10-Q 1 form10-q.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

(Mark One)

 

(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended December 31, 2020

 

(  ) For the transition period from __________ to __________

 

Commission file number: 0-22773

 

NETSOL TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

 

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

 

23975 Park Sorrento, Suite 250, Calabasas, CA 91302

(Address of principal executive offices) (Zip Code)

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of exchange on which registered
Common Stock, $0.01 par value per share   NTWK   NASDAQ

 

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

Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):

 

  Large Accelerated Filer [  ] Accelerated Filer [  ]
  Non-accelerated Filer [X] Smaller reporting company [X]
    Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

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

Yes [  ] No [X]

 

The issuer had 12,147,458 shares issued and 11,360,519 outstanding of its $.01 par value Common Stock and no Preferred Stock outstanding as of February 9, 2021.

 

 

 

 

 

 

NETSOL TECHNOLOGIES, INC.

 

  Page No.
PART I. FINANCIAL INFORMATION  
   
Item 1. Financial Statements (Unaudited)  
Condensed Consolidated Balance Sheets as of December 31, 2020 and June 30, 2020 3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2020 and 2019 4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended December 31, 2020 and 2019 5
Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended December 31, 2020 and 20196
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2020 and 2019 8
Notes to the Condensed Consolidated Financial Statements 10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 34
Item 3. Quantitative and Qualitative Disclosures about Market Risk 50
Item 4. Controls and Procedures 50
   
PART II. OTHER INFORMATION  
Item 1. Legal Proceedings 51
Item 1A Risk Factors 51
Item 2. Unregistered Sales of Equity and Use of Proceeds 51
Item 3. Defaults Upon Senior Securities 51
Item 4. Mine Safety Disclosures 51
Item 5. Other Information 51
Item 6. Exhibits 51

 

Page 2

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

 

   As of   As of 
  December 31, 2020   June 30, 2020 
ASSETS          
Current assets:          
Cash and cash equivalents  $32,003,647   $20,166,830 
Accounts receivable, net of allowance of $308,236 and $435,611   5,213,604    10,131,752 
Accounts receivable - related party, net of allowance of $1,373,099 and $90,594   -    1,282,505 
Revenues in excess of billings, net of allowance of $153,650 and $188,914   13,290,010    17,198,281 
Revenues in excess of billings - related party, net of allowance of $8,163 and $0   -    8,163 
Other current assets, net of allowance of $1,243,633 and $0   2,395,985    3,108,180 
Total current assets   52,903,246    51,895,711 
Revenues in excess of billings, net - long term   356,059    1,300,289 
Convertible note receivable - related party, net of allowance of $4,250,000 and $0   -    4,250,000 
Property and equipment, net   12,209,500    11,329,631 
Right of use of assets - operating leases   1,937,907    2,360,129 
Long term investment   3,734,907    2,387,692 
Other assets   47,190    41,992 
Intangible assets, net   4,753,543    5,391,077 
Goodwill   9,516,568    9,516,568 
Total assets  $85,458,920   $88,473,089 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable and accrued expenses  $6,327,192   $5,680,837 
Current portion of loans and obligations under finance leases   10,383,572    9,139,561 
Current portion of operating lease obligations   1,169,960    1,111,912 
Unearned revenues   3,753,781    4,095,472 
Common stock to be issued   88,324    88,324 
Total current liabilities   21,722,829    20,116,106 
Loans and obligations under finance leases; less current maturities   1,554,317    1,539,975 
Operating lease obligations; less current maturities   962,724    1,339,965 
Total liabilities   24,239,870    22,996,046 
Commitments and contingencies          
Stockholders’ equity:          
Preferred stock, $.01 par value; 500,000 shares authorized;   -    - 
Common stock, $.01 par value; 14,500,000 shares authorized;          
12,147,458 shares issued and 11,452,959 outstanding as of December 31, 2020 and 12,122,149 shares issued and 11,874,646 outstanding as of June 30, 2020   121,476    121,222 
Additional paid-in-capital   128,823,181    128,677,754 
Treasury stock (at cost, 694,499 shares and 247,503 shares as of December 31, 2020 and June 30, 2020, respectively)   (2,848,640)   (1,455,969)
Accumulated deficit   (40,104,089)   (34,269,817)
Other comprehensive loss   (32,060,151)   (34,085,047)
Total NetSol stockholders’ equity   53,931,777    58,988,143 
Non-controlling interest   7,287,273    6,488,900 
Total stockholders’ equity   61,219,050    65,477,043 
Total liabilities and stockholders’ equity  $85,458,920   $88,473,089 

 

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

 

Page 3

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations

(Unaudited)

 

   For the Three Months   For the Six Months 
   Ended December 31,   Ended December 31, 
   2020   2019   2020   2019 
Net Revenues:                    
License fees  $2,586,504   $176,706   $2,589,979   $2,640,922 
Subscription and support   5,724,802    5,104,736    10,896,665    9,711,112 
Services   4,810,154    10,351,153    12,282,194    16,770,044 
Services - related party   -    57,424    -    140,357 
Total net revenues   13,121,460    15,690,019    25,768,838    29,262,435 
                     
Cost of revenues:                    
Salaries and consultants   5,294,662    4,625,872    9,821,311    9,080,836 
Travel   159,174    1,572,923    262,926    2,915,558 
Depreciation and amortization   713,749    734,352    1,420,998    1,454,017 
Other   911,566    954,912    1,839,719    1,899,436 
Total cost of revenues   7,079,151    7,888,059    13,344,954    15,349,847 
                     
Gross profit   6,042,309    7,801,960    12,423,884    13,912,588 
                     
Operating expenses:                    
Selling and marketing   1,558,027    1,858,096    3,167,631    3,601,964 
Depreciation and amortization   221,572    215,479    443,362    417,866 
General and administrative   4,065,788    4,568,790    7,493,424    8,487,403 
Research and development cost   110,419    454,605    196,408    1,127,575 
Total operating expenses   5,955,806    7,096,970    11,300,825    13,634,808 
                     
Income from operations   86,503    704,990    1,123,059    277,780 
                     
Other income and (expenses)                    
Gain (loss) on sale of assets   (52,531)   528    (74,273)   239 
Interest expense   (94,241)   (88,006)   (197,568)   (151,669)
Interest income   210,854    435,682    411,675    834,911 
Gain (loss) on foreign currency exchange transactions   13,981    61,061    310,022    (1,699,129)
Share of net loss from equity investment   (43,685)   (164,796)   (151,535)   (354,020)
Other income   45,365    207,987    132,637    226,313 
Total other income (expenses)   79,743    452,456    430,958    (1,143,355)
                     
Net income (loss) before income taxes   166,246    1,157,446    1,554,017    (865,575)
Income tax provision   (245,434)   (610,510)   (509,728)   (848,748)
Net income (loss)   (79,188)   546,936    1,044,289    (1,714,323)
Non-controlling interest   (162,916)   39,039    (568,839)   472,351 
Net income (loss) attributable to NetSol  $(242,104)  $585,975   $475,450   $(1,241,972)
                     
Net income (loss) per share:                    
Net income (loss) per common share                    
Basic  $(0.02)  $0.05   $0.04   $(0.11)
Diluted  $(0.02)  $0.05   $0.04   $(0.11)
                     
Weighted average number of shares outstanding                    
Basic   11,580,030    11,724,606    11,683,631    11,694,423 
Diluted   11,580,030    11,724,606    11,683,631    11,694,423 

 

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

 

Page 4

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)

 

   For the Three Months   For the Six Months 
   Ended December 31,   Ended December 31, 
   2020   2019   2020   2019 
Net income (loss)  $(242,104)  $585,975   $475,450   $(1,241,972)
Other comprehensive income (loss):                    
Translation adjustment   1,633,906    2,009,060    2,728,630    3,496,761 
Translation adjustment attributable to non-controlling interest   (483,826)   (244,031)   (703,734)   (828,387)
Net translation adjustment   1,150,080    1,765,029    2,024,896    2,668,374 
Comprehensive income (loss) attributable to NetSol  $907,976   $2,351,004   $2,500,346   $1,426,402 

 

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

 

Page 5

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)

 

A statement of the changes in equity for the three months ended December 31, 2020 is provided below:

 

           Additional           Other   Non   Total 
   Common Stock   Paid-in   Treasury   Accumulated   Comprehensive   Controlling   Stockholders’ 
   Shares   Amount   Capital   Shares   Deficit   Loss   Interest   Equity 
Balance at September 30, 2020   12,137,045   $121,371   $128,764,618   $(1,920,645)  $(39,861,985)  $(33,210,231)  $6,640,531   $60,533,659 
Common stock issued for:                                        
Services   10,413    105    58,563    -    -    -    -    58,668 
Purchase of treasury shares   -    -    -    (927,995)   -    -    -    (927,995)
Foreign currency translation adjustment   -    -    -    -    -    1,150,080    483,826    1,633,906 
Net income (loss) for the period   -    -    -    -    (242,104)   -    162,916    (79,188)
Balance at December 31, 2020   12,147,458   $121,476   $128,823,181   $(2,848,640)  $(40,104,089)  $(32,060,151)  $7,287,273   $61,219,050 

 

A statement of the changes in equity for the three months ended September 30, 2020 is provided below:

 

           Additional           Other   Non   Total 
   Common Stock   Paid-in   Treasury   Accumulated   Comprehensive   Controlling   Stockholders’ 
   Shares   Amount   Capital   Shares   Deficit   Loss   Interest   Equity 
Balance at June 30, 2020   12,122,149   $121,222   $128,677,754   $(1,455,969)  $(34,269,817)  $(34,085,047)  $6,488,900   $65,477,043 
Cumulative effect adjustment (1)   -    -    -    -    (6,309,722)        (474,578)   (6,784,300)
Subsidiary common stock issued for:                                        
-Services   -    -    -    -    -    -    378    378 
Common stock issued for:                                        
Services   14,896    149    86,864    -    -    -    -    87,013 
Purchase of treasury shares   -    -    -    (464,676)   -    -    -    (464,676)
Foreign currency translation adjustment   -    -    -    -    -    874,816    219,908    1,094,724 
Net income for the period   -    -    -    -    717,554    -    405,923    1,123,477 
Balance at September 30, 2020   12,137,045   $121,371   $128,764,618   $(1,920,645)  $(39,861,985)  $(33,210,231)  $6,640,531   $60,533,659 

 

(1) Cumulative effect adjustment relates to the adoption of Accounting Standard Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Refer to Note 2 – Accounting Policies for more information.

