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 SecuritiesExchange Act of 1934

 

For the quarterly period ended DecemberMarch 31, 20172020

 

[  ] 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

Incorporation or Organization)

 (I.R.S. Employer
NO.)
Incorporation or Organization)

 

23975Park 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 classTrading Symbol(s)Name of exchange on which registered
Common Stock, $0.01 par value per shareNTWKNASDAQ

 

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 a check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

 

Large Accelerated Filer [  ]Accelerated Filer [  ]
Non-Accelerated Filer [  ]Small Reporting Company [X]

 

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 11,395,40112,038,697 shares issued and 11,791,194 outstanding of its $.01 par value Common Stock and no Preferred Stock issued and outstanding as of February 10, 2018.May 8, 2020.

 

 

 

 

 

 

NETSOL TECHNOLOGIES, INC.

 

 Page No.
PART I. FINANCIAL INFORMATION 
Item 1. Financial Statements (Unaudited) 
Condensed Consolidated Balance Sheets as of DecemberMarch 31, 20172020 and June 30, 201720193
Condensed Consolidated Statements of Operations for the Three and SixNine Months Ended DecemberMarch 31, 20172020 and 201620194
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and SixNine Months Ended DecemberMarch 31, 20172020 and 201620195
Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended March 31, 2020 and 20196
Condensed Consolidated Statements of Cash Flows for the SixNine Months Ended DecemberMarch 31, 20172020 and 20162019610
Notes to the Condensed Consolidated Financial Statements812
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations3036
Item 3. Quantitative and Qualitative Disclosures about Market Risk4550
Item 4. Controls and Procedures4650
  
PART II. OTHER INFORMATION 
Item 1. Legal Proceedings4751
Item 1A Risk Factors4751
Item 2. Unregistered Sales of Equity and Use of Proceeds4751
Item 3. Defaults Upon Senior Securities4751
Item 4. Mine Safety Disclosures4751
Item 5. Other Information4851
Item 6. Exhibits4851

 

Page 2

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETSCondensed Consolidated Balance Sheets

(UNAUDITED)
(Unaudited)

 

  As of December 31,  As of June 30, 
  2017  2017 
ASSETS        
Current assets:        
Cash and cash equivalents $10,004,650  $14,172,954 
Accounts receivable, net of allowance of $347,413 and $571,511  19,106,677   6,583,199 
Accounts receivable, net - related party  2,582,403   1,644,942 
Revenues in excess of billings  16,094,026   19,126,389 
Revenues in excess of billings - related party  107,562   80,705 
Convertible note receivable - related party  750,000   200,000 
Other current assets  2,819,183   2,463,886 
Total current assets  51,464,501   44,272,075 
Restricted cash  90,000   90,000 
Revenues in excess of billings, net - long term  6,668,854   5,173,538 
Property and equipment, net  18,443,494   20,370,703 
Other assets  3,543,315   3,211,295 
Intangible assets, net  14,810,605   17,043,151 
Goodwill  9,516,568   9,516,568 
Total assets $104,537,337  $99,677,330 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable and accrued expenses $7,560,298  $6,880,194 
Current portion of loans and obligations under capitalized leases  10,133,100   10,222,795 
Unearned revenues  10,082,346   3,925,702 
Common stock to be issued  88,324   88,324 
Total current liabilities  27,864,068   21,117,015 
Loans and obligations under capitalized leases; less current maturities  250,883   366,762 
Total liabilities  28,114,951   21,483,777 
Commitments and contingencies        
Stockholders’ equity:        
Preferred stock, $.01 par value; 500,000 shares authorized;  -   - 
Common stock, $.01 par value; 14,500,000 shares authorized; 11,395,401 shares issued and 11,221,347 outstanding as of December 31, 2017 and 11,225,385 shares issued and 11,190,606 outstanding as of June 30, 2017  113,954   112,254 
Additional paid-in-capital  125,354,035   124,409,998 
Treasury stock (At cost, 174,054 shares and 34,779 shares as of December 31, 2017 and June 30, 2017, respectively)  (1,055,330)  (454,310)
Accumulated deficit  (42,036,467)  (42,301,390)
Stock subscription receivable  (221,000)  (297,511)
Other comprehensive loss  (20,276,030)  (18,074,570)
Total NetSol stockholders’ equity  61,879,162   63,394,471 
Non-controlling interest  14,543,224   14,799,082 
Total stockholders’ equity  76,422,386   78,193,553 
Total liabilities and stockholders’ equity $104,537,337  $99,677,330 

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, 
  2017  2016  2017  2016 
     Restated     Restated 
Net Revenues:                
License fees $235,932  $3,769,557  $561,998  $9,223,352 
Maintenance fees  3,568,448   3,588,899   7,042,173   7,112,696 
Services  9,087,191   6,619,158   16,104,928   12,175,293 
License fees - related party  217,105   -   261,513   246,957 
Maintenance fees - related party  101,251   51,345   204,214   181,976 
Services - related party  1,236,508   1,829,827   3,090,385   3,994,981 
Total net revenues  14,446,435   15,858,786   27,265,211   32,935,255 
                 
Cost of revenues:                
Salaries and consultants  5,362,092   5,979,804   10,826,252   11,873,153 
Travel  287,901   836,240   801,013   1,548,135 
Depreciation and amortization  1,168,103   1,318,764   2,341,216   2,649,636 
Other  939,986   1,065,727   1,796,568   2,038,065 
Total cost of revenues  7,758,082   9,200,535   15,765,049   18,108,989 
                 
Gross profit  6,688,353   6,658,251   11,500,162   14,826,266 
                 
Operating expenses:                
Selling and marketing  1,932,140   2,713,478   3,643,436   5,057,516 
Depreciation and amortization  222,785   271,485   468,658   540,582 
Provision for bad debts  -   1,026   -   1,026 
General and administrative  4,026,706   3,932,387   7,814,264   8,551,583 
Research and development cost  189,891   91,607   374,976   184,539 
Total operating expenses  6,371,522   7,009,983   12,301,334   14,335,246 
                 
Income from operations  316,831   (351,732)  (801,172)  491,020 
                 
Other income and (expenses)                
Loss on sale of assets  (8,939)  (32,339)  (16,069)  (34,742)
Interest expense  (109,675)  (62,127)  (227,746)  (116,602)
Interest income  115,570   23,416   252,481   53,856 
Gain (loss) on foreign currency exchange transactions  1,737,967   (621,887)  2,754,329   (1,036,783)
Share of net loss from equity investment  (203,336)  -   (270,898)  - 
Other income  14,511   6,823   15,610   28,383 
Total other income (expenses)  1,546,098   (686,114)  2,507,707   (1,105,888)
                 
Net income (loss) before income taxes  1,862,929   (1,037,846)  1,706,535   (614,868)
Income tax provision  (200,927)  (338,884)  (225,798)  (378,759)
Net income (loss)  1,662,002   (1,376,730)  1,480,737   (993,627)
Non-controlling interest  (1,027,581)  (791,664)  (1,215,814)  (1,560,878)
Net income (loss) attributable to NetSol $634,421  $(2,168,394) $264,923  $(2,554,505)
                 
Net income (loss) per share:                
Net income (loss) per common share                
Basic $0.06  $(0.20) $0.02  $(0.24)
Diluted $0.06  $(0.20) $0.02  $(0.24)
                 
Weighted average number of shares outstanding                
Basic  11,159,075   10,877,446   11,115,346   10,783,685 
Diluted  11,171,543   10,877,446   11,127,814   10,783,685 
  As of  As of 
 March 31, 2020  June 30, 2019 
ASSETS      
Current assets:        
Cash and cash equivalents $15,743,328  $17,366,364 
Accounts receivable, net of allowance of $364,383 and $192,786  12,900,412   12,332,714 
Accounts receivable, net of allowance of $54,307 and $166,075 - related party  1,332,575   3,266,600 
Revenues in excess of billings, net of allowance of $190,811 and $194,684  15,301,150   14,719,047 
Revenues in excess of billings - related party  8,245   110,827 
Convertible note receivable - related party  4,250,000   3,650,000 
Other current assets  3,593,365   3,146,264 
Total current assets  53,129,075   54,591,816 
Revenues in excess of billings, net - long term  1,282,898   1,281,492 
Property and equipment, net  11,553,814   12,096,855 
Right of use of assets - operating leases  2,690,777   - 
Long term investment  2,329,706   2,653,769 
Other assets  23,066   23,569 
Intangible assets, net  5,880,759   7,332,950 
Goodwill  9,516,568   9,516,568 
Total assets $86,406,663  $87,497,019 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable and accrued expenses $7,107,933  $7,476,560 
Current portion of loans and obligations under finance leases  8,794,858   6,905,597 
Current portion of operating lease obligations  1,146,696   - 
Unearned revenues  3,440,663   5,977,736 
Common stock to be issued  88,324   88,324 
Total current liabilities  20,578,474   20,448,217 
Loans and obligations under finance leases; less current maturities  305,702   564,572 
Operating lease obligations; less current maturities  1,635,866   - 
Total liabilities  22,520,042   21,012,789 
Commitments and contingencies        
Stockholders’ equity:        
Preferred stock, $.01 par value; 500,000 shares authorized;  -   - 

Common stock, $.01 par value; 14,500,000 shares authorized;

12,038,697 shares issued and 11,791,194 outstanding as of March 31, 2020 and 11,911,742 shares issued and 11,664,239 outstanding as of June 30, 2019

  120,387   119,117 
Additional paid-in-capital  128,374,098   127,737,999 
Treasury stock (At cost, 247,503 shares and 247,503 shares as of March 31, 2020 and June 30, 2019, respectively)  (1,455,969)  (1,455,969)
Accumulated deficit  (35,448,063)  (35,206,898)
Other comprehensive loss  (34,065,385)  (33,125,006)
Total NetSol stockholders’ equity  57,525,068   58,069,243 
Non-controlling interest  6,361,553   8,414,987 
Total stockholders’ equity  63,886,621   66,484,230 
Total liabilities and stockholders’ equity $86,406,663  $87,497,019 

 

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

 

Page 43

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)Condensed Consolidated Statements of Operations

(UNAUDITED)(Unaudited)

 

  For the Three Months For the Six Months
  Ended December 31, Ended December 31,
  2017 2016 2017 2016
    Restated   Restated
Net income (loss) $634,421  $(2,168,394) $264,923  $(2,554,505)
Other comprehensive income (loss):                
Translation adjustment  (2,453,890)  (944,837)  (3,279,634)  149,237 
Translation adjustment attributable to non-controlling interest  841,009   276,575   1,078,174   (47,138)
Net translation adjustment  (1,612,881)  (668,262)  (2,201,460)  102,099 
Comprehensive income (loss) attributable to NetSol $(978,460) $(2,836,656) $(1,936,537) $(2,452,406)

  For the Three Months  For the Nine Months 
  Ended March 31,  Ended March 31, 
  2020  2019  2020  2019 
Net Revenues:                
License fees $312,133  $2,536,320  $3,375,241  $13,310,002 
Maintenance fees  4,934,635   3,704,756   14,291,959   11,106,155 
Services  8,222,227   10,728,983   24,923,873   25,548,451 
Services - related party  61,842   156,996   202,199   561,619 
Total net revenues  13,530,837   17,127,055   42,793,272   50,526,227 
                 
Cost of revenues:                
Salaries and consultants  4,850,438   4,833,611   13,931,274   14,351,227 
Travel  1,052,033   1,793,964   3,967,591   4,652,143 
Depreciation and amortization  737,637   874,654   2,191,654   2,692,306 
Other  868,491   1,067,506   2,767,927   3,176,602 
Total cost of revenues  7,508,599   8,569,735   22,858,446   24,872,278 
                 
Gross profit  6,022,238   8,557,320   19,934,826   25,653,949 
                 
Operating expenses:                
Selling and marketing  1,587,821   1,864,990   5,189,785   5,614,619 
Depreciation and amortization  206,035   252,442   623,901   658,453 
General and administrative  4,151,394   3,833,209   12,638,797   12,241,988 
Research and development cost  453,050   513,770   1,580,625   1,256,577 
Total operating expenses  6,398,300   6,464,411   20,033,108   19,771,637 
                 
Income (loss) from operations  (376,062)  2,092,909   (98,282)  5,882,312 
                 
Other income and (expenses)                
Gain (loss) on sale of assets  129   16,380   368   65,170 
Interest expense  (94,395)  (70,447)  (246,064)  (233,685)
Interest income  448,368   201,084   1,283,279   680,469 
Gain (loss) on foreign currency exchange transactions  1,770,894   47,218   71,765   2,594,885 
Share of net loss from equity investment  (78,502)  (245,389)  (432,522)  (843,373)
Other income  17,012   3,116   243,325   12,998 
Total other income (expenses)  2,063,506   (48,038)  920,151   2,276,464 
                 
Net income before income taxes  1,687,444   2,044,871   821,869   8,158,776 
Income tax provision  (218,351)  (275,476)  (1,067,099)  (777,262)
Net income (loss)  1,469,093   1,769,395   (245,230)  7,381,514 
Non-controlling interest  (468,286)  (501,835)  4,065   (2,295,736)
Net income (loss) attributable to NetSol $1,000,807  $1,267,560 $(241,165) $5,085,778 
                 
Net income (loss) per share:                
Net income (loss) per common share                
Basic $0.09  $0.11  $(0.02) $0.44 
Diluted $0.09  $0.11  $(0.02) $0.44 
                 
Weighted average number of shares outstanding                
Basic  11,753,063   11,656,098  11,713,827   11,580,066 
Diluted  11,753,063   11,691,342  11,713,827   11,615,310 

 

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

 

Page 54

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCondensed Consolidated Statements of Comprehensive Income (Loss)
(UNAUDITED)

(Unaudited)

 

  For the Six Months 
  Ended December 31, 
  2017  2016 
     Restated 
Cash flows from operating activities:        
Net income (loss) $1,480,737  $(993,627)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:        
Depreciation and amortization  2,809,874   3,190,218 
Provision for bad debts  -   1,026 
Share of net loss from investment under equity method  270,898   - 
Loss on sale of assets  16,069   34,742 
Stock based compensation  833,530   1,525,775 
Fair market value of warrants and stock options granted  -   21,804 
Changes in operating assets and liabilities:        
Accounts receivable  (13,231,059)  3,678,110 
Accounts receivable - related party  (1,637,829)  829,285 
Revenues in excess of billing  602,676   (7,592,495)
Revenues in excess of billing - related party  (32,308)  285,791 
Other current assets  (524,547)  585,147 
Accounts payable and accrued expenses  887,824   334,241 
Unearned revenue  6,469,146   (1,830,619)
Net cash provided by (used in) operating activities  (2,054,989)  69,398 
         
Cash flows from investing activities:        
Purchases of property and equipment  (543,123)  (1,074,316)
Sales of property and equipment  193,241   181,087 
Convertible note receivable - related party  (500,000)  - 
Investment in WRLD3D  (50,000)  (705,555)
Net cash used in investing activities  (899,882)  (1,598,784)
         
Cash flows from financing activities:        
Proceeds from the exercise of stock options and warrants  215,311   429,452 
Proceeds from exercise of subsidiary options  7,755   18,089 
Purchase of treasury stock  (601,020)  (38,885)
Dividend paid by subsidiary to non-controlling interest  (417,853)  (968,657)
Proceeds from bank loans  708,457   - 
Payments on capital lease obligations and loans - net  (361,814)  (69,998)
Net cash used in financing activities  (449,164)  (629,999)
Effect of exchange rate changes  (764,269)  107,241 
Net decrease in cash and cash equivalents  (4,168,304)  (2,052,144)
Cash and cash equivalents, beginning of the period  14,172,954   11,557,527 
Cash and cash equivalents, end of period $10,004,650  $9,505,383 
  For the Three Months  For the Nine Months 
  Ended March 31,  Ended March 31, 
  2020  2019  2020  2019 
Net income (loss) $1,000,807  $1,267,560  $(241,165) $5,085,778 
Other comprehensive income (loss):                
Translation adjustment  (4,605,609)  (128,387)  (1,108,848)  (6,376,953)
Translation adjustment attributable to non-controlling interest  996,856   100,366   168,469   2,288,192 
Net translation adjustment  (3,608,753)  (28,021)  (940,379)  (4,088,761)
Comprehensive income (loss) attributable to NetSol $(2,607,946) $1,239,539  $(1,181,544) $997,017 

 

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 March 31, 2020 is provided below:

                 Other       
        Additional        Compre-  Non  Total 
  Common Stock  Paid-in  Treasury  Accumulated  hensive  Controlling  Stockholders’ 
  Shares  Amount  Capital  Shares  Deficit  Loss  Interest  Equity 
                         
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 
Common stock issued for:                                
Services  38,131   381   176,509   -   -   -   -   176,890 
Foreign currency translation adjustment  -   -   -   -   -   (3,608,753)  (996,856)  (4,605,609)
Net income  -   -   -   -   1,000,807   -   468,286   1,469,093 
Balance at March 31, 2020  12,038,697  $120,387  $128,374,098  $(1,455,969) $(35,448,063) $(34,065,385) $6,361,553  $63,886,621 

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

                 Other       
        Additional        Compre-  Non  Total 
  Common Stock  Paid-in  Treasury  Accumulated  hensive  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 

Page 6

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)Condensed Consolidated Statement of Stockholders’ Equity
(UNAUDITED)(Unaudited)

 

  For the Six Months 
  Ended December 31, 
  2017  2016 
SUPPLEMENTAL DISCLOSURES:        
Cash paid during the period for:        
Interest $189,769  $123,682 
Taxes $226,098  $77,414 
         
NON-CASH INVESTING AND FINANCING ACTIVITIES:        
Provided services for investment in WRLD3D $553,678  $549,621 
Assets acquired under capital lease $113,220  $- 

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

                 Other       
        Additional        Compre-  Non  Total 
  Common Stock  Paid-in  Treasury  Accumulated  hensive  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  -   -   -   -   (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 Statement of Stockholders’ Equity
(Unaudited)

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

                 Stock  Other       
        Additional        Sub-  Compre-  Non  Total 
  Common Stock  Paid-in  Treasury  Accumulated  scriptions  hensive  Controlling  Stockholders’ 
  Shares  Amount  Capital  Shares  Deficit  Receivable  Loss  Interest  Equity 
                            
Balance at December 31, 2018  11,860,310  $118,603  $127,398,738  $(1,205,024) $(39,972,079) $(221,000) $(28,446,811) $10,237,446   67,909,873 
Exercise of common stock options  3,076   31   19,969   -   -   -   -   -   20,000 
Common stock issued for:                                    
Services  15,670   157   89,287   -   -   -   -   -   89,444 
Fair value of options extended  -   -   43,612   -   -   -   -   -   43,612 
Foreign currency translation adjustment  -   -   -   -   -   -   (28,021)  (100,366)  (128,387)
Net income  -   -   -   -   1,267,560   -   -   501,835   1,769,395 
Balance at March 31, 2019  11,879,056  $118,791  $127,551,606  $(1,205,024) $(38,704,519) $(221,000) $(28,474,832) $10,638,915  $69,703,937 

A statement of the changes in equity for the three months ended December 31, 2018 is provided below:

                 Stock  Other       
     Additional        Sub-  Compre-  Non  Total 
  Common Stock  Paid-in  Treasury  Accumulated  scriptions  hensive  Controlling  Stockholders’ 
  Shares  Amount  Capital  Shares  Deficit  Receivable  Loss  Interest  Equity 
                            
Balance at September 30, 2018  11,782,360  $117,824  $126,918,319  $(1,205,024) $(42,827,708) $(221,000) $(24,649,274) $11,315,509   69,448,646 
Exercise of common stock options  10,000   100   64,900   -   -   -   -   -   65,000 
Common stock issued for:    ��                               
Services  67,950   679   415,519   -   -   -   -   -   416,198 
Dividend to non-controlling interest  -   -   -   -   -   -   -   (566,465)  (566,465)
Foreign currency translation adjustment  -   -   -   -   -   -   (3,797,537)  (1,986,953)  (5,784,490)
Net income  -   -   -   -   2,855,629   -   -   1,475,355   4,330,984 
Balance at December 31, 2018  11,860,310  $118,603  $127,398,738  $(1,205,024) $(39,972,079) $(221,000) $(28,446,811) $10,237,446  $67,909,873 

