Ended June 30, | ||||||||||||||||
| 2015 | 2014 | |||||||||||||||
| Income tax (benefit) provision at statutory rate | $ | (1,692,486 | ) | 35.0 | % | $ | (4,677,785 | ) | 34.0 | % | ||||||
| State income (benefit) taxes, net of federal tax benefit | (278,051 | ) | 5.7 | % | (67,583 | ) | 0.5 | % | ||||||||
| Foreign earnings taxed at different rates | 1,655,514 | -34.2 | % | 2,223,746 | -16.2 | % | ||||||||||
| Change in valuation allowance for deferred tax assets | 843,390 | -17.4 | % | 2,584,235 | -18.8 | % | ||||||||||
| Share of net (income) loss in equity method investee | - | 0.0 | % | 217,266 | -1.6 | % | ||||||||||
| Other | (114,869 | ) | 2.38 | % | 58,403 | -0.4 | % | |||||||||
| Provision for income taxes | $ | 413,498 | -8.6 | % | $ | 338,282 | -2.5 | % | ||||||||
Deferred income tax assets and liabilities as of June 30, 20142015 and 20132014 consist of tax effects of temporary differences related to the following:
| Years Ended June 30, | ||||||||
| 2014 | 2013 | |||||||
| Net operating loss carry forwards | $ | 13,947,156 | $ | 11,396,640 | ||||
| Other | 216,706 | 182,987 | ||||||
| Net deferred tax assets | 14,163,862 | 11,579,627 | ||||||
| Valuation allowance for deferred tax assets | (14,163,862 | ) | (11,579,627 | ) | ||||
| Net deferred tax assets | $ | - | $ | - | ||||
| Years Ended June 30, | ||||||||
| 2015 | 2014 | |||||||
| Net operating loss carry forwards | $ | 14,527,578 | $ | 13,947,156 | ||||
| Other | 479,674 | 216,706 | ||||||
| Net deferred tax assets | 15,007,252 | 14,163,862 | ||||||
| Valuation allowance for deferred tax assets | (15,007,252 | ) | ||||||
| Net deferred tax assets | $ | - | $ | - | ||||
The Company has established a full valuation allowance as management believes it is more likely than not that these assets will not be realized in the future. The valuation allowance increased by $2,584,235$843,390 for the year ended June 30, 20142015 mainly due to adjusting the Company'sCompany’s net operating loss carry forwards for the current year operating loss.
At June 30, 2014,2015, federal and state net operating loss carry forwards in the United States of America were $34,225,224$36,374,907 and $5,526,650,$6,414,294, respectively. Federal net operating loss carry forwards begin to expire in 2020, while state net operating loss carry forwards begin to expire in 2014.are expiring each year. Due to both historical and recent changes in the capitalization structure of the Company, the utilization of net operating losses may be limited pursuant to section 382 of the Internal Revenue Code. Net operating losses related to foreign entities were $8,118,547$5,018,966 at June 30, 2014.
As of June 30, 2014,2015, 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.
| F-29 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2015 and 2014
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, 20112012 through 2013.2014. 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 $28,838,494$28,046,265 as of June 30, 2014.2015. The additional US income tax on unremitted foreign earnings, if repatriated, would be offset in part by foreign tax credits. The extent of this offset would depend on many factors, including the method of distribution, and specific earnings distributed. The Company determined that it is not practicable to determine unrecognized deferred tax liability associated with the unremitted earnings attributable to the foreign subsidiaries.
Income from the export of computer software and its related services developed in Pakistan is exempt from tax through June 30, 2014 and 2013
NOTE 14 – STOCKHOLDERS’ EQUITY
During the years ended June 30, 20142015 and 2013,2014, the Company issued 65,000152,500 and 5,00065,000 restricted shares of common stock, respectively, for services rendered by officers of the Company. These shares were valued at the fair market value of $663,350$699,000 and 25,200,$663,350, respectively, and recorded as compensation expense in the accompanying consolidated financial statements.
During the years ended June 30, 20142015 and 2013,2014, the Company issued 5,17341,726 and nil5,173 restricted shares of common stock, respectively, for services rendered by the independent members of the Board of Directors as part of their board compensation. These shares were valued at the fair market value of $55,249$173,633 and $Nil, respectively,$55,249, and recorded as compensation expense in the accompanying consolidated financial statements.
During the years ended June 30, 20142015 and 2013,2014, the Company issued 9,000170,275 and 2,5009,000 restricted shares of common stock, respectively, to employees pursuant to the terms of their employment agreements. These shares were valued at the fair market value of $81,395$603,075 and $12,600,$81,394, respectively, and recorded as compensation expense in the accompanying consolidated financial statements.
During the years ended June 30, 2014, and 2013, the Company issued 2,400 and 4,800 restricted shares of common stock for services performed by unrelated consultants. These shares were valued at the fair market value of $17,424, and $18,420, respectively, and recorded as general and administrative costs in the accompanying consolidated financial statements.
During the year ended June 30, 2014, the Company issued 27,000 shares of its common stock for the settlement of a payable to a related party valued at $210,060.
