Source: https://ir.netsoltech.com/all-sec-filings/content/0001493152-18-001965/form10-q.htm?TB_iframe=true&height=auto&width=auto&preload=false
Timestamp: 2018-02-24 21:53:06
Document Index: 433865764

Matched Legal Cases: ['arty 2', 'arty 107', 'arty 750', 'arty 217', 'arty 101', 'arty 1', 'arty 1', 'arty 4', 'arty 469', 'arty 51', 'arty 1']

The issuer had 11,395,401 shares of its $.01 par value Common Stock and no Preferred Stock issued and outstanding as of February 10, 2018.
Condensed Consolidated Balance Sheets as of December 31, 2017 and June 30, 2017 3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2017 and 2016 4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended December 31, 2017 and 2016 5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2017 and 2016 6
Item 3. Quantitative and Qualitative Disclosures about Market Risk 45
Item 1A Risk Factors 47
Item 2. Unregistered Sales of Equity and Use of Proceeds 47
Cash and cash equivalents $ 10,004,650 $ 14,172,954
Accounts receivable, net of allowance of $347,413 and $571,511 19,106,677 6,583,199
Accounts receivable, net - related party 2,582,403 1,644,942
Revenues in excess of billings 16,094,026 19,126,389
Revenues in excess of billings - related party 107,562 80,705
Convertible note receivable - related party 750,000 200,000
Other current assets 2,819,183 2,463,886
Total current assets 51,464,501 44,272,075
Revenues in excess of billings, net - long term 6,668,854 5,173,538
Property and equipment, net 18,443,494 20,370,703
Other assets 3,543,315 3,211,295
Intangible assets, net 14,810,605 17,043,151
Total assets $ 104,537,337 $ 99,677,330
Accounts payable and accrued expenses $ 7,560,298 $ 6,880,194
Current portion of loans and obligations under capitalized leases 10,133,100 10,222,795
Unearned revenues 10,082,346 3,925,702
Total current liabilities 27,864,068 21,117,015
Loans and obligations under capitalized leases; less current maturities 250,883 366,762
Total liabilities 28,114,951 21,483,777
Common stock, $.01 par value; 14,500,000 shares authorized; 11,395,401 shares issued and 11,221,347 outstanding as of December 31, 2017 and 11,225,385 shares issued and 11,190,606 outstanding as of June 30, 2017 113,954 112,254
Additional paid-in-capital 125,354,035 124,409,998
Treasury stock (At cost, 174,054 shares and 34,779 shares as of December 31, 2017 and June 30, 2017, respectively) (1,055,330 ) (454,310 )
Accumulated deficit (42,036,467 ) (42,301,390 )
Other comprehensive loss (20,276,030 ) (18,074,570 )
Total NetSol stockholders’ equity 61,879,162 63,394,471
Non-controlling interest 14,543,224 14,799,082
Total stockholders’ equity 76,422,386 78,193,553
Total liabilities and stockholders’ equity $ 104,537,337 $ 99,677,330
License fees $ 235,932 $ 3,769,557 $ 561,998 $ 9,223,352
Maintenance fees 3,568,448 3,588,899 7,042,173 7,112,696
Services 9,087,191 6,619,158 16,104,928 12,175,293
License fees - related party 217,105 - 261,513 246,957
Maintenance fees - related party 101,251 51,345 204,214 181,976
Services - related party 1,236,508 1,829,827 3,090,385 3,994,981
Total net revenues 14,446,435 15,858,786 27,265,211 32,935,255
Salaries and consultants 5,362,092 5,979,804 10,826,252 11,873,153
Travel 287,901 836,240 801,013 1,548,135
Depreciation and amortization 1,168,103 1,318,764 2,341,216 2,649,636
Other 939,986 1,065,727 1,796,568 2,038,065
Total cost of revenues 7,758,082 9,200,535 15,765,049 18,108,989
Gross profit 6,688,353 6,658,251 11,500,162 14,826,266
Selling and marketing 1,932,140 2,713,478 3,643,436 5,057,516
Depreciation and amortization 222,785 271,485 468,658 540,582
Provision for bad debts - 1,026 - 1,026
General and administrative 4,026,706 3,932,387 7,814,264 8,551,583
Research and development cost 189,891 91,607 374,976 184,539
Total operating expenses 6,371,522 7,009,983 12,301,334 14,335,246
Income from operations 316,831 (351,732 ) (801,172 ) 491,020
Loss on sale of assets (8,939 ) (32,339 ) (16,069 ) (34,742 )
Interest expense (109,675 ) (62,127 ) (227,746 ) (116,602 )
Interest income 115,570 23,416 252,481 53,856
Gain (loss) on foreign currency exchange transactions 1,737,967 (621,887 ) 2,754,329 (1,036,783 )
Share of net loss from equity investment (203,336 ) - (270,898 ) -
Other income 14,511 6,823 15,610 28,383
Total other income (expenses) 1,546,098 (686,114 ) 2,507,707 (1,105,888 )
Net income (loss) before income taxes 1,862,929 (1,037,846 ) 1,706,535 (614,868 )
Income tax provision (200,927 ) (338,884 ) (225,798 ) (378,759 )
Net income (loss) 1,662,002 (1,376,730 ) 1,480,737 (993,627 )
Non-controlling interest (1,027,581 ) (791,664 ) (1,215,814 ) (1,560,878 )