Page 8

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

A statement of the changes in equity for the three months ended September 30, 2018 is provided below:

                 Stock  Other       
        Additional        Sub-  Compre-  Non  Total 
  Common Stock  Paid-in  Treasury  Accumulated  scriptions  hensive  Controlling  Stockholders’ 
  Shares  Amount  Capital  Shares  Deficit  Receivable  Loss  Interest  Equity 
                            
Balance at June 30, 2018  11,708,469  $117,085  $126,479,147  $(1,205,024) $(37,994,502) $(221,000) $(24,386,071) $14,146,417   76,936,052 
Adjustment in retained earnings on adoption of ASC 606  -   -   -   -   (5,795,795)  -   -   (2,957,860)  (8,753,655)
Exercise of subsidiary common stock options  -   -   (6,629)  -   -   -   -   9,279   2,650 
Common stock issued for:                                    
Services  73,891   739   445,801   -   -   -   -   -   446,540 
Foreign currency translation adjustment  -   -   -   -   -   -   (263,203)  (200,873)  (464,076)
Net income  -   -   -   -   962,589   -   -   318,546   1,281,135 
Balance at September 30, 2018  11,782,360  $117,824  $126,918,319  $(1,205,024) $(42,827,708) $(221,000) $(24,649,274) $11,315,509  $69,448,646 

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

Page 9

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

  For the Nine Months 
  Ended March 31, 
  2020  2019 
Cash flows from operating activities:        
Net income (loss) $(245,230) $7,381,514 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:        
Depreciation and amortization  2,815,555   3,350,759 
Provision for bad debts  75,437   - 
Share of net loss from investment under equity method  432,522   843,373 
Gain on sale of assets  (368)  (65,170)
Stock based compensation  565,287   980,682 
Fair market value of stock options  -   43,612 
Changes in operating assets and liabilities:        
Accounts receivable  (651,991)  (4,249,540)
Accounts receivable - related party  1,979,232   (461,435)
Revenues in excess of billing  (1,394,184)  (6,862,451)
Revenues in excess of billing - related party  106,592   (97,359)
Other current assets  (824,068)  (1,189,909)
Accounts payable and accrued expenses  63,289   (540,615)
Unearned revenue  (2,510,954)  611,157 
Net cash provided by (used in) operating activities  411,119   (255,382)
         
Cash flows from investing activities:        
Purchases of property and equipment  (1,011,285)  (2,590,302)
Sales of property and equipment  33,820   1,005,214 
Convertible note receivable - related party  (600,000)  (1,126,500)
Net cash used in investing activities  (1,577,465)  (2,711,588)
         
Cash flows from financing activities:        
Proceeds from the exercise of stock options and warrants  -   85,000 
Proceeds from exercise of subsidiary options  11,621   2,650 
Dividend paid by subsidiary to non-controlling interest  (1,920,618)  (566,465)
Proceeds from bank loans  2,312,968   1,337,092 
Payments on finance lease obligations and loans - net  (422,051)  (298,610)
Net cash provided by (used in) financing activities  (18,080)  559,667 
Effect of exchange rate changes  (438,610)  (2,666,960)
Net decrease in cash and cash equivalents  (1,623,036)  (5,074,263)
Cash and cash equivalents at beginning of the period  17,366,364   22,088,853 
Cash and cash equivalents at end of period $15,743,328  $17,014,590 

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

Page 10

 

 

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

  For the Nine Months 
  Ended March 31, 
  2020  2019 
SUPPLEMENTAL DISCLOSURES:        
Cash paid during the period for:        
Interest $220,041  $256,528 
Taxes $1,112,179  $673,712 
         
NON-CASH INVESTING AND FINANCING ACTIVITIES:        
Assets acquired under finance lease $-  $66,256 
Assets recognized under operating lease $3,474,583  $- 

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

Page 11

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNotes to Condensed Consolidated Financial Statements

DECEMBERMarch 31, 20172020

(UNAUDITED)(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, 2017.2019. 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 condensed consolidated financial statements include the accounts of NetSol Technologies, Inc. and subsidiaries (collectively, the “Company”) as follows:

 

Wholly owned Subsidiaries

NetSol Technologies Americas, Inc. (“NTA”)

OTOZ, Inc. (“OTOZ”)

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”)

NetSol Technologies (GmbH)Ascent Europe Ltd. (“NTG”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”)

Virtual Lease Services Holdings Limited (“VLSH”)

Page 12

Virtual Lease Services Limited (“VLS”)

Virtual Lease Services (Ireland) Limited (“VLSIL”)NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 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  For the Six Months 
  Ended December 31, 2016  Ended December 31, 2016 
  Originally reported  Reclassified  Originally reported  Reclassified 
             
Net Revenues:                
Services $6,984,084  $6,619,158  $12,790,801  $12,175,293 
Services - related party  1,464,901   1,829,827   3,379,473   3,994,981 
  $8,448,985  $8,448,985  $16,170,274  $16,170,274 
                 
Operating expenses:                
Provision for bad debts $-  $1,026  $-  $1,026 
General and administrative  3,933,413   3,932,387   8,552,609   8,551,583 
  $3,933,413  $3,933,413  $8,552,609  $8,552,609 

Page 8

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

  For the Three Months Ended  For the Nine Months Ended 
  March 31, 2019  March 31, 2019 
  Originally reported  Reclassified  Originally reported  Reclassified 
             
REVENUES                
License fees $2,536,320  $2,536,320  $13,310,002  $13,310,002 
Maintenance fees  3,562,412   3,704,756   10,735,432   11,106,155 
Services  10,519,219   10,728,983   25,175,187   25,548,451 
Maintenance fees - related party  142,344   -   370,723   - 
Services - related party  366,760   156,996   934,883   561,619 
Total net revenues $17,127,055  $17,127,055  $50,526,227  $50,526,227 

 

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. As of DecemberMarch 31, 2017,2020, and June 30, 2017,2019, the Company had uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $8,463,863$14,677,110 and $11,564,343,$16,124,339, 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 13

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

Fair Value of Financial Instruments

The Company applies the provisions of ASCAccounting 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, restricted cash, accounts receivable, accounts payable and short-term debt, the carrying amounts approximate fair value due to their relatively short maturities. The carrying amounts of the 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.

 

Page 9

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

The Company’s financial assets that arewere measured at fair value on a recurring basis as of DecemberMarch 31, 2017, are2020, were as follows:

 

 Level 1 Level 2 Level 3 Total Assets  Level 1 Level 2 Level 3 Total Assets 
Revenue in excess of billing - long term $-  $-  $6,668,854  $6,668,854 
Revenues in excess of billings - long term $   -  $    -  $1,282,898  $1,282,898 
Total $-  $-  $6,668,854  $6,668,854  $-  $-  $1,282,898  $1,282,898 

 

The Company’s financial assets that were measured at fair value on a recurring basis as of June 30, 2017,2019, were as follows:

 

 Level 1 Level 2 Level 3 Total Assets  Level 1 Level 2 Level 3 Total Assets 
Revenue in excess of billing - long term $-  $-  $5,173,538  $5,173,538 
Revenues in excess of billings - long term $    -  $   -  $1,281,492  $1,281,492 
Total $-  $-  $5,173,538  $5,173,538  $-  $-  $1,281,492  $1,281,492 

 

The reconciliation from June 30, 20172019 to DecemberMarch 31, 20172020 is as follows:

 

 Revenue in excess of billing - long term Fair value discount Total  Revenues in excess
of billings - long term
 Fair value discount Total 
Balance at June 30, 2017 $5,483,869  $(310,331) $5,173,538 
Balance at June 30, 2018 $1,445,245  $(238,576) $1,206,669 
Effect of ASC 606 adoption  (1,445,245)  238,576   (1,206,669)
Additions  1,469,379  $(85,057)  1,384,322   1,380,631   (99,139)  1,281,492 
Balance at June 30, 2019 $1,380,631  $(99,139) $1,281,492 
Amortization during the period  -   110,994   110,994   -   41,621   41,621 
Balance at December 31, 2017 $6,953,248  $(284,394) $6,668,854 
Effect of Translation Adjustment  (42,840)  2,625   (40,215)
Balance at March 31, 2020 $1,337,791  $(54,893) $1,282,898 

Page 14

 

The Company applied the discounted cash flow methodNETSOL TECHNOLOGIES, INC.

Notes to calculate the fair value and used NetSol PK’s weighted average borrowing rate, ranging from 3.93% to 4.43%.Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

Management analyzes all financial instruments with features of both liabilities and equity under ASC 480,“Distinguishing Liabilities Fromfrom 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 warrantwarrants and option derivatives are valued using the Black-Scholes model.

 

New Accounting Pronouncements

 

Recent Accounting Standards Adopted by the Company:

 

In November 2015,February 2016, the Financial Accounting Standards Board (FASB)(“FASB”) issued ASU 2015-17,Balance Sheet Classification of Deferred Taxes (ASU 2015-17),Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). This pronouncement requires lessees to recognize a liability for lease obligations, which changes how deferred taxes are classifiedrepresents the discounted obligation to make future lease payments, and a corresponding right-of-use (“ROU”) asset on the balance sheetsheet. The Company adopted ASU 2016-02, along with related clarifications and is effective for financial statements issued for annualimprovements, as of July 1, 2019, using the modified retrospective approach, which allows the Company to apply ASC 840, Leases, in the comparative periods beginning after December 15, 2016, with early adoption permitted. ASU 2015-17 requires all deferred taxpresented in the year of adoption. Accordingly, the comparative periods and disclosures have not been restated.

The Company elected the package of practical expedients to not reassess:

whether a contract is or contains a lease
lease classification
initial direct costs

Additionally, the Company adopted the policy election to not recognize ROU assets and lease liabilities for short-term leases for all asset classes.

Adoption of the new standard resulted in the recording of a non-cash transitional adjustment to be classifiedROU assets and lease liabilities of $3,011,814 and $3,091,236, respectively, as non-current.of July 1, 2019. The difference between the ROU assets and lease liabilities represented existing deferred rent expense and prepaid rent that were derecognized and adjusted the ROU assets in the Condensed Consolidated Balance Sheets. The adoption of this guidanceASU 2016-02 did not have a materialmaterially impact on the Company’s results of operations financial position or disclosures.

In March 2016, the FASB issued ASU 2016-09,Improvements to Employee Share-Based Payment Accounting. The guidance simplifies accounting for share-based payments, most notably by requiring all excess tax benefits and tax deficiencies to be recorded as income tax benefits or expense in the income statement and by allowing entities to recognize forfeitures of awards when they occur. This new guidance is effective for annual reporting periods beginning after December 15, 2016 and may be adopted prospectively or retroactively. The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.

Page 10

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)cash flows.

 

Accounting Standards Recently Issued but Not Yet Adopted by the Company:

 

In May 2014, the (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,Revenue from Contracts with Customers, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB deferred the effective date of the new revenue standard by one year, which will make it effective for the Company in the first quarter of its fiscal year ending June 30, 2019. The Company is currently in the process of evaluating the impact of adoption of this ASU on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01,Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which requires equity investments that are not accounted for under the equity method of accounting to be measured at fair value with changes recognized in net income and updates certain presentation and disclosure requirements. ASU 2016-01 is effective beginning after December 15, 2017. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

In February 2016, the FASB issued ASU No. 2016-02,Leases, which requires lessees to recognize right-of-use assets and lease liabilities, for all leases, with the exception of short-term leases, at the commencement date of each lease. This ASU requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. This ASU is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods. Early adoption is permitted. The amendments of this update should be applied using a modified retrospective approach, which requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15,Clarification of Certain Cash Receipts and Cash Payments, which eliminates the diversity in practice related to the classification of certain cash receipts and payments in the statement of cash flows, by adding or clarifying guidance on eight specific cash flow issues. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The amendments in this update should be applied retrospectively to all periods presented, unless deemed impracticable, in which case, prospective application is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

On November 17, 2016, the FASB issued Accounting Standards Update No. 2016-18,Statement of Cash Flows (Topic 230): Restricted Cash. It is intended to reduce diversity in the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. The new standard requires that restricted cash and restricted cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Earlier adoption is permitted. The Company maintains restricted cash balances and will show restricted cash as part of cash and restricted cash equivalents in the statement of cash flows.

In January 2017, the FASB issued ASU No. 2017-01,Clarifying the Definition of a Business, which clarifies and provides a more robust framework to use in determining when a set of assets and activities is a business. The amendments in this update should be applied prospectively on or after the effective date. This update is effective for annual periods beginning after December 15, 2017, and interim periods within those periods. Early adoption is permitted for acquisition or deconsolidation transactions occurring before the issuance date or effective date and only when the transactions have not been reported in issued or made available for issuance financial statements. The Company does not expect the adoption to have any significant impact on its Consolidated Financial Statements.

In January 2017, the FASB issued ASU No. 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 will apply this guidance to applicable impairment tests after the adoption date.

 

Page 11

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

In May 2017, the FASB issued ASU 2017-09,Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting,which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as a modification. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new standard will be effective prospectively for the Company for the fiscal year beginning July 1, 2018. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.

In July 2017, the FASB issued ASU No. 2017-11,Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception”.Exception. The ASU was issued to address the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. The ASU, among other things, eliminates the need to consider the effects of down round features when analyzing convertible debt, warrants and other financing instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The amendments are effective for fiscal years beginning after December 15, 2018, and should be applied retrospectively. Early adoption is permitted, including adoption in an interim period. The Company is currently in the process of evaluating the impact of the adoption of this standard on its consolidated financial statements.

 

Page 15

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

All other newly issued accounting pronouncements not yet effective have been deemed either immaterial or not applicable.

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) maintenance, which includes post contract 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.

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.

Subscription

Subscription revenue 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.

Page 16

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

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.

Maintenance

Revenue from support services and product updates, referred to as maintenance 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.

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.

Page 17

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

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

  For the Three Months  For the Nine Months 
  Ended March 31,  Ended March 31, 
  2020  2019  2020  2019 
Core:                
License $312,133  $2,536,320  $3,375,241  $13,310,002 
Maintenance  4,934,635   3,704,756   14,291,959   11,106,155 
Services  6,430,189   9,148,894   19,615,987   21,005,540 
Services - related party  61,842   156,996   202,199   494,333 
Total core revenue, net  11,738,799   15,546,966   37,485,386   45,916,030 
                 
Non-Core:                
Services  1,792,038   1,580,089   5,307,886   4,542,911 
Services - related party  -   -   -   67,286 
Total non-core revenue, net  1,792,038   1,580,089   5,307,886   4,610,197 
                 
Total net revenue $13,530,837  $17,127,055  $42,793,272  $50,526,227 

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 maintenance 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 18

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

Revenue is recognized over time for the Company’s subscription, maintenance 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  As of 
  March 31, 2020  June 30, 2019 
       
Revenues in excess of billings $16,592,293  $16,111,366 
         
Deferred Revenue $3,440,663  $5,977,736 

During the three and nine months ended March 31, 2020, the Company recognized revenue of $586,899 and $5,638,097, 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 19

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 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 $63,609,872 as of March 31, 2020, of which the Company estimates to recognize approximately $13,066,505 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 20

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

NOTE 34 – EARNINGS PER SHARE

 

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

Page 12

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

 

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

 

  For the three months ended
December 31, 2017
  For the six months ended
December 31, 2017
 
  Net Income  Shares  Per Share  Net Income  Shares  Per Share 
Basic income per share:                        
Net income available to common shareholders $634,421   11,159,075  $0.06  $264,923   11,115,346  $0.02 
Effect of dilutive securities                        
Stock options  -   12,468   -   -   12,468   - 
Diluted income per share $634,421   11,171,543  $0.06  $264,923   11,127,814  $0.02 

  For the three months ended March 31, 2020  For the nine months ended March 31, 2020 
  Net Income  Shares  Per Share  Net Loss  Shares  Per Share 
Basic income (loss) per share:                        
Net income (loss) available to common shareholders $1,000,807   11,753,063  $0.09  $(241,165)  11,713,827  $(0.02)
Effect of dilutive securities                        
Stock options  -   -   -   -   -   - 
Share grants  -   -   -   -   -   - 
Diluted income (loss) per share $1,000,807   11,753,063  $0.09  $(241,165)  11,713,827  $(0.02)

 

    For the three months ended
December 31, 2016
  For the six months ended
December 31, 2016
 
  Net Loss  Shares  Per Share  Net Loss  Shares  Per Share 
  Restated     Restated  Restated     Restated 
Basic loss per share:                        
Net loss available to common shareholders $(2,168,394)  10,877,446  $(0.20) $(2,554,505)  10,783,685  $(0.24)
Effect of dilutive securities                        
Stock options  -   -   -   -   -   - 
Diluted loss per share $(2,168,394)  10,877,446  $(0.20) $(2,554,505)  10,783,685  $(0.24)

  For the three months ended March 31, 2019  For the nine months ended March 31, 2019 
  Net Income  Shares  Per Share  Net Income  Shares  Per Share 
                   
Basic income per share:                        
Net income available to common shareholders $1,267,560   11,656,098  $0.11  $5,085,778   11,580,066  $0.44 
Effect of dilutive securities                        
Stock options  -   4,948   -   -   5,686   - 
Share grants  -   30,296   -   -   -   - 
Diluted income per share $1,267,560   11,691,342  $0.11  $5,085,778   11,585,752  $0.44 

 

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, 
  2017  2016  2017  2016 
             
Stock Options  -   480,133   -   480,133 
Warrants  -   11,075   -   11,075 
Share Grants  285,956   629,258   285,956   629,258 
   285,956   1,120,466   285,956   1,120,466 
  For the Three Months  For the Nine Months 
  Ended March 31,  Ended March 31, 
  2020  2019  2020  2019 
             
Share Grants  101,790   -   101,790   - 
   101,790   -   101,790   - 

Page 21

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

NOTE 45 – OTHER COMPREHENSIVE INCOME AND FOREIGN CURRENCY:CURRENCY

 

The accounts of NTE, AEL, VLSH and VLS use the British Pound; VLSIL and NTG useuses the Euro; NetSol PK, Connect, and NetSol Innovation use the Pakistan Rupee; NTPK Thailand and NetSol Thai use the Thai Baht; Australia uses the Australian dollar; and NetSol Beijing uses the Chinese Yuan as the functional currencies. NetSol Technologies, Inc., and its subsidiary, NTA, use the U.S. dollar as the functional currency. Assets and liabilities are translated at the exchange rate on the balance sheet date, and operating results are translated at the average exchange rate throughout the period. Accumulated translation losses classified as an item of accumulated other comprehensive loss in the stockholders’ equity section of the consolidated balance sheet were $20,276,030$34,065,385 and $18,074,570$33,125,006 as of DecemberMarch 31, 20172020 and June 30, 2017,2019, respectively. During the three and sixnine months ended DecemberMarch 31, 2017,2020, comprehensive income (loss) in the consolidated statements of comprehensive income (loss) included a translation loss attributable to NetSol of $1,612,881$3,608,753 and $2,201,460,$940,379, respectively. During the three and sixnine months ended DecemberMarch 31, 2016,2019, comprehensive income (loss) in the consolidated statements of operationscomprehensive income (loss) included a translation loss attributable to NetSol of $668,262$28,021 and translation income of $102,099,$4,088,761, respectively.

Page 13

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

 

NOTE 56 – RELATED PARTY TRANSACTIONS

 

NetSol-Innovation

 

In November 2004, the Company entered into a joint venture with 1insurer, formerlyInnovation Group, called NetSol-Innovation. NetSol-Innovation providesprovided support services to 1insurer. During the three and sixnine months ended DecemberMarch 31, 2017,2020, NetSol Innovation provided $Nil services. During the three and nine months ended March 31, 2019, NetSol Innovation provided services of $796,757$Nil and $1,928,513, respectively. During the three and six months ended December 31, 2016, NetSol-Innovation provided services of $1,401,144 and $2,956,619,$67,286, respectively. Accounts receivable at DecemberMarch 31, 20172020 and June 30, 20172019 were $2,429,771$Nil and $1,462,078,$2,130,041, respectively.