During the year ended June 30, 2015, the Company received $2,359,530 pursuant to a stock purchase agreement for the purchase of 743,107 restricted shares of common stock at price ranging from $2.85 to $4.46 per share.
During the year ended June 30, 2015, the Company received $191,400 pursuant to a stock option agreement for the exercise of 49,329 restricted shares of common stock at price of $3.88 per share.
During the year ended June 30, 2015, the Company determined that certain subscription receivables related to stock issuances in previous years were deemed uncollectible and reduced the subscription receivable account $982,181 with a corresponding entry to additional-paid-in-capital.
During the year ended June 30, 2015, the Company determined that certain subscription receivables related to the exercise of stock options were deemed uncollectible and reduced the subscription receivable account by $158,635 with a corresponding entry to compensation expense.
| F-30 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2015 and 2014
NOTE 15 – STOCK BASED COMPENSATION
The Company maintains several Incentive and Non-Statutory Stock Option Plans (“Plans”) for its employees and consultants. Options granted under these Plans to an employee of the Company become exercisable over a period of no longer than ten (10) years and no less than twenty percent (20%) of the shares are exercisable annually. Options are not exercisable, in whole or in part, prior to one (1) year from the date of grant unless the board of directors specifically determines otherwise, as provided.
Two types of options may be granted under these Plans: (1) Incentive Stock Options (also known as Qualified Stock Options) which may only be issued to employees of the Company and whereby the exercise price of the option is not less than the fair market value of the common stock on the date it was reserved for issuance under the Plan; and (2) Non-statutory Stock Options which may be issued to either employees or consultants of the Company and whereby the exercise price of the option is less than the fair market value of the common stock on the date it was reserved for issuance under the plan. Grants of options may be made to employees and consultants without regard to any performance measures. All options issued pursuant to the Plan are nontransferable and subject to forfeiture.
In July 2013,May 2015, the shareholders approved the 20132015 Equity Incentive Plan (the “2013“2015 Plan”) which provides for the grant of equity-based awards, including options, stock appreciation rights, restricted stock awards or performance share awards or any other right or interest relating to shares or cash, to eligible participants. The aggregate number of shares reserved and available for award under the 20132015 Plan was 1,250,000. The 20132015 Plan contemplates the issuance of common stock upon exercise of options or other awards granted to eligible persons under the 20132015 Plan. Shares issued under the 20132015 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 20132015 Plan, in whole or in part, the number of shares of common stock subject to such award again becomes available for grant under the 20132015 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.
| F-31 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 20142015 and 20132014
Options granted under the 20132015 Plan are not generally transferable and must be exercised within 10 years, subject to earlier termination upon termination of the option holder'sholder’s employment, but in no event later than the expiration of the option'soption’s term. The exercise price of each option may not be less than the fair market value of a share of the Company’s common stock on the date of grant (except in connection with the assumption or substitution for another option in a manner qualifying under Section 424(a) of the Internal Revenue Code of 1986, as amended. Incentive stock options granted to any participant who owns 10% or more of the Company’s outstanding common stock (a “Ten Percent Shareholder”) must have an exercise price equal to or exceeding 110% of the fair market value of a share of our common stock on the date of the grant and must not be exercisable for longer than five years. Options become vested and exercisable at such times or upon such events and subject to such terms, conditions, performance criteria or restrictions as specified by the Committee. The maximum term of any option granted under the 20132015 Plan is ten years, provided that an incentive stock option granted to a Ten Percent Shareholder must have a term not exceeding five years.
Under the 20132015 Plan, a participant may also be awarded a "performance“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"“deferred share” awards, which entitle the participant to receive the Company’s stock in the future for services performed between the date of the award and the date the participant may receive the stock. The vesting of deferred share awards may be based on performance criteria and/or continued service with the Company. A participant who is granted a "stock“stock appreciation right"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"“restricted stock” awards under the 20132015 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, 2014,2015, no shares were issued under this plan to non- officersnon-officer employees.