Net income (loss) attributable to NetSol $ 634,421 $ (2,168,394 ) $ 264,923 $ (2,554,505 )
Basic $ 0.06 $ (0.20 ) $ 0.02 $ (0.24 )
Diluted $ 0.06 $ (0.20 ) $ 0.02 $ (0.24 )
Basic 11,159,075 10,877,446 11,115,346 10,783,685
Diluted 11,171,543 10,877,446 11,127,814 10,783,685
Net income (loss) $ 634,421 $ (2,168,394 ) $ 264,923 $ (2,554,505 )
Translation adjustment (2,453,890 ) (944,837 ) (3,279,634 ) 149,237
Translation adjustment attributable to non-controlling interest 841,009 276,575 1,078,174 (47,138 )
Net translation adjustment (1,612,881 ) (668,262 ) (2,201,460 ) 102,099
Comprehensive income (loss) attributable to NetSol $ (978,460 ) $ (2,836,656 ) $ (1,936,537 ) $ (2,452,406 )
Net income (loss) $ 1,480,737 $ (993,627 )
Depreciation and amortization 2,809,874 3,190,218
Provision for bad debts - 1,026
Share of net loss from investment under equity method 270,898 -
Loss on sale of assets 16,069 34,742
Stock based compensation 833,530 1,525,775
Accounts receivable (13,231,059 ) 3,678,110
Accounts receivable - related party (1,637,829 ) 829,285
Revenues in excess of billing 602,676 (7,592,495 )
Revenues in excess of billing - related party (32,308 ) 285,791
Other current assets (524,547 ) 585,147
Accounts payable and accrued expenses 887,824 334,241
Unearned revenue 6,469,146 (1,830,619 )
Net cash provided by (used in) operating activities (2,054,989 ) 69,398
Purchases of property and equipment (543,123 ) (1,074,316 )
Sales of property and equipment 193,241 181,087
Investment in WRLD3D (50,000 ) (705,555 )
Net cash used in investing activities (899,882 ) (1,598,784 )
Proceeds from the exercise of stock options and warrants 215,311 429,452
Proceeds from exercise of subsidiary options 7,755 18,089
Purchase of treasury stock (601,020 ) (38,885 )
Dividend paid by subsidiary to non-controlling interest (417,853 ) (968,657 )
Proceeds from bank loans 708,457 -
Payments on capital lease obligations and loans - net (361,814 ) (69,998 )
Net cash used in financing activities (449,164 ) (629,999 )
Effect of exchange rate changes (764,269 ) 107,241
Net decrease in cash and cash equivalents (4,168,304 ) (2,052,144 )
Cash and cash equivalents, end of period $ 10,004,650 $ 9,505,383
Interest $ 189,769 $ 123,682
Taxes $ 226,098 $ 77,414
Provided services for investment in WRLD3D $ 553,678 $ 549,621
Assets acquired under capital lease $ 113,220 $ -
These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended June 30, 2017. The Company follows the same accounting policies in preparation of interim reports. Results of operations for the interim periods are not indicative of annual results.
Ended December 31, 2016 Ended December 31, 2016
Services $ 6,984,084 $ 6,619,158 $ 12,790,801 $ 12,175,293
Services - related party 1,464,901 1,829,827 3,379,473 3,994,981
$ 8,448,985 $ 8,448,985 $ 16,170,274 $ 16,170,274
Provision for bad debts $ - $ 1,026 $ - $ 1,026
General and administrative 3,933,413 3,932,387 8,552,609 8,551,583
$ 3,933,413 $ 3,933,413 $ 8,552,609 $ 8,552,609
Cash includes cash on hand and demand deposits in accounts maintained within the United States as well as in foreign countries. Certain financial instruments, which subject the Company to concentration of credit risk, consist of cash and restricted cash. The Company maintains balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for the banks located in the United States. Balances at financial institutions within certain foreign countries are not covered by insurance. As of December 31, 2017, and June 30, 2017, the Company had uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $8,463,863 and $11,564,343, respectively. The Company has not experienced any losses in such accounts.
The Company’s financial assets that are measured at fair value on a recurring basis as of December 31, 2017, are as follows:
Revenue in excess of billing - long term $ - $ - $ 6,668,854 $ 6,668,854
Total $ - $ - $ 6,668,854 $ 6,668,854
The Company’s financial assets that were measured at fair value on a recurring basis as of June 30, 2017, were as follows:
Revenue in excess of billing - long term $ - $ - $ 5,173,538 $ 5,173,538
The reconciliation from June 30, 2017 to December 31, 2017 is as follows:
Revenue in excess of billing - long term Fair value discount Total
Balance at June 30, 2017 $ 5,483,869 $ (310,331 ) $ 5,173,538
Additions 1,469,379 $ (85,057 ) 1,384,322
Amortization during the period - 110,994 110,994
Balance at December 31, 2017 $ 6,953,248 $ (284,394 ) $ 6,668,854
The Company applied the discounted cash flow method to calculate the fair value and used NetSol PK’s weighted average borrowing rate, ranging from 3.93% to 4.43%.