 

Investec Asset Finance

In October 2011, NTE entered into an agreement with Investec Asset Finance to acquire VLS. NTE and VLS provide support services to Investec. During the three and six months ended December 31, 2017, NTE and VLS provided license, maintenance and services of $442,699 and $1,043,891, respectively. During the three and six months ended December 31, 2016, NTE and VLS provided license, maintenance and services of $115,102 and $851,787, respectively. Accounts receivable at December 31, 2017 and June 30, 2017 were $113,310 and $133,218, respectively.

WRLD3D

On May 31, 2017, Faizaan Ghauri, son of CEO Najeeb Ghauri, and an employee of the Company was appointed CEO of WRLD3D, Inc. (“WRLD3D”) a non-public company. On March 2, 2016, the Company purchased a 4.9% interest in WRLD3D for $1,111,111 and the Company’s subsidiary NetSol PK purchased a 12.2% investment in WRLD3D for $2,777,778 which will be earned over future periods by providing IT and enterprise software solutions. See NoteNOTE 7 and Note 11.

G-FORCE

Najeeb Ghauri, CEO and Chairman of the Board, and Naeem Ghauri, Director, have a financial interest in G-Force, LLC, which purchased a 4.9% investment in WRLD3D, Inc. for $1,111,111. See Note 11 “Other Long-Term Assets”

NOTE 6 – MAJOR CUSTOMERS

 

The Company is a strategic business partner forDuring the nine months ended March 31, 2020, revenues from Daimler Financial Services (which consists(“DFS”) and BMW Financial (“BMW”) were $11,906,959 and $6,893,438, respectively representing 27.8% and 16.1%, respectively of a group of many companies in different countries), which accounts for approximately 35.90% and 41.54% of revenue forrevenues. During the sixnine months ended DecemberMarch 31, 20172019, revenues from DFS and 2016, respectively.BMW were $17,137,545 and $10,339,704, respectively representing 33.9% and 20.5%, respectively of revenues. The revenue from this customer isthese customers are shown in the Asia – Pacific segment.

Accounts receivable from DFS and BMW at March 31, 2020, were $5,186,256 and $3,271,459, respectively. Accounts receivable at DecemberJune 30, 2019, were $7,917,814 and $159,322, respectively. Revenues in excess of billings at March 31, 20172020 were $5,982,097 and $5,365,137, respectively. Revenues in excess of billings at June 30, 2019, were $4,371,081 and $5,472,043, respectively. Included in this amount was $1,282,898 and $1,281,492 shown as long term at March 31, 2020 and June 30, 2017, were $12,761,829 and $1,620,717,2019, respectively. Revenue in excess of billing at December 31, 2017 was $16,674,348, which included $6,668,854 shown as long term. Revenue in excess of billing at June 30, 2017 was $18,579,540, which included $5,173,538 shown as long term.

On December 21, 2015, the Company entered into a 10-year contract with Daimler Financial Services to provide license, maintenance and services for 12 countries in the Asia Pacific Region. The implementation phase is expected to be over a five-year period with maintenance and support over 10 years. The contract is a fixed fee arrangement with total license and maintenance fees of approximately €71,000,000 (approximately $85,054,591) with services to be separately agreed upon and billed as they are performed. The customer will make fixed annual payments of €5,850,000 (approximately $7,008,019) for years 1-5 and €8,350,000 (approximately $10,002,899) for years 6-10. Under the terms of the contract, the customer has the right to withdraw from certain modules and terminate the agreement as to certain countries based on good cause or business reasons prior to the beginning of implementation.

On, September 4, 2017, the Company amended the agreement which provided for an additional €7,700,000 (approximately $9,277,108) to be earned over the remaining life of the contract. The amended agreement provides for €7,000,000 (approximately $8,433,735) to be paid in the current fiscal year with €100,000 (approximately $120,482) to be paid each year over the remaining seven years.

Page 14

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

 

NOTE 78 – CONVERTIBLE NOTE RECEIVABLE – RELATED PARTY

 

The Company entered into an agreement with WRLD3D, whereby the Company was issued a Convertible Promissory Note (the “Convertible“August 2019 Note”) which was fully executed on May 25, 2017.August 19, 2019. The maximum principal amount of the Convertible Note is $750,000, and as of December 31, 2017, the Company had disbursed the full amount.$400,000 was paid on September 9, 2019. The ConvertibleAugust 2019 Note bears interest at 5%10% per annum and all unpaid interest and principal is due and payable upon the Company’s request on or after February 1, 2018.March 31, 2020. The ConvertibleCompany 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 August 2019 Note is convertible into Series BB Preferred shares atupon the lesseroccurrence of (i)the following events:

1.Conversion upon a qualified financing which is an equity financing of at least $1,000,000.
2.Optional conversion upon an equity financing less than $1,000,000.
3.Optional conversion after the maturity date.
4.Change of control.

Page 22

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

If the Company converts the August 2019 Note upon the occurrence of a financing, then the conversion price will be equal to the product of: (A) the price paid per share for the equity securitysecurities by the investors inmultiplied by (B) a calculated conversion rate which is determined based on the qualified financingamount of the principal and (ii)interest outstanding and the Company’s ownership percentage.

If the Company converts the August 2019 Note either as an optional conversion after the maturity date or due to a change of control, then the conversion price is equal to $0.6788 per share (adjusted for any stock dividends, combinations, splits, recapitalizations or the like with respect to WRLD3D’s Series BB Preferred Stock after the date of the ConvertibleAugust 2019 Note). The Convertible Note is convertible upon the occurrence of the following events:

 

1. Upon a qualified financingThe following table summarizes the convertible notes receivable from WRLD3D.

       Convertible 
Agreement Interest  Maturity Note 
Date Rate  Date Amount 
May 25, 2017 5% On Demand $750,000 
February 9, 2018 10% On Demand  2,500,000 
April 1, 2019 10% March 31, 2020  600,000 
August 19, 2019 10% March 31, 2020  400,000 
       $4,250,000 

The Company has accrued interest of $604,452 and $328,748 at March 31, 2020 and June 30, 2019, respectively, which is an equity financing of at least $2,000,000.included in “Other current assets.

2. Optionally, upon an equity financing less than $2,000,000.

3. Optionally after the maturity date.

4. Upon a change of control.

 

NOTE 89 - OTHER CURRENT ASSETS

 

Other current assets consisted of the following:

 

 As of December 31, As of June 30,  As of As of 
 2017 2017  March 31, 2020 June 30, 2019 
          
Prepaid Expenses $660,417  $597,687  $968,504  $991,528 
Advance Income Tax  979,296   1,052,935   482,518   800,798 
Employee Advances  114,147   128,100   125,653   33,778 
Security Deposits  84,934   103,255   282,596   147,668 
Other Receivables  648,237   252,590   1,534,222   733,826 
Other Assets  332,152   329,319   199,872   438,666 
Total $2,819,183  $2,463,886  $3,593,365  $3,146,264 

Page 23

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

NOTE 910REVENUEREVENUES IN EXCESS OF BILLINGS – LONG TERM

 

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

 

  As of December 31,  As of June 30, 
  2017  2017 
Revenue in excess of billing - long term $6,953,248 ��$5,483,869 
Present value discount  (284,394)  (310,331)
Net Balance $6,668,854  $5,173,538 

  As of  As of 
  March 31, 2020  June 30, 2019 
       
Revenues in excess of billings - long term $1,337,791  $1,380,631 
Present value discount  (54,893)  (99,139)
Net Balance $1,282,898  $1,281,492 

 

Pursuant to revenue recognition for contract accounting, the Company hashad recorded revenuerevenues in excess of billings long-term for amounts billable after one year. During the three and sixnine months ended DecemberMarch 31, 2017,2020, the Company accreted $59,272$13,940 and $110, 994, respectively,$41,621 which iswas recorded in interest income.income for that period. The Company used the discounted cash flow method with an interest rates ranging from 3.93% to 4.43%rate of 4.35%.

Page 15

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

 

NOTE 1011 - PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

 As of December 31, As of June 30,  As of As of 
 2017 2017  March 31, 2020 June 30, 2019 
          
Office Furniture and Equipment $3,908,883  $3,755,710  $3,132,869  $3,125,382 
Computer Equipment  25,788,684   26,693,730   19,077,749   18,905,603 
Assets Under Capital Leases  1,522,708   1,965,650   1,553,868   1,720,490 
Building  8,794,381   9,243,866   5,905,714   6,021,939 
Land  2,299,047   2,428,626   1,528,091   1,559,111 
Capital Work In Progress  12,899   - 
Autos  1,287,043   1,270,339   1,301,193   1,024,754 
Improvements  534,900   592,652   87,609   111,165 
Subtotal  44,135,646   45,950,573   32,599,992   32,468,444 
Accumulated Depreciation  (25,692,152)  (25,579,870)  (21,046,178)  (20,371,589)
Property and Equipment, Net $18,443,494  $20,370,703  $11,553,814  $12,096,855 

 

For the three and sixnine months ended DecemberMarch 31, 2017,2020, depreciation expense totaled $707,668$479,350 and $1,436,327,$1,429,463, respectively. Of these amounts, $484,883$273,315 and $967,669,$805,562, respectively, are reflected in cost of revenues. For the three and sixnine months ended DecemberMarch 31, 2016,2019, depreciation expense totaled $902,678$606,641 and $1,801,981,$1,704,606, respectively. Of these amounts, $631,193$354,199 and $1,261,399,$1,046,153, respectively, are reflected in cost of revenues.

Page 24

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

Following is a summary of fixed assets held under capitalfinance leases as of DecemberMarch 31, 20172020 and June 30, 2017:2019:

 

 As of December 31, As of June 30,  As of As of 
 2017 2017  March 31, 2020 June 30, 2019 
Computers and Other Equipment $236,518  $309,863  $328,998  $324,466 
Furniture and Fixtures  65,084   227,914   51,119   65,084 
Vehicles  1,221,106   1,427,873   1,173,751   1,330,940 
Total  1,522,708   1,965,650   1,553,868   1,720,490 
Less: Accumulated Depreciation - Net  (568,087)  (711,622)  (652,372)  (538,564)
 $954,621  $1,254,028  $901,496  $1,181,926 

Finance lease term and discount rate were as follows:

As of
March 31, 2020
Weighted average remaining lease term - Finance leases1.65 Years
Weighted average discount rate - Finance leases13.0%

 

NOTE 1112 - 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.

Page 25

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

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 
  March 31, 2020 
Assets    
Operating lease assets, net $2,690,777 
     
Liabilities    
Current    
Operating $1,146,696 
Non-current    
Operating  1,635,866 
Total Lease Liabilities $2,782,562 

The components of lease cost were as follows:

  For the Nine Months 
  Ended March 31, 2020 
    
Amortization of finance lease assets $194,632 
Interest on finance lease obligation  71,416 
Operating lease cost  931,955 
Short term lease cost  228,869 
Sub lease income  (25,227)
Total lease cost $1,401,645 

Lease term and discount rate were as follows:

As of
March 31, 2020
Weighted average remaining lease term - Operating leases2.66 Years
Weighted average discount rate - Operating leases5.6%

Page 26

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

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

  For the Nine Months 
  Ended March 31, 2020 
    
Cash flows related to lease liabilities    
Operating cash flows related to operating leases $905,076 

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

  Amount 
Within year 1 $1,267,595 
Within year 2  958,385 
Within year 3  604,275 
Within year 4  132,663 
Within year 5  32,001 
Thereafter  3,372 
Total Lease Payments  2,998,291 
Less: Imputed interest  (215,729)
Present Value of lease liabilities  2,782,562 
Less: Current portion  (1,146,696)
Non-Current portion $1,635,866 

As of June 30, 2019, future minimum lease payments, as defined under the previous lease accounting guidance of ASC Topic 840, under non-cancelable operating leases for the following five fiscal years and thereafter were as follows:

Within year 1 $744,549 
Within year 2  514,243 
Within year 3  269,375 
Within year 4  197,872 
Within year 5  36,044 
Total $1,762,083 

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 nine months ended March 31, 2020, the Company received $8,514 and $25,227 of lease income.

Page 27

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

NOTE 13 OTHER LONG TERM ASSETSINVESTMENT

 

    As of December 31,  As of June 30, 
    2017  2017 
         
Investment (1) $3,389,801  $3,057,020 
Long Term Security Deposits    153,514   154,275 
Total   $3,543,315  $3,211,295 

Drivemate

 

(1) InvestmentThe Company and Drivemate Co., Ltd. (“Drivemate”) entered into a subscription agreement (“Drivemate Agreement”) whereby the Company will purchase an equity interest of 30% in WRLD3DDrivemate. 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 paid $250,000 on May 2, 2019 and received 760 shares for a 5.27% holding in Drivemate. The remaining $250,000 will be paid in $62,500 increments beginning 15 months from the date of the Drivemate Agreement signing with the final payment due 24 months from the date of the Drivemate Agreement signing. 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.

During the three and nine months ended March 31, 2020, the Company performed $355,051 and $862,767 of services, respectively.

Under the equity method of accounting, the Company recorded its share of net loss of $5,667 and $16,915 for the three and nine months ended March 31, 2020, respectively.

WRLD3D-Related Party

 

On March 2, 2016,2017, 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, 2016.2017. NetSol PK, the subsidiary of the Company, purchased a 12.2% investment in WRLD3D, for $2,777,778 which will bewas earned over future periods by providing IT and enterprise software solutions. Per the agreement, NetSol PK is to provide a minimum of $200,000 of services in each three-month period and the entire balance is required to be provided within three years of the date of the agreement. If NetSol PK fails to provide the future services, it may be required to forfeit the unearned shares back to WRLD3D. As of December 31, the investment earned by NetSol PK is $2,549,587.

Page 16

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

In connection with the investment, the Company and NetSol PK received a warrant to purchase preferred stock of WRLD3D which included the following key terms and features:

The warrants are exercisable into shares of the “Next Round Preferred”, only if and when the Next Round Preferred is issued by WRLD3D in a “Qualified Financing”.
The warrants expire on March 2, 2020.
“Next Round Preferred” is defined as occurring if WRLD3D’s preferred stock (or securities convertible into preferred stock) are issued in a Qualified Financing that occurs after March 2, 2016.
“Qualified Financing” is defined as financing with total proceeds of at least $2 million.
The total number of common stock shares to be issued is equal to $1,250,000 divided by the per share price of the Next Round Preferred.
The exercise price of the warrants is equal to the greater of

a)70% of the per share price of the Next Round Preferred sold in a Qualified Financing, or
b)25,000,000 divided by the total number of shares of common stock outstanding immediately prior to the Qualified Financing (on a fully-diluted basis, excluding the number of common stock shares issuable upon the exercise of any given warrant).

The Company had originally accounted for the investment under the cost method. On May 31, 2017, the Company determined that it met the significant influence criteria since the newly appointed CEO of WRLD3D is the son of the CEO, Najeeb Ghauri, and also an employee of the Company; therefore, the Company changed the accounting treatment from the cost method to the equity method.

 

During the three and sixnine months ended DecemberMarch 31, 2017,2020, NetSol PK provided services valued at $315,408$61,842 and $583,708, respectively.$202,199, respectively, which is recorded as services-related party. During the three months and sixnine months ended DecemberMarch 31, 2016,2019, NetSol PK provided services valued at $300,963$156,996 and $549,621, respectively. This revenue$494,333, respectively, which is recorded as services-related party. These services are recorded as accounts receivable until approved by WRLD3D after which the shares are released from restriction. Accounts receivable at DecemberMarch 31, 20172020 and June 30, 20172019 were $39,322$1,332,575 and $49,646,$1,020,589, respectively. Revenue in excess of billingbillings at DecemberMarch 31, 20172020 and June 30, 20172019 were $107,562$8,245 and $80,705,$110,827, respectively. During the three and six months ended December 31, 2017, NetSol PK services valued at $285,378 and $553,678, respectively, were released from restriction. During the three and six months ended December 31, 2016, NetSol PK services valued at $300,963 and $549,621, respectively, were released from restriction.

Under the equity method of accounting, the Company recorded its share of net loss of $203,336$72,835 and $270,898$415,607 for the three and sixnine months ended DecemberMarch 31, 2017,2020, respectively, and the Company recorded its share of net loss of $245,389 and $843,373 for the three and nine months ended March 31, 2019, respectively.

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

  Drivemate  WRLD3D  Total 
Initial investment $250,000  $3,888,889  $4,138,889 
Cumulative net loss on investment  (19,015)  (1,351,413)  (1,370,428)
Cumulative Other comprehensive income (loss)  -   (438,755)  (438,755)
Net Investment $230,985  $2,098,721  $2,329,706 

Page 28

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

NOTE 1214 - INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

 

 As of December 31, As of June 30,  As of As of 
 2017 2017  March 31, 2020 June 30, 2019 
          
Product Licenses - Cost $47,244,997  $47,244,997  $47,244,997  $47,244,997 
Effect of Translation Adjustment  (4,850,984)  (3,134,488)  (15,833,112)  (15,343,727)
Accumulated Amortization  (27,583,408)  (27,067,358)  (25,531,126)  (24,568,320)
Net Balance $14,810,605  $17,043,151  $5,880,759  $7,332,950 

 

(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 $14,810,605$5,880,759 will be amortized over the next 5.53.5 years. Amortization expense for the three and sixnine months ended DecemberMarch 31, 20172020 was $683,220$464,322 and $1,373,547,$1,386,092, respectively. Amortization expense for the three and sixnine months ended DecemberMarch 31, 20162019 was $687,571$520,455 and $1,388,237,$1,646,153, respectively.

Page 17

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

 

(B) Future Amortization

 

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

 

Year ended:   
December 31, 2018 $2,630,334 
December 31, 2019  2,630,334 
December 31, 2020  2,630,334 
December 31, 2021  2,630,334 
December 31, 2022  2,630,334 
Thereafter  1,658,935 
  $14,810,605 
Year ended:   
March 31, 2021 $1,748,286 
March 31, 2022  1,748,286 
March 31, 2023  1,748,286 
March 31, 2024  635,901 
  $5,880,759 

 

NOTE 1315 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following:

 

 As of December 31, As of June 30,  As of As of 
 2017 2017  March 31, 2020 June 30, 2019 
          
Accounts Payable $1,639,112  $1,466,265  $1,711,503  $1,156,498 
Accrued Liabilities  5,086,258   4,498,958   4,478,601   5,055,358 
Accrued Payroll & Taxes  488,491   520,719   553,223   793,503 
Taxes Payable  167,994   174,485   196,376   326,386 
Other Payable  178,443   219,767   168,230   144,815 
Total $7,560,298  $6,880,194  $7,107,933  $7,476,560 

 

Page 1829

 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNotes to Condensed Consolidated Financial Statements

DECEMBERMarch 31, 20172020

(UNAUDITED)(Unaudited)

 

NOTE 1416 – DEBTS

 

Notes payable and capitalfinance leases consisted of the following:

 

   As of December 31, 2017    As of March 31, 2020 
     Current Long-Term      Current Long-Term 
Name   Total Maturities Maturities    Total Maturities Maturities 
                  
D&O Insurance (1) $105,023  $105,023  $-   (1) $164,731  $164,731  $- 
Bank Overdraft Facility (2)  -   -   -   (2)  -   -   - 
Loan Payable Bank - Export Refinance (3)  4,521,613   4,521,613   -   (3)  3,005,350   3,005,350   - 
Loan Payable Bank - Running Finance (4)  678,217   678,217   -   (4)  -   -   - 
Loan Payable Bank - Export Refinance II (5)  3,165,130   3,165,130   -   (5)  2,284,065   2,284,065   - 
Loan Payable Bank - Running Finance II (6)  1,356,484   1,356,484   -   (6)  -   -   - 
Loan Payable Bank - Export Refinance III  (7)  3,005,350   3,005,350   - 
Related Party Loan  (8)  69,425   16,174   53,251 
    9,826,467   9,826,467   -       8,528,921   8,475,670   53,251 
Subsidiary Capital Leases (7)  557,516   306,633   250,883 
Subsidiary Finance Leases  (9)  571,639   319,188   252,451 
   $10,383,983  $10,133,100  $250,883      $9,100,560  $8,794,858  $305,702 

 

   As of June 30, 2017    As of June 30, 2019 
     Current Long-Term      Current Long-Term 
Name   Total Maturities Maturities    Total Maturities Maturities 
                  
D&O Insurance (1) $87,485  $87,485  $-   (1) $67,671  $67,671  $- 
Bank Overdraft Facility (2)  221,379   221,379   -   (2)  -   -   - 
Loan Payable Bank - Export Refinance (3)  4,776,461   4,776,461   -   (3)  3,066,355   3,066,355   - 
Loan Payable Bank - Running Finance  (4)  325,034   325,034   - 
Loan Payable Bank - Export Refinance II (5)  1,910,585   1,910,585   -   (5)  2,330,431   2,330,431   - 
Loan Payable Bank - Running Finance II (6)  2,865,877   2,865,877   -   (6)  735,925   735,925   - 
Loan Payable Bank - Export Refinance III  (7)  -   -   - 
Related Party Loan  (8)  82,969   15,838   67,131 
    9,861,787   9,861,787   -       6,608,385   6,541,254   67,131 
Subsidiary Capital Leases (7)  727,770   361,008   366,762 
Subsidiary Finance Leases  (9)  861,784   364,343   497,441 
   $10,589,557  $10,222,795  $366,762      $7,470,169  $6,905,597  $564,572 

 

(1) The Company finances Directors’ and Officers’ (“D&O”) liability insurance and Errors and Omissions (“E&O”) liability insurance, and some account payables, for which the D&O and E&O balances are renewed on an annual basis and, as such, are recorded in current maturities. The interest rate on these financings were ranging from 4.8%5.0% to 7.69%7.0% as of DecemberMarch 31, 20172020 and June 30, 2017.2019.