 

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

 

Page 6

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)

 

A statement of the changes in equity for the three months ended December 31, 2019 is provided below:

 

           Additional           Other   Non   Total 
   Common Stock   Paid-in   Treasury   Accumulated   Comprehensive   Controlling   Stockholders’ 
   Shares   Amount   Capital   Shares   Deficit   Loss   Interest   Equity 
Balance at September 30, 2019   11,972,109   $119,721   $128,052,079   $(1,455,969)  $(37,034,845)  $(32,221,661)  $8,605,749   $66,065,074 
Common stock issued for:                                        
Services   28,457    285    145,510    -    -    -    -    145,795 
Dividend to non-controlling interest   -    -    -    -    -    -    (1,920,618)   (1,920,618)
Foreign currency translation adjustment   -    -    -    -    -    1,765,029    244,031    2,009,060 
Net income   -    -    -    -    585,975    -    (39,039)   546,936 
Balance at December 31, 2019   12,000,566   $120,006   $128,197,589   $(1,455,969)  $(36,448,870)  $(30,456,632)  $6,890,123   $66,846,247 

 

A statement of the changes in equity for the three months ended September 30, 2019 is provided below:

 

           Additional           Other   Non   Total 
   Common Stock   Paid-in   Treasury   Accumulated   Comprehensive   Controlling   Stockholders’ 
   Shares   Amount   Capital   Shares   Deficit   Loss   Interest   Equity 
                                 
Balance at June 30, 2019   11,911,742   $119,117   $127,737,999   $(1,455,969)  $(35,206,898)  $(33,125,006)  $8,414,987   $66,484,230 
Exercise of subsidiary common stock options   -    -    (28,097)   -    -    -    39,718    11,621 
Common stock issued for:                                        
Services   60,367    604    342,177    -    -    -    -    342,781 
Foreign currency translation adjustment   -    -    -    -    -    903,345    584,356    1,487,701 
Net loss for the period   -    -    -    -    (1,827,947)   -    (433,312)   (2,261,259)
Balance at September 30, 2019   11,972,109   $119,721   $128,052,079   $(1,455,969)  $(37,034,845)  $(32,221,661)  $8,605,749   $66,065,074 

 

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

 

Page 7

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)

 

   For the Six Months 
   Ended December 31, 
   2020   2019 
Cash flows from operating activities:          
Net income (loss)  $1,044,289   $(1,714,323)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:          
Depreciation and amortization   1,864,360    1,871,883 
Provision for bad debts   (175,575)   (20,699)
Share of net loss from investment under equity method   151,535    354,020 
Loss on sale of assets   74,273    (239)
Stock based compensation   165,164    328,585 
Changes in operating assets and liabilities:          
Accounts receivable   5,479,516    4,554,558 
Accounts receivable - related party   -    2,229,695 
Revenues in excess of billing   4,540,271    (1,088,693)
Revenues in excess of billing - related party   -    14,823 
Other current assets   (252,781)   (208,065)
Accounts payable and accrued expenses   313,869    490,875 
Unearned revenue   (554,077)   (3,019,493)
Net cash provided by operating activities   12,650,844    3,792,927 
           
Cash flows from investing activities:          
Purchases of property and equipment   (1,249,895)   (785,999)
Sales of property and equipment   123,194    32,524 
Convertible note receivable - related party   -    (535,000)
Investment in associates   (93,000)   - 
Net cash used in investing activities   (1,219,701)   (1,288,475)
           
Cash flows from financing activities:          
Proceeds from exercise of subsidiary options   -    11,621 
Purchase of treasury stock   (1,392,671)   - 
Dividend paid by subsidiary to non-controlling interest   -    (1,920,618)
Proceeds from bank loans   705,338    2,074,341 
Payments on finance lease obligations and loans - net   (175,352)   (102,499)
Net cash provided by (used in) financing activities   (862,685)   62,845 
Effect of exchange rate changes   1,268,359    2,149,923 
Net increase in cash and cash equivalents   11,836,817    4,717,220 
Cash and cash equivalents at beginning of the period   20,166,830    17,366,364 
Cash and cash equivalents at end of period  $32,003,647   $22,083,584 

 

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

 

Page 8

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)

 

   For the Six Months 
   Ended December 31, 
   2020   2019 
SUPPLEMENTAL DISCLOSURES:          
Cash paid during the period for:          
Interest  $219,412   $149,210 
Taxes  $366,695   $805,709 
           
NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Assets acquired under finance lease  $222,391   $- 
Provided services for investment in Drivemate  $1,300,000   $- 
Assets recognized under operating lease  $-   $3,571,947 

 

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

 

Page 9

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2020

(Unaudited)

 

NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

 

The Company designs, develops, markets, and exports proprietary software products to customers in the automobile financing and leasing, banking, and financial services industries worldwide. The Company also provides system integration, consulting, and IT products and services in exchange for fees from customers.

 

The consolidated condensed interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

 

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, 2020. The Company follows the same accounting policies in preparation of interim reports. Results of operations for the interim periods are not indicative of annual results.

 

The accompanying consolidated financial statements include the accounts of the Company as follows:

 

Wholly owned Subsidiaries

 

NetSol Technologies Americas, Inc. (“NTA”)

NetSol Connect (Private), Ltd. (“Connect”)

NetSol Technologies Australia Pty Ltd. (“Australia”)

NetSol Technologies Europe Limited (“NTE”)

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

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

Ascent Europe Ltd. (“AEL”)

Virtual Lease Services Holdings Limited (“VLSH”)

Virtual Lease Services Limited (“VLS”)

Virtual Lease Services (Ireland) Limited (“VLSIL”)

 

Majority-owned Subsidiaries

 

NetSol Technologies, Ltd. (“NetSol PK”)

NetSol Innovation (Private) Limited (“NetSol Innovation”)

NetSol Technologies Thailand Limited (“NetSol Thai”)

OTOZ, Inc. (“OTOZ”)

OTOZ (Thailand) Limited (“OTOZ Thai”)

 

Page 10

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2020

(Unaudited)

 

For comparative purposes, prior year’s condensed consolidated financial statements have been reclassified to conform to report classifications of the current period. Below is the table of reclassified amounts:

 

    For the Three Months Ended     For the Six Months ended  
    December 31, 2019     December 31, 2019  
    Originally reported     Reclassified     Originally reported     Reclassified  
                         
REVENUES                                
License fees   $ 383,963     $ 176,706     $ 3,063,108     $ 2,640,922  
Subscription and support     4,965,877       5,104,736       9,357,324       9,711,112  
Services     10,282,755       10,351,153       16,701,646       16,770,044  
Services - related party     57,424       57,424       140,357       140,357  
Total net revenues   $ 15,690,019     $ 15,690,019     $ 29,262,435     $ 29,262,435  

 

NOTE 2 – ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The areas requiring significant estimates are provision for doubtful accounts, provision for taxation, useful life of depreciable assets, useful life of intangible assets, contingencies, assumptions used to determine the net present value of operating lease liabilities, and estimated contract costs. The estimates and underlying assumptions are reviewed on an ongoing basis. Actual results could differ from those estimates.

 

Concentration of Credit Risk

 

Cash includes cash on hand and demand deposits in accounts maintained within the United States as well as in foreign countries. Certain financial instruments, which subject the Company to concentration of credit risk, consist of cash and restricted cash. The Company maintains balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for the banks located in the United States. Balances at financial institutions within certain foreign countries are not covered by insurance except balances maintained in China are insured for RMB 500,000 ($76,570) in each bank and in UK for GBP 85,000 ($116,438) in each bank. The Company maintains two bank accounts in China and six bank accounts in the UK. As of December 31, 2020, and June 30, 2020, the Company had uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $28,954,360 and $18,210,378, respectively. The Company has not experienced any losses in such accounts.

 

The Company’s operations are carried out globally. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments of each country and by the general state of the country’s economy. The Company’s operations in each foreign country are subject to specific considerations and significant risks not typically associated with companies in economically developed nations. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

 

Page 11

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2020

(Unaudited)

 

Fair Value of Financial Instruments

 

The Company applies the provisions of Accounting Standards Codification (“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, 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 convertible note receivable and the long-term debt approximate their fair values based on current interest rates for instruments with similar characteristics.