In November 2015, the Financial Accounting Standards Board (FASB) issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (ASU 2015-17), which changes how deferred taxes are classified on the balance sheet and is effective for financial statements issued for annual periods beginning after December 15, 2016, with early adoption permitted. ASU 2015-17 requires all deferred tax assets and liabilities to be classified as non-current. The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. The guidance simplifies accounting for share-based payments, most notably by requiring all excess tax benefits and tax deficiencies to be recorded as income tax benefits or expense in the income statement and by allowing entities to recognize forfeitures of awards when they occur. This new guidance is effective for annual reporting periods beginning after December 15, 2016 and may be adopted prospectively or retroactively. The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception”. The ASU was issued to address the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. The ASU, among other things, eliminates the need to consider the effects of down round features when analyzing convertible debt, warrants and other financing instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The amendments are effective for fiscal years beginning after December 15, 2018, and should be applied retrospectively. Early adoption is permitted, including adoption in an interim period. The Company is currently in the process of evaluating the impact of the adoption of this standard on its consolidated financial statements.
December 31, 2017 For the six months ended
Net income available to common shareholders $ 634,421 11,159,075 $ 0.06 $ 264,923 11,115,346 $ 0.02
Stock options - 12,468 - - 12,468 -
Diluted income per share $ 634,421 11,171,543 $ 0.06 $ 264,923 11,127,814 $ 0.02
December 31, 2016 For the six months ended
Restated Restated Restated Restated
Net loss available to common shareholders $ (2,168,394 ) 10,877,446 $ (0.20 ) $ (2,554,505 ) 10,783,685 $ (0.24 )
Diluted loss per share $ (2,168,394 ) 10,877,446 $ (0.20 ) $ (2,554,505 ) 10,783,685 $ (0.24 )
Stock Options - 480,133 - 480,133
Warrants - 11,075 - 11,075
Share Grants 285,956 629,258 285,956 629,258
285,956 1,120,466 285,956 1,120,466
The accounts of NTE, VLSH and VLS use the British Pound; VLSIL and NTG use the Euro; NetSol PK, Connect, and NetSol Innovation use the Pakistan Rupee; NTPK Thailand and NetSol Thai use the Thai Baht; Australia uses the Australian dollar; and NetSol Beijing uses the Chinese Yuan as the functional currencies. NetSol Technologies, Inc., and its subsidiary, NTA, use the U.S. dollar as the functional currency. Assets and liabilities are translated at the exchange rate on the balance sheet date, and operating results are translated at the average exchange rate throughout the period. Accumulated translation losses classified as an item of accumulated other comprehensive loss in the stockholders’ equity section of the consolidated balance sheet were $20,276,030 and $18,074,570 as of December 31, 2017 and June 30, 2017, respectively. During the three and six months ended December 31, 2017, comprehensive income (loss) in the consolidated statements of comprehensive income (loss) included a translation loss attributable to NetSol of $1,612,881 and $2,201,460, respectively. During the three and six months ended December 31, 2016, comprehensive income (loss) in the consolidated statements of operations included a translation loss of $668,262 and translation income of $102,099, respectively.
In November 2004, the Company entered into a joint venture with 1insurer, formerly Innovation Group, called NetSol-Innovation. NetSol-Innovation provides support services to 1insurer. During the three and six months ended December 31, 2017, NetSol Innovation provided services of $796,757 and $1,928,513, respectively. During the three and six months ended December 31, 2016, NetSol-Innovation provided services of $1,401,144 and $2,956,619, respectively. Accounts receivable at December 31, 2017 and June 30, 2017 were $2,429,771 and $1,462,078, respectively.
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 three and six months ended December 31, 2017, NTE and VLS provided license, maintenance and services of $442,699 and $1,043,891, respectively. During the three and six months ended December 31, 2016, NTE and VLS provided license, maintenance and services of $115,102 and $851,787, respectively. Accounts receivable at December 31, 2017 and June 30, 2017 were $113,310 and $133,218, respectively.
On May 31, 2017, Faizaan Ghauri, son of CEO Najeeb Ghauri, and an employee of the Company was appointed CEO of WRLD3D, Inc. (“WRLD3D”) a non-public company. On March 2, 2016, the Company purchased a 4.9% interest in WRLD3D for $1,111,111 and the Company’s subsidiary NetSol PK purchased a 12.2% investment in WRLD3D for $2,777,778 which will be earned over future periods by providing IT and enterprise software solutions. See Note 7 and Note 11.
Najeeb Ghauri, CEO and Chairman of the Board, and Naeem Ghauri, Director, have a financial interest in G-Force, LLC, which purchased a 4.9% investment in WRLD3D, Inc. for $1,111,111. See Note 11 “Other Long-Term Assets”
NOTE 6 – 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 35.90% and 41.54% of revenue for the six months ended December 31, 2017 and 2016, respectively. The revenue from this customer is shown in the Asia – Pacific segment. Accounts receivable at December 31, 2017 and June 30, 2017, were $12,761,829 and $1,620,717, respectively. Revenue in excess of billing at December 31, 2017 was $16,674,348, which included $6,668,854 shown as long term. Revenue in excess of billing at June 30, 2017 was $18,579,540, which included $5,173,538 shown as long term.