 

(2) The Company’s subsidiary, NTE, has an overdraft facility with HSBC Bank plc whereby the bank would cover any overdrafts up to £300,000, or approximately $405,405.$370,370. The annual interest rate was 4.75%5.12% as of DecemberMarch 31, 2017.2020. Total outstanding balance as of DecemberMarch 31, 20172020 was £Nil. Interest expense for three and six months ended December 31, 2017, was $5,991 and $8,045, respectively. Interest expense for three and six months ended December 31, 2016, was $nil.

 

This overdraft facility requires that the aggregate amount of invoiced trade debtors (net of provisions for bad and doubtful debts and excluding intra-group debtors) of NTE, not exceeding 90 days old, will not be less than an amount equal to 200% of the facility. As of DecemberMarch 31, 2017,2020, NTE was in compliance with this covenant.

Page 30

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

(3) The Company’s subsidiary, NetSol PK, has an export refinance facility with Askari Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every sixnine months. Total facility amount is Rs. 500,000,000 or $4,521,613$3,005,350 at DecemberMarch 31, 20172020 and Rs. 500,000,000 or $3,066,355 at June 30, 2017.2019. The interest rate for the loansloan was 3% at DecemberMarch 31, 20172020 and June 30, 2017. Interest expense for the three and six months ended December 31, 2017 was $35,533 and $71,431, respectively. Interest expense for the three and six months ended December 31, 2016 was $28,527 and $57,592, respectively.2019.

 

(4) The Company’s subsidiary, NetSol PK, has a running finance facility with Askari Bank Limited, secured by NetSol PK’s assets. Total facility amount is Rs. 75,000,000 or $678,242,$450,802, at DecemberMarch 31, 2017.2020. NetSol PK used Rs. 74,997,233Nil, or $678,217,$Nil at DecemberMarch 31, 2017.2020. The interest rate for the loansloan was 8.16%13.2% and 13.0% at DecemberMarch 31, 2017.

Page 19

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)2020 and June 30, 2019, 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 DecemberMarch 31, 2017,2020, NetSol PK was in compliance with this covenant.

 

(5) The Company’s subsidiary, NetSol PK, has an export refinance facility with Samba Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every sixnine months. Total facility amount is Rs. 350,000,000380,000,000 or $3,165,130$2,284,065 and Rs. 200,000,000380,000,000 or $1,910,585,$2,330,431 at DecemberMarch 31, 20172020 and June 30, 2017,2019, respectively. The interest rate for the loansloan was 3% at DecemberMarch 31, 20172020 and June 30, 2017. Interest expense for the three and six months ended December 31, 2017 was $17,656 and $39,778, respectively. Interest expense for three and six months ended December 31, 2016, was $nil.2019.

 

(6) The Company’s subsidiary, NetSol PK, has a running finance facility with Samba Bank Limited, secured by NetSol PK’s assets. Total facility amount is Rs. 150,000,000120,000,000 or $1,356,484$721,284 and Rs. 300,000,000120,000,000 or $2,865,877,$735,925, at DecemberMarch 31, 20172020 and June 30, 2017,2019, respectively. The interest rate for the loansloan was 8.13%12.9% and 14.3% at DecemberMarch 31, 20172020 and June 30, 2017,2019, respectively. Interest expense for the three and six months ended DecemberTotal outstanding balance at March 31, 20172020 was $35,626 and $79,721, respectively. Interest expense for three and six months ended December 31, 2016, was $nil.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 DecemberMarch 31, 2017,2020, NetSol PK was in compliance with these covenants.

 

(6)(7) 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. Total facility amount is Rs. 900,000,000 or $5,409,629 and NetSol PK used Rs. 500,000,000 or $3,005,350 at March 31, 2020. The interest rate for the loan was 3% at March 31, 2020.

(8) In March 2019, the Company’s subsidiary, VLS, entered into a loan agreement. The loan amount was £69,549, or $85,863, for a period of 5 years with monthly payment of £1,349, or $1,666. As of March 31, 2020, the subsidiary has used this facility up to $69,425, of which $53,251 was shown as long-term and $16,174 as current. The interest rate was 6.14% at March 31, 2020.

(9) The Company leases various fixed assets under capitalfinance lease arrangements expiring in various years through 2022.2024. The assets and liabilities under capitalfinance 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 capitalfinance leases is included in depreciation expense for the three months ended DecemberMarch 31, 20172020 and 2016.2019.

Page 31

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

Following is the aggregate minimum future lease payments under capitalfinance leases as of DecemberMarch 31, 2017:2020:

 

 Amount  Amount 
Minimum Lease Payments        
Due FYE 12/31/18 $336,546 
Due FYE 12/31/19  220,855 
Due FYE 12/31/20  36,412 
Due FYE 12/31/21  5,182 
Due FYE 12/31/22  - 
Within year 1 $365,384 
Within year 2  228,102 
Within year 3  19,852 
Within year 4  18,198 
Total Minimum Lease Payments  598,995   631,536 
Interest Expense relating to future periods  (41,479)  (59,897)
Present Value of minimum lease payments  557,516   571,639 
Less: Current portion  (306,633)  (319,188)
Non-Current portion $250,883  $252,451 

 

NOTE 1517 - STOCKHOLDERS’ EQUITY

 

During the sixnine months ended DecemberMarch 31, 2017,2020, the Company issued 26,13642,818 shares of common stock for services rendered by officers of the Company. These shares were valued at the fair market value of $163,350.$239,799.

 

During the sixnine months ended DecemberMarch 31, 2017,2020, the Company issued 9,69921,615 shares of common stock for services rendered by the independent members of the Board of Directors as part of their board compensation. These shares were valued at the fair market value of $55,080.$106,601.

 

During the sixnine months ended DecemberMarch 31, 2017,2020, the Company issued 98,40862,522 shares of its common stock to employees pursuant to the terms of their employment agreements valued at $605,107.

Page 20

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

During the six months ended December 31, 2017, the Company collected subscription receivable of $76,511 related to the exercise of stock options in previous years.

During the six months ended December 31, 2017, the Company received $138,800 pursuant to a stock option agreement for the exercise of 35,773 shares of common stock at a price of $3.88 per share.

During the six months ended December 31, 2017, the Company paid $601,020 to purchase 139,275 of shares of its common stock from the open market at an average price of $4.32 per share.$319,066.

 

NOTE 1618 - INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN

 

Common stock purchase options and warrants consisted of the following:

 

OPTIONS:

OPTIONS:         
 # of shares Weighted Ave Exercise Price Weighted Average Remaining Contractual Life (in years) Aggregated Intrinsic Value          
          # of shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years) Aggregated Intrinsic Value 
Outstanding and exercisable, June 30, 2016  610,133  $4.90   0.99  $799,030 
Outstanding and exercisable, June 30, 2019  40,386  $6.50   0.61  $404 
Granted  79,838  $4.53           -   -         
Exercised  (84,838) $4.49           -   -         
Expired / Cancelled  (130,000) $7.50           (40,386) $6.50         
Outstanding and exercisable, June 30, 2017  475,133  $4.20   1.05  $8,413 
Granted  -   -         
Exercised  (35,773) $3.88         
Expired / Cancelled  (1,000) $16.00         
Outstanding and exercisable, December 31, 2017  438,360  $4.20   0.57  $319,465 
Outstanding and exercisable, March 31, 2020  -   -   -  $- 

 

The following table summarizes information about stockDuring the nine months ended March 31, 2020, 40,386 options and warrants outstanding and exercisable, at December 31, 2017.became expired.

Exercise Price  Number Outstanding and Exercisable  Weighted Average Remaining Contractual Life  Weighted Ave Exercise Price 
OPTIONS:          
           
$3.88   384,898   0.49  $3.88 
$6.50   53,462   1.10  $6.50 
Totals   438,360   0.57  $4.20 

 

Page 2132

 

 

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNotes to Condensed Consolidated Financial Statements

DECEMBERMarch 31, 20172020

(UNAUDITED)(Unaudited)

 

The following table summarizes stock grants awarded as compensation:

 

 # of shares Weighted Average Grant Date Fair Value ($)  # of shares Weighted Average Grant Date Fair Value ($) 
     
Unvested, June 30, 2016  630,228  $6.07 
Unvested, June 30, 2019  81,515  $5.88 
Granted  222,146  $5.92   148,221  $5.27 
Vested  (126,955) $5.24 
Forfeited / Cancelled  (5,000) $5.55   (991) $6.05 
Vested  (427,175) $5.90 
Unvested, June 30, 2017  420,199  $6.07 
Vested  (134,243) $6.13 
Unvested, December 31, 2017  285,956  $6.18 
Unvested, March 31, 2020  101,790  $5.79 

 

For the three and sixnine months ended DecemberMarch 31, 2017,2020, the Company recorded compensation expense of $405,721$236,702 and $833,530,$565,287, respectively. For the three and sixnine months ended DecemberMarch 31, 2016,2019, the Company recorded compensation expense of $682,640$110,939 and $1,547,579,$980,682, respectively. The compensation expense related to the unvested stock grants as of DecemberMarch 31, 20172019 was $1,731,908$539,603 which will be recognized during the fiscal years 20182020 through 2022.

 

NOTE 17 – TAXES

U.S. Tax Reform

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly revises the future ongoing U.S. corporate income tax by, among other things, lowering U. S. corporate income tax rates and implementing a territorial tax system. As the Company has a June 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory federal rate of approximately 28% for our fiscal year ending June 30, 2018, and 21% for subsequent fiscal years.

There are also certain transitional impacts of the Tax Act. As part of the transition to the new territorial tax system, the Tax Act imposes a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries. As of December 31, 2017, the provisional undistributed earnings of foreign subsidiaries were $22.8 million which the Company anticipates being able to offset fully with net operating loss carry forwards. In addition, the modified territorial tax system includes a new anti-deferral provision, referred to as global intangible low taxed income (“GILTI”), which subjects certain foreign income to current U.S. tax.

The changes included in the Tax Act are broad and complex. The final transition impacts of the Tax Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the company has utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates and foreign exchange rates of foreign subsidiaries.

In December 2017, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Reform Act. Under SAB 118, companies are able to record a reasonable estimate of the impacts of the Tax Reform Act if one is able to be determined and report it as a provisional amount during the measurement period. The measurement period is not to extend beyond one year from the enactment date. Impacts of the Tax Reform Act that a company is not able to make a reasonable estimate for should not be recorded until a reasonable estimate can be made during the measurement period.

We currently anticipate finalizing and recording any resulting adjustments by the end of our current fiscal year ending June 30, 2018.

Page 22

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

NOTE 1819 – CONTINGENCIES

 

On April 7, 2017, Conister Bank Limited filed a complaintFrom time to time, the Company is subject to legal proceedings, claims, and litigation arising in the High Courtordinary course of Justice Chancery Division, as claim no. HC-2017-001045business including tax assessments. The Company defends itself vigorously against our subsidiary, Virtual Lease Services Limited (“VLS”).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 complaint alleges that VLS wasCompany provides disclosure in willful default of their agreements with Conister Bank Limited by failing to fulfill its obligations under the agreements with Conister. The complaint alleges damages in excess of £200,000 (approximately $270,270). VLS has respondednotes to the complaintconsolidated 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 its expenses are currently covered bywhether such liability is reasonably estimable. The Company bases accruals on the best information available insurance. VLS denies all claims and intends to vigorously defendat the action.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 1920 – 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.

 

Page 33

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

The following table presents a summary of identifiable assets as of DecemberMarch 31, 20172020 and June 30, 2017:2019:

 

 As of December 31, As of June 30,  As of As of 
 2017 2017  March 31, 2020 June 30, 2019 
Identifiable assets:                
Corporate headquarters $3,308,334  $2,922,514  $4,263,871  $2,947,727 
North America  5,513,464   6,717,366   5,441,314   5,730,928 
Europe  6,590,233   6,056,514   9,689,483   8,399,033 
Asia - Pacific  89,125,306   83,980,936   67,011,995   70,419,331 
Consolidated $104,537,337  $99,677,330  $86,406,663  $87,497,019 

 

The following table presents a summary of investment under equity method as of DecemberMarch 31, 20172020 and June 30, 2017:2019:

 

  As of December 31,  As of June 30, 
  2017  2017 
Investment in WRLD3D:        
Corporate headquarters $1,033,486  $1,111,111 
Asia - Pacific  2,356,315   1,945,909 
Consolidated $3,389,801  $3,057,020 

Page 23

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

  As of  As of 
  March 31, 2020  June 30, 2019 
Investment in associates under equity method:        
Corporate headquarters $509,281  $686,504 
Asia - Pacific  1,820,425   1,967,265 
Consolidated $2,329,706  $2,653,769 

 

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

 

  For the Three Months  For the Nine Months 
  Ended March 31,  Ended March 31, 
  2020  2019  2020  2019 
Revenues from unaffiliated customers:                
North America $1,210,187  $1,022,655  $3,464,705  $2,843,190 
Europe  2,791,238   2,405,234   8,225,906   6,425,393 
Asia - Pacific  9,467,570   13,542,170   30,900,462   40,696,025 
   13,468,995   16,970,059   42,591,073   49,964,608 
Revenue from affiliated customers                
Asia - Pacific  61,842   156,996   202,199   561,619 
   61,842   156,996   202,199   561,619 
Consolidated $13,530,837  $17,127,055  $42,793,272  $50,526,227 
                 
Intercompany revenue                
Europe $143,814  $120,153  $455,040  $416,483 
Asia - Pacific  2,048,652   1,389,773   5,618,855   6,887,631 
Eliminated $2,192,466  $1,509,926  $6,073,895  $7,304,114 
                 
Net income (loss) after taxes and before non-controlling interest:                
Corporate headquarters $240,294  $692,854  $(1,003,798) $(1,667,600)
North America  134,390   (92,029)  230,738   (426,209)
Europe  122,974   330,039   927,717   735,972 
Asia - Pacific  971,435   838,531   (399,887)  8,739,351 
Consolidated $1,469,093  $1,769,395  $(245,230) $7,381,514 

  For the Three Months  For the Six Months 
  Ended December 31,  Ended December 31, 
  2017  2016  2017  2016 
     Restated     Restated 
Revenues from unaffiliated customers:                
North America $1,287,638  $1,513,997  $2,135,710  $3,355,428 
Europe  1,661,213   1,298,037   3,109,037   1,888,578 
Asia - Pacific  10,258,128   11,530,506   18,464,352   23,267,335 
   13,206,979   14,342,540   23,709,099   28,511,341 
Revenue from affiliated customers                
Europe  442,699   115,102   1,043,891   1,467,295 
Asia - Pacific  796,757   1,401,144   2,512,221   2,956,619 
   1,239,456   1,516,246   3,556,112   4,423,914 
Consolidated $14,446,435  $15,858,786  $27,265,211  $32,935,255 
                 
Intercompany revenue                
Europe $139,228  $95,053  $241,703  $231,180 
Asia - Pacific  768,431   1,462,603   1,145,368   1,922,554 
Eliminated $907,659  $1,557,656  $1,387,071  $2,153,734 
                 
Net income (loss) after taxes and before non-controlling interest:                
Corporate headquarters $(1,258,717) $(1,190,559) $(2,296,641) $(2,179,432)
North America  65,194   (71,134)  (230,452)  (266,817)
Europe  180,655   (698,364)  280,045   (1,293,771)
Asia - Pacific  2,674,870   583,327   3,727,785   2,746,393 
Consolidated $1,662,002  $(1,376,730) $1,480,737  $(993,627)
Page 34

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

The following table presents a summary of capital expenditures for the sixnine months ended DecemberMarch 31:

 

  For the Six Months 
  Ended December 31, 
  2017  2016 
Capital expenditures:        
North America $-  $41,275 
Europe  123,335   273,794 
Asia - Pacific  419,788   759,247 
Consolidated $543,123  $1,074,316 

Page 24

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

  For the Nine Months 
  Ended March 31, 
  2020  2019 
Capital expenditures:        
North America $2,404  $1,383 
Europe  487,693   461,376 
Asia - Pacific  521,188   2,127,543 
Consolidated $1,011,285  $2,590,302 

 

NOTE 2021 – 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, 2017
  Non-Controlling Interest % 

Non-Controlling Interest at

March 31, 2020

 
          
NetSol PK  33.83% $12,386,620   33.88% $6,203,015 
NetSol-Innovation  49.90%  1,749,551   49.90%  158,549 
VLS, VLSH & VLSIL Combined  49.00%  407,132 
NetSol Thai  0.006%  (79)  0.006%  (11)
Total     $14,543,224      $6,361,553 

 

SUBSIDIARY Non-Controlling Interest % Non-Controlling Interest at
June 30, 2017
  Non-Controlling Interest % 

Non-Controlling Interest at

June 30, 2019

 
          
NetSol PK  33.80% $12,887,938   33.80% $6,993,491 
NetSol-Innovation  49.90%  1,599,734   49.90%  1,421,528 
VLS, VLHS & VLSIL Combined  49.00%  311,502 
NetSol Thai  0.006%  (92)  0.006%  (32)
Total     $14,799,082      $8,414,987 

 

NetSol PK

 

During the sixnine months ended DecemberMarch 31, 2017,2020, employees of NetSol PK exercised 50,000 of114,000 options of common stock pursuant to employees exercising stock options and NetSol PK received cash of $7,755 resulting in an increase in$11,261. Due to the exercise of options, the non-controlling interest increased from 33.80% to 33.83%33.88%.

During the sixnine months ended DecemberMarch 31, 2017,2020, NetSol PK paid a cash dividend of $1,234,991.$1,610,909.

 

NOTE 21 – RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTSNetSol Innovation

 

During the preparation of the Company’s Form 10-Q for the nine months ended March 31, 2017, misstatements were identified in the previous financial statements relating to the recording2020, NetSol Innovation paid a cash dividend of revenue in the proper period. The restated financial statements for the periods affected were disclosed in Note 19 of the Notes to Condensed Consolidated Financial Statement contained in the Company’s Form 10-Q for the nine months ended March 31, 2017.$2,778,453.

 

On December 21, 2015, the Company signed a 10-year contract for a 12-country installation of its NFS Ascent product which included a perpetual license, continued maintenance on the existing product and then maintenance on NFS Ascent upon installation. The Company did not appropriately apply the percentage-of-completion method for this arrangement in accordance with ASC 605-35. As a result, for quarter ended September 30, 2016, license revenue was understated by $1,953,935 and for the quarter ended December 31, 2016, license revenue was overstated by $1,580,529.