 

The three levels of valuation hierarchy are defined as follows:

 

Level 1: Valuations consist of unadjusted quoted prices in active markets for identical assets and liabilities and has the highest priority.

 

Level 2: Valuations rely on quoted prices in markets that are not active or observable inputs over the full term of the asset or liability.

 

Level 3: Valuations are based on prices or third party or internal valuation models that require inputs that are significant to the fair value measurement and are less observable and thus have the lowest priority.

 

The Company’s financial assets that were measured at fair value on a recurring basis as of December 31, 2020, were as follows:

 

   Level 1   Level 2   Level 3   Total Assets 
Revenues in excess of billings - long term  $     -   $       -   $356,059   $356,059 
Total  $-   $-   $356,059   $356,059 

 

The Company’s financial assets that were measured at fair value on a recurring basis as of June 30, 2020, were as follows:

 

   Level 1   Level 2   Level 3   Total Assets 
Revenues in excess of billing - long term  $     -   $       -   $1,300,289   $1,300,289 
Total  $-   $-   $1,300,289   $1,300,289 

 

The reconciliation from June 30, 2020 to December 31, 2020 is as follows:

 

   Revenues in excess of billings - long term   Fair value discount   Total 
Balance at June 30, 2020  $1,341,575   $(41,286)  $1,300,289 
Additions   376,874    (20,815)   356,059 
Amortization during the period   -    41,286    41,286 
Transfers to short term   (1,341,575)   -    (1,341,575)
Balance at December 31, 2020  $376,874   $(20,815)  $356,059 

 

Page 12

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2020

(Unaudited)

 

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 warrants and option derivatives are valued using the Black-Scholes model.

 

Recent Accounting Standards Adopted by the Company:

 

In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. Under the new standard, goodwill impairment would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. This ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods. Early adoption is permitted for interim or annual goodwill impairment test performed on testing dates after January 1, 2017. The Company adopted this standard on July 1, 2020 and the adoption did not have a material effect on our condensed consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 introduced a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables, contract assets and held-to-maturity debt securities, which requires the Company to incorporate considerations of historical information, current information and reasonable and supportable forecasts. ASU 2016-13 also expands disclosure requirements.

 

The Company adopted the standard on July 1, 2020 using the modified retrospective approach. The adoption of ASU 2016-13 resulted in changes to the Company’s accounting policies for trade and other receivables, contract assets and convertible notes receivable. Based on the results of the Company’s evaluation, the adoption of ASU 2016-13 resulted in a one-time cumulative-effect adjustment through retained earnings of $6,784,300 to increase its allowance for credit losses related to the convertible notes receivable, interest receivable, accounts receivable, revenues in excess of billings, and other receivables.

 

The following table presents the impact of adopting ASC Topic 326 as of July 1, 2020:

 

   Adjustment 
   to Adopt 
Asset Classification  ASC Topic 326 
Allowance for credit losses - accounts receivable  $109,486 
Allowance for credit losses - accounts receivable - related party   1,282,505 
Allowance for credit losses - revenue in excess of billings - related party   8,163 
Allowance for credit losses - convertible notes receivable - related party   4,250,000 
Allowance for credit losses - other current assets   1,134,146 
   $6,784,300 

 

Accounts receivable includes trade accounts receivables from the Company’s customers, net of an allowance for credit risk. Accounts receivable are recorded at the invoiced amount and do not bear interest. 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. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

 

Page 13

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2020

(Unaudited)

 

Revenue in excess of billings, relates to services performed which were not billed, net of an allowance for credit risk. As customers are billed under the terms of the contract, the corresponding amount is transferred to accounts receivable. In establishing the required allowance, management regularly reviews the composition of and analyzes customer credit worthiness, customer concentrations, current economic trends, changes in customer payment patterns, the project status and assesses individual unbilled contract assets over a specific aging and amount. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

 

The convertible notes receivable represents loans provided to WRLD3D. The allowance for credit risk for the convertible notes is established based on various quantitative and qualitative factors including customer credit worthiness, current economic trends and changes in payment patterns. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

 

NOTE 3 – REVENUE RECOGNITION

 

The Company determines revenue recognition through the following steps:

 

Identification of the contract, or contracts, with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when, or as, the Company satisfies a performance obligation.

 

The Company records the amount of revenue and related costs by considering whether the entity is a principal (gross presentation) or an agent (net presentation) by evaluating the nature of its promise to the customer. Revenue is presented net of sales, value-added and other taxes collected from customers and remitted to government authorities.

 

The Company has two primary revenue streams: core revenue and non-core revenue.

 

Core Revenue

 

The Company generates its core revenue from the following sources: (1) software licenses, (2) services, which include implementation and consulting services, and (3) subscription and support, which includes subscription revenue and post contract customer support, of its enterprise software solutions for the lease and finance industry. The Company offers its software using the same underlying technology via two models: a traditional on-premises licensing model and a subscription model. The on-premises model involves the sale or license of software on a perpetual basis to customers who take possession of the software and install and maintain the software on their own hardware. Under the subscription delivery model, the Company provides access to its software on a hosted basis as a service and customers generally do not have the contractual right to take possession of the software.

 

Non-Core Revenue

 

The Company generates its non-core revenue by providing business process outsourcing (“BPO”), other IT services and internet services.

 

Performance Obligations

 

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under Topic 606. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied by transferring the promised good or service to the customer. The Company identifies and tracks the performance obligations at contract inception so that the Company can monitor and account for the performance obligations over the life of the contract.

 

Page 14

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2020

(Unaudited)

 

The Company’s contracts which contain multiple performance obligations generally consist of the initial purchase of subscription or licenses and a professional services engagement. License purchases generally have multiple performance obligations as customers purchase maintenance and services in addition to the licenses. The Company’s single performance obligation arrangements are typically maintenance renewals, subscription renewals and services engagements.

 

For contracts with multiple performance obligations where the contracted price differs from the standalone selling price (“SSP”) for any distinct good or service, the Company may be required to allocate the contract’s transaction price to each performance obligation using its best estimate for the SSP.

 

Software Licenses

 

Transfer of control for software is considered to have occurred upon delivery of the product to the customer. The Company’s typical payment terms tend to vary by region, but its standard payment terms are within 30 days of invoice.

 

Subscription and Support

 

Subscription

 

Revenue from subscriptions is recognized ratably over the initial subscription period committed to by the customer commencing when the product is made available to the customer. The initial subscription period is typically 12 to 60 months. The Company generally invoices its customers in advance in quarterly or annual installments and typical payment terms provide that customers make payment within 30 days of invoice.

 

Support

 

Revenue from support services and product updates, referred to as post contract customer support revenue, is recognized ratably over the term of the maintenance period, which in most instances is one year. Software license updates provide customers with rights to unspecified software product updates, maintenance releases and patches released during the term of the support period on a when-and-if available basis. The Company’s customers purchase both product support and license updates when they acquire new software licenses. In addition, a majority of customers renew their support services contracts annually and typical payment terms provide that customers make payment within 30 days of invoice.

 

Professional Services

 

Revenue from professional services is typically comprised of implementation, development, data migration, training or other consulting services. Consulting services are generally sold on a time-and-materials or fixed fee basis and can include services ranging from software installation to data conversion and building non-complex interfaces to allow the software to operate in integrated environments. The Company recognizes revenue for time-and-materials arrangements as the services are performed. In fixed fee arrangements, revenue is recognized as services are performed as measured by costs incurred to date, compared to total estimated costs to complete the services project. Management applies judgment when estimating project status and the costs necessary to complete the services projects. A number of internal and external factors can affect these estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes. Services are generally invoiced upon milestones in the contract or upon consumption of the hourly resources and payments are typically due 30 days after invoice.

 

BPO and Internet Services

 

Revenue from BPO services is recognized based on the stage of completion which is measured by reference to labor hours incurred to date as a percentage of total estimated labor hours for each contract. Internet services are invoiced either monthly, quarterly or half yearly in advance to the customers and revenue is recognized ratably overtime on a monthly basis.

 

Page 15

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2020

(Unaudited)

 

Disaggregated Revenue

 

The Company disaggregates revenue from contracts with customers by category — core and non-core, as it believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

 

The Company’s disaggregated revenue by category is as follows:

 

    For the Three Months     For the Six Months  
    Ended December 31,     Ended December 31,  
    2020     2019     2020     2019  
Core:                        
License   $ 2,586,504     $ 176,706     $ 2,589,979     $ 2,640,922  
Subscription and support     5,724,802       5,104,736       10,896,665       9,711,112  
Services     3,191,375       8,627,927       9,064,313       13,254,196  
Services - related party     -       57,424       -       140,357  
Total core revenue, net     11,502,681       13,966,793       22,550,957       25,746,587  
                                 
Non-Core:                                
Services     1,618,779       1,723,226       3,217,881       3,515,848  
Total non-core revenue, net     1,618,779       1,723,226       3,217,881       3,515,848  
                                 
Total net revenue   $ 13,121,460     $ 15,690,019     $ 25,768,838     $ 29,262,435  

 

Significant Judgments

 

Due to the complexity of certain contracts, the actual revenue recognition treatment required under Topic 606 for the Company’s arrangements may be dependent on contract-specific terms and may vary in some instances.