On December 21, 2015, the Company entered into a 10-year contract with Daimler Financial Services to provide license, maintenance and services for 12 countries in the Asia Pacific Region. The implementation phase is expected to be over a five-year period with maintenance and support over 10 years. The contract is a fixed fee arrangement with total license and maintenance fees of approximately €71,000,000 (approximately $85,054,591) with services to be separately agreed upon and billed as they are performed. The customer will make fixed annual payments of €5,850,000 (approximately $7,008,019) for years 1-5 and €8,350,000 (approximately $10,002,899) for years 6-10. Under the terms of the contract, the customer has the right to withdraw from certain modules and terminate the agreement as to certain countries based on good cause or business reasons prior to the beginning of implementation.
On, September 4, 2017, the Company amended the agreement which provided for an additional €7,700,000 (approximately $9,277,108) to be earned over the remaining life of the contract. The amended agreement provides for €7,000,000 (approximately $8,433,735) to be paid in the current fiscal year with €100,000 (approximately $120,482) to be paid each year over the remaining seven years.
NOTE 7 – CONVERTIBLE NOTE RECEIVABLE – RELATED PARTY
The Company entered into an agreement with WRLD3D, whereby the Company was issued a Convertible Promissory Note (the “Convertible Note”) which was fully executed on May 25, 2017. The maximum principal amount of the Convertible Note is $750,000, and as of December 31, 2017, the Company had disbursed the full amount. The Convertible Note bears interest at 5% per annum and all unpaid interest and principal is due and payable upon the Company’s request on or after February 1, 2018. The Convertible Note is convertible into Series BB Preferred shares at the lesser of (i) the price paid per share for the equity security by the investors in the qualified financing and (ii) $0.6788 per share (adjusted for any stock dividends, combinations, splits, recapitalizations or the like with respect to WRLD3D’s Series BB Preferred Stock after the date of the Convertible Note). The Convertible Note is convertible upon the occurrence of the following events:
1. Upon a qualified financing which is an equity financing of at least $2,000,000.
2. Optionally, upon an equity financing less than $2,000,000.
3. Optionally after the maturity date.
4. Upon a change of control.
NOTE 8 - OTHER CURRENT ASSETS
Prepaid Expenses $ 660,417 $ 597,687
Advance Income Tax 979,296 1,052,935
Employee Advances 114,147 128,100
Security Deposits 84,934 103,255
Other Receivables 648,237 252,590
Other Assets 332,152 329,319
Total $ 2,819,183 $ 2,463,886
NOTE 9 – REVENUE IN EXCESS OF BILLINGS – LONG TERM
Revenue in excess of billings, net consisted of the following:
Revenue in excess of billing - long term $ 6,953,248 $ 5,483,869
Present value discount (284,394 ) (310,331 )
Net Balance $ 6,668,854 $ 5,173,538
Pursuant to revenue recognition for contract accounting, the Company has recorded revenue in excess of billings long-term for amounts billable after one year. During the three and six months ended December 31, 2017, the Company accreted $59,272 and $110, 994, respectively, which is recorded in interest income. The Company used the discounted cash flow method with interest rates ranging from 3.93% to 4.43%.
Office Furniture and Equipment $ 3,908,883 $ 3,755,710
Computer Equipment 25,788,684 26,693,730
Assets Under Capital Leases 1,522,708 1,965,650
Building 8,794,381 9,243,866
Land 2,299,047 2,428,626
Autos 1,287,043 1,270,339
Improvements 534,900 592,652
Subtotal 44,135,646 45,950,573
Accumulated Depreciation (25,692,152 ) (25,579,870 )
Property and Equipment, Net $ 18,443,494 $ 20,370,703
For the three and six months ended December 31, 2017, depreciation expense totaled $707,668 and $1,436,327, respectively. Of these amounts, $484,883 and $967,669, respectively, are reflected in cost of revenues. For the three and six months ended December 31, 2016, depreciation expense totaled $902,678 and $1,801,981, respectively. Of these amounts, $631,193 and $1,261,399, respectively, are reflected in cost of revenues.
Following is a summary of fixed assets held under capital leases as of December 31, 2017 and June 30, 2017:
Computers and Other Equipment $ 236,518 $ 309,863
Furniture and Fixtures 65,084 227,914
Vehicles 1,221,106 1,427,873
Total 1,522,708 1,965,650
Less: Accumulated Depreciation - Net (568,087 ) (711,622 )
$ 954,621 $ 1,254,028
NOTE 11 – OTHER LONG TERM ASSETS
Investment (1) $ 3,389,801 $ 3,057,020
Long Term Security Deposits 153,514 154,275
Total $ 3,543,315 $ 3,211,295
(1) Investment in WRLD3D
On March 2, 2016, the Company purchased a 4.9% interest in WRLD3D, a non-public company, for $1,111,111. The Company paid $555,556 at the initial closing and $555,555 on September 1, 2016. NetSol PK, the subsidiary of the Company, purchased a 12.2% investment in WRLD3D, for $2,777,778 which will be earned over future periods by providing IT and enterprise software solutions. Per the agreement, NetSol PK is to provide a minimum of $200,000 of services in each three-month period and the entire balance is required to be provided within three years of the date of the agreement. If NetSol PK fails to provide the future services, it may be required to forfeit the unearned shares back to WRLD3D. As of December 31, the investment earned by NetSol PK is $2,549,587.