NOTE 22 – SUBSEQUENT EVENTS

COVID-19

 

The Company charges maintenance revenuerecent outbreak of the coronavirus, also known as "COVID-19", has spread across the globe and is impacting worldwide economic activity. Conditions surrounding the coronavirus continue to rapidly evolve and government authorities have implemented emergency measures to mitigate the spread of the virus. The outbreak and the related mitigation measures have had and will continue to have a material adverse impact on global economic conditions as well as on the license value plus any additional customization thatCompany's business activities. The extent to which COVID-19 may impact the customer may require. For one customer,Company's business activities will depend on future developments, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions, business disruptions, and the effectiveness of actions taken in the United States and other countries to contain and treat the disease. These events are highly uncertain and, as such, the Company did not increasecannot determine their financial impact at this time. No adjustments have been made to the maintenance fee for the additional customization that was performed during the year. This resultedamounts reported in an understatement of maintenance revenue of $120,976 for the quarter ended September 30, 2016 and an overstatement of maintenance revenue of $198,797 for the quarter ended December 31, 2016.

The following tables present the restatedthese condensed consolidated financial statements for the three and six months ended December 31, 2016.as a result of this matter.

Page 25

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

  Balance Sheet 
  As of December 31, 2016 
   As Originally   Amount of     
  Presented   Restatement   As Restated 
ASSETS            
Current assets:            
Cash and cash equivalents $9,505,383      $9,505,383 
Accounts receivable, net of allowance of $495,760 and $492,498  5,840,490       5,840,490 
Accounts receivable, net - related party  4,303,380       4,303,380 
Revenues in excess of billings  17,646,488   373,406   18,019,894 
Revenues in excess of billings - related party  469,030       469,030 
Other current assets  2,904,650       2,904,650 
Total current assets  40,669,421   373,406   41,042,827 
Restricted cash  90,000       90,000 
Property and equipment, net  21,873,277       21,873,277 
Other assets  2,054,938       2,054,938 
Intangible assets, net  18,423,439       18,423,439 
Goodwill  9,516,568       9,516,568 
Total assets $92,627,643  $373,406  $93,001,049 
             
LIABILITIES AND STOCKHOLDERS’ EQUITY            
Current liabilities:            
Accounts payable and accrued expenses $7,373,097      $7,373,097 
Current portion of loans and obligations under capitalized leases  4,368,930       4,368,930 
Unearned revenues  2,806,804   77,821   2,884,625 
Common stock to be issued  88,324       88,324 
Total current liabilities  14,637,155   77,821   14,714,976 
Long term loans and obligations under capitalized leases; less current maturities  501,554       501,554 
Total liabilities  15,138,709   77,821   15,216,530 
Commitments and contingencies            
Stockholders’ equity:            
Preferred stock, $.01 par value; 500,000 shares authorized;  -   -   - 
Common stock, $.01 par value; 14,500,000 shares authorized;            
10,993,054 shares issued and 10,958,275 outstanding as of December 31, 2016 and 10,713,372 shares issued and 10,686,093 outstanding as of June 30, 2016  109,931       109,931 
Additional paid-in-capital  123,019,215       123,019,215 
Treasury stock (34,779 shares and 27,279 shares)  (454,310)      (454,310)
Accumulated deficit  (40,074,755)  196,890   (39,877,865)
Stock subscription receivable  (450,220)      (450,220)
Other comprehensive loss  (18,628,395)      (18,628,395)
Total NetSol stockholders’ equity  63,521,466   196,890   63,718,356 
Non-controlling interest  13,967,468   98,695   14,066,163 
Total stockholders’ equity  77,488,934   295,585   77,784,519 
Total liabilities and stockholders’ equity $92,627,643  $373,406  $93,001,049 

 

Page 26

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

  For the Three Months  For the Six Months 
  Ended December 31, 2016  Ended December 31, 2016 
  As Originally  Amount of     As Originally  Amount of    
  Presented  Restatement  As Restated  Presented  Restatement  As Restated 
Net Revenues:                        
License fees $5,350,086  $(1,580,529) $3,769,557  $8,849,946  $373,406  $9,223,352 
Maintenance fees  3,787,696   (198,797)  3,588,899   7,190,517   (77,821)  7,112,696 
Services  6,984,084       6,984,084   12,790,801       12,790,801 
License fees - related party  -       -   246,957       246,957 
Maintenance fees - related party  51,345       51,345   181,976       181,976 
Services - related party  1,464,901       1,464,901   3,379,473       3,379,473 
Total net revenues  17,638,112   (1,779,326)  15,858,786   32,639,670   295,585   32,935,255 
                         
Cost of revenues:                        
Salaries and consultants  5,979,804       5,979,804   11,873,153       11,873,153 
Travel  836,240       836,240   1,548,135       1,548,135 
Depreciation and amortization  1,318,764       1,318,764   2,649,636       2,649,636 
Other  1,065,727       1,065,727   2,038,065       2,038,065 
Total cost of revenues  9,200,535   -   9,200,535   18,108,989   -   18,108,989 
                         
Gross profit  8,437,577   (1,779,326)  6,658,251   14,530,681   295,585   14,826,266 
                         
Operating expenses:                     ��  
Selling and marketing  2,713,478       2,713,478   5,057,516       5,057,516 
Depreciation and amortization  271,485       271,485   540,582       540,582 
General and administrative  3,933,413       3,933,413   8,552,609       8,552,609 
Research and development cost  91,607       91,607   184,539       184,539 
Total operating expenses  7,009,983   -   7,009,983   14,335,246   -   14,335,246 
                         
Income (loss) from operations  1,427,594   (1,779,326)  (351,732)  195,435   295,585   491,020 
                         
Other income and (expenses)                        
Loss on sale of assets  (32,339)      (32,339)  (34,742)      (34,742)
Interest expense  (62,127)      (62,127)  (116,602)      (116,602)
Interest income  23,416       23,416   53,856       53,856 
Loss on foreign currency exchange transactions  (621,887)      (621,887)  (1,036,783)      (1,036,783)
Other income  6,823       6,823   28,383       28,383 
Total other income (expenses)  (686,114)  -   (686,114)  (1,105,888)  -   (1,105,888)
                         
Net income (loss) before income taxes  741,480   (1,779,326)  (1,037,846)  (910,453)  295,585   (614,868)
Income tax provision  (338,884)      (338,884)  (378,759)      (378,759)
Net income (loss) from continuing operations  402,596   (1,779,326)  (1,376,730)  (1,289,212)  295,585   (993,627)
Non-controlling interest  (1,388,272)  596,608   (791,664)  (1,462,183)  (98,695)  (1,560,878)
Net income (loss) attributable to NetSol $(985,676) $(1,182,718) $(2,168,394) $(2,751,395) $196,890  $(2,554,505)
                         
Net income (loss) per share:                        
                         
Net income (loss) per common share                        
Basic $(0.09) $(0.11) $(0.20) $(0.26) $0.03  $(0.24)
Diluted $(0.09) $(0.11) $(0.20) $(0.26) $0.03  $(0.24)
                         
Weighted average number of shares outstanding                        
Basic  10,877,446   10,877,446   10,877,446   10,783,685   10,783,685   10,783,685 
Diluted  10,877,446   10,877,446   10,877,446   10,783,685   10,783,685   10,783,685 

Page 2735

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

  For the Three Months 
  Ended December 31, 2016 
  As Originally  Amount of    
  Presented  Restatement  As Restated 
Net income (loss) $(985,676) $(1,182,718) $(2,168,394)
Other comprehensive income (loss):            
Translation adjustment  (944,837)  -   (944,837)
Comprehensive income (loss)  (1,930,513)  (1,182,718)  (3,113,231)
Comprehensive income (loss) attributable to non-controlling interest  (276,575)  -   (276,575)
Comprehensive income (loss) attributable to NetSol $(1,653,938) $(1,182,718) $(2,836,656)

  For the Six Months 
  Ended December 31, 2016 
  As Originally  Amount of    
  Presented  Restatement  As Restated 
Net income (loss) $(2,751,395) $262,469  $(2,488,926)
Other comprehensive income (loss):            
Translation adjustment  149,237   -   149,237 
Comprehensive income (loss)  (2,602,158)  262,469   (2,339,689)
Comprehensive income (loss) attributable to non-controlling interest  47,138   -   47,138 
Comprehensive income (loss) attributable to NetSol $(2,649,296) $262,469  $(2,386,827)

Page 28

NETSOL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

(UNAUDITED)

  For the Six Months 
  Ended December 31, 2016 
  As Originally  Amount of    
  Presented  Restatement  As Restated 
Cash flows from operating activities:            
Net income (loss) $(1,289,212) $295,585  $(993,627)
Adjustments to reconcile net income (loss) to net cash used in operating activities:          
Depreciation and amortization  3,190,218       3,190,218 
Provision for bad debts  1,026       1,026 
Loss on sale of assets  34,742       34,742 
Stock issued for services  1,525,775       1,525,775 
Fair market value of warrants and stock options granted  21,804       21,804 
Changes in operating assets and liabilities:            
Accounts receivable  3,678,110       3,678,110 
Accounts receivable - related party  829,285       829,285 
Revenues in excess of billing  (7,219,089)  (373,406)  (7,592,495)
Revenues in excess of billing - related party  285,791       285,791 
Other current assets  585,147       585,147 
Accounts payable and accrued expenses  334,241       334,241 
Unearned revenue  (1,908,440)  77,821   (1,830,619)
Net cash used in operating activities  69,398   -   69,398 
             
Cash flows from investing activities:            
Purchases of property and equipment  (1,074,316)      (1,074,316)
Sales of property and equipment  181,087       181,087 
Purchase of treasury stock  (38,885)      (38,885)
Investment  (705,555)      (705,555)
Net cash used in investing activities  (1,637,669)  -   (1,637,669)
             
Cash flows from financing activities:            
Proceeds from the exercise of stock options and warrants  429,452       429,452 
Proceeds from exercise of subsidiary options  18,089       18,089 
Dividend paid by subsidiary to Non controlling interest  (968,657)      (968,657)
Payments on capital lease obligations and loans - net  (69,998)      (69,998)
Net cash provided by financing activities  (591,114)  -   (591,114)
Effect of exchange rate changes  107,241       107,241 
Net decrease in cash and cash equivalents  (2,052,144)  -   (2,052,144)
Cash and cash equivalents, beginning of the period  11,557,527       11,557,527 
Cash and cash equivalents, end of period $9,505,383  $-  $9,505,383 

Page 29

 

 

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 sixnine months ended DecemberMarch 31, 2017.2020. 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, 2017,2019, and the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

Our website is located atwww.netsoltech.com, and our investor relations website is located athttp://ir.netsoltech.com. The following filings are available through our investor relations website after we file with the SEC: Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and our Proxy Statements for our annual meetings of stockholders. These filings are also available for download free of charge on our investor relations website. We also provide a link to the section of the SEC’s website atwww.sec.gov that has all of our public filings, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, our Proxy Statements and other ownership related filings. Further, a copy of this 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 athttp:// 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 AscentTM® for leading businesses in the global lease and finance industry.

 

NetSol’s clients include Dow-Jones 30 Industrials and Fortune 500 manufacturers and financial institutions, global vehicle manufacturers, and enterprise technology providers, all of which are serviced by NetSol delivery locations around the globe.

Page 36

 

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 AmericaLos Angeles Area
 EuropeLondon Metropolitan area
 Asia PacificLahore, Karachi, Bangkok, Beijing, Shanghai, Jakarta and Sydney

 

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

 

Page 30

NFS Ascent®

 

NFS Ascent™

NFS Ascent™ isAscent®, the Company’s next-generationnext generation platform, offeringoffers a technologically advanced solution for the auto and equipment finance and leasing industry. NFS Ascent’s™Ascent’s® architecture and user interfaces were designed based on the Company’s collective experience with global Fortune 500 companies over the past 30 years.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™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 multibillion dollarmulti-billion-dollar lease portfolios underin compliance with various generally accepted accounting principles (GAAP), as well as international financial reporting standards (IFRS).regulatory standards. NFS Ascent™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™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

 

NetSol launched NFS digital in 2014. ItDigital enables a sales force for thea finance and leasing company acrossto access different channels such aslike point of sale, field investigation and auditing and allowsas well as allowing end customers to access their contract details through a self-service mobile application. NFS digital includes mAccount, mPOS, mDealer, mAuditor, and Mobile Field Investigator (mFI).

 

LeasePak

 

In North America, NTA has and continues to develop the LeasePak CMS product.product which is now tailored to be an offering on the Microsoft Azure™ cloud. LeasePak streamlines the lease and loan management lifecycle, enabling superior lease and loan portfolio management, flexible financial products (lease or loan terms) and sophisticated financial analysis and management to reducingreduce 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 accrualaccounting methods for virtually all sizes and varying complexity of operations. It is partthe centerpiece of the vehicle leasing infrastructure at leading Fortune 500 banks and manufacturers,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 asset disposition. It is also integrated with important partners in the asset-finance ecosystem, such as Vertex Series O.remarketing.

 

LeasePak-SaaS

 

NTA also offers the LeasePak Software-as-a-Service (“SaaS”)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.

Page 37

LeaseSoft

 

In addition to offering NFS Ascent™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 major successes achieved inhighlights for the six monthsquarter ended DecemberMarch 31, 2017:2020:

 

 We amended the 12 countyNFSAscent™ contract securing €7.7generated close to $2.0 million Euros (approximately $9.3 million) in future revenues in addition to what was previously projected from the customer. Thesuccessful implementation of change requests from various customers across multiple regions.
One of the largest independently owned finance companies in the UK had a successful go live with our LeaseSoft application.
We signed a contract with one of the leading banks in the UK to implement its NFS Ascent® Retail Platform. This has now marked the first retail customer of NFS Ascent® in Europe.
Our innovation lab project “OTOZ” entered into a contract with the captive auto finance company of a leading German auto manufacturer in China to launch its pilot program in China.
We upsold system enhancements during the implementation phase worth approximately $4.0 million of additional revenue will be recognized overto the contract term ascaptive auto finance company of a leading German Auto manufacturer in China.
We delivered our NFS Ascent® Retail system to the support services are performed.first NFS Ascent® customer in North America.
 PursuantWe delivered our NFS Ascent® Retail platform to the 12 countryNFSAscent™ contract, we successfully implemented the Loan Origination System and the Wholesale Financial Systemcaptive auto finance company of a notable Japanese equipment manufacturer in Thailand and Korea, respectively.Australia/New Zealand.
 Pursuant to the 12 countryNFSAscent™ contract, we delivered the first major releaseThe leading captive finance company of NFS Ascent™ to China.

Page 31

An increase in software modification requests from some of our existing customers spread across the various regions contributed reasonably to the revenues for the quarter. A trend which is believed will be continued in the following quarters.
We signed a chargeable proof of concept agreement with one of the oldest and largest banks in Australia. The proof of concept project will add to our revenues and assist us in making further progress in the selection process for our NFS Ascent™ product.
Mizhou Balimore, anotable Japanese bank in Indonesia went live withimplemented the first phase of its NFS Ascent™ digital solution.
Our existing customer,i-OPS (i-operations) system in a bid to extend their market reach by allowing their call center workforce contact prospects and act as an auto finance company of a leading bank in Indonesia, kicked off its leasing project. We believe that this is likely to help increase revenues in the following quarters of the current fiscal year. This kick off has further strengthened our relationship with this Indonesian business partner paving the wayadditional channel for further success in the market. Additionally, all the branches of the same business partner successfully went live with NFS Ascent™ during the first quarter of the current fiscal year culminating into a maturing and long-standing delivery commitment.
NFS Ascent™ and Ascent Digital continue to generate interest across all major regions and industries as some significant new prospects have come through the pipeline, further strengthening projections and forecasts. Revenue could also be boosted as customization requests grow in addition to new business volume.lead generation.

 

Our success, in the near term, will depend, in large part, on the Company’s ability to continue to grow revenues and improve profits, adequately capitalize for growth in various markets and verticals, make progress in the North American and European markets and, continue to streamline sales and marketing efforts in every market we operate. However, management’s outlook for the continuing operations, which has been consolidated and has been streamlined, remains optimistic.

 

Management has identified the following material trends affecting NetSol.

 

Positive trends:

 

 Improving U.S. economy generally,NFS Ascent® SaaS offering is gaining traction in mid-size auto captives in North American and particularly auto and bankingEuropean markets.
According to Automotive World December 2017 publication,global demand for light weight trucks is expected to reach an all-time high in 2018.
 Total industry sales of more than 20 million vehicles annually by 2018, according to John Murphy, an analyst for Bank of America Merrill Lynch annual industry outlook.Mobility and digital transformation is the new norm showing acceleration in every sector particularly in auto and banking.
 Robust Chinese marketsOn Cloud demand for our solution is on the rise.
COVID -19 has created new dynamics for businesses and corporations to have employees and executives work from home. Essentially, the decreased office and maintenance costs as asset based leasing and finance sectorwell as the sharply reduced travel expenses, should positively impact our financials.
COVID-19 is creating newer opportunities in our space or complementary sectors while our R&D teams are far from maturity levels.exploring new windows to monetize.
 Latin American markets, primarily in Mexico, remain largely untapped.
 Pakistan economy growth in gross domestic product reached 4.7% in 2016, according to the Pakistan Bureau of Statistics; and improved credit ratings by Bloomberg, S&P, Moody’s and Forbes Pakistan security and geopolitical environment has improved.
China investment or CPEC (China Pakistan Economic Corridor) has exceeded $50 billion from originally $46 billion in Pakistan on energy and infrastructure projects.
NewIn developing markets, new interests are emerging markets and IT destinations in Thailand, Malaysia, Indonesia, China and Australia.
Continued interest from Fortune 500 multinational auto captives and global companies in NetSol Ascent™.
Continuing interest from existing clients in the NFS™ legacy systems in emergingfor upgradation and developing markets.mobility platform.
 Growing demandopportunities and traction for upgrading to NFS Ascent™ by existing tier one auto captive clients.dynamics of shared car ownership either through ride hailing and car sharing encouraging our innovation and development tools.
 Increased visits to NetSol PKStrong engagement and continued traction by senior executives oftier 1 existing clients and potential new customers.customers in the OTOZ platform.
Improved stability in US 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.

Page 38

 

Negative trends:

 

 Continued Global terrorismCOVID-19 has caused a global recession that will adversely impact every one of our business sectors. NetSol Board member, Shahid Burki, a renowned World Bank economist (1974 to 1999), warns that the COVID-19 crisis will bring about important global change. The United States is heading towards a major economic slowdown and extremism threats in European countries.what we are seeing, therefore, is not a typical recession but a hurricane.
 Geopolitical unrest in the Middle EastMost OEMs and potential terrorism and the disruption risk it creates.
Restricted liquidity and financial burdenauto sectors are experiencing major slowdown due to tighter internal processeslockdowns and limited budgets might cause delays in the receivables from some clients.health concerns.
 The threatsC-level decision making to acquire new systems or even upgrade will be elongated due to uncertainty of conflict between in the Middle Eastern countries could potentially create volatility inCOVID-19 virus.
The steep drop of global oil prices causing readjustmentsreflects a sudden drop in transportation, air travels and road travels. The lockdowns worldwide present layers of corporate budgetschallenges for every business worldwide.
Regional tensions between US and consumer spending slowingIran could further accelerate.
US and China trade conflicts tend to further aggravate the global auto sales.business environment.

Page 32

 

CHANGES IN FINANCIAL CONDITION

 

Quarter Ended DecemberMarch 31, 2017 compared2020 Compared to Decemberthe Quarter Ended March 31, 20162019

 

The following table sets forth the items in our unaudited condensed consolidated statement of operations for the quarter ended DecemberMarch 31, 20172020 and 20162019 as a percentage of revenues.