| F-32 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 20142015 and 2013
A summary of option and warrant activity for the years ended June 30, 20142015 and 20132014 is presented below:
| # of shares | Weighted Ave Exericse Price | Weighted Average Remaining Contractual Life (in years) | Aggregated Intrinsic Value | |||||||||||||
| 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 | ||||||||||
| Granted | 612,793 | $ | 4.32 | |||||||||||||
| Exercised | (112,793 | ) | $ | 6.29 | ||||||||||||
| Expired / Cancelled | (54,000 | ) | $ | 32.92 | ||||||||||||
| Outstanding June 30, 2014 | 757,462 | $ | 6.65 | 2.2 | $ | - | ||||||||||
| Exercisable, June 30, 2014 | 257,462 | $ | 12.03 | 2.63 | $ | - | ||||||||||
| WARRANTS: | ||||||||||||||||
| Outstanding and exercisable, June 30, 2012 | 261,719 | $ | 4.24 | 6.59 | $ | - | ||||||||||
| 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 | ||||||||||
| Granted / adjusted | - | - | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Expired | - | - | ||||||||||||||
| Outstanding and exercisable, June 30, 2014 | 163,124 | $ | 7.29 | 2.2 | $ | - | ||||||||||
| # of shares | Weighted Ave Exercise Price | Weighted Average Remaining Contractual Life (in years) | Aggregated Intrinsic Value | |||||||||||||
| OPTIONS: | ||||||||||||||||
| Outstanding and exercisable, June 30, 2013 | 311,462 | $ | 15.65 | 3.3 | $ | 523,125 | ||||||||||
| Granted | 612,793 | $ | 4.32 | |||||||||||||
| Exercised | (112,793 | ) | $ | 6.29 | ||||||||||||
| Expired / Cancelled | (54,000 | ) | $ | 32.92 | ||||||||||||
| Outstanding June 30, 2014 | 757,462 | $ | 6.65 | 2.2 | $ | - | ||||||||||
| Granted | - | - | ||||||||||||||
| Exercised | (49,329 | ) | $ | 3.88 | ||||||||||||
| Expired / Cancelled | - | - | ||||||||||||||
| Outstanding and exercisable, June 30, 2015 | 708,133 | $ | 6.84 | 1.22 | $ | 572,352 | ||||||||||
| WARRANTS: | ||||||||||||||||
| Outstanding and exercisable, June 30, 2013 | 163,124 | $ | 7.29 | 3.19 | $ | 451,519 | ||||||||||
| Granted / adjusted | - | - | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Expired | - | - | ||||||||||||||
| Outstanding and exercisable, June 30, 2014 | 163,124 | $ | 7.29 | 2.2 | $ | - | ||||||||||
| Granted / adjusted | - | - | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Expired | - | - | ||||||||||||||
| Outstanding and exercisable, June 30, 2015 | 163,124 | $ | 7.29 | 1.22 | $ | - | ||||||||||
The following table summarizes information about stock options and warrants outstanding and exercisable as ofat June 30, 2014:2015:
| Exercise Price | Number Outstanding and Exercisable | Weighted Average Remaining Contractual Life | Weighted Ave Exercise Price | |||||||||
| OPTIONS: | ||||||||||||
| $0.10 - $9.90 | 634,133 | 1.27 | $ | 4.84 | ||||||||
| $10.00 - $19.90 | 14,000 | 0.63 | $ | 18.18 | ||||||||
| $20.00 - $29.90 | 60,000 | 0.84 | $ | 25.33 | ||||||||
| Totals | 708,133 | 1.22 | $ | 6.84 | ||||||||
| WARRANTS: | ||||||||||||
| $5.00 - $7.50 | 163,124 | 1.22 | $ | 7.29 | ||||||||
| Totals | 163,124 | 1.22 | $ | 7.29 | ||||||||
| F-33 |
| Exercise Price | Number Outstanding | Weighted Average Remaining Contractual Life | Weighted Ave Exericse Price | Number Exercisable | Weighted Average Remaining Contractual Life | Weighted Ave Exericse Price | ||||||||||||||||||||
| OPTIONS: | ||||||||||||||||||||||||||
| $0.10 | - | $9.90 | 683,462 | 2.24 | $ | 4.77 | 183,462 | 2.97 | $ | 7.21 | ||||||||||||||||
| $10.00 | - | $19.90 | 14,000 | 1.61 | $ | 18.18 | 14,000 | 1.61 | $ | 18.18 | ||||||||||||||||
| $20.00 | - | $29.90 | 60,000 | 1.82 | $ | 25.33 | 60,000 | 1.82 | $ | 25.33 | ||||||||||||||||
| Totals | 757,462 | 2.20 | $ | 6.65 | 257,462 | 2.63 | $ | 12.03 | ||||||||||||||||||
| WARRANTS: | ||||||||||||||||||||||||||
| $5.00 | - | $7.50 | 163,124 | 2.20 | $ | 7.29 | 163,124 | 2.20 | $ | 7.29 | ||||||||||||||||
| Totals | 163,124 | 2.20 | $ | 7.29 | 163,124 | 2.20 | $ | 7.29 | ||||||||||||||||||
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2015 and 2014
The assumptions used in calculating the fair value of options granted using the Black-Scholes option-pricing model for options granted during the years ended June 30, 20142015 and 20132014 are as follows:
| June 30, 2014 | June 30, 2013 | |||||||
| Risk-free interest rate | 0.05% | - | 0.47% | 0.01% | - | 0.11% | ||
| Expected life (months) | 1 | - | 24 | 1 | - | 3 | ||
| Expected volatility | 17.5% | - | 57.88% | 13.95% | - | 33.22% | ||
| Expected dividend | 0% | 0% | ||||||
| June 30, 2015 | June 30, 2014 | |||
| Risk-free interest rate | - | 0.05% - 0.47% | ||
| Expected life | - | 1 month - 10 years | ||
| Expected volatility | - | 17.5% - 57.88% | ||
| Expected dividend | - | 0% |
The weighted average grant-date fair value for the options granted during the yearsyear ended June 30, 2014, and 2013, was $1.32 and $1.41, respectively.