In connection with the investment, the Company and NetSol PK received a warrant to purchase preferred stock of WRLD3D which included the following key terms and features:
● The warrants are exercisable into shares of the “Next Round Preferred”, only if and when the Next Round Preferred is issued by WRLD3D in a “Qualified Financing”.
● The warrants expire on March 2, 2020.
● “Next Round Preferred” is defined as occurring if WRLD3D’s preferred stock (or securities convertible into preferred stock) are issued in a Qualified Financing that occurs after March 2, 2016.
● “Qualified Financing” is defined as financing with total proceeds of at least $2 million.
● The total number of common stock shares to be issued is equal to $1,250,000 divided by the per share price of the Next Round Preferred.
● The exercise price of the warrants is equal to the greater of
a) 70% of the per share price of the Next Round Preferred sold in a Qualified Financing, or
b) 25,000,000 divided by the total number of shares of common stock outstanding immediately prior to the Qualified Financing (on a fully-diluted basis, excluding the number of common stock shares issuable upon the exercise of any given warrant).
The Company had originally accounted for the investment under the cost method. On May 31, 2017, the Company determined that it met the significant influence criteria since the newly appointed CEO of WRLD3D is the son of the CEO, Najeeb Ghauri, and also an employee of the Company; therefore, the Company changed the accounting treatment from the cost method to the equity method.
During the three and six months ended December 31, 2017, NetSol PK provided services valued at $315,408 and $583,708, respectively. During the three and six months ended December 31, 2016, NetSol PK provided services valued at $300,963 and $549,621, respectively. This revenue is recorded as services-related party. These services are recorded as accounts receivable until approved by WRLD3D after which the shares are released from restriction. Accounts receivable at December 31, 2017 and June 30, 2017 were $39,322 and $49,646, respectively. Revenue in excess of billing at December 31, 2017 and June 30, 2017 were $107,562 and $80,705, respectively. During the three and six months ended December 31, 2017, NetSol PK services valued at $285,378 and $553,678, respectively, were released from restriction. During the three and six months ended December 31, 2016, NetSol PK services valued at $300,963 and $549,621, respectively, were released from restriction. Under the equity method of accounting, the Company recorded its share of net loss of $203,336 and $270,898 for the three and six months ended December 31, 2017, respectively.
Effect of Translation Adjustment (4,850,984 ) (3,134,488 )
Accumulated Amortization (27,583,408 ) (27,067,358 )
Net Balance $ 14,810,605 $ 17,043,151
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 $14,810,605 will be amortized over the next 5.5 years. Amortization expense for the three and six months ended December 31, 2017 was $683,220 and $1,373,547, respectively. Amortization expense for the three and six months ended December 31, 2016 was $687,571 and $1,388,237, respectively.
December 31, 2018 $ 2,630,334
December 31, 2019 2,630,334
December 31, 2020 2,630,334
December 31, 2021 2,630,334
December 31, 2022 2,630,334
Thereafter 1,658,935
$ 14,810,605
NOTE 13 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts Payable $ 1,639,112 $ 1,466,265
Accrued Liabilities 5,086,258 4,498,958
Accrued Payroll & Taxes 488,491 520,719
Taxes Payable 167,994 174,485
Other Payable 178,443 219,767
Total $ 7,560,298 $ 6,880,194
NOTE 14 – DEBTS
D&O Insurance (1) $ 105,023 $ 105,023 $ -
Loan Payable Bank - Export Refinance (3) 4,521,613 4,521,613 -
Loan Payable Bank - Running Finance (4) 678,217 678,217 -
Loan Payable Bank - Export Refinance II (5) 3,165,130 3,165,130 -
Loan Payable Bank - Running Finance II (6) 1,356,484 1,356,484 -
9,826,467 9,826,467 -
Subsidiary Capital Leases (7) 557,516 306,633 250,883
$ 10,383,983 $ 10,133,100 $ 250,883
D&O Insurance (1) $ 87,485 $ 87,485 $ -
Bank Overdraft Facility (2) 221,379 221,379 -
Loan Payable Bank - Export Refinance (3) 4,776,461 4,776,461 -
Loan Payable Bank - Export Refinance II (5) 1,910,585 1,910,585 -
Loan Payable Bank - Running Finance II (6) 2,865,877 2,865,877 -
9,861,787 9,861,787 -
Subsidiary Capital Leases (7) 727,770 361,008 366,762
$ 10,589,557 $ 10,222,795 $ 366,762
(1) The Company finances Directors’ and Officers’ (“D&O”) liability insurance, Errors and Omissions (“E&O”) liability insurance and some account payables, for which the D&O and E&O balances are renewed on an annual basis and, as such, are recorded in current maturities. The interest rate on these financings were ranging from 4.8% to 7.69% as of December 31, 2017 and June 30, 2017.