 

Judgment is required to determine the SSP for each distinct performance obligation. The Company rarely licenses or sells products on a stand-alone basis, so the Company is required to estimate the range of SSPs for each performance obligation. In instances where SSP is not directly observable because the Company does not sell the license, product or service separately, the Company determines the SSP using information that may include market conditions and other observable inputs. In making these judgments, the Company analyzes various factors, including its pricing methodology and consistency, size of the arrangement, length of term, customer demographics and overall market and economic conditions. Based on these results, the estimated SSP is set for each distinct product or service delivered to customers.

 

The most significant inputs involved in the Company’s revenue recognition policies are: The (1) stand-alone selling prices of the Company’s software license, and the (2) the method of recognizing revenue for installation/customization, and other services.

 

The stand-alone selling price of the licenses was measured primarily through an analysis of pricing that management evaluated when quoting prices to customers. Although the Company has no history of selling its software separately from post contract customer support and other services, the Company does have historical experience with amending contracts with customers to provide additional modules of its software or providing those modules at an optional price. This information guides the Company in assessing the stand-alone selling price of the Company’s software, since the Company can observe instances where a customer had a particular component of the Company’s software that was essentially priced separate from other goods and services that the Company delivered to that customer.

 

The Company recognized revenue from implementation and customization services using the percentage of estimated “man-days” that the work requires. The Company believes the level of effort to complete the services is best measured by the amount of time (measured as an employee working for one day on implementation/customization work) that is required to complete the implementation or customization work. The Company reviews its estimate of man-days required to complete implementation and customization services each reporting period.

 

Page 16

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2020

(Unaudited)

 

Revenue is recognized over time for the Company’s subscription, post contract customer support and fixed fee professional services that are separate performance obligations. For the Company’s professional services, revenue is recognized over time, generally using costs incurred or hours expended to measure progress. Judgment is required in estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization, specification variances and testing requirement changes.

 

If a group of agreements are entered at or near the same time and so closely related that they are, in effect, part of a single arrangement, such agreements are deemed to be combined as one arrangement for revenue recognition purposes. The Company exercises significant judgment to evaluate the relevant facts and circumstances in determining whether agreements should be accounted for separately or as a single arrangement. The Company’s judgments about whether a group of contracts comprise a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved.

 

If a contract includes variable consideration, the Company exercises judgment in estimating the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer. When estimating variable consideration, the Company will consider all relevant facts and circumstances. Variable consideration will be estimated and included in the contract price only when it is probable that a significant reversal in the amount of revenue recognized will not occur.

 

Contract Balances

 

The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in receivables, contract assets (revenues in excess of billings), or contract liabilities (deferred revenue) on the Company’s Consolidated Balance Sheets. The Company records revenues in excess of billings when the Company has transferred goods or services but does not yet have the right to consideration. The Company records deferred revenue when the Company has received or has the right to receive consideration but has not yet transferred goods or services to the customer.

 

The revenues in excess of billings are transferred to receivables when the rights to consideration become unconditional, usually upon completion of a milestone.

 

The Company’s revenues in excess of billings and deferred revenue are as follows:

 

   As of
December 31, 2020
   As of
June 30, 2020
 
         
Revenues in excess of billings  $13,646,069   $18,506,733 
           
Deferred Revenue  $3,753,781   $4,095,472 

 

During the three and six months ended December 31, 2020, the Company recognized revenue of $762,484 and $3,790,120, respectively, that was included in the deferred revenue balance at the beginning of the period. All other activity in deferred revenue is due to the timing of invoicing in relation to the timing of revenue recognition.

 

Page 17

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2020

(Unaudited)

 

Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted but unsatisfied performance obligations were approximately $48,262,490 as of December 31, 2020, of which the Company estimates to recognize approximately $12,922,159 in revenue over the next 12 months and the remainder over an estimated 5 years thereafter. Actual revenue recognition depends in part on the timing of software modules installed at various customer sites. Accordingly, some factors that affect the Company’s revenue, such as the availability and demand for modules within customer geographic locations, is not entirely within the Company’s control. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, and not to facilitate financing arrangements.

 

Deferred Revenue

 

The Company typically invoices its customers for subscription and support fees in advance on a quarterly or annual basis, with payment due at the start of the subscription or support term. Unpaid invoice amounts for non-cancelable license and services starting in future periods are included in accounts receivable and deferred revenue.

 

Practical Expedients and Exemptions

 

There are several practical expedients and exemptions allowed under Topic 606 that impact timing of revenue recognition and the Company’s disclosures. Below is a list of practical expedients applied by the Company:

 

The Company does not evaluate a contract for a significant financing component if payment is expected within one year or less from the transfer of the promised items to the customer.
The Company generally expenses sales commissions and sales agent fees when incurred when the amortization period would have been one year or less or the commissions are based on cashed received. These costs are recorded within sales and marketing expense in the Consolidated Statement of Operations.
The Company does not disclose the value of unsatisfied performance obligations for contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed (applies to time-and-material engagements).

 

Costs to Obtain a Contract

 

The Company does not have a material amount of costs to obtain a contract capitalized at any balance sheet date. In general, the Company incurs few direct incremental costs of obtaining new customer contracts. The Company rarely incurs incremental costs to review or otherwise enter into contractual arrangements with customers. In addition, the Company’s sales personnel receive fees that are referred to as commissions, but that are based on more than simply signing up new customers. The Company’s sales personnel are required to perform additional duties beyond new customer contract inception dates, including fulfilment duties and collections efforts.

 

Page 18

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2020

(Unaudited)

 

NOTE 4 – EARNINGS PER SHARE

 

Basic earnings per share are computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.

 

The components of basic and diluted earnings per share were as follows:

 

   For the three months ended December 31, 2020   For the six months ended December 31, 2020 
   Net Loss   Shares   Per Share   Net Income   Shares   Per Share 
Basic income (loss) per share:                        
Net income (loss) available to common shareholders  $(242,104)   11,580,030   $(0.02)  $475,450    11,683,631   $0.04 
Effect of dilutive securities                              
Share grants   -    -    -    -    -    - 
Diluted income (loss) per share  $(242,104)   11,580,030   $(0.02)  $475,450    11,683,631   $0.04 

 

   For the three months ended December 31, 2019   For the six months ended December 31, 2019 
   Net Income   Shares   Per Share   Net Loss   Shares   Per Share 
                         
Basic income (loss) per share:                              
Net income (loss) available to common shareholders  $585,975    11,724,606   $0.05   $(1,241,972)   11,694,423   $(0.11)
Effect of dilutive securities                              
Share grants   -    -    -    -    -    - 
Diluted income (loss) per share  $585,975    11,724,606   $0.05   $(1,241,972)   11,694,423   $(0.11)

 

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

 

    For the Three Months     For the Six Months  
    Ended December 31,     Ended December 31,  
    2020     2019     2020     2019  
                         
Stock Options     -       40,386       -       40,386  
Share Grants     41,112       119,921       41,112       119,921  
      41,112       160,307       41,112       160,307  

 

NOTE 5 – OTHER COMPREHENSIVE INCOME AND FOREIGN CURRENCY

 

The accounts of NTE, AEL, VLSH and VLS use the British Pound; VLSIL uses 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 $32,060,151 and $34,085,047 as of December 31, 2020 and June 30, 2020, respectively. During the three and six months ended December 31, 2020, comprehensive income (loss) in the consolidated statements of comprehensive income (loss) included a translation gain attributable to NetSol of $1,150,080 and $2,024,896, respectively. During the three and six months ended December 31, 2019, comprehensive income (loss) in the consolidated statements of comprehensive income (loss) included a translation gain attributable to NetSol of $1,765,029 and $2,668,374, respectively.

 

Page 19

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2020

(Unaudited)

 

NOTE 6 – MAJOR CUSTOMERS

 

During the six months ended December 31, 2020, revenues from Daimler Financial Services (“DFS”) and BMW Financial (“BMW”) were $5,402,152 and $3,051,244, respectively representing 21.0% and 11.8%, respectively of revenues. During the six months ended December 31, 2019 revenues from these two customers were $8,691,233 and $4,793,304 representing 29.7% and 16.4% of revenues. The revenue from these customers are shown in the Asia – Pacific segment.

 

Accounts receivable from DFS and BMW at December 31, 2020, were $1,263,670 and $22,697, respectively. Accounts receivable at June 30, 2020, were $4,821,468 and $474,271, respectively. Revenues in excess of billings at December 31, 2020 were $6,800,273 and $1,084,396 for DFS and BMW, respectively. Revenues in excess of billings at June 30, 2020, were $5,709,226 and $6,977,375 for DFS and BMW, respectively. Included in this amount was $Nil and $1,300,289 shown as long term at December 31, 2020 and June 30, 2020, respectively.

 

NOTE 7 – CONVERTIBLE NOTES RECEIVABLE – RELATED PARTY

 

The Company has entered into multiple convertible note receivable agreements with WRLD3D. The convertible notes bear interest ranging from 5% to 10% with various maturity dates. The convertible notes have conversion features which allow the Company to convert the notes into shares of WRLD3D stock upon the occurrence of certain events. The Company has a security interest in all of WRLD3D’s personal property, inventory, equipment, general intangibles, financial assets, investment property, securities, deposit accounts and the proceeds thereof.

 

The following table summarizes the convertible notes receivable from WRLD3D.