The Company recorded compensation expense of $189,937$622,490 and $678,494$189,937 for the years ended June 30, 2015 and 2014, and 2013, respectively, related to vested options. The compensation expense related to the unvested options as of June 30, 2014 was $622,490 which will be recognized over the weighted average period of 1 year.
The following table summarizes stock grants awarded as compensation:
| # of shares | Weighted Average Grant Date Fair Value ($) | |||||||
| Unvested, June 30, 2012 | - | - | ||||||
| Granted | 3,750 | $ | 5.48 | |||||
| Vested | (3,750 | ) | $ | 5.48 | ||||
| Unvested, June 30, 2013 | - | - | ||||||
| Granted | 337,899 | $ | 5.78 | |||||
| Vested | (105,899 | ) | $ | 10.00 | ||||
| Unvested, June 30, 2014 | 232,000 | $ | 3.88 | |||||
| # of shares | Weighted Average Grant Date Fair Value ($) | |||||||
| Unvested, June 30, 2013 | - | - | ||||||
| Granted | 337,899 | $ | 5.78 | |||||
| Vested | (105,899 | ) | $ | 10.00 | ||||
| Unvested, June 30, 2014 | 232,000 | $ | 3.88 | |||||
| Granted | 113,275 | $ | 3.26 | |||||
| Vested | (338,608 | ) | $ | 3.60 | ||||
| Unvested, June 30, 2015 | 6,667 | $ | 6.00 | |||||
For the years ended June 30, 2015 and 2014, and 2013, the companyCompany recorded compensation expense of $1,059,186$1,475,707 and $6,850$1,059,186, respectively. The compensation expense related to the unvested stock grants as of June 30, 20142015 was $892,400$40,000 which will be recognized over the weighted average period of 1 year.
NOTE 16 – COMMITMENTS AND CONTINGENCIES
(A)Non-cancellable operating leases
| The Company’s headquarters is located in Calabasas California with approximately 7,210 rentable square feet for |
| F-34 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2015 and 2014
| The Australia lease is a two-year lease that expires in March 2016 with a monthly rent of approximately |
| ● | The Beijing lease is a three-year lease that expires in January 2017 with a monthly rent of approximately |
| ● | The Bangkok lease is a three years lease expiring in November 2016 with monthly rent of approximately |
| ● | The NetSol Europe facilities, located in Horsham, United Kingdom, are leased until June 23, 2021 with an annual rent of approximately |
| ● | VLS facilities, located in Chester, United Kingdom, are leased until July 2016 with an annual rent of approximately |
| ● | NTA facilities are located in Alameda, California with a monthly rent of $8,381. The Alameda lease |
| ● | The NetSol |
Upon expiration of the leases, the Company does not anticipate any difficulty in obtaining renewals or alternative space. Rent expense amounted to $1,617,598$1,524,677 and $1,377,545$1,617,598 for the years ended June 30, 2015 and 2014, and 2013, respectively.
The total annual lease commitment for the next five years is as follows:
| FYE 6/30/15 | $ | 896,624 | ||
| FYE 6/30/16 | 847,584 | |||
| FYE 6/30/17 | 670,565 | |||
| FYE 6/30/18 | 310,612 | |||
| FYE 6/30/19 | 118,993 |
| FYE 6/30/16 | $ | 971,890 | ||
| FYE 6/30/17 | 751,488 | |||
| FYE 6/30/18 | 394,212 | |||
| FYE 6/30/19 | 202,593 | |||
| FYE 6/30/20 | 148,593 |
(B)Litigation
As previously disclosed, on July 25, 2014, purported class action lawsuits were filed in the U.S. District Court for the Central District of California against the Company and three of its current or former officers and/or directors, which have been consolidated under the captionRand-Heart of New York, Inc. v. NetSol Technologies, Inc., et al., Case No. 2:14-cv-05787 PA (SHx). Plaintiffs subsequently filed a consolidated complaint, which asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 premised on allegedly false and misleading statements regarding the Company’s next generation product, NFS Ascent, and whether it was truly available on a global basis when stated. After several successful motions by the Company, the Court granted the plaintiff a final opportunity to amend the complaint on a narrowed basis. The amended complaint was filed which contained a much narrowed class period from October 2013 to November 8, 2013, eliminated all but one of the individual defendants from the suit, and limited the scope of the alleged claims. The Company has filed an answer to this final amended complaint.
The Company continues to believe the amended allegations are meritless and intends to vigorously defend all claims asserted. The Company has engaged counsel and has liability insurance. Given the early stage of the litigation, however, at this time the Company is unable to form a professional judgment that an unfavorable outcome is either probable or remote, and it is not possible to assess whether or not the outcome of these proceedings will or will not have a material adverse effect on the Company.