 

 For the Three Months  For the Three Months 
 Ended December 31,  Ended March 31, 
 2017 % 

2016

Restated

 %  2020 % 2019 % 
Net Revenues:                                
License fees $235,932   1.63% $3,769,557   23.77% $312,133   2.3% $2,536,320   14.8%
Maintenance fees  3,568,448   24.70%  3,588,899   22.63%  4,934,635   36.5%  3,704,756   21.6%
Services  9,087,191   62.90%  6,619,158   41.74%  8,222,227   60.8%  10,728,983   62.6%
License fees - related party  217,105   1.50%  -   0.00%
Maintenance fees - related party  101,251   0.70%  51,345   0.32%
Services - related party  1,236,508   8.56%  1,829,827   11.54%  61,842   0.5%  156,996   0.9%
Total net revenues  14,446,435   100.00%  15,858,786   100.00%  13,530,837   100.0%  17,127,055   100.0%
                                
Cost of revenues:                                
Salaries and consultants  5,362,092   37.12%  5,979,804   37.71%  4,850,438   35.8%  4,833,611   28.2%
Travel  287,901   1.99%  836,240   5.27%  1,052,033   7.8%  1,793,964   10.5%
Depreciation and amortization  1,168,103   8.09%  1,318,764   8.32%  737,637   5.5%  874,654   5.1%
Other  939,986   6.51%  1,065,727   6.72%  868,491   6.4%  1,067,506   6.2%
Total cost of revenues  7,758,082   53.70%  9,200,535   58.02%  7,508,599   55.5%  8,569,735   50.0%
                                
Gross profit  6,688,353   46.30%  6,658,251   41.98%  6,022,238   44.5%  8,557,320   50.0%
Operating expenses:                                
Selling and marketing  1,932,140   13.37%  2,713,478   17.11%  1,587,821   11.7%  1,864,990   10.9%
Depreciation and amortization  222,785   1.54%  271,485   1.71%  206,035   1.5%  252,442   1.5%
Provision for bad debts  -   0.00%  1,026   0.01%
General and administrative  4,026,706   27.87%  3,932,387   24.80%  4,151,394   30.7%  3,833,209   22.4%
Research and development cost  189,891   1.31%  91,607   0.58%  453,050   3.3%  513,770   3.0%
Total operating expenses  6,371,522   44.10%  7,009,983   44.20%  6,398,300   47.3%  6,464,411   37.7%
                                
Income (loss) from operations  316,831   2.19%  (351,732)  -2.22%
Income from operations  (376,062)  -2.8%  2,092,909   12.2%
Other income and (expenses)                                
Loss on sale of assets  (8,939)  -0.06%  (32,339)  -0.20%
Gain (loss) on sale of assets  129   0.0%  16,380   0.1%
Interest expense  (109,675)  -0.76%  (62,127)  -0.39%  (94,395)  -0.7%  (70,447)  -0.4%
Interest income  115,570   0.80%  23,416   0.15%  448,368   3.3%  201,084   1.2%
Gain (loss) on foreign currency exchange transactions  1,737,967   12.03%  (621,887)  -3.92%  1,770,894   13.1%  47,218   0.3%
Share of net loss from equity investment  (203,336)  -1.41%  -   0.00%  (78,502)  -0.6%  (245,389)  -1.4%
Other income  14,511   0.10%  6,823   0.04%  17,012   0.1%  3,116   0.0%
Total other income (expenses)  1,546,098   10.70%  (686,114)  -4.33%  2,063,506   15.3%  (48,038)  -0.3%
                                
Net income (loss) before income taxes  1,862,929   12.90%  (1,037,846)  -6.54%  1,687,444   12.5%  2,044,871   11.9%
Income tax provision  (200,927)  -1.39%  (338,884)  -2.14%  (218,351)  -1.6%  (275,476)  -1.6%
Net income (loss)  1,662,002   11.50%  (1,376,730)  -8.68%  1,469,093   10.9%  1,769,395   10.3%
Non-controlling interest  (1,027,581)  -7.11%  (791,664)  -4.99%  (468,286)  -3.5%  (501,835)  -2.9%
Net income (loss) attributable to NetSol $634,421   4.39% $(2,168,394)  -13.67% $1,000,807   7.4% $1,267,560   7.4%

 

Page 3339

 

A significant portion of our business is conducted in currencies other than the U.S. dollar. We operate in several geographical regions as described in Note 1920 “Operating Segments” within the Notes to the Condensed Consolidated Financial Statements. Weakening of the value of the U.S. dollar compared to foreign currency exchange rates generally has the effect of increasing our revenues but also increasing our expenses denominated in currencies other than the U.S. dollar. Similarly, strengthening of the U.S. dollar compared to foreign currency exchange rates generally has the effect of reducing our revenues but also reducing our expenses denominated in currencies other than the U.S. dollar. We plan our business accordingly by deploying additional resources to areas of expansion, while continuing to monitor our overall expenditures given the economic uncertainties of our target markets. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, we compare the changes in results from one period to another period using constant currency. In order to calculate our constant currency results, we apply the current period results to the prior period foreign currency exchange rates. In the table below, we present the change based on actual results in reported currency and in constant currency.

 

              Favorable  Favorable  Total 
  For the Three Months  (Unfavorable)  (Unfavorable)  Favorable 
  Ended December 31,  Change in  Change due to  (Unfavorable) 
      2016    Constant  Currency  Change as 
  2017  %  Restated  %  Currency  Fluctuation  Reported 
                      
Net Revenues:  14,446,435   100.00%  15,858,786   100.00%  (1,506,082)  93,731   (1,412,351)
                             
Cost of revenues:  7,758,082   53.70%  9,200,535   58.02%  1,473,242   (30,789)  1,442,453 
                             
Gross profit  6,688,353   46.30%  6,658,251   41.98%  (32,840)  62,942   30,102 
                             
Operating expenses:  6,371,522   44.10%  7,009,983   44.20%  730,914   (92,453)  638,461 
                             
Income (loss) from operations  316,831   2.19%  (351,732)  -2.22%  698,074   (29,511)  668,563 

 

     Favorable  Favorable  Total 
     (Unfavorable)  (Unfavorable)  Favorable 
  For the Three Months  Change in  Change due to  (Unfavorable) 
  Ended March 31,  Constant  Currency  Change as 
  2020  %  2019  %  Currency  Fluctuation  Reported 
                      
Net Revenues: $13,530,837   100.0% $17,127,055   100.0% $(2,593,911) $(1,002,307) $(3,596,218)
                             
Cost of revenues:  7,508,599   55.5%  8,569,735   50.0%  401,501   659,635   1,061,136 
                             
Gross profit  6,022,238   44.5%  8,557,320   50.0%  (2,192,410)  (342,672)  (2,535,082)
                             
Operating expenses:  6,398,300   47.3%  6,464,411   37.7%  (294,309)  360,420   66,111 
                             
Income (loss) from operations $(376,062)  -2.8% $2,092,909   12.2% $(2,486,719) $17,748  $(2,468,971)

Net revenues for the quarter ended DecemberMarch 31, 20172020 and 20162019 are broken out among the segments as follows:

 

 2020 2019 
 2017 2016  Revenue % Revenue % 
 Revenue % Revenue
Restated
 %          
North America $1,287,638   8.91% $1,513,997   9.55% $1,210,187   8.9% $1,022,655   6.0%
Europe  2,103,912   14.56%  1,413,139   8.91%  2,791,238   20.6%  2,405,234   14.0%
Asia-Pacific  11,054,885   76.52%  12,931,650   81.54%  9,529,412   70.4%  13,699,166   80.0%
Total $14,446,435   100.00% $15,858,786   100.00% $13,530,837   100.0% $17,127,055   100.0%

 

Revenues

 

License fees

 

License fees for the three months ended DecemberMarch 31, 20172020 were $235,932$312,133 compared to $3,769,557$2,536,320 for the three months ended DecemberMarch 31, 20162019 reflecting a decrease of $3,533,625$2,224,187 with a change in constant currency of $3,556,109. The decrease in license revenue for$2,222,978. During the fiscal three months ended DecemberMarch 31, 2017 compared to 2016 is primarily due2019, we recognized approximately $2,100,000 related to the decrease of license revenue recognized for the 12 countryDFS contract, to implement our NFS Ascent™ contract.Ascent® Retail Platform. During the current quarter, we hadthree months ended March 31, 2020, license revenues through sales offees were for additional licenses being sold with our other regional offerings in the U.S. and the U.K.offerings.

 

Page 3440

 

License fees – related party

License fees from related party for the three months ended December 31, 2017 were $217,105 compared to $Nil for the three months ended December 31, 2016 reflecting an increase of $217,105 with a change in constant currency of $210,400.

 

Maintenance fees

 

Maintenance fees for the three months ended DecemberMarch 31, 20172020 were $3,568,448$4,934,635 compared to $3,588,899$3,704,756 for the three months ended DecemberMarch 31, 20162019 reflecting a decreasean increase of $20,451$1,229,879 with a change in constant currency of $51,595.$1,597,826. The increase is primarily due to the DFS markets going live with NFS Ascent®. Maintenance fees begin once a customer has “gone live” with our product. The decrease was due to some customers not renewing their maintenance agreements. We anticipate maintenance fees to gradually increase as we implement both our NFS legacy product and NFS Ascent™Ascent®.

Maintenance fees – related party

Maintenance fees from related party for the three months ended December 31, 2017 were $101,251 compared to $51,345 for the three months ended December 31, 2016 reflecting an increase of $49,906 with a change in constant currency of $44,670. The decrease was due to the fluctuation in usage of active users.

 

Services

 

Services income for the three months ended DecemberMarch 31, 20172020 was $9,087,191$8,222,227 compared to $6,619,158$10,728,983 for the three months ended DecemberMarch 31, 20162019 reflecting an increasea decrease of $2,468,033$2,506,756 with a changedecrease in constant currency of $2,451,053.$1,880,980. The decrease in services revenue increase was due to an increasea decrease in services revenue associated with new implementations for DFS and BMW and change requests. Services revenue is derived from services provided to both current customers as well as services provided to new customers as part of the implementation process.

 

Services – related party

 

Services income from related party for the three months ended DecemberMarch 31, 20172020 was $1,236,508$61,842 compared to $1,829,827$156,996 for the three months ended DecemberMarch 31, 20162019 reflecting a decrease of $593,319$95,154 with a change in constant currency of $604,501.$87,779. The decrease in related party service revenue is due to a decrease in revenue from our joint venture with 1insurer.WRLD3D.

 

Gross Profit

 

The gross profit was $6,688,353,$6,022,238, for the three months ended DecemberMarch 31, 20172020 as compared with $6,658,251$8,557,320 for the three months ended DecemberMarch 31, 2016.2019. This is an increasea decrease of $30,102$2,535,082 with a decreasechange in constant currency of $32,840.$2,192,410. The gross profit percentage for the three months ended DecemberMarch 31, 2017 increased2020 also decreased to 46.30%44.5% from 41.98%50.0% for the three months ended DecemberMarch 31, 2016.2019. The cost of sales was $7,758,082$7,508,599 for the three months ended DecemberMarch 31, 20172020 compared to $9,200,535$8,569,735 for the three months ended DecemberMarch 31, 20162019 for a decrease of $1,442,453$1,061,136 and on a constant currency basis a decrease of $1,473,242.$401,501. As a percentage of sales, cost of sales decreasedincreased from 58.02%50.0% for the three months ended DecemberMarch 31, 20162019 to 53.70%55.5% for the three months ended DecemberMarch 31, 2017.2020.

 

Salaries and consultant fees decreasedincreased by $617,712$16,827 from $5,979,804$4,833,611 for the three months ended DecemberMarch 31, 20162019 to $5,362,092$4,850,438 for the three months ended DecemberMarch 31, 20172020 and on a constant currency basis decreased $629,888.increased $426,558. The decrease in salaries and consultant feesincrease, based on constant currency, is due to annual salary increases and the right sizinghiring of technical employees at key locations including Pakistan, Thailand, China, UK and North America.personnel. As a percentage of sales, salaries and consultant expense decreasedincreased from 37.71%28.2% for the three months ended DecemberMarch 31, 20162019 to 37.12%35.9% for the three months ended DecemberMarch 31, 2017.2020.

Travel costs decreased by $741,931 from $1,793,964 for the three months ended March 31, 2019 to $1,052,033 for the three months ended March 31, 2020 and on a constant currency basis decreased by $652,344. The decrease in travel expense is due to the spread of COVID-19. As a percentage of sales, travel expense decreased from 10.5% for the three months ended March 31, 2019 to 7.8% for the three months ended March 31, 2020.

 

Depreciation and amortization expense decreased to $1,168,103$737,637 compared to $1,318,764$874,654 for the three months ended DecemberMarch 31, 20162019 or a decrease of $150,661$137,017 and on a constant currency basis a decrease of $143,439.$48,712. Depreciation and amortization expense decreased as some products became fully amortized.

 

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Operating Expenses

 

Operating expenses were $6,371,522$6,398,300 for the three months ended DecemberMarch 31, 20172020 compared to $7,009,983,$6,464,411, for the three months ended DecemberMarch 31, 20162019 for a decrease of 9.11%1.0% or $638,461$66,111 and on a constant currency basis an increase of 4.6% or $294,309. As a percentage of sales, it increased from 37.7% to 47.3%. The increase in operating expenses was primarily due to increases in general and administrative expenses, and salaries and wages offset by decreases in selling and marketing expenses, and professional services.

Selling and marketing expenses decreased $277,169 or 14.9% and on a constant currency basis decreased $191,188 or 10.3%. The decrease was primarily due to a decrease in salaries and commissions.

General and administrative expenses were $4,151,394 for the three months ended March 31, 2020 compared to $3,833,209 for the three months ended March 31, 2019 or an increase of $318,185 or 5.8% and on a constant currency basis an increase of $528,536 or 13.8%. The increase is primarily due to the increase in withholding taxes on funds received from China, , provision for doubtful debts, salaries, and rent expense, offset by decreases in professional services.

Page 41

Research and development cost were $453,050 for the three months ended March 31, 2020 compared to $513,770 for the three months ended March 31, 2019 or a decrease of $60,720 or 11.8% and on a constant currency basis a decrease of 10.43%$8,608 or $730,914.1.7%.

Income (loss) from Operations

Loss from operations was $376,062 for the three months ended March 31, 2020 compared to income of $2,092,909 for the three months ended March 31, 2019. This represents a decrease of $2,468,971 with a decrease of $2,486,719 on a constant currency basis. As a percentage of sales, it decreasedloss from 44.2% to 44.1%. The decrease in operating expensesoperations was primarily due to decreases in selling and marketing expenses, salaries and wages, and depreciation.

Selling and marketing expenses decreased by $781,338 or 28.79% and on a constant currency basis a decrease of $816,557 or 30.09%. The decrease in selling and marketing expenses is due to reduction in staff, decrease in our salaries and commissions, travel expenses, and business development costs to market and sell NFS Ascent™ globally.

General and administrative expenses were $4,026,7062.8% for the three months ended DecemberMarch 31, 20172020 compared to $3,933,413 at December 31, 2016 or an increaseincome of $93,293 or 2.37% and on a constant currency basis an increase of $42,545 or 1.08%. During the three months ended December 31, 2017, salaries decreased by approximately $155,400 or $174,016 on a constant currency basis due to the decrease in the number of employees, minimal annual raises, less share grants and options, offset by an increase in professional services of approximately $73,308 or $69,760 on a constant currency basis and other general and administrative expenses of approximately $176,411 or $147,827 on a constant currency basis.

Income/Loss from Operations

Income from operations was $316,83112.2% for the three months ended DecemberMarch 31, 2017 compared to loss of $351,732 for the three months ended December 31, 2016. This represents an increase of $668,563 with an increase of $698,074 on a constant currency basis for the three months ended December 31, 2017 compared with the three months ended December 31, 2016. As a percentage of sales, income from operations was 2.19% for the three months ended December 31, 2017 compared to a loss of 2.22% for the three months ended December 31, 2016.2019.

 

Other incomeIncome and expenseExpense

Other income was $1,546,098$2,063,506 for the three months ended DecemberMarch 31, 20172020 compared with a lossto other expense of $686,114$48,038 for the three months ended DecemberMarch 31, 2016.2019. This represents an increase of $2,232,212$2,111,544 with an increase of $2,243,765$2,306,768 on a constant currency basis. The increase is primarily due to the foreign currency exchange transactions. The majority of the contracts with NetSol PK are either in U.S. dollars or Euros; therefore, the currency fluctuations will lead to foreign currency exchange gains or losses depending on the value of the Pakistan Rupee (“PKR”)PKR compared to the U.S. dollar and the Euro. In December 2017, Pakistan’s central bank withdrew its support of the PKR, which caused the PKR to drop in value. During the three months ended DecemberMarch 31, 2017,2020, we recognized a gain of $1,737,967$1,770,894 in foreign currency exchange transactions compared to a loss of $621,887$47,218 for the three months ended DecemberMarch 31, 2016.2019. During the three months ended DecemberMarch 31, 2017,2020, the value of the U.S. dollar increased 7.4% and the value of the Euro increased 4.30% and 5.76%5.4%, respectively, compared to the PKR. During the three months ended DecemberMarch 31, 2016,2019, the value of the U.S. dollar increased 1.08% and the Euro decreased 5.14%increased 0.8% and 1.2%, respectively, compared to the PKR.

 

Non-controlling Interest

For the three months ended DecemberMarch 31, 2017 and 2016,2020, the net income attributable to non-controlling interest was $1,027,581 and $791,664, respectively.$468,286, compared to $501,835 for the three months ended March 31, 2019. The increasechange in non-controlling interest is primarily due to the increase in net income of NetSol PK offset by a decrease in net income of NetSol Innovation.PK.

 

Net Income / Loss attributable to NetSol

Net income was $634,421$1,000,807 for the three months ended DecemberMarch 31, 20172020 compared to a loss of $2,168,394$1,267,560 for the three months ended DecemberMarch 31, 2016.2019. This is an increasea decrease of $2,802,815$266,753 with an increasea decrease of $2,843,590$169,054 on a constant currency basis, compared to the prior year. For the three months ended DecemberMarch 31, 2017,2020, net income per share was $0.06$0.09 for basic and diluted shares compared to a loss of $0.20$0.11 for basic and diluted shares for the three months ended DecemberMarch 31, 2016.2019.

 

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SixNine Months Ended DecemberMarch 31, 2017 compared2020 Compared to Decemberthe Nine Months Ended March 31, 20162019

 

The following table sets forth the items in our unaudited condensed consolidated statement of operations for the sixnine months ended DecemberMarch 31, 20172020 and 20162019 as a percentage of revenues.