 

           Convertible     
Agreement  Interest   Maturity   Note   Accrued 
Date  Rate   Date   Amount   Interest 
May 25, 2017   5%   March 2, 2018   $750,000   $110,202 
February 9, 2018   10%   March 31, 2019    2,500,000    500,773 
April 1, 2019   10%   March 31, 2020    600,000    57,648 
August 19, 2019   10%   March 31, 2020    400,000    32,439 
              4,250,000    701,062 
Less allowance for doubtful account    (4,250,000)   (701,062)
Net Balance            $-   $- 

 

The Company has an accrued interest balance of $701,062 at December 31, 2020 and June 30, 2020, respectively, which is included in “Other current assets”. Starting July 1, 2020, the Company is not accruing interest.

 

Page 20

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2020

(Unaudited)

 

NOTE 8 - OTHER CURRENT ASSETS

 

Other current assets consisted of the following:

 

   As of   As of 
   December 31, 2020   June 30, 2020 
         
Prepaid Expenses  $               1,243,439   $1,035,415 
Advance Income Tax   332,023    355,482 
Employee Advances   199,503    44,415 
Security Deposits   280,611    270,403 
Other Receivables   112,612    1,239,221 
Other Assets   227,797    163,244 
Total  $2,395,985   $3,108,180 

 

NOTE 9 – REVENUES IN EXCESS OF BILLINGS – LONG TERM

 

Revenues in excess of billings, net consisted of the following:

 

   As of   As of 
   December 31, 2020   June 30, 2020 
         
Revenues in excess of billings - long term  $376,874   $1,341,575 
Present value discount   (20,815)   (41,286)
Net Balance  $356,059   $1,300,289 

 

Pursuant to revenue recognition for contract accounting, the Company had recorded revenues in excess of billings long-term for amounts billable after one year. During the three and six months ended December 31, 2020, the Company accreted $27,766 and $41,826, respectively. During the three and six months ended December 31, 2019, the Company accreted $13,821 and $27,681, respectively, which were recorded in interest income for those periods. The Company used the discounted cash flow method with an interest rate of 4.65% and 4.35% for the period ended December 31, 2020 and June 30, 2020, respectively.

 

Page 21

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2020

(Unaudited)

 

NOTE 10 - PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

   As of   As of 
   December 31, 2020   June 30, 2020 
         
Office Furniture and Equipment  $                3,213,526   $3,143,833 
Computer Equipment   21,331,085    19,256,543 
Assets Under Capital Leases   1,511,557    1,443,423 
Building   6,123,262    5,848,813 
Land   1,586,153    1,512,905 
Capital Work In Progress   30,079    27,648 
Autos   1,475,366    1,348,405 
Improvements   38,062    36,929 
Subtotal   35,309,090    32,618,499 
Accumulated Depreciation   (23,099,590)   (21,288,868)
Property and Equipment, Net  $12,209,500   $11,329,631 

 

For the three and six months ended December 31, 2020, depreciation expense totaled $485,456 and $981,723, respectively. Of these amounts, $263,884 and $538,361, respectively, are reflected in cost of revenues. For the three and six months ended December 31, 2019, depreciation expense totaled $484,662 and $950,113, respectively. Of these amounts, $269,183 and $532,247, respectively, are reflected in cost of revenues.

 

Following is a summary of fixed assets held under finance leases as of December 31, 2020 and June 30, 2020:

 

   As of   As of 
   December 31, 2020   June 30, 2020 
Computers and Other Equipment  $                    362,337   $328,621 
Furniture and Fixtures   56,722    51,119 
Vehicles   1,092,498    1,063,683 
Total   1,511,557    1,443,423 
Less: Accumulated Depreciation - Net   (736,767)   (667,096)
   $774,790   $776,327 

 

Finance lease term and discount rate were as follows:

 

   As of 
   December 31, 2020 
     
Weighted average remaining lease term - Finance leases    1.01 Years 
      
Weighted average discount rate - Finance leases   7.6%

 

Page 22

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2020

(Unaudited)

 

NOTE 11 - LEASES

 

The Company leases certain office space, office equipment and autos with remaining lease terms of one year to 10 years under leases classified as financing and operating. For certain leases, the Company has options to extend the lease term for additional periods ranging from one year to 10 years.

 

The Company treats a contract as a lease when the contract conveys the right to use a physically distinct asset for a period of time in exchange for consideration, or the Company directs the use of the asset and obtains substantially all the economic benefits of the asset. These leases are recorded as right-of-use (“ROU”) assets and lease obligation liabilities for leases with terms greater than 12 months. ROU assets represent the Company’s right to use an underlying asset for the entirety of the lease term. Lease liabilities represent the Company’s obligation to make payments over the life of the lease. A ROU asset and a lease liability are recognized at commencement of the lease based on the present value of the lease payments over the life of the lease. Initial direct costs are included as part of the ROU asset upon commencement of the lease. Since the interest rate implicit in a lease is generally not readily determinable for the operating leases, the Company uses an incremental borrowing rate to determine the present value of the lease payments. The incremental borrowing rate represents the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar lease term to obtain an asset of similar value. The Company used the incremental borrowing rate on July 1, 2019 for all leases that commenced prior to that date. For finance leases, the Company used the incremental borrowing rate implicit in the lease.

 

The Company reviews the impairment of ROU assets consistent with the approach applied for the Company’s other long-lived assets. The Company reviews the recoverability of long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on the Company’s ability to recover the carrying value of the asset from the expected undiscounted future pre-tax cash flows of the related operations.

 

The Company elected the practical expedient to exclude short-term leases (leases with original terms of 12 months or less) from ROU asset and lease liability accounts.

 

Lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred. Variable payments change due to facts or circumstances occurring after the commencement date, other than the passage of time, and do not result in a re-measurement of lease liabilities. The Company’s variable lease payments include payments for finance leases that are adjusted based on a change in the Karachi Inter Bank Offer Rate. The Company’s lease agreements do not contain any significant residual value guarantees or restrictive covenants.

 

Supplemental balance sheet information related to leases was as follows:

 

   As of   As of 
   December 31, 2020   June 30, 2020 
Assets          
Operating lease assets, net  $                 1,937,907   $2,360,129 
           
Liabilities          
Current          
Operating  $1,169,960   $1,111,912 
Non-current          
Operating   962,724    1,339,965 
Total Lease Liabilities  $2,132,684   $2,451,877 

 

Page 23

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2020

(Unaudited)

 

The components of lease cost were as follows:

 

   For the Three Months   For the Six Months 
   Ended December 31,   Ended December 31, 
   2020   2019   2020   2019 
                 
Amortization of finance lease assets  $31,926   $108,670   $77,179   $135,000 
Interest on finance lease obligation   6,953    29,413    18,645    52,331 
Operating lease cost   310,740    334,492    630,826    598,069 
Short term lease cost   13,493    78,862    30,071    152,972 
Sub lease income   (8,738)   (8,514)   (17,362)   (16,713)
Total lease cost  $354,374   $542,923   $739,359   $921,659 

 

Lease term and discount rate were as follows:

 

   As of 
   December 31, 2020 
     
Weighted average remaining lease term - Operating leases    2.08 Years 
      
Weighted average discount rate - Operating leases   5.6%

 

Supplemental disclosures of cash flow information related to leases were as follows:

 

   For the Six Months Ended 
   December 31, 2020   December 31, 2019 
         
Cash flows related to lease liabilities          
Operating cash flows related to operating leases  $529,970   $566,589 

 

Page 24

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2020

(Unaudited)

 

Maturities of operating lease liabilities were as follows as of December 31, 2020:

 

   Amount 
Within year 1  $1,249,702 
Within year 2   734,691 
Within year 3   222,387 
Within year 4   42,317 
Within year 5   824 
Thereafter   2,882 
Total Lease Payments   2,252,803 
Less: Imputed interest   (120,119)
Present Value of lease liabilities   2,132,684 
Less: Current portion   (1,169,960)
Non-Current portion  $962,724 

 

The Company is a lessor for certain office space leased by the Company and sub-leased to others under non-cancelable leases. These lease agreements provide for a fixed base rent and terminate by July 2021. All leases are considered operating leases. There are no rights to purchase the premises and no residual value guarantees. For the three and six months ended December 31, 2020, the Company received lease income of $8,738 and $17,362, respectively. For the three and six months ended December 31, 2019, the Company received lease income of $8,514 and $16,713, respectively.

 

NOTE 12 – LONG TERM INVESTMENT

 

Drivemate

 

The Company and Drivemate Co., Ltd. (“Drivemate”) entered into a subscription agreement on April 25, 2019, (“Drivemate Agreement”) whereby the Company will purchase an equity interest of 30% in Drivemate. Per the Drivemate Agreement, the Company will purchase 5,469 preferred shares for $1,800,000 consisting of $500,000 cash and $1,300,000 in services. The Company has paid $437,500 in cash, provided services of $1,300,000 and has received 5,217 shares. The remaining $62,500 will be paid in increments based on the contract with the final payment due 24 months from the date of the Drivemate Agreement signing. As of December 31, 2020, the Company owns 21.47% of Drivemate. Per the Drivemate Agreement, the Company appointed two directors to the Drivemate board. The Company determined that it met the significant influence criteria since two of the four directors are appointed by the Company and the Company is to own 30% of Drivemate at the final payment date; therefore, the Company accounts for the investment using the equity method of accounting.