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2015 and 2014
NOTE 17 – SEGMENT INFORMATION AND GEOGRAPHIC AREAS
The Company has identified three global regions or segments for its products and services; North America, Europe, and Asia-Pacific. The reportable segments are business units located in different global regions. Each business unit provides similar products and services; license fees for leasing and asset-based software, related maintenance fees, and implementation and IT consulting services. Separate management of each segment is required because each business unit is subject to operational issues and strategies unique to their particular regional location. We account for intercompany sales and expenses as if the sales or expenses were to third parties and eliminate them in consolidation.
The following table presents a summary of identifiable assets as of June 30, 20142015 and 2013:2014:
| As of | As of | |||||||
| June 30, 2015 | June 30, 2014 | |||||||
| Identifiable assets: | ||||||||
| Corporate headquarters | $ | 4,896,334 | $ | 5,150,823 | ||||
| North America | 7,162,846 | 7,406,631 | ||||||
| Europe | 6,631,945 | 6,169,265 | ||||||
| Asia - Pacific | 70,271,209 | 76,176,555 | ||||||
| Consolidated | $ | 88,962,334 | $ | 94,903,274 | ||||
| F-36 |
As of June 30, 2014 | As of June 30, 2013 | |||||||
| Identifiable assets: | ||||||||
| Corporate headquarters | $ | 5,150,823 | $ | 5,011,474 | ||||
| North America | 7,406,631 | 7,661,245 | ||||||
| Europe | 6,169,265 | 8,838,425 | ||||||
| Asia - Pacific | 76,176,555 | 81,192,971 | ||||||
| Consolidated | $ | 94,903,274 | $ | 102,704,115 | ||||
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 20142015 and 2013
The following table presents a summary of operating information for the years ended June 30:
| 2015 | 2014 | |||||||
| Revenues from unaffiliated customers: | ||||||||
| North America | $ | 5,535,183 | $ | 4,729,908 | ||||
| Europe | 5,707,127 | 5,813,744 | ||||||
| Asia - Pacific | 32,110,574 | 20,154,790 | ||||||
| 43,352,884 | 30,698,442 | |||||||
| Revenue from affiliated customers | ||||||||
| Europe | 1,652,077 | 715,567 | ||||||
| Asia - Pacific | 6,043,617 | 4,970,794 | ||||||
| 7,695,694 | 5,686,361 | |||||||
| Consolidated | $ | 51,048,578 | $ | 36,384,803 | ||||
| Intercompany revenue | ||||||||
| Europe | $ | 302,812 | $ | 490,888 | ||||
| Asia - Pacific | 4,620,426 | 3,680,292 | ||||||
| Eliminated | $ | 4,923,238 | $ | 4,171,180 | ||||
| Net income (loss) after taxes and before non-controlling interest: | ||||||||
| Corporate headquarters | $ | (4,306,400 | ) | $ | (4,372,278 | ) | ||
| North America | 685,008 | 893,947 | ||||||
| Europe | (767,103 | ) | (2,078,631 | ) | ||||
| Asia - Pacific | (860,677 | ) | (8,539,512 | ) | ||||
| Discontinued operation | - | 1,158,752 | ||||||
| Consolidated | $ | (5,249,172 | ) | $ | (12,937,722 | ) | ||
| Depreciation and amortization: | ||||||||
| Corporate headquarters | $ | 16,148 | $ | 47,932 | ||||
| North America | 165,240 | 100,875 | ||||||
| Europe | 665,826 | 854,163 | ||||||
| Asia - Pacific | 9,496,600 | 7,727,766 | ||||||
| Consolidated | $ | 10,343,814 | $ | 8,730,736 | ||||
| Interest expense: | ||||||||
| Corporate headquarters | $ | 13,783 | $ | 34,461 | ||||
| North America | 1,588 | 6,916 | ||||||
| Europe | 52,926 | 164,569 | ||||||
| Asia - Pacific | 98,665 | 49,731 | ||||||
| Consolidated | $ | 166,962 | $ | 255,677 | ||||
| Income tax expense: | ||||||||
| Europe | $ | 1,244 | $ | 7,298 | ||||
| Asia - Pacific | 412,254 | 330,984 | ||||||
| Consolidated | $ | 413,498 | $ | 338,282 | ||||
| F-37 |
| 2014 | 2013 | |||||||
| Revenues from unaffiliated customers: | ||||||||
| North America | $ | 4,729,908 | $ | 5,796,484 | ||||
| Europe | 6,529,311 | 7,838,642 | ||||||
| Asia - Pacific | 20,154,790 | 32,479,754 | ||||||
| Consolidated | $ | 31,414,009 | $ | 46,114,880 | ||||
| Revenue from affiliated customers | ||||||||
| Asia - Pacific | $ | 4,970,794 | $ | 3,734,583 | ||||
| 4,970,794 | 3,734,583 | |||||||
| Consolidated | $ | 36,384,803 | $ | 49,849,463 | ||||