 

 For the Six Months 
 Ended December 31,  For the Nine Months 
   2016   Ended March 31, 
 2017 % Restated %  2020 % 2019 % 
Net Revenues:                                
License fees $561,998   2.06% $9,223,352   28.00% $3,375,241   7.9% $13,310,002   26.3%
Maintenance fees  7,042,173   25.83%  7,112,696   21.60%  14,291,959   33.4%  11,106,155   22.0%
Services  16,104,928   59.07%  12,175,293   36.97%  24,923,873   58.2%  25,548,451   50.6%
License fees - related party  261,513   0.96%  246,957   0.75%
Maintenance fees - related party  204,214   0.75%  181,976   0.55%
Services - related party  3,090,385   11.33%  3,994,981   12.13%  202,199   0.5%  561,619   1.1%
Total net revenues  27,265,211   100.00%  32,935,255   100.00%  42,793,272   100.0%  50,526,227   100.0%
                                
Cost of revenues:                                
Salaries and consultants  10,826,252   39.71%  11,873,153   36.05%  13,931,274   32.6%  14,351,227   28.4%
Travel  801,013   2.94%  1,548,135   4.70%  3,967,591   9.3%  4,652,143   9.2%
Depreciation and amortization  2,341,216   8.59%  2,649,636   8.04%  2,191,654   5.1%  2,692,306   5.3%
Other  1,796,568   6.59%  2,038,065   6.19%  2,767,927   6.5%  3,176,602   6.3%
Total cost of revenues  15,765,049   57.82%  18,108,989   54.98%  22,858,446   53.4%  24,872,278   49.2%
                                
Gross profit  11,500,162   42.18%  14,826,266   45.02%  19,934,826   46.6%  25,653,949   50.8%
Operating expenses:                                
Selling and marketing  3,643,436   13.36%  5,057,516   15.36%  5,189,785   12.1%  5,614,619   11.1%
Depreciation and amortization  468,658   1.72%  540,582   1.64%  623,901   1.5%  658,453   1.3%
Provision for bad debts  -   0.00%  1,026   0.00%
General and administrative  7,814,264   28.66%  8,551,583   25.96%  12,638,797   29.5%  12,241,988   24.2%
Research and development cost  374,976   1.38%  184,539   0.56%  1,580,625   3.7%  1,256,577   2.5%
Total operating expenses  12,301,334   45.12%  14,335,246   43.53%  20,033,108   46.8%  19,771,637   39.1%
                                
Income (loss) from operations  (801,172)  -2.94%  491,020   1.49%
Income from operations  (98,282)  -0.2%  5,882,312   11.6%
Other income and (expenses)                                
Loss on sale of assets  (16,069)  -0.06%  (34,742)  -0.11%
Gain (loss) on sale of assets  368   0.0%  65,170   0.1%
Interest expense  (227,746)  -0.84%  (116,602)  -0.35%  (246,064)  -0.6%  (233,685)  -0.5%
Interest income  252,481   0.93%  53,856   0.16%  1,283,279   3.0%  680,469   1.3%
Gain (loss) on foreign currency exchange transactions  2,754,329   10.10%  (1,036,783)  -3.15%  71,765   0.2%  2,594,885   5.1%
Share of net loss from equity investment  (270,898)  -0.99%  -   0.00%  (432,522)  -1.0%  (843,373)  -1.7%
Other income  15,610   0.06%  28,383   0.09%  243,325   0.6%  12,998   0.0%
Total other income (expenses)  2,507,707   9.20%  (1,105,888)  -3.36%  920,151   2.2%  2,276,464   4.5%
                                
Net income (loss) before income taxes  1,706,535   6.26%  (614,868)  -1.87%  821,869   1.9%  8,158,776   16.1%
Income tax provision  (225,798)  -0.83%  (378,759)  -1.15%  (1,067,099)  -2.5%  (777,262)  -1.5%
Net income (loss)  1,480,737   5.43%  (993,627)  -3.02%  (245,230)  -0.6%  7,381,514   14.6%
Non-controlling interest  (1,215,814)  -4.46%  (1,560,878)  -4.74%  4,065   0.0%  (2,295,736)  -4.5%
Net income (loss) attributable to NetSol $264,923   0.97% $(2,554,505)  -7.76% $(241,165)  -0.6% $5,085,778   10.1%

 

Page 3743

 

A significant portion of our business is conducted in currencies other than the U.S. dollar. We operate in several geographical regions as described in Note 1920 “Operating Segments” within the Notes to the Condensed Consolidated Financial Statements. Weakening of the value of the U.S. dollar compared to foreign currency exchange rates generally has the effect of increasing our revenues but also increasing our expenses denominated in currencies other than the U.S. dollar. Similarly, strengthening of the U.S. dollar compared to foreign currency exchange rates generally has the effect of reducing our revenues but also reducing our expenses denominated in currencies other than the U.S. dollar. We plan our business accordingly by deploying additional resources to areas of expansion, while continuing to monitor our overall expenditures given the economic uncertainties of our target markets. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, we compare the changes in results from one period to another period using constant currency. In order to calculate our constant currency results, we apply the current period results to the prior period foreign currency exchange rates. In the table below, we present the change based on actual results in reported currency and in constant currency.

 

         Favorable Favorable Total          Favorable Favorable Total 
 For the Six Months (Unfavorable) (Unfavorable) Favorable          (Unfavorable) (Unfavorable) Favorable 
 Ended December 31, Change in Change due to (Unfavorable)  For the Nine Months Change in Change due to (Unfavorable) 
   2016  Constant Currency Change as  Ended March 31, Constant Currency Change as 
 2017 % Restated % Currency Fluctuation Reported  2020 % 2019 % Currency Fluctuation Reported 
                              
Net Revenues:  27,265,211   100.00%  32,935,255   100.00%  (5,650,244)  (19,800)  (5,670,044) $42,793,272   100.0% $50,526,227   100.0% $(2,887,868) $(4,845,087) $(7,732,955)
                                                        
Cost of revenues:  15,765,049   57.82%  18,108,989   54.98%  2,269,770   74,170   2,343,940   22,858,446   53.4%  24,872,278   49.2%  (1,066,273)  3,080,105   2,013,832 
                                                        
Gross profit  11,500,162   42.18%  14,826,266   45.02%  (3,380,474)  54,370   (3,326,104)  19,934,826   46.6%  25,653,949   50.8%  (3,954,141)  (1,764,982)  (5,719,123)
                                                        
Operating expenses:  12,301,334   45.12%  14,335,246   43.53%  2,097,944   (64,032)  2,033,912   20,033,108   46.8%  19,771,637   39.1%  (1,822,396)  1,560,925   (261,471)
                                                        
Income (loss) from operations  (801,172)  -2.94%  491,020   1.49%  (1,282,530)  (9,662)  (1,292,192) $(98,282)  -0.2% $5,882,312   11.6% $(5,776,537) $(204,057) $(5,980,594)

 

Net revenues for the sixnine months ended DecemberMarch 31, 20172020 and 20162019 are broken out among the segments as follows:

 

 2020 2019 
 2017 2016  Revenue % Revenue % 
 Revenue % 

Revenue Restated

 %          
North America $2,135,710   7.83% $3,355,428   10.19% $3,464,706   8.1% $2,843,190   5.6%
Europe  4,152,928   15.23%  3,355,873   10.19%  8,225,905   19.2%  6,425,393   12.7%
Asia-Pacific  20,976,573   76.94%  26,223,954   79.62%  31,102,661   72.7%  41,257,644   81.7%
Total $27,265,211   100.00% $32,935,255   100.00% $42,793,272   100.0% $50,526,227   100.0%

 

Revenues

 

License fees

License fees for the sixnine months ended DecemberMarch 31, 20172020 were $561,998$3,375,241 compared to $9,223,352$13,310,002 for the sixnine months ended DecemberMarch 31, 20162019 reflecting a decrease of $8,661,354$9,934,761 with a change in constant currency of $8,683,204.$9,248,402. The decrease in license revenue for the fiscal sixnine months ended DecemberMarch 31, 20172020 compared to 2016the nine months ended March 31, 2019 is primarily due to the decrease ofin license revenue recognized for the 12 countryDFS and BMW contracts to implement our NFS Ascent™ contract. During the current quarter, we had license revenues through sales of our regional offerings in the U.S. and the U.K.Ascent® Retail Platform.

 

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License fees – related party

License fees from related party for the six months ended December 31, 2017 were $261,513 compared to $246,957 for the six months ended December 31, 2016 reflecting an increase of $14,556 with a change in constant currency of $7,851.

 

Maintenance fees

 

Maintenance fees for the sixnine months ended DecemberMarch 31, 20172020 were $7,042,173$14,291,959 compared to $7,112,696$11,106,155 for the sixnine months ended DecemberMarch 31, 20162019 reflecting a decreasean increase of $70,523$3,185,804 with a change in constant currency of $80,252.$4,689,011. The increase is primarily due to the DFS markets going live with NFS Ascent®. Maintenance fees begin once a customer has “gone live” with our product. The decrease was due to some customers not renewing their maintenance agreements. We anticipate maintenance fees to gradually increase as we implement both our NFS legacy product and NFS Ascent™Ascent®.

Maintenance fees – related party

Maintenance fees from related party for the six months ended December 31, 2017 were $204,214 compared to $181,976 for the six months ended December 31, 2016 reflecting an increase of $22,238 with a change in constant currency of $17,002. The increase was due to the fluctuation in usage of active users.

 

Services

 

Services income for the sixnine months ended DecemberMarch 31, 20172020 was $16,104,928$24,923,873 compared to $12,175,293$25,548,451 for the sixnine months ended DecemberMarch 31, 20162019 reflecting a decrease of $624,578 with an increase of $3,929,635 with a change in constant currency of $3,987,343.$1,934,545. The services revenue increase in constant currency was due to an increase in services revenue associated with new implementations and change requests. Services revenue is derived from services provided to both current customers as well as services provided to new customers as part of the implementation process.

 

Services – related party

 

Services income from related party for the sixnine months ended DecemberMarch 31, 20172020 was $3,090,385$202,199 compared to $3,994,981$561,619 for the sixnine months ended DecemberMarch 31, 20162019 reflecting a decrease of $904,596$359,420 with a changedecrease in constant currency of $898,984.$263,022. The decrease in related party service revenue is due to a decrease in revenue from our joint venture with the company, 1insurer.1insurer of approximately $67,286 and approximately $292,134 in service revenue related to services performed for WRLD3D.

 

Gross Profit

 

The gross profit was $11,500,162,$19,934,826, for the sixnine months ended DecemberMarch 31, 20172020 as compared with $14,826,266$25,653,949 for the sixnine months ended DecemberMarch 31, 2016.2019. This is a decrease of $3,326,104$5,719,123 with a change in constant currency of $3,380,474.$3,954,141. The gross profit percentage for the sixnine months ended DecemberMarch 31, 20172020 decreased to 42.18%46.6% from 45.02%50.8% for the sixnine months ended DecemberMarch 31, 2016.2019. The cost of sales was $15,765,049$22,858,446 for the sixnine months ended DecemberMarch 31, 20172020 compared to $18,108,989$24,872,278 for the sixnine months ended DecemberMarch 31, 20162019 for a decrease of $2,343,940$2,013,832 and on a constant currency basis a decreasean increase of $2,269,770.$1,066,273. As a percentage of sales, cost of sales increased from 54.98%49.2% for the sixnine months ended DecemberMarch 31, 20162019 to 57.82%53.4% for the sixnine months ended DecemberMarch 31, 2017.2020.

 

Salaries and consultant fees decreased by $1,046,901$419,953 from $11,873,153$14,351,227 for the sixnine months ended DecemberMarch 31, 20162019 to $10,826,252$13,931,274 for the sixnine months ended DecemberMarch 31, 20172020 and on a constant currency basis decreased $972,201.increased $1,379,014. The decrease in salaries and consultant feesincrease on a constant currency basis is due to annual salary increases and the right sizinghiring of technical employees at key locations including Pakistan, Thailand, China, UK and North America.personnel. As a percentage of sales, salaries and consultant expense increased from 36.05%28.4% for the sixnine months ended DecemberMarch 31, 20162019 to 39.71%32.6% for the sixnine months ended DecemberMarch 31, 2017.2020.

Travel expenses decreased by $684,552 from $4,652,143 for the nine months ended March 31, 2019 to $3,967,591 for the nine months ended March 31, 2020 and on a constant currency basis decreased by $155,239. The decrease in travel expenses is due to the spread of COVID-19. As a percentage of sales, travel expense increased from 9.2% for the nine months ended March 31, 2019 to 9.3% for the nine months ended March 31, 2020.

 

Depreciation and amortization expense decreased to $2,341,216$2,191,654 for the nine months ended March 31, 2020 compared to $2,649,636$2,692,306 for the sixnine months ended DecemberMarch 31, 20162019 or a decrease of $308,420$500,652 and on a constant currency basis a decrease of $283,783.$97,478. Depreciation and amortization expense decreased as some products became fully amortized.

 

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Operating Expenses

 

Operating expenses were $12,301,334$20,033,108 for the sixnine months ended DecemberMarch 31, 20172020 compared to $14,335,246,$19,771,637, for the sixnine months ended DecemberMarch 31, 20162019 for a decreasean increase of 14.19%1.3% or $2,033,912 and on a constant currency basis a decrease of 14.63% or $2,097,944. As a percentage of sales, it increased from 43.53% to 45.12%. The decrease in operating expenses was primarily due to decreases in selling and marketing expenses, salaries and wages and depreciation.

Selling and marketing expenses decreased by $1,414,080 or 27.96% and on a constant currency basis a decrease of $1,445,637 or 28.58%. The decrease in selling and marketing expenses is due to reduction in staff, decrease in our salaries and commissions, travel expenses, and business development costs to market and sell NFS Ascent™ globally.

General and administrative expenses were $7,814,264 for the six months ended December 31, 2017 compared to $8,552,609 at December 31, 2016 or a decrease of $738,345 or 8.63%$261,471 and on a constant currency basis an increase of $768,7329.2% or 8.99%$1,822,396. As a percentage of sales, it increased from 39.1% to 46.8%. During the six months ended December 31, 2017, salariesThe increase in operating expenses was primarily due to increases in general and administrative expenses, professional services and research and development cost.

Selling and marketing expenses decreased by approximately $1,052,356$424,834 or $1,043,1477.6% and on a constant currency basis due to the decrease in the number of employees, minimal annual raises, less share grants and options, offset by an increase in other generalincreased $37,065 or 0.7%.

General and administrative expenses were $12,638,797 for the nine months ended March 31, 2020 compared to $12,241,988 at March 31, 2019 or an increase of approximately $249,382$396,809 or $213,4613.2% and on a constant currency basis an increase of $1,167,758 or 9.5%. The increase is primarily due to the increase in withholding taxes on dividends received from Pakistan and professional services approximately $65,655funds received from China, travel costs and rent expense, offset by decreases in salaries due to less share grants expensed during the current quarter.

Research and development cost were $1,580,625 for the nine months ended March 31, 2020 compared to $1,256,577 for the nine months ended March 31, 2019 or $61,980an increase of $324,048 or 25.8% and on a constant currency bases.basis an increase of $603,654 or 48.0%.

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LossIncome (loss) from Operations

Loss from operations was $801,172$98,282 for the sixnine months ended DecemberMarch 31, 20172020 compared to income of $491,020$5,882,312 for the sixnine months ended DecemberMarch 31, 2016.2019. This represents a decrease of $1,292,192$5,980,594 with a decrease of $1,282,530$5,776,537 on a constant currency basis for the six months ended December 31, 2017 compared with the six months ended December 31, 2016.basis. As a percentage of sales, loss from operations was 2.94%0.2% for the sixnine months ended DecemberMarch 31, 20172020 compared to income of 1.49%11.6% for the sixnine months ended DecemberMarch 31, 2016.2019.

Other Income and Expense

Other income was $2,507,707$920,151 for the sixnine months ended DecemberMarch 31, 20172020 compared to $2,276,464 for the nine months ended March 31, 2019. This represents a decrease of $1,356,313 with a lossdecrease of $1,105,888 for the six months ended December 31, 2016. This represents an increase of $3,613,595 with an increase of $3,641,001$1,563,686 on a constant currency basis. The increasedecrease is primarily due to the foreign currency exchange transactions. The majority of the contracts with NetSol PK are either in U.S. dollars or Euros; therefore, the currency fluctuations will lead to foreign currency exchange gains or losses depending on the value of the PKR compared to the U.S. dollar and the Euro. In December 2017, Pakistan’s central bank withdrew its support of the PKR, which caused the PKR to drop in value. During the sixnine months ended DecemberMarch 31, 2017,2020, we recognized a gain of $2,754,329$71,765 in foreign currency exchange transactions compared to a loss of $1,036,783$2,594,885 for the sixnine months ended DecemberMarch 31, 2017.2019. During the sixnine months ended DecemberMarch 31, 2017,2020, the value of the U.S. dollar increased 2.0% and the Euro decreased 1.3% , respectively, compared to the PKR. During the nine months ended March 31, 2019, the value of the U.S. dollar and the Euro increased 5.63%15.4% and 10.77%, respectively, compared to the PKR. During the six months ended December 31, 2016, the value of the U.S. dollar and the Euro decreased 0.69% and 5.93%10.8%, respectively, compared to the PKR.

 

Non-controlling Interest

For the sixnine months ended DecemberMarch 31, 20172020 and 2016,2019, the net incomeloss attributable to non-controlling interest was $1,215,814 and $1,560,878,$4,065 compared to net income of $2,295,736, respectively. The decreasechange in non-controlling interest is primarily due to the decreaseincrease in net incomeloss of NetSol Innovation.PK.

 

Net Income / Loss(loss) attributable to NetSol

Net incomeloss was $264,923$241,165 for the sixnine months ended DecemberMarch 31, 20172020 compared to a lossnet income of $2,554,505$5,085,778 for the sixnine months ended DecemberMarch 31, 2016.2019. This is an increasea decrease of $2,819,428$5,326,943 with an increasea decrease of $2,851,849$5,428,055 on a constant currency basis, compared to the prior year. For the sixnine months ended DecemberMarch 31, 2017,2020, net incomeloss per share was $0.02 for basic and diluted shares compared to a lossnet income of $0.24$0.44 for basic and diluted shares for the sixnine months ended DecemberMarch 31, 2016.2019.

 

Non-GAAP Financial Measures

 

Regulation S-K Item 10(e), “Use of Non-GAAP Financial Measures in Commission Filings,” defines and prescribes the conditions for use of non-GAAP financial information. Our measures of adjusted EBITDA and adjusted EBITDA per basic and diluted share meet the definition of a non-GAAP financial measure.

 

We define the non-GAAP measures as follows:

 

 EBITDA is GAAP net income or loss before net interest expense, income tax expense, depreciation and amortization.
 Non-GAAP adjusted EBITDA is EBITDA lessplus stock-based compensation expense.
 Adjusted EBITDA per basic and diluted share – Adjusted EBITDA allocated to common stock divided by the weighted average shares outstanding and diluted shares outstanding.

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We use non-GAAP measures internally to evaluate the business and believe that presenting non-GAAP measures provides useful information to investors regarding the underlying business trends and performance of our ongoing operations as well as useful metrics for monitoring our performance and evaluating it against industry peers. The non-GAAP financial measures presented should be used in addition to, and in conjunction with, results presented in accordance with GAAP, and should not be relied upon to the exclusion of GAAP financial measures. Management strongly encourages investors to review our consolidated financial statements in their entirety and not to rely on any single financial measure in evaluating the Company.

 

The non-GAAP measures reflect adjustments based on the following items:

 

EBITDA: We report EBITDA as a non-GAAP metric by excluding the effect of net interest expense, income tax expense, depreciation and amortization from net income or loss because doing so makes internal comparisons to our historical operating results more consistent. In addition, we believe providing an EBITDA calculation is a more useful comparison of our operating results to the operating results of our peers.

 

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Stock-based compensation expense: We have excluded the effect of stock-based compensation expense from the non-GAAP adjusted EBITDA and non-GAAP adjusted EBITDA per basic and diluted share calculations. Although stock-based compensation expense is calculated in accordance with current GAAP and constitutes an ongoing and recurring expense, such expense is excluded from non-GAAP results because it is not an expense which generally requires cash settlement by NetSol, and therefore is not used by us to assess the profitability of our operations. We also believe the exclusion of stock-based compensation expense provides a more useful comparison of our operating results to the operating results of our peers.

 

Non-controlling interest: We add back the non-controlling interest in calculating gross adjusted EBITDA and then subtract out the income taxes, depreciation and amortization and net interest expense attributable to the non-controlling interest to arrive at a net adjusted EBITDA.