 

The Company did not perform any services during the three and six months ended December 31, 2020. During the three and six months ended December 31, 2019, the Company performed $303,101 and $507,716 of services, respectively.

 

Under the equity method of accounting, the Company recorded its share of net income of $3,324 and $3,919 for the three and six months ended December 31, 2020, respectively.

 

Under the equity method of accounting, the Company recorded its share of net loss of $5,856 and $11,248 for the three and six months ended December 31, 2019, respectively.

 

Page 25

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2020

(Unaudited)

 

WRLD3D-Related Party

 

On March 2, 2017, 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, 2017. NetSol PK, the subsidiary of the Company, purchased a 12.2% investment in WRLD3D, for $2,777,778 which was earned by providing IT and enterprise software solutions.

 

NetSol PK has not provided services to WRLD3D for the three and six months ended December 31, 2020, and has provided services of $57,424 and $140,357 for the three and six months ended December 31, 2019, which is recorded as services-related party. Accounts receivable and revenue in excess of billing were $1,373,099 and $8,163 at June 30, 2020, respectively. Upon adoption of ASC 326, an allowance was established for the full amounts of these accounts. The net balances of accounts receivable and revenues in excess of billing were $Nil at December 31, 2020.

 

Under the equity method of accounting, the Company recorded its share of net loss of $47,009 and $155,454 for the three and six months ended December 31, 2020 and the Company recorded its share of net loss of $158,940 and $342,772 for the three and six months ended December 31, 2019, respectively.

 

The following table reflects the above investments at December 31, 2020.

 

   Drivemate   WRLD3D   Total 
Gross investment  $1,737,500   $3,888,889   $5,626,389 
Cumulative net loss on investment   (16,537)   (1,445,687)   (1,462,224)
Cumulative other comprehensive income (loss)   -    (429,258)   (429,258)
Net investment  $1,720,963   $2,013,944   $3,734,907 

 

NOTE 13 - INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

 

   As of   As of 
   December 31, 2020   June 30, 2020 
         
Product Licenses - Cost  $               47,244,997   $47,244,997 
Effect of Translation Adjustment   (14,779,667)   (16,045,322)
Accumulated Amortization   (27,711,787)   (25,808,598)
Net Balance  $4,753,543   $5,391,077 

 

(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 $4,753,543 will be amortized over the next 2.75 years. Amortization expense for the three and six months ended December 31, 2020 was $449,865 and $882,637, respectively. Amortization expense for the three and six months ended December 31, 2019 was $465,169 and $921,770, respectively.

 

Page 26

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2020

(Unaudited)

 

(B) Future Amortization

 

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

 

Period ended:    
December 31, 2021  $1,814,714 
December 31, 2022   1,814,714 
December 31, 2023   1,124,115 
   $4,753,543 

 

NOTE 14 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following:

 

   As of   As of 
   December 31, 2020   June 30, 2020 
         
Accounts Payable  $                  1,329,315   $1,351,158 
Accrued Liabilities   4,058,567    3,349,624 
Accrued Payroll & Taxes   485,642    537,888 
Taxes Payable   276,305    303,996 
Other Payable   177,363    138,171 
Total  $6,327,192   $5,680,837 

 

Page 27

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2020

(Unaudited)

 

NOTE 15 – DEBTS

 

Notes payable and finance leases consisted of the following:

 

       As of December 31, 2020 
           Current   Long-Term 
Name      Total   Maturities   Maturities 
                 
D&O Insurance  (1)  $142,582   $142,582   $- 
Paycheck Protection Program Loans  (2)   469,721    339,243    130,478 
Bank Overdraft Facility  (3)   -    -    - 
Term Finance Facility  (4)   2,168,714    850,166    1,318,548 
Loan Payable Bank - Export Refinance  (5)   3,119,541    3,119,541    - 
Loan Payable Bank - Running Finance  (6)   -    -    - 
Loan Payable Bank - Export Refinance II  (7)   2,370,850    2,370,850    - 
Loan Payable Bank - Running Finance II  (8)   -    -    - 
Loan Payable Bank - Export Refinance III  (9)   3,119,542    3,119,542    - 
Term Finance Facility  (10)   63,677    18,790    44,887 
        11,454,627    9,960,714    1,493,913 
Subsidiary Finance Leases  (11)   483,262    422,858    60,404 
       $11,937,889   $10,383,572   $1,554,317 

 

       As of June 30, 2020 
           Current   Long-Term 
Name      Total   Maturities   Maturities 
                 
D&O Insurance  (1)  $81,728   $81,728   $- 
Paycheck Protection Program Loans  (2)   469,721    182,669    287,052 
Bank Overdraft Facility  (3)   -    -    - 
Term Finance Facility  (4)   1,380,878    354,337    1,026,541 
Loan Payable Bank - Export Refinance  (5)   2,975,482    2,975,482    - 
Loan Payable Bank - Running Finance  (6)   -    -    - 
Loan Payable Bank - Export Refinance II  (7)   2,261,365    2,261,365    - 
Loan Payable Bank - Running Finance II  (8)   -    -    - 
Loan Payable Bank - Export Refinance III  (9)   2,975,483    2,975,483    - 
Term Finance Facility  (10)   65,473    16,423    49,050 
        10,210,130    8,847,487    1,362,643 
Subsidiary Finance Leases  (11)   469,406    292,074    177,332 
       $10,679,536   $9,139,561   $1,539,975 

 

(1) The Company finances Directors’ and Officers’ (“D&O”) liability insurance and Errors and Omissions (“E&O”) liability insurance, 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 5.0% to 7.0% as of December 31, 2020 and June 30, 2020.

 

(2) The Company and its subsidiary, NTA, received Paycheck Protection Program loans of $469,721 introduced by the U.S. Government during the COVID-19 Pandemic. This loan is forgivable if the Company meets the criteria set by the U.S. Government. The loans carry an interest rate of 1% and have a maturity date of two years from the date of the disbursement of the loan. As of December 31, 2020, the Company has not applied for the loan forgiveness.

 

Page 28

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2020

(Unaudited)

 

(3) 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 $410,959. The annual interest rate was 5.12% as of December 31, 2020. The total outstanding balance as of December 31, 2020 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, 2020, NTE was in compliance with this covenant.

 

(4) The Company’s subsidiary, NetSol PK, has a term finance facility from Askari Bank Limited, approved by the Government of Pakistan to protect the employment situation during the Pandemic COVID-19. This is a term loan payable in three years. The availed facility amount was Rs. 347,601,639 or $2,168,714, at December 31, 2020, of which $850,166 is shown as current and the remaining $1,318,548 is shown as long term. The availed facility amount was Rs. 232,042,664 or $1,380,878, at June 30, 2020, of which $354,337 is shown as current and the remaining $1,026,541 is shown as long term. The interest rate for the loan was 3% at December 31, 2020 and June 30, 2020.

 

(5) 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 nine months. The total facility amount is Rs. 500,000,000 or $3,119,541 at December 31, 2020 and Rs. 500,000,000 or $2,975,482 at June 30, 2020. The interest rate for the loan was 3% at December 31, 2020 and June 30, 2020.

 

(6) The Company’s subsidiary, NetSol PK, has a running finance facility with Askari Bank Limited, secured by NetSol PK’s assets. The total facility amount is Rs. 75,000,000 or $467,931, at December 31, 2020. The balance outstanding at December 31, 2020 and June 30, 2020 was Rs. Nil. The interest rate for the loan was 9.29% and 7.2% at December 31, 2020 and June 30, 2020, respectively.

 

This facility requires NetSol PK to maintain a long-term debt equity ratio of 60:40 and the current ratio of 1:1. As of December 31, 2020, NetSol PK was in compliance with this covenant.

 

(7) 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 nine months. The total facility amount is Rs. 380,000,000 or $2,370,851 and Rs. 380,000,000 or $2,261,366 at December 31, 2020 and June 30, 2020, respectively. The interest rate for the loan was 3% at December 31, 2020 and June 30, 2020.

 

(8) The Company’s subsidiary, NetSol PK, has a running finance facility with Samba Bank Limited, secured by NetSol PK’s assets. The total facility amount is Rs. 120,000,000 or $748,690 and Rs. 120,000,000 or $714,116, at December 31, 2020 and June 30, 2020, respectively. The interest rate for the loan was 8.79% and 7.7% at December 31, 2020 and June 30, 2020, respectively. The balance outstanding at December 31, 2020 and June 30, 2020 was Rs. 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, 2020, NetSol PK was in compliance with these covenants.

 

(9) The Company’s subsidiary, NetSol PK, has an export refinance facility with Habib Metro Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every nine months. The total facility amount is Rs. 900,000,000 or $5,615,173 and NetSol PK used Rs. 500,000,000 or $3,119,541 at December 31, 2020. The total facility amount is Rs. 900,000,000 or $5,355,868 and NetSol PK used Rs. 500,000,000 or $2,975,482 at June 30, 2020. The interest rate for the loan was 3% at December 31, 2020 and June 30, 2020.

 

(10) In March 2019, the Company’s subsidiary, VLS, entered into a loan agreement. The loan amount was £69,549, or $95,273, for a period of 5 years with monthly payments of £1,349, or $1,848. As of December 31, 2020, the subsidiary has used this facility up to $63,677, of which $44,887 was shown as long-term and $18,790 as current. The interest rate was 6.14% at December 31, 2020.