(2) The Company’s subsidiary, NTE, has an overdraft facility with HSBC Bank plc whereby the bank would cover any overdrafts up to £300,000, or approximately $405,405. The annual interest rate was 4.75% as of December 31, 2017. Total outstanding balance as of December 31, 2017 was £Nil. Interest expense for three and six months ended December 31, 2017, was $5,991 and $8,045, respectively. Interest expense for three and six months ended December 31, 2016, was $nil.
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 December 31, 2017, NTE was in compliance with this covenant.
(3) The Company’s subsidiary, NetSol PK, has an export refinance facility with Askari Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every six months. Total facility amount is Rs. 500,000,000 or $4,521,613 at December 31, 2017 and June 30, 2017. The interest rate for the loans was 3% at December 31, 2017 and June 30, 2017. Interest expense for the three and six months ended December 31, 2017 was $35,533 and $71,431, respectively. Interest expense for the three and six months ended December 31, 2016 was $28,527 and $57,592, respectively.
(4) The Company’s subsidiary, NetSol PK, has a running finance facility with Askari Bank Limited, secured by NetSol PK’s assets. Total facility amount is Rs. 75,000,000 or $678,242, at December 31, 2017. NetSol PK used Rs. 74,997,233 or $678,217, at December 31, 2017. The interest rate for the loans was 8.16% at December 31, 2017.
This facility requires NetSol PK to maintain a long-term debt equity ratio of 60:40 and the current ratio of 1:1. As of December 31, 2017, NetSol PK was in compliance with this covenant.
(5) The Company’s subsidiary, NetSol PK, has an export refinance facility with Samba Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every six months. Total facility amount is Rs. 350,000,000 or $3,165,130 and Rs. 200,000,000 or $1,910,585, at December 31, 2017 and June 30, 2017, respectively. The interest rate for the loans was 3% at December 31, 2017 and June 30, 2017. Interest expense for the three and six months ended December 31, 2017 was $17,656 and $39,778, respectively. Interest expense for three and six months ended December 31, 2016, was $nil.
(6) The Company’s subsidiary, NetSol PK, has a running finance facility with Samba Bank Limited, secured by NetSol PK’s assets. Total facility amount is Rs. 150,000,000 or $1,356,484 and Rs. 300,000,000 or $2,865,877, at December 31, 2017 and June 30, 2017, respectively. The interest rate for the loans was 8.13% at December 31, 2017 and June 30, 2017, respectively. Interest expense for the three and six months ended December 31, 2017 was $35,626 and $79,721, respectively. Interest expense for three and six months ended December 31, 2016, was $nil.
During the tenure of loan, the facilities from Samba Bank Limited require NetSol PK to maintain at a minimum a current ratio of 1:1, an interest coverage ratio of 4 times, a leverage ratio of 2 times, and a debt service coverage ratio of 4 times. As of December 31, 2017, NetSol PK was in compliance with these covenants.
(6) The Company leases various fixed assets under capital lease arrangements expiring in various years through 2022. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are secured by the assets themselves. Depreciation of assets under capital leases is included in depreciation expense for the three months ended December 31, 2017 and 2016.
Following is the aggregate minimum future lease payments under capital leases as of December 31, 2017:
Due FYE 12/31/18 $ 336,546
Due FYE 12/31/19 220,855
Due FYE 12/31/20 36,412
Due FYE 12/31/21 5,182
Due FYE 12/31/22 -
Total Minimum Lease Payments 598,995
Interest Expense relating to future periods (41,479 )
Present Value of minimum lease payments 557,516
Less: Current portion (306,633 )
Non-Current portion $ 250,883
NOTE 15 - STOCKHOLDERS’ EQUITY
During the six months ended December 31, 2017, the Company issued 26,136 shares of common stock for services rendered by officers of the Company. These shares were valued at the fair market value of $163,350.
During the six months ended December 31, 2017, the Company issued 9,699 shares of common stock for services rendered by the independent members of the Board of Directors as part of their board compensation. These shares were valued at the fair market value of $55,080.
During the six months ended December 31, 2017, the Company issued 98,408 shares of its common stock to employees pursuant to the terms of their employment agreements valued at $605,107.
During the six months ended December 31, 2017, the Company collected subscription receivable of $76,511 related to the exercise of stock options in previous years.
During the six months ended December 31, 2017, the Company received $138,800 pursuant to a stock option agreement for the exercise of 35,773 shares of common stock at a price of $3.88 per share.
During the six months ended December 31, 2017, the Company paid $601,020 to purchase 139,275 of shares of its common stock from the open market at an average price of $4.32 per share.
NOTE 16 - INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN
Exercised (84,838 ) $ 4.49
Exercised (35,773 ) $ 3.88
Expired / Cancelled (1,000 ) $ 16.00
Outstanding and exercisable, December 31, 2017 438,360 $ 4.20 0.57 $ 319,465
The following table summarizes information about stock options and warrants outstanding and exercisable at December 31, 2017.