| Intercompany Revenue | ||||||||
| Europe | $ | 490,888 | $ | 197,761 | ||||
| Asia - Pacific | 3,680,292 | 3,380,512 | ||||||
| Eliminated | $ | 4,171,180 | $ | 3,578,273 | ||||
| Net income (loss) after taxes and before non-controlling interest: | ||||||||
| Corporate headquarters | $ | (5,012,922 | ) | $ | (3,695,617 | ) | ||
| North America | 1,357,522 | 2,452,427 | ||||||
| Europe | (1,583,512 | ) | 1,050,276 | |||||
| Asia - Pacific | (8,857,562 | ) | 14,066,719 | |||||
| Discontinued operation | 1,158,752 | (1,785,750 | ) | |||||
| Consolidated | $ | (12,937,722 | ) | $ | 12,088,055 | |||
| Depreciation and amortization: | ||||||||
| Corporate headquarters | $ | 47,932 | $ | 136,541 | ||||
| North America | 100,875 | 164,831 | ||||||
| Europe | 854,163 | 860,485 | ||||||
| Asia - Pacific | 7,727,766 | 4,059,647 | ||||||
| Consolidated | $ | 8,730,736 | $ | 5,221,504 | ||||
| Interest expense: | ||||||||
| Corporate headquarters | $ | 34,461 | $ | 358,308 | ||||
| North America | 6,916 | 42,235 | ||||||
| Europe | 164,569 | 184,447 | ||||||
| Asia - Pacific | 49,731 | 78,977 | ||||||
| Consolidated | $ | 255,677 | $ | 663,967 | ||||
| Income tax expense: | ||||||||
| Europe | $ | 7,298 | $ | 7,606 | ||||
| Asia - Pacific | 330,984 | 457,820 | ||||||
| Consolidated | $ | 338,282 | $ | 465,426 | ||||
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 20142015 and 2013
The following table presents a summary of capital expenditures for the years ended June 30:
| 2014 | 2013 | |||||||
| Capital expenditures: | ||||||||
| Corporate headquarters | $ | 4,531 | $ | 7,992 | ||||
| North America | 16,387 | 51,741 | ||||||
| Europe | 523,189 | 491,226 | ||||||
| Asia - Pacific | 12,692,029 | 8,407,917 | ||||||
| Consolidated | $ | 13,236,136 | $ | 8,958,876 | ||||
| 2015 | 2014 | |||||||
| Capital expenditures: | ||||||||
| Corporate headquarters | $ | 3,439 | $ | 4,531 | ||||
| North America | 47,497 | 16,387 | ||||||
| Europe | 140,870 | 523,189 | ||||||
| Asia - Pacific | 3,366,906 | 12,692,029 | ||||||
| Consolidated | $ | 3,558,712 | $ | 13,236,136 | ||||
Geographic Information
Disclosed in the table below is geographic information for each country that comprised greater than five percent of total revenues for the years ended June 30 20142015 and 2013.
| June 30, 2014 | June 30, 2013 | |||||||||||||||
| Revenue | Long-lived Assets | Revenue | Long-lived Assets | |||||||||||||
| China | $ | 9,924,993 | $ | 10,420 | $ | 10,156,476 | $ | 138,597 | ||||||||
| Thailand | 3,833,442 | 612,189 | 7,104,115 | 520,652 | ||||||||||||
| USA | 6,205,706 | 9,621,308 | 5,013,889 | 10,552,454 | ||||||||||||
| UK | 8,745,813 | 1,217,371 | 6,882,417 | 1,492,607 | ||||||||||||
| Pakistan & India | 1,278,860 | 56,550,911 | 2,731,951 | 47,379,603 | ||||||||||||
| Australia & New Zealand | 1,960,661 | 28,515 | 6,030,646 | 440 | ||||||||||||
| Mexico | 1,133,492 | - | 2,624,450 | - | ||||||||||||
| Other Countries | 3,301,836 | - | 9,305,519 | - | ||||||||||||
| Total | $ | 36,384,803 | $ | 68,040,714 | $ | 49,849,463 | $ | 60,084,353 | ||||||||
| June 30, 2015 | June 30, 2014 | |||||||||||||||
| Revenue | Long-lived Assets | Revenue | Long-lived Assets | |||||||||||||
| China | $ | 15,119,518 | $ | 27,453 | $ | 9,924,993 | $ | 10,420 | ||||||||
| Thailand | 4,842,577 | 123,097 | 3,833,442 | 612,189 | ||||||||||||
| USA | 7,190,905 | 4,715,670 | 6,205,706 | 4,982,884 | ||||||||||||
| UK | 10,641,565 | 4,075,864 | 8,745,813 | 4,689,185 | ||||||||||||
| Pakistan & India | 1,868,090 | 48,457,329 | 1,278,860 | 57,717,521 | ||||||||||||
| Australia & New Zealand | 2,672,265 | 37,303 | 1,960,661 | 28,515 | ||||||||||||
| Mexico | 1,202,832 | - | 1,133,492 | - | ||||||||||||
| Indonesia | 5,212,919 | - | - | - | ||||||||||||
| Other Countries | 2,297,907 | 14,953.00 | 3,301,836 | - | ||||||||||||
| Total | $ | 51,048,578 | $ | 57,451,669 | $ | 36,384,803 | $ | 68,040,714 | ||||||||
Disclosed in the table below is the reconciliation of revenue from un-affiliated parties by each entity and country disclosed above for the years ended June 30 20142015 and 2013.2014.