 

Page 29

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2020

(Unaudited)

 

(11) The Company leases various fixed assets under finance lease arrangements expiring in various years through 2024. The assets and liabilities under finance 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 finance leases is included in depreciation expense for the three and six months ended December 31, 2020 and 2019.

 

Following is the aggregate minimum future lease payments under finance leases as of December 31, 2020:

 

   Amount 
Minimum Lease Payments     
Within year 1  $433,875 
Within year 2   37,913 
Within year 3   22,027 
Within year 4   3,671 
Total Minimum Lease Payments   497,486 
Interest Expense relating to future periods   (14,224)
Present Value of minimum lease payments   483,262 
Less: Current portion   (422,858)
Non-Current portion  $60,404 

 

NOTE 16 - STOCKHOLDERS’ EQUITY

 

During the three and six months ended December 31, 2020, the Company issued 3,020 and 6,040 shares of common stock for services rendered by officers of the Company. These shares were valued at the fair market value of $17,068 and $34,136, respectively.

 

During the three and six months ended December 31, 2020, the Company issued nil and 1,983 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 $Nil and $11,997.

 

During the three and six months ended December 31, 2020, the Company issued 7,393 and 17,286 shares of its common stock to employees pursuant to the terms of their employment agreements valued at $41,600 and $99,548, respectively.

 

NOTE 17 - INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN

 

The following table summarizes stock grants awarded as compensation:

 

   # of shares   Weighted Average Grant Date Fair Value ($) 
Unvested, June 30, 2020   66,421   $5.88 
Vested   (25,309)  $5.76 
Unvested, December 31, 2020   41,112   $5.75 

 

For the three and six months ended December 31, 2020, the Company recorded compensation expense of $74,167 and $164,784, respectively. For the three and six months ended December 31, 2019, the Company recorded compensation expense of $164,292 and $328,585, respectively. The compensation expense related to the unvested stock grants as of December 31, 2020 was $208,445 which will be recognized during the fiscal years 2021 through 2022.

 

Page 30

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2020

(Unaudited)

 

NOTE 18 – CONTINGENCIES

 

From time to time, the Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business including tax assessments. The Company defends itself vigorously against any such claims. When (i) it is probable that an asset has been impaired or a liability has been incurred and (ii) the amount of the loss can be reasonably estimated, the Company records the estimated loss. The Company provides disclosure in the notes to the consolidated financial statements for loss contingencies that do not meet both conditions if there is a reasonable possibility that a loss may have been incurred that would be material to the financial statements. Significant judgment is required to determine the probability that a liability has been incurred and whether such liability is reasonably estimable. The Company bases accruals on the best information available at the time, which can be highly subjective. The final outcome of these matters could vary significantly from the amounts included in the accompanying consolidated financial statements.

 

NOTE 19 – OPERATING SEGMENTS

 

The Company has identified three segments for its products and services; North America, Europe and Asia-Pacific. Our reportable segments are business units located in different global regions. Each business unit provides similar products and services; license fees for leasing and asset-based software, related maintenance fees, and implementation and IT consulting services. Separate management of each segment is required because each business unit is subject to different operational issues and strategies due to their particular regional location. The Company accounts for intra-company sales and expenses as if the sales or expenses were to third parties and eliminates them in the consolidation.

 

The following table presents a summary of identifiable assets as of December 31, 2020 and June 30, 2020:

 

   As of   As of 
   December 31, 2020   June 30, 2020 
Identifiable assets:          
Corporate headquarters  $                  3,814,916   $4,508,724 
North America   6,073,162    5,949,653 
Europe   11,617,067    10,856,814 
Asia - Pacific   63,953,775    67,157,898 
Consolidated  $85,458,920   $88,473,089 

 

The following table presents a summary of investment under equity method as of December 31, 2020 and June 30, 2020:

 

   As of   As of 
   December 31, 2020   June 30, 2020 
Investment in associates under equity method:          
Corporate headquarters  $                    424,504   $473,692 
Asia - Pacific   3,310,403    1,914,000 
Consolidated  $3,734,907   $2,387,692 

 

Page 31

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2020

(Unaudited)

 

The following table presents a summary of operating information for the three and six months ended December 31:

 

   For the Three Months   For the Six Months 
   Ended December 31,   Ended December 31, 
   2020   2019   2020   2019 
Revenues from unaffiliated customers:                    
North America  $1,016,556   $1,277,343   $1,829,434   $2,254,518 
Europe   2,726,206    2,842,329    5,878,097    5,434,668 
Asia - Pacific   9,378,698    11,512,923    18,061,307    21,432,892 
    13,121,460    15,632,595    25,768,838    29,122,078 
Revenue from affiliated customers                    
Asia - Pacific   -    57,424    -    140,357 
    -    57,424    -    140,357 
Consolidated  $13,121,460   $15,690,019   $25,768,838   $29,262,435 
                     
Intercompany revenue                    
Europe  $126,757   $164,401   $265,913   $311,226 
Asia - Pacific   3,125,729    2,505,437    5,284,357    3,570,203 
Eliminated  $3,252,486   $2,669,838   $5,550,270   $3,881,429 
                     
Net income (loss) after taxes and before non-controlling interest:                    
Corporate headquarters  $1,173,146   $(379,882)  $2,340,941   $(1,244,092)
North America   (47,019)   154,335    (328,816)   96,348 
Europe   173,085    423,649    776,101    804,743 
Asia - Pacific   (1,378,400)   348,834    (1,743,937)   (1,371,322)
Consolidated  $(79,188)  $546,936   $1,044,289   $(1,714,323)

 

The following table presents a summary of capital expenditures for the six months ended December 31:

 

   For the Six Months 
   Ended December 31, 
   2020   2019 
Capital expenditures:          
North America  $1,521   $2,405 
Europe   301,233    329,332 
Asia - Pacific   947,141    454,262 
Consolidated  $1,249,895   $785,999 

 

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NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2020

(Unaudited)

 

NOTE 20 – NON-CONTROLLING INTEREST IN SUBSIDIARY

 

The Company had non-controlling interests in several of its subsidiaries. The balance of non-controlling interest was as follows:

 

SUBSIDIARY  Non-Controlling Interest %   Non-Controlling Interest at December 31, 2020 
         
NetSol PK   33.88%  $7,165,477 
NetSol-Innovation   33.88%   133,243 
NetSol Thai   0.006%   (262)
OTOZ Thai   0.006%   (42)
OTOZ   5.00%   (11,143)
Total       $7,287,273 

 

SUBSIDIARY  Non-Controlling Interest %   Non-Controlling Interest at June 30, 2020 
         
NetSol PK   33.88%  $6,361,747 
NetSol-Innovation   33.88%   128,514 
NetSol Thai   0.006%   (39)
OTOZ Thai   0.006%   4 
OTOZ   5.00%   (1,326)
Total       $6,488,900 

 

NOTE 21 – INCOME TAXES

 

The current tax provision is based on taxable income for the year determined in accordance with the prevailing law for taxation of income. The charge for tax on income is calculated at the current rates of taxation as applicable after considering tax credit and tax rebates available, if any. We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Our effective tax rate is lower than the U.S. statutory rate primarily because of more earnings realized in countries that have lower statutory tax rates. Our effective tax rate in the future will depend on the portion of our profits earned within and outside the United States. Income from the export of computer software and its related services developed in Pakistan is exempt from tax through June 30, 2025; however, tax at the applicable rates is charged to the income from revenue generated from other than core business activities.

 

During the three and six months ended December 31, 2020, the Company recorded an income tax provision of $245,434 and $509,728, respectively, resulting in an effective tax rate of 147.6% and 32.8%, respectively. During the three and six months ended December 31, 2019, the Company recorded an income tax provision of $610,510 and $848,748, respectively, resulting in an effective tax rate of 52.7% and (98.1%), respectively.

 

NOTE 22 – SUBSEQUENT EVENTS

 

Subsequent to December 31, 2020, the Company purchased an additional 92,440 shares at an average price of $4.03 per share pursuant to the stock repurchase plan approved by the Company’s Board of Directors on July 30, 2020.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion is intended to assist in an understanding of the Company’s financial position and results of operations for the three and six months ended December 31, 2020. The following discussion should be read in conjunction with the information included within our Annual Report on Form 10-K for the year ended June 30, 2020, and the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

 

Our website is located at www.netsoltech.com, and our investor relations website is located at http://ir.netsoltech.com. The following filings are available through our investor relations website after we file with the SEC: Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and our Proxy Statements for our annual meetings of stockholders. These filings are also available for download free of charge on our investor relations website. We also provide a link to the section of the SEC’s website at www.sec.gov that has all of our public filings, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, our Proxy Statements and other ownership related filings. Further, a copy of this Quarterly Report on Form 10-Q 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 and on social media platforms linked to our corporate website. Investors and others can receive notifications of new information posted on our investor relations website by signing up for e-mail alerts. Further corporate governance information, including our committee charters and code of conduct, is also available on our investor relations website at http:// netsoltech.com/about-us. The content of our websites is not intended to be incorporated by reference into this 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.