 

Our reconciliation of the non-GAAP financial measures of adjusted EBITDA and non-GAAP earnings per basic and diluted share to the most comparable GAAP measures for the three and sixnine months ended DecemberMarch 31, 20172020 and 20162019 are as follows:

 

  For the Three Months Ended  For the Three Months Ended  For the Nine Months Ended  For the Nine Months Ended 
  March 31, 2020  March 31, 2019  March 31, 2020  March 31, 2019 
             
Net Income (loss) attributable to NetSol $1,000,807  $1,267,560  $(241,165) $5,085,778 
Non-controlling interest  468,286   501,835   (4,065)  2,295,736 
Income taxes  218,351   275,476   1,067,099   777,262 
Depreciation and amortization  943,672   1,127,096   2,815,555   3,350,759 
Interest expense  94,395   70,447   246,064   233,685 
Interest (income)  (448,368)  (201,084)  (1,283,279)  (680,469)
EBITDA $2,277,143  $3,041,330  $2,600,209  $11,062,751 
Add back:                
Non-cash stock-based compensation  236,702   154,551   565,287   1,024,294 
Adjusted EBITDA, gross $2,513,845  $3,195,881  $3,165,496  $12,087,045 
Less non-controlling interest (a)  (729,735)  (959,955)  (885,144)  (3,600,485)
Adjusted EBITDA, net $1,784,110  $2,235,926  $2,280,352  $8,486,560 
                 
Weighted Average number of shares outstanding                
Basic  11,753,063   11,656,098   11,713,827   11,580,066 
Diluted  11,753,063   11,691,342   11,713,827   11,615,310 
                 
Basic adjusted EBITDA $0.15  $0.19  $0.19  $0.73 
Diluted adjusted EBITDA $0.15  $0.19  $0.19  $0.73 
                 
(a)The reconciliation of adjusted EBITDA of non-controlling interest to net income attributable to non-controlling interest is as follows                
                 
Net Income attributable to non-controlling interest $468,286  $501,835  $(4,065) $2,295,736 
Income Taxes  59,983   109,957   303,610   251,321 
Depreciation and amortization  271,244   360,071   800,882   1,064,203 
Interest expense  28,068   22,173   72,600   75,082 
Interest (income)  (113,413)  (43,905)  (334,584)  (165,020)
EBITDA $714,168  $950,131  $838,443  $3,521,322 
Add back:                
Non-cash stock-based compensation  15,567   9,824   46,701   79,163 
Adjusted EBITDA of non-controlling interest $729,735  $959,955  $885,144  $3,600,485 

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    Three Months    Six Months 
  Three Months  Ended  Six Months  Ended 
  Ended  December 31, 2016  Ended  December 31, 2016 
  December 31, 2017  Restated  December 31, 2017  Restated 
             
Net Income (loss) before preferred dividend, per GAAP $634,421  $(2,168,394) $264,923  $(2,554,505)
Non-controlling interest  1,027,581   791,664   1,215,814   1,560,878 
Income taxes  200,927   338,884   225,798   378,759 
Depreciation and amortization  1,390,888   1,590,249   2,809,874   3,190,218 
Interest expense  109,675   62,127   227,746   116,602 
Interest (income)  (115,570)  (23,416)  (252,481)  (53,856)
EBITDA $3,247,922  $591,114  $4,491,674  $2,638,096 
Add back:                
Non-cash stock-based compensation  405,721   660,319   833,530   1,547,579 
Adjusted EBITDA, gross $3,653,643  $1,251,433  $5,325,204  $4,185,675 
Less non-controlling interest (a)  (1,562,303)  (1,550,729)  (2,264,167)  (3,183,972)
Adjusted EBITDA, net $2,091,340  $(299,296) $3,061,037  $1,001,703 
                 
Weighted Average number of shares outstanding                
Basic  11,159,075   10,877,446   11,115,346   10,783,685 
Diluted  11,171,543   10,877,446   11,127,814   10,939,177 
                 
Basic adjusted EBITDA $0.19  $(0.03) $0.28  $0.09 
Diluted adjusted EBITDA $0.19  $(0.03) $0.28  $0.09 
                 
(a)The reconciliation of adjusted EBITDA of non-controlling interest to net income attributable to non-controlling interest is as follows               
                 
Net Income attributable to non-controlling interest $1,027,581  $791,664  $1,215,814  $1,560,878 
Income Taxes  29,945   23,907   40,423   37,781 
Depreciation and amortization  465,138   730,672   932,320   1,556,538 
Interest expense  34,463   12,991   73,535   31,333 
Interest (income)  (36,918)  (34,947)  (82,075)  (51,397)
EBITDA $1,520,209  $1,524,287  $2,180,017  $3,135,133 
Add back:                
Non-cash stock-based compensation  42,094   26,442   84,150   48,839 
Adjusted EBITDA of non-controlling interest $1,562,303  $1,550,729  $2,264,167  $3,183,972 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our cash position was $10,004,650$15,743,328 at DecemberMarch 31, 2017,2020, compared to $14,172,954$17,366,364 at June 30, 2017.2019.

 

Net cash used in operating activities was $2,054,989 for the six months ended December 31, 2017 compared to net cash provided by operating activities of $69,398was $411,119 for the sixnine months ended DecemberMarch 31, 2016.2020 compared to $255,382 used in operating activities for the nine months ended March 31, 2019. At DecemberMarch 31, 2017,2020, we had current assets of $51,464,501$53,129,075 and current liabilities of $27,864,068.$20,578,474. We had accounts receivable of $21,689,080$14,232,987 at DecemberMarch 31, 20172020 compared to $8,228,141$15,599,314 at June 30, 2017. The increase in accounts receivable includes $8,433,735 due to billing for the code split per the amended DFS contract of which approximately $4,216,737 was received in January 2018.2019. We had revenues in excess of billings of $22,870,442$16,592,293 at DecemberMarch 31, 20172020 compared to $24,380,632$16,111,366 at June 30, 20172019 of which $6,668,854$1,282,898 and $5,173,538$1,281,492 is shown as long term as of Decemberat March 31, 20172020 and June 30, 2017,2019, respectively. The long-term portion iswas discounted by $284,394$54,893 and $310,331$99,139 at DecemberMarch 31, 20172020 and June 30, 2017,2019, respectively, using the discounted cash flow method with an interest rates ranging from 3.93% to 4.43% which is NetSol PK’s weighted average borrowing rate.rate of 4.35%. During the sixnine months ended DecemberMarch 31, 2017,2020, our revenues in excess of billings were reclassified to accounts receivable pursuant to billing requirements detailed in each contract. The combined totals for accounts receivable and revenues in excess of billings increaseddecreased by $11,950,749$885,400 from $32,608,773$31,710,680 at June 30, 20172019 to $44,559,522$30,825,280 at DecemberMarch 31, 2017. The increase is due to recognition of revenue according to progress of contracts and billing for the amended DFS contract.2020. Accounts payable and accrued expenses, and current portions of loans and lease obligations amounted to $7,560,298$7,107,933 and $10,133,100,$8,794,858, respectively at DecemberMarch 31, 2017.2020. Accounts payable and accrued expenses, and current portions of loans and lease obligations amounted to $6,880,194$7,476,560 and $10,222,795,$6,905,597, respectively at June 30, 2017.2019.

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The average days sales outstanding for the sixnine months ended DecemberMarch 31, 20172020 and 20162019 were 260201 and 145174 days, respectively, for each period. The days sales outstanding have been calculated by taking into consideration the average combined balances of accounts receivable and revenuerevenues in excess of billings.

 

Net cash used in investing activities was $899,882$1,577,465 for the sixnine months ended DecemberMarch 31, 2017,2020, compared to $1,598,784$2,711,588 for the sixnine months ended DecemberMarch 31, 2016.2019. We had purchases of property and equipment of $543,123$1,011,285 compared to $1,074,316$2,590,302 for the comparable period last fiscal year.nine months ended March 31, 2019. For the sixnine months ended DecemberMarch 31, 2017,2020 and 2019, we invested $500,000$600,000 and $1,126,500, respectively, in a short-term convertible notenotes receivable from WRLD3D. For the six months ended December 31, 2017, we invested $50,000 in WRLD3D compared to $705,555 for the six months ended December 31, 2016.

 

Net cash used in financing activities was $449,164,$18,080 for the nine months ended March 31, 2020, compared to $629,999$559,667 provided by financing activities for the sixnine months ended DecemberMarch 31, 2017, and 2016, respectively.2019. The sixnine months ended DecemberMarch 31, 20172020 included the cash inflow of $215,311$2,312,968 from the exercising of stock options and warrantsbank proceeds compared to $429,452$1,337,092 for the same period last year. During the sixnine months ended DecemberMarch 31, 2017, we purchased 139,275 shares of our common stock from the open market for $601,020 compared to 7,500 shares of common stock for $38,885 for the same period last year. During the six months ended December 31, 2017,2020, we had net payments for bank loans and capitalfinance leases of $361,814$422,051 compared to $69,998$298,610 for the sixnine months ended DecemberMarch 31, 2016.2019. We are operating in various geographical regions of the world through our various subsidiaries. Those subsidiaries have financial arrangements from various financial institutions to meet both their short and long-term funding requirements. These loans will become due at different maturity dates as described in Note 1416 of the financial statements. We are in compliance with the covenants of the financial arrangements and there is no default, which may lead to early payment of these obligations. We anticipate paying back all these obligations on their respective due dates from its own sources.

 

We typically fund the cash requirements for our operations in the U.S. through our license, services, and maintenance agreements, intercompany charges for corporate services, and through the exercise of options and warrants. As of DecemberMarch 31, 2017,2020, we had approximately $10$15.7 million of cash, cash equivalents and marketable securities of which approximately $8.46$14.7 million is held by our foreign subsidiaries. As of June 30, 2017,2019, we had approximately $14.17$17.4 million of cash, cash equivalents and marketable securities of which approximately $11.56$16.1 million is held by our foreign subsidiaries. The Tax Act, which was passed on December 22, 2017, imposes a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries. As of December 31, 2017, the provisional undistributed earnings of foreign subsidiaries were $22.8 million which we anticipate being able to offset fully with net operating loss carry forwards.

 

We remain open to strategic relationships that would provide value added benefits. The focus will remain on continuously improving cash reserves internally and reduced reliance on external capital raise.

 

As a growing company, we have on-going capital expenditure needs based on our short term and long-term business plans. Although our requirements for capital expenses vary from time to time, for the next 12 months, we anticipate needing $2$2.5 million for APAC, U.S. and Europe new business development activities and infrastructure enhancements, which we expect to provide from current operations.

 

While there is no guarantee that any of these methods will result in raising sufficient funds to meet our capital needs or that even if available will be on terms acceptable to us, we will be very cautious and prudent about any new capital raise given the global market uncertainties. However, we are very conscious of the dilutive effect and price pressures in raising equity-based capital.

 

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Financial Covenants

 

Our UK based subsidiary, NTE, has an approved overdraft facility of £300,000 ($405,405)370,370) which requires that the aggregate amount of invoiced trade debtors (net of provisions for bad and doubtful debts and excluding intra-group debtors) of NTE, not exceeding 90 days old, will not be less than an amount equal to 200% of the facility. The Pakistani subsidiary, NetSol PK has an approved facility for export refinance from Askari Bank Limited amounting to Rupees 500 million ($4,521,613)3,005,350) and a running finance facility of Rupees 75 million ($678,217)450,802) which requires NetSol PK to maintain a long-term debt equity ratio of 60:40 and the current ratio of 1:1. NetSol PK also has an approved export refinance facility of Rs. 350380 million ($3,165,130)2,284,065) and a running finance facility of Rs. 150120 million ($1,356,484)721,284) from Samba Bank Limited. NetSol PK has another approved export refinance facility of Rs. 900 million ($5,409,629) from Habib Metro Bank Limited. During the tenure of loan, these two facilities 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.

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As of the date of this report, we are in compliance with the financial covenants associated with our borrowings. The maturity dates of the borrowings of respective subsidiaries may accelerate if they do not comply with these covenants. In case of any change in control in subsidiaries, they may have to repay their respective credit facilities.

 

CRITICAL ACCOUNTING POLICIES

 

Our condensed consolidated financial statements are prepared applying certain critical accounting policies. The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective, or complex judgments. Critical accounting policies require numerous estimates and accompanying notesstrategic or economic assumptions that may prove inaccurate or subject to variations and may significantly affect our reported results and financial position for the period or in future periods. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on our future financial condition and results of operations. Our financial statements are prepared in accordance with accounting principles generally acceptedU.S. GAAP, and they conform to general practices in the United States (“U.S. GAAP”). Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management��s application of accounting policies. Criticalour industry. We apply critical accounting policies for us include revenue recognitionconsistently from period to period and multiple element arrangements, intangible assets, software development costs, and goodwill.

REVENUE RECOGNITION

The Company derives revenues from the following sources: (1) software licenses, (2) services, which include implementation and consulting services, and (3) maintenance, which includes post contract support.

The Company recognizes revenue from license contracts without major customization when a non-cancelable, non-contingent license agreement has been signed, delivery of the software has occurred, the fee is fixed or determinable, and collectability is probable. Delivery is considered to have occurred upon electronic transfer of the license keyintend that provides immediate availability of the product to the purchaser. Determining whether and when some of these criteriaany change in methodology occur in an appropriate manner. There have been satisfied often involves assumptionsno significant changes to our accounting policies and judgments that can have a significant impactestimates as discussed in our Annual Report on the timing and amount of revenue the Company reports.

If an arrangement does not qualify for separate accounting of the software license and consulting transactions, then new software license revenue is generally recognized together with the consulting services based on contract accounting using either the percentage-of-completion or completed contract method. Contract accounting is applied to any arrangements: (1) that include milestones or customer specific acceptance criteria that may affect collection of the software license fees; (2) where services include significant modification or customization of the software; (3) where significant consulting services are provided for in the software license contract without additional charge or are substantially discounted; or (4) where the software license payment is tied to the performance of consulting services.

Revenue from consulting services is recognized as the services are performed for time-and-materials contracts. Revenue from training and development services is recognized as the services are performed.

Revenue from maintenance agreements is recognized ratably over the term of the maintenance agreement, typically one year.

Multiple Element Arrangements

The Company may enter into multiple element revenue arrangements in which a customer may purchase a number of different combinations of software licenses, consulting services, maintenance and support, as well as training and development.

Vendor specific objective evidence (“VSOE”) of fair value for each element is based on the price for which the element is sold separately. The Company determines the VSOE of fair value of each element based on historical evidence of the Company’s stand-alone sales of these elements to third-parties or from the stated renewal rateForm 10-K for the elements contained in the initial software license arrangement. When VSOE of fair value does not exist for any undelivered element, revenue is deferred until the earlier of the point at which such VSOE of fair value exists or until all elements of the arrangement have been delivered. The only exception to this guidance is when the only undelivered element is maintenance and support or other services, then the entire arrangement fee is recognized ratably over the performance period.

INTANGIBLE ASSETS

Intangible assets consist of product licenses, renewals, enhancements, copyrights, trademarks, trade names, and customer lists. Intangible assets with finite lives are amortized over the estimated useful life and are evaluated for impairment at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We assess recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If the future undiscounted cash flows are less than the carrying amount of these assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.

Page 44

SOFTWARE DEVELOPMENT COSTS

Costs incurred to internally develop computer software products or to enhance an existing product are recorded as research and development costs and expensed when incurred until technological feasibility for the respective product is established. Thereafter, all software development costs are capitalized and reported at the lower of unamortized cost or net realizable value. Capitalization ceases when the product or enhancement is available for general release to customers.

The Company makes on-going evaluations of the recoverability of its capitalized software projects by comparing the amount capitalized for each product to the estimated net realizable value of the product. If such evaluations indicate that the unamortized software development costs exceed the net realizable value, the Company writes off the amount which the unamortized software development costs exceed net realizable value. Capitalized and purchased computer software development costs are being amortized ratably based on the projected revenue associated with the related software or on a straight-line basis.

STOCK-BASED COMPENSATION

Our stock-based compensation expense is estimated at the grant date based on the award’s fair value as calculated by the Black-Scholes-Merton (BSM) option pricing model and is recognized as expense over the requisite service period. The BSM model requires various highly judgmental assumptions including expected volatility and expected term. If any of the assumptions used in the BSM model changes significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience and our expectations regarding future pre-vesting termination behavior of employees. To the extent our actual forfeiture rate is different from our estimate; stock-based compensation expense is adjusted accordingly.

GOODWILL

Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase businesses combination. Goodwill is reviewed for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the carrying amount of goodwill may be impaired. The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed.fiscal year ended June 30, 2019.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 2 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risks.

 

None.

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Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Chief Financial Officer and Chief Executive Officer concluded that our disclosure controls and procedures were ineffective.effective.

 

TheManagement’s Report on Internal Control over Financial Reporting

Our management has the responsibility to establish and maintain adequate internal controls over our financial reporting, as defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934. Our internal controls are designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our external financial statements in accordance with generally accepted accounting principles (GAAP).

Due to inherent limitations of any internal control system, management acknowledges that there are limitations as to the effectiveness of internal controls over financial reporting and therefore recognize that only reasonable assurance can be gained from any internal control system. Accordingly, our internal control system may not detect or prevent material misstatements in our financial statements and projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and participation of management, including the Chief Executive Officer and Chief Financial Officer, we have performed an assessment of the effectiveness of our internal controls over financial reporting as of March 31, 2020. This assessment was based on the criteria established in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of our assessment, the Company has determined that as of March 31, 2020, there was no material weakness relates to the lack of qualified Internal Audit resources dedicated to documenting and testing legacy accounting systems and Corporate functions.

The Company is in the process of remediating the material weakness, including, but not limited to, by continuing the implementation of a leading cloud-based global ERP system, as approved by the Company’s Board in fiscal year 2016, which is already live in certain locations, and is expected to be completed by June 30, 2018. Further, the Company engaged an internal audit consulting firm to advise and assist with the remediation and internal control improvements, including to assist with the expansion and training of the Company’s internal audit function,control over financial reporting. Our management, including our Chief Executive Officer, believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and to augment corporate oversight and internal audit coverage.cash flows for the periods presented.

Changes in Internal Control over Financial Reporting

 

Except for progress made in the remediation actions described above, thereThere were no changes in our internal controls over financial reporting during the three months ended DecemberMarch 31, 2017,2020, that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15d – 15(f)).

 

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PART II OTHER INFORMATION

 

Item 1. Legal Proceedings

 

On April 7, 2017, Conister Bank Limited filed a complaint in the High Court of Justice Chancery Division, as claim no. HC-2017-001045 against our subsidiary, Virtual Lease Services Limited (“VLS”). The complaint alleges that VLS was in willful default of their agreements with Conister Bank Limited by failing to fulfill its obligations under the agreements with Conister. The complaint alleges damages in excess of £200,000 (approximately $270,270). VLS has responded to the complaint and its expenses are currently covered by available insurance. VLS denies all claims and intends to vigorously defend the action.None

 

Item 1A. Risk Factors

 

None.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

The repurchases provided in the table below were made through the quarter ended December 31, 2017:

Issuer Purchases of Equity Securities (1)
Month Total Number of Shares Purchased  Average
Price Paid
Per Share
  Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs  Maximum Number of Shares that may be Purchased Under the Plans or Programs 
Jul-17  20,247  $4.32   20,247   - 
Aug-17  91,533  $4.51   111,780   - 
Sep-17  -  $-   111,780   - 
Oct-17  27,495  $3.65   139,275   - 
Nov-17  -  $-   -   - 
Dec-17  -  $-   -   - 
Total  139,275  $4.32   139,275   1,000,000 

On July 18, 2017, the Company announced that it had authorized a stock repurchase program permitting the Company to repurchase up to 1,000,000 of its shares of common stock through December 15, 2017. The shares were to be repurchased from time to time in open market transactions or privately negotiated transactions in the Company’s discretion. The repurchase plan expired on its own terms on December 15, 2017.None

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

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Item 5. Other Information

 

On February 9, 2018, the Board of Directors of the Company amended and restated the bylaws of the Company. The Company has attached a copy of the Amended and Restated Bylaws of NetSol Technologies, Inc. dated February 9, 2018 (the “Bylaws”) in its entirety as Exhibit 3.10. The Bylaws were amended and restated to consolidate into one comprehensive document all prior amendments and to reflect prior amendments to the Articles of Incorporation relevant to the Bylaws. This document is further amended as follows:None.

 

Item 6. To change the Company’s name in the Bylaws from NetSol International, Inc. to NetSol Technologies, Inc consistent with the Company’s Articles of Incorporation.Exhibits
 Article II, Section 2 and Section 4, amending to clarify that the minimum and maximum number of board members to 3 and 9, respectively, and to confirm the board’s ability to fill board vacancies.
Article IV, Section 2 amending the date of the annual shareholders meeting to be in line with the Company’s current fiscal year end and practices.

Item 6. Exhibits

3.10Amended and Restated Bylaws of NetSol Technologies, Inc. dated February 9, 2018.
31.1Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CEO)
31.2Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CFO)
32.1Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CEO)
32.2Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CFO)

 

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SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

NETSOL TECHNOLOGIES, INC.

 

Date:February May 13, 20182020/s/ Najeeb U. Ghauri
 NAJEEB U. GHAURI
 Chief Executive Officer

Date:February May 13, 20182020/s/Roger K. Almond
 ROGER K. ALMOND
 Chief Financial Officer
 Principal Accounting Officer

 

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