| Revenues 2015 | ||||||||||||||||||||||||||||||||||||||||
| Total | China | Thailand | USA | UK | Pakistan & India | Australia & New Zealand | Mexico | Indonesia | Other Countries | |||||||||||||||||||||||||||||||
| North America: | $ | 5,535,183 | $ | - | $ | - | $ | 4,332,351 | $ | - | $ | - | $ | - | $ | 1,202,832 | $ | - | $ | - | ||||||||||||||||||||
| Europe: | 7,375,527 | - | - | - | 7,094,304 | - | - | - | - | 281,223 | ||||||||||||||||||||||||||||||
| Asia-Pacific: | 38,137,868 | 15,119,518 | 4,842,577 | 2,858,554 | 3,547,261 | 1,868,090 | 2,672,265 | - | 5,212,919 | 2,016,684 | ||||||||||||||||||||||||||||||
| Total | $ | 51,048,578 | $ | 15,119,518 | $ | 4,842,577 | $ | 7,190,905 | $ | 10,641,565 | $ | 1,868,090 | $ | 2,672,265 | $ | 1,202,832 | $ | 5,212,919 | $ | 2,297,907 | ||||||||||||||||||||
| Revenues 2014 | ||||||||||||||||||||||||||||||||||||||||
| Total | China | Thailand | USA | UK | Pakistan & India | Australia & New Zealand | Mexico | Indonesia | Other Countries | |||||||||||||||||||||||||||||||
| North America: | $ | 4,729,909 | $ | - | $ | - | $ | 3,596,417 | $ | - | $ | - | $ | - | $ | 1,133,492 | $ | - | $ | - | ||||||||||||||||||||
| Europe: | 6,529,311 | - | - | - | 6,529,311 | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Asia-Pacific: | 25,125,583 | 9,924,993 | 3,833,442 | 2,609,289 | 2,216,502 | 1,278,860 | 1,960,661 | - | - | 3,301,836 | ||||||||||||||||||||||||||||||
| Total | $ | 36,384,803 | $ | 9,924,993 | $ | 3,833,442 | $ | 6,205,706 | $ | 8,745,813 | $ | 1,278,860 | $ | 1,960,661 | $ | 1,133,492 | $ | - | $ | 3,301,836 | ||||||||||||||||||||
| F-38 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 20142015 and 2013
| Revenues 2014 | ||||||||||||||||||||||||||||||||||||
| Total | China | Thailand | USA | UK | Pakistan & India | Australia & New Zealand | Mexico | Other Countries | ||||||||||||||||||||||||||||
| Corporate headquarters | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||
| North America: | ||||||||||||||||||||||||||||||||||||
| NTA | 4,729,908 | - | - | 3,596,417 | - | - | - | 1,133,492 | - | |||||||||||||||||||||||||||
| 4,729,908 | - | - | 4,729,908 | - | - | - | - | - | ||||||||||||||||||||||||||||
| Europe: | ||||||||||||||||||||||||||||||||||||
| NTE | 4,471,175 | - | - | - | 4,471,175 | - | - | - | - | |||||||||||||||||||||||||||
| VLS | 2,058,136 | - | - | - | 2,058,136 | - | - | - | - | |||||||||||||||||||||||||||
| 6,529,311 | - | - | - | 6,529,311 | - | - | - | - | ||||||||||||||||||||||||||||
| Asia-Pacific: | ||||||||||||||||||||||||||||||||||||
| NetSol PK | 14,628,317 | 7,008,245 | 2,938,706 | 31,569 | - | 203,089 | 1,144,872 | - | 3,301,836 | |||||||||||||||||||||||||||
| Netsol-Innovation | 4,970,794 | - | - | 2,577,721 | 2,216,502 | - | 176,571 | - | - | |||||||||||||||||||||||||||
| Connect | 863,620 | - | - | - | - | 863,620 | - | - | - | |||||||||||||||||||||||||||
| Abraxas | 639,218 | - | - | - | - | - | 639,218 | - | - | |||||||||||||||||||||||||||
| NTPK Thailand | 1,106,887 | - | 894,736 | - | - | 212,151 | - | - | - | |||||||||||||||||||||||||||
| NetSol Beijing | 2,916,748 | 2,916,748 | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
| 25,125,584 | 9,924,993 | 3,833,442 | 2,609,290 | 2,216,502 | 1,278,860 | 1,960,661 | - | 3,301,836 | ||||||||||||||||||||||||||||
| Total | $ | 36,384,803 | $ | 9,924,993 | $ | 3,833,442 | $ | 6,205,706 | $ | 8,745,813 | $ | 1,278,860 | $ | 1,960,661 | $ | 1,133,492 | $ | 3,301,836 | ||||||||||||||||||
| Revenues 2013 | ||||||||||||||||||||||||||||||||||||
| Total | China | Thailand | USA | UK | Pakistan & India | Australia & New Zealand | Mexico | Other Countries | ||||||||||||||||||||||||||||
| Corporate headquarters | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||
| North America: | ||||||||||||||||||||||||||||||||||||