Exercise Price Number Outstanding and Exercisable Weighted Average Remaining Contractual Life Weighted Ave Exercise Price
$ 3.88 384,898 0.49 $ 3.88
$ 6.50 53,462 1.10 $ 6.50
Totals 438,360 0.57 $ 4.20
Forfeited / Cancelled (5,000 ) $ 5.55
Vested (427,175 ) $ 5.90
Unvested, June 30, 2017 420,199 $ 6.07
Vested (134,243 ) $ 6.13
Unvested, December 31, 2017 285,956 $ 6.18
For the three and six months ended December 31, 2017, the Company recorded compensation expense of $405,721 and $833,530, respectively. For the three and six months ended December 31, 2016, the Company recorded compensation expense of $682,640 and $1,547,579, respectively. The compensation expense related to the unvested stock grants as of December 31, 2017 was $1,731,908 which will be recognized during the fiscal years 2018 through 2022.
NOTE 17 – TAXES
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly revises the future ongoing U.S. corporate income tax by, among other things, lowering U. S. corporate income tax rates and implementing a territorial tax system. As the Company has a June 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory federal rate of approximately 28% for our fiscal year ending June 30, 2018, and 21% for subsequent fiscal years.
There are also certain transitional impacts of the Tax Act. As part of the transition to the new territorial tax system, the Tax Act imposes a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries. As of December 31, 2017, the provisional undistributed earnings of foreign subsidiaries were $22.8 million which the Company anticipates being able to offset fully with net operating loss carry forwards. In addition, the modified territorial tax system includes a new anti-deferral provision, referred to as global intangible low taxed income (“GILTI”), which subjects certain foreign income to current U.S. tax.
The changes included in the Tax Act are broad and complex. The final transition impacts of the Tax Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the company has utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates and foreign exchange rates of foreign subsidiaries.
We currently anticipate finalizing and recording any resulting adjustments by the end of our current fiscal year ending June 30, 2018.
NOTE 18 – CONTINGENCIES
On April 7, 2017, Conister Bank Limited filed a complaint in the High Court of Justice Chancery Division, as claim no. HC-2017-001045 against our subsidiary, Virtual Lease Services Limited (“VLS”). The complaint alleges that VLS was in willful default of their agreements with Conister Bank Limited by failing to fulfill its obligations under the agreements with Conister. The complaint alleges damages in excess of £200,000 (approximately $270,270). VLS has responded to the complaint and its expenses are currently covered by available insurance. VLS denies all claims and intends to vigorously defend the action.
NOTE 19 – OPERATING SEGMENTS
The following table presents a summary of identifiable assets as of December 31, 2017 and June 30, 2017:
Corporate headquarters $ 3,308,334 $ 2,922,514
North America 5,513,464 6,717,366
Europe 6,590,233 6,056,514
Asia - Pacific 89,125,306 83,980,936
Consolidated $ 104,537,337 $ 99,677,330
The following table presents a summary of investment under equity method as of December 31, 2017 and June 30, 2017:
Investment in WRLD3D:
Corporate headquarters $ 1,033,486 $ 1,111,111
Asia - Pacific 2,356,315 1,945,909
Consolidated $ 3,389,801 $ 3,057,020
North America $ 1,287,638 $ 1,513,997 $ 2,135,710 $ 3,355,428
Europe 1,661,213 1,298,037 3,109,037 1,888,578
Asia - Pacific 10,258,128 11,530,506 18,464,352 23,267,335
13,206,979 14,342,540 23,709,099 28,511,341
Europe 442,699 115,102 1,043,891 1,467,295
Asia - Pacific 796,757 1,401,144 2,512,221 2,956,619
1,239,456 1,516,246 3,556,112 4,423,914
Consolidated $ 14,446,435 $ 15,858,786 $ 27,265,211 $ 32,935,255
Europe $ 139,228 $ 95,053 $ 241,703 $ 231,180
Asia - Pacific 768,431 1,462,603 1,145,368 1,922,554
Eliminated $ 907,659 $ 1,557,656 $ 1,387,071 $ 2,153,734
Corporate headquarters $ (1,258,717 ) $ (1,190,559 ) $ (2,296,641 ) $ (2,179,432 )
North America 65,194 (71,134 ) (230,452 ) (266,817 )
Europe 180,655 (698,364 ) 280,045 (1,293,771 )
Asia - Pacific 2,674,870 583,327 3,727,785 2,746,393
Consolidated $ 1,662,002 $ (1,376,730 ) $ 1,480,737 $ (993,627 )
North America $ - $ 41,275
Europe 123,335 273,794
Asia - Pacific 419,788 759,247
Consolidated $ 543,123 $ 1,074,316
NOTE 20 – NON-CONTROLLING INTEREST IN SUBSIDIARY
SUBSIDIARY Non-Controlling Interest % Non-Controlling Interest at
NetSol PK 33.83 % $ 12,386,620
NetSol-Innovation 49.90 % 1,749,551
VLS, VLSH & VLSIL Combined 49.00 % 407,132
NetSol Thai 0.006 % (79 )
Total $ 14,543,224
NetSol PK 33.80 % $ 12,887,938
NetSol-Innovation 49.90 % 1,599,734
VLS, VLHS & VLSIL Combined 49.00 % 311,502
NetSol Thai 0.006 % (92 )
Total $ 14,799,082
During the six months ended December 31, 2017, employees of NetSol PK exercised 50,000 of options of common stock pursuant to employees exercising stock options and NetSol PK received cash of $7,755 resulting in an increase in non-controlling interest from 33.80% to 33.83%.
During the six months ended December 31, 2017, NetSol PK paid a cash dividend of $1,234,991.