 

Forward-Looking Information

 

This report contains certain forward-looking statements and information relating to the Company that is based on the beliefs of its management as well as assumptions made by and information currently available to its management. When used in this report, the words “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”, and similar expressions as they relate to the Company or its management, are intended to identify forward-looking statements. These statements reflect management’s current view of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions. Should any of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this report as anticipated, estimated or expected. The Company’s realization of its business aims could be materially and adversely affected by any technical or other problems in, or difficulties with, planned funding and technologies, third party technologies which render the Company’s technologies obsolete, the unavailability of required third party technology licenses on commercially reasonable terms, the loss of key research and development personnel, the inability or failure to recruit and retain qualified research and development personnel, or the adoption of technology standards which are different from technologies around which the Company’s business ultimately is built. The Company does not intend to update these forward-looking statements.

 

Business Overview

 

NetSol Technologies, Inc. (NasdaqCM: NTWK) is a worldwide provider of IT and enterprise software solutions. We believe that our solutions constitute mission critical applications for 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 Ascent® 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.

 

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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 Los Angeles Area
  Europe London Metropolitan area
  Asia Pacific Lahore, Karachi, Bangkok, Beijing, Shanghai, Jakarta and Sydney

 

NetSol’s offerings include its flagship global solution, NFS™. A robust suite of four software applications that is an end-to-end solution for the asset finance industry covering the complete leasing and finance cycle starting from quotation origination through end of contract transactions and including digital channel support with intuitive mobile applications. The four applications under NFS™ have been designed and developed for a highly flexible setting and are capable of dealing with multinational, multi-company, multi-asset, multi-lingual, multi-distributor and multi-manufacturer environments. Each application is a complete system in itself and can be used independently to address specific sub-domains of the leasing/financing cycle. When used together, they fully automate the entire leasing/financing cycle for companies of any size, including those with multi-billion-dollar portfolios.

 

NFS Ascent®

 

NFS Ascent®, the Company’s next generation platform, offers a technologically advanced solution for the auto and equipment finance and leasing industry. NFS Ascent’s® architecture and user interfaces were designed based on the Company’s collective experience with global Fortune 500 companies over the past 40 years combined with UX design concepts. The platform’s framework allows auto captive and asset finance companies to rapidly transform legacy driven technology into a state-of-the-art IT and business process environment. At the core of the NFS Ascent® platform, is a lease accounting and contract processing engine, which allows for an array of interest calculation methods, as well as robust accounting of multi-billion-dollar lease portfolios in compliance with various regulatory standards. NFS Ascent®, with its distributed and clustered deployment across parallel application and high-volume data servers, enables finance companies to process voluminous data in a hyper speed environment. NFS Ascent® has been developed using the latest tools and technologies and its n-tier SOA architecture allows the system to greatly improve a myriad of areas including, but not limited to, scalability, performance, fault tolerance and security. Pricing models for NFS Ascent® are also available on a software as a service (“SaaS”) or subscription-based pricing as an alternative to the traditional license model. Subscription-based pricing is being offered on a monthly, quarterly or annual basis and decreases the cost of the initial buy-in for new customers while providing an alternative to current customers seeking lower software usage and maintenance costs.

 

NFS Digital

 

NFS Digital enables a sales force for a finance and leasing company to access different channels like point of sale, field investigation and auditing as well as allowing end customers to access their contract details through a self-service mobile application.

 

Otoz Mobility Orchestration System

 

Otoz is a digital platform that helps automotive asset-holders (auto-manufacturers, auto-captives and fleet owners) and start-ups to launch, orchestrate and scale mobility businesses. Otoz platform is built on cutting-edge technology stack which comprises of Cloud-Native Architecture, Microservices, Artificial Intelligence, Machine Learning, Blockchain, DevOps and APIs. Otoz powerful feature-set allows automotive asset-holders with the ability to orchestrate a range of car-share and vehicle subscription services. The data-driven nature of platform empowers automotive asset-holders to maximize optimize and utilize mobility offerings. Otoz enables customers to book car-share and subscribe to vehicles through its intuitive, digital, and easy to use interface. An API driven architecture allows quick integration of ecosystem partners such as maintenance, roadside and offline jobs providers to allow seamless operation of mobility services.

 

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LeasePak

 

In North America, NTA has and continues to develop the LeasePak CMS product which is now tailored to be an offering on the Microsoft Azure™ cloud. LeasePak streamlines the lease and loan management lifecycle, enabling superior portfolio management, flexible financial products (lease or loan terms) and sophisticated financial analysis and management to reduce operating costs, simplify accounting and improve profits. It is scalable from a basic offering to a collection of highly specialized add on modules for systems, portfolios and accounting methods for virtually all sizes and complexity of operations. It is the centerpiece of vehicle leasing infrastructure at leading Fortune 500 banks and Automotive Captives, 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 for asset disposition and remarketing.

 

LeasePak-SaaS

 

NTA also offers the LeasePak SaaS business line, which provides high performance with a reduced total cost of ownership. SaaS offers a proven deployment option whereby customers only require access to the internet to use the software. With an elastic cloud price, revenue stream predictability and improved return on investment for customers, management believes that its SaaS customers will experience the performance, the reliability and the speed usually associated with a highly scalable private cloud. LeasePak-SaaS targets small and mid-sized leasing and finance companies.

 

LeaseSoft

 

In addition to offering NFS Ascent® to the European market, NTE has some regional offerings, including LeaseSoft and LoanSoft. LeaseSoft is a full lifecycle lease and finance system aimed predominantly at the UK funder market, including modules to support web portals and an electronic data interchange manager to facilitate integration between funders and introducers. LoanSoft is similar to LeaseSoft, but optimized for the consumer loan market.

 

Highlights

 

Listed below are a few of NetSol’s highlights for the quarter ended December 31, 2020:

 

  We entered into an agreement with an existing tier one finance company in China for them to upgrade to our NFS Ascent® Retail and Wholesale platforms. The contract is expected to generate approximately $9,000,000 during the contract term.
  A Captive auto finance company of a leading German Auto manufacturer based in China went successfully live with our NFS Ascent® Retail Platform.
 

NetSol and WRLD3D introduced NXT - a smart workplace platform to support companies to return to work safely

  A rapidly growing U.K. bank serving small and medium-sized enterprises has successfully gone live with the NFS Ascent® Retail Platform. This is our first go live of an NFS Ascent® Retail client in the U.K.
  Daimler Financial Services went live with our NSF Ascent® Retail Platform in Thailand.
  We generated approximately $1,500,000 by successfully implementing change requests from various customers across multiple regions.
  We entered into an agreement with a renowned financial services company in the U.S. to implement LeasePak, one of our legacy solutions. The contract is expected to generate approximately $1,000,000 over the life of the contract.

 

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Management has identified the following material trends affecting NetSol.

 

Positive trends:

 

  NFS Ascent® SaaS offering is gaining traction in mid-size auto captives in the North American and European markets.
  Mobility and digital transformation are the new norm showing acceleration in every sector particularly in auto and banking.
  On Cloud demand for our solution is on the rise.
  COVID-19 has created new dynamics for businesses and corporations with employees and executives working from home. Essentially, the decreased office and maintenance costs, as well as the sharply reduced travel expenses, should positively impact our financials.
  COVID-19 is creating new opportunities for our R&D teams to expand and monetize mobile and digital solutions in our space and complementary sectors.
  In developing markets, new interests are emerging from existing clients for upgrades and mobility platforms.
  Growing opportunities and dynamics of shared car ownership either through ride hailing and car sharing encouraging our innovation and development tools.
  OTOZ platform is showing positive trajectory of interest from existing and new auto leasing and Tier 1 companies in all of our markets, including China, the US and Europe.
  Improved stability in U.S. and Pakistan relationship boosting confidence and trade relations.
  China’s China Pakistan Economic Corridor (CPEC) investment has exceeded $62 billion investment from the originally planned $46 billion on Pakistan energy and infrastructure sectors.
  China auto sector remains strong as our customers are constantly demanding ‘Change Requests’ or additional services and reflects resilience.

 

Negative trends:

 

  COVID-19 has caused a global recession that will adversely impact every one of our business sectors.
  Most OEMs and auto sectors are experiencing a major slowdown due to lockdowns and health concerns.
  The C-level decision making to acquire new systems or even upgrade will be elongated due to uncertainty of the COVID-19 virus.
  Due to travel restrictions caused by COVID-19, it is increasingly difficult to conduct face to face meetings for global clients and new prospects removing the personal connection essential to some decision making.
  The COVID-19 pandemic has adversely affected live industry conferences and events, such as those held by the Equipment Leasing and Finance Association (ELFA), reducing leads and market exposure.
  Working from the office poses its own risk of virus spread until it vanishes completely.
  US and China trade conflicts tend to further aggravate the global business environment.
  Global outlook for auto sector is uncertain if the recessionary impact worsens.

 

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CHANGES IN FINANCIAL CONDITION

 

Quarter Ended December 31, 2020 Compared to the Quarter Ended December 31, 2019

 

The following table sets forth the items in our unaudited condensed consolidated statement of operations for the three months ended December 31, 2020 and 2019 as a percentage of revenues.

 

   For the Three Months 
   Ended December 31,  
   2020   %   2019   % 
Net Revenues:                    
License fees  $2,586,504    19.7%  $176,706    1.1%
Subscription and support   5,724,802    43.6%   5,104,736    32.5%
Services   4,810,154    36.7%   10,351,153    66.0%
Services - related party   -    0.0%   57,424    0.4%
Total net revenues   13,121,460    100.0%   15,690,019    100.0%