| NTA | 5,796,484 | - | - | 3,172,034 | - | - | - | 2,624,450 | - | |||||||||||||||||||||||||||
| North America: | 5,796,484 | - | - | 3,172,034 | - | - | - | 2,624,450 | - | |||||||||||||||||||||||||||
| Europe: | ||||||||||||||||||||||||||||||||||||
| NTE | 6,183,202 | 1,450,000 | - | - | 3,611,567 | - | - | - | 1,121,635 | |||||||||||||||||||||||||||
| VLS | 1,655,440 | - | - | - | 1,655,440 | - | - | - | - | |||||||||||||||||||||||||||
| Europe: | 7,838,642 | 1,450,000 | - | - | 5,267,007 | - | - | - | 1,121,635 | |||||||||||||||||||||||||||
| Asia-Pacific: | ||||||||||||||||||||||||||||||||||||
| NetSol PK | 22,605,831 | 8,386,318 | 2,110,555 | 1,356 | (5,230 | ) | 1,119,530 | 4,397,880 | - | 6,595,422 | ||||||||||||||||||||||||||
| Netsol-Innovation | 3,734,583 | - | - | 1,840,499 | 1,620,640 | - | 273,444 | - | - | |||||||||||||||||||||||||||
| Connect | 760,795 | - | - | - | - | 760,795 | - | - | - | |||||||||||||||||||||||||||
| Abraxas | 1,359,322 | - | - | - | - | - | 1,359,322 | - | - | |||||||||||||||||||||||||||
| NTPK Thailand | 7,433,648 | - | 4,993,560 | - | - | 851,626 | - | - | 1,588,462 | |||||||||||||||||||||||||||
| NetSol Beijing | 320,158 | 320,158 | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
| Asia-Pacific: | 36,214,337 | 8,706,476 | 7,104,115 | 1,841,855 | 1,615,410 | 2,731,951 | 6,030,646 | - | 8,183,884 | |||||||||||||||||||||||||||
| Total | $ | 49,849,463 | $ | 10,156,476 | $ | 7,104,115 | $ | 5,013,889 | $ | 6,882,417 | $ | 2,731,951 | $ | 6,030,646 | $ | 2,624,450 | $ | 9,305,519 | ||||||||||||||||||
NOTE 18 – DISCONTINUED OPERATIONS
On March 31, 2014, the Company sold 100% of its stock in Vroozi, Inc. for a purchase price of $2,716,050 consisting of $1,810,700 cash, a $452,675 non-interest bearing note receivable due September 30, 2014, and a $452,675 non-interest bearing note receivable contingent upon the occurrence of future events; however, the future events must occur before March 31, 2015. The Company recognized a $1,870,871 gain on the sale, which is recorded in the net income (loss) from discontinued operations in the condensed consolidated statements of operations. The $452,674 non-interest bearing note receivable that is contingent upon the occurrence of future events was not included in the gain calculation due to the uncertainty that the future events would occur.
NOTE 19 – 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, 20142015 and 20132014 was as follows:
| SUBSIDIARY | Non Controlling Interest % | Non-Controlling Interest at June 30, 2014 | ||||||
| NetSol PK | 36.62 | % | $ | 14,317,233 | ||||
| NetSol-Innovation | 49.90 | % | 1,546,920 | |||||
| VLS, VLHS & VLSIL Combined | 49.00 | % | 260,359 | |||||
| Total | $ | 16,124,512 | ||||||
| SUBSIDIARY | Non Controlling Interest % | Non-Controlling Interest at June 30, 2013 | ||||||
| NetSol PK | 34.81 | % | $ | 15,593,585 | ||||
| NetSol-Innovation | 49.90 | % | 1,161,649 | |||||
| VLS, VLHS & VLSIL Combined | 49.00 | % | 481,121 | |||||
| Vroozi | 9.09 | % | 34,908 | |||||
| Total | $ | 17,271,263 | ||||||
| SUBSIDIARY | Non Controlling Interest % | Non-Controlling Interest at June 30, 2015 | ||||||
| NetSol PK | 34.90 | % | $ | 11,411,954 | ||||
| NetSol-Innovation | 49.90 | % | 2,035,548 | |||||
| VLS, VLHS & VLSIL Combined | 49.00 | % | 393,139 | |||||
| Total | $ | 13,840,641 | ||||||
| SUBSIDIARY | Non Controlling Interest % | Non-Controlling Interest at June 30, 2014 | ||||||
| NetSol PK | 36.62 | % | $ | 14,317,233 | ||||
| NetSol-Innovation | 49.90 | % | 1,546,920 | |||||
| VLS, VLHS & VLSIL Combined | 49.00 | % | 260,359 | |||||
| Total | $ | 16,124,512 | ||||||
NetSol PK
During the year ended June 30, 2014,2015, employees of the NetSol PK had the following equity transactions:
NetSol-Innovation
During the year ended June 30, 2014,2015, NetSol-Innovation paid a cash dividend of $1,500,000.
| F-39 |