NOTE 21 – RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
During the preparation of the Company’s Form 10-Q for the nine months ended March 31, 2017, misstatements were identified in the previous financial statements relating to the recording of revenue in the proper period. The restated financial statements for the periods affected were disclosed in Note 19 of the Notes to Condensed Consolidated Financial Statement contained in the Company’s Form 10-Q for the nine months ended March 31, 2017.
On December 21, 2015, the Company signed a 10-year contract for a 12-country installation of its NFS Ascent product which included a perpetual license, continued maintenance on the existing product and then maintenance on NFS Ascent upon installation. The Company did not appropriately apply the percentage-of-completion method for this arrangement in accordance with ASC 605-35. As a result, for quarter ended September 30, 2016, license revenue was understated by $1,953,935 and for the quarter ended December 31, 2016, license revenue was overstated by $1,580,529.
The Company charges maintenance revenue on the license value plus any additional customization that the customer may require. For one customer, the Company did not increase the maintenance fee for the additional customization that was performed during the year. This resulted in an understatement of maintenance revenue of $120,976 for the quarter ended September 30, 2016 and an overstatement of maintenance revenue of $198,797 for the quarter ended December 31, 2016.
The following tables present the restated financial statements for the three and six months ended December 31, 2016.
As Originally Amount of
Presented Restatement As Restated
Cash and cash equivalents $ 9,505,383 $ 9,505,383
Accounts receivable, net of allowance of $495,760 and $492,498 5,840,490 5,840,490
Accounts receivable, net - related party 4,303,380 4,303,380
Revenues in excess of billings 17,646,488 373,406 18,019,894
Revenues in excess of billings - related party 469,030 469,030
Other current assets 2,904,650 2,904,650
Total current assets 40,669,421 373,406 41,042,827
Property and equipment, net 21,873,277 21,873,277
Other assets 2,054,938 2,054,938
Intangible assets, net 18,423,439 18,423,439
Total assets $ 92,627,643 $ 373,406 $ 93,001,049
Accounts payable and accrued expenses $ 7,373,097 $ 7,373,097
Current portion of loans and obligations under capitalized leases 4,368,930 4,368,930
Unearned revenues 2,806,804 77,821 2,884,625
Total current liabilities 14,637,155 77,821 14,714,976
Long term loans and obligations under capitalized leases; less current maturities 501,554 501,554
Total liabilities 15,138,709 77,821 15,216,530
Preferred stock, $.01 par value; 500,000 shares authorized; - - -
10,993,054 shares issued and 10,958,275 outstanding as of December 31, 2016 and 10,713,372 shares issued and 10,686,093 outstanding as of June 30, 2016 109,931 109,931
Additional paid-in-capital 123,019,215 123,019,215
Treasury stock (34,779 shares and 27,279 shares) (454,310 ) (454,310 )
Accumulated deficit (40,074,755 ) 196,890 (39,877,865 )
Stock subscription receivable (450,220 ) (450,220 )
Other comprehensive loss (18,628,395 ) (18,628,395 )
Total NetSol stockholders’ equity 63,521,466 196,890 63,718,356
Non-controlling interest 13,967,468 98,695 14,066,163
Total stockholders’ equity 77,488,934 295,585 77,784,519
Total liabilities and stockholders’ equity $ 92,627,643 $ 373,406 $ 93,001,049
As Originally Amount of As Originally Amount of
Presented Restatement As Restated Presented Restatement As Restated
License fees $ 5,350,086 $ (1,580,529 ) $ 3,769,557 $ 8,849,946 $ 373,406 $ 9,223,352
Maintenance fees 3,787,696 (198,797 ) 3,588,899 7,190,517 (77,821 ) 7,112,696
Services 6,984,084 6,984,084 12,790,801 12,790,801
License fees - related party - - 246,957 246,957
Maintenance fees - related party 51,345 51,345 181,976 181,976
Services - related party 1,464,901 1,464,901 3,379,473 3,379,473
Total net revenues 17,638,112 (1,779,326 ) 15,858,786 32,639,670 295,585 32,935,255
Salaries and consultants 5,979,804 5,979,804 11,873,153 11,873,153
Travel 836,240 836,240 1,548,135 1,548,135
Depreciation and amortization 1,318,764 1,318,764 2,649,636 2,649,636
Other 1,065,727 1,065,727 2,038,065 2,038,065
Total cost of revenues 9,200,535 - 9,200,535 18,108,989 - 18,108,989
Gross profit 8,437,577 (1,779,326 ) 6,658,251 14,530,681 295,585 14,826,266
Selling and marketing 2,713,478 2,713,478 5,057,516 5,057,516
Depreciation and amortization 271,485 271,485 540,582 540,582
General and administrative 3,933,413 3,933,413 8,552,609 8,552,609
Research and development cost 91,607 91,607 184,539 184,539
Total operating expenses 7,009,983 - 7,009,983 14,335,246 - 14,335,246
Income (loss) from operations 1,427,594 (1,779,326 ) (351,732 ) 195,435 295,585 491,020
Loss on sale of assets (32,339 ) (32,339 ) (34,742 ) (34,742 )
Interest expense (62,127 ) (62,127 ) (116,602 )