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NETSOL TECHNOLOGIES INC - Quarter Report: 2021 December (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended December 31, 2021

 

For the transition period from __________ to __________

 

Commission file number: 0-22773

 

NETSOL TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

 

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

 

23975 Park Sorrento, Suite 250, Calabasas, CA 91302
(Address of principal executive offices) (Zip Code)

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

 

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

 

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

 

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

Yes ☒ 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 ☒ No ☐

 

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

 

  Large Accelerated Filer ☐ Accelerated Filer ☐
  Non-accelerated Filer Smaller reporting company
    Emerging growth company

 

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

 

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

Yes No ☒

 

The issuer had 12,186,070 shares issued and 11,247,039 outstanding of its $.01 par value Common Stock and no Preferred Stock outstanding as of February 5, 2022.

 

 

 

 

 

 

NETSOL TECHNOLOGIES, INC.

 

  Page No.
PART I. FINANCIAL INFORMATION  
Item 1. Financial Statements (Unaudited)  
Condensed Consolidated Balance Sheets as of December 31, 2021 and June 30, 2021 3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2021 and 2020 4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended December 31, 2021 and 2020 5
Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended December 31, 2021 and 2020 6
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2021 and 2020 8
Notes to the Condensed Consolidated Financial Statements 10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 32
Item 3. Quantitative and Qualitative Disclosures about Market Risk 47
Item 4. Controls and Procedures 47
   
PART II. OTHER INFORMATION  
Item 1. Legal Proceedings 48
Item 1A Risk Factors 48
Item 2. Unregistered Sales of Equity and Use of Proceeds 48
Item 3. Defaults Upon Senior Securities 48
Item 4. Mine Safety Disclosures 48
Item 5. Other Information 48
Item 6. Exhibits 48

 

Page 2

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

(Unaudited)

 

   As of   As of 
   December 31, 2021   June 30, 2021 
ASSETS          
Current assets:          
Cash and cash equivalents  $25,587,515   $33,705,154 
Accounts receivable, net of allowance of $173,589 and $166,231   7,190,759    4,184,096 
Accounts receivable - related party, net of allowance of $1,373,099 and $1,373,099   -    - 
Revenues in excess of billings, net of allowance of $82,042 and $136,976   18,730,022    14,680,131 
Revenues in excess of billings - related party, net of allowance of $8,163 and $8,163   -    - 
Other current assets, net of allowance of $1,243,633 and $1,243,633   2,581,401    3,009,393 
Total current assets   54,089,697    55,578,774 
Revenues in excess of billings, net - long term   985,772    957,603 
Convertible note receivable - related party, net of allowance of $4,250,000 and $4,250,000   -    - 
Property and equipment, net   10,265,385    12,091,812 
Right of use of assets - operating leases   1,029,294    1,345,869 
Long term investment   2,921,667    3,155,852 
Other assets   33,204    55,127 
Intangible assets, net   2,657,204    3,904,656 
Goodwill   9,516,568    9,516,568 
Total assets  $81,498,791   $86,606,261 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable and accrued expenses  $6,394,780   $6,696,035 
Current portion of loans and obligations under finance leases   10,147,993    11,366,171 
Current portion of operating lease obligations   770,559    857,729 
Unearned revenue   3,719,348    4,556,626 
Total current liabilities   21,032,680    23,476,561 
Loans and obligations under finance leases; less current maturities   120,277    699,841 
Operating lease obligations; less current maturities   319,613    564,257 
Total liabilities   21,472,570    24,740,659 
Commitments and contingencies   -       
Stockholders’ equity:          
Preferred stock, $.01 par value; 500,000 shares authorized;   -    - 
Common stock, $.01 par value; 14,500,000 shares authorized; 12,186,070 shares issued and 11,247,039 outstanding as of December 31, 2021 and 12,181,585 shares issued and 11,265,064 outstanding as of June 30, 2021   121,861    121,816 
Additional paid-in-capital   129,042,021    129,018,826 
Treasury stock (at cost, 939,031 shares and 916,521 shares as of December 31, 2021 and June 30, 2021, respectively)   (3,920,856)   (3,820,750)
Accumulated deficit   (37,206,528)   (38,801,282)
Other comprehensive loss   (34,935,629)   (31,868,481)
Total NetSol stockholders’ equity   53,100,869    54,650,129 
Non-controlling interest   6,925,352    7,215,473 
Total stockholders’ equity   60,026,221    61,865,602 
Total liabilities and stockholders’ equity  $81,498,791   $86,606,261 

 

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)

 

   2021   2020   2021   2020 
   For the Three Months   For the Six Months 
   Ended December 31,   Ended December 31, 
   2021   2020   2021   2020 
Net Revenues:                    
License fees  $1,955,331   $2,586,504   $1,966,047   $2,589,979 
Subscription and support   9,374,869    5,724,802    15,605,258    10,896,665 
Services   4,142,762    4,810,154    11,322,418    12,282,194 
Total net revenues   15,472,962    13,121,460    28,893,723    25,768,838 
                     
Cost of revenues:                    
Salaries and consultants   5,661,917    5,294,662    11,324,327    9,821,311 
Travel   282,836    159,174    496,968    262,926 
Depreciation and amortization   728,868    713,749    1,494,603    1,420,998 
Other   1,156,754    911,566    2,492,215    1,839,719 
Total cost of revenues   7,830,375    7,079,151    15,808,113    13,344,954 
                     
Gross profit   7,642,587    6,042,309    13,085,610    12,423,884 
                     
Operating expenses:                    
Selling and marketing   1,807,162    1,558,027    3,427,155    3,167,631 
Depreciation and amortization   212,864    221,572    427,135    443,362 
General and administrative   3,733,303    4,065,788    7,706,442    7,493,424 
Research and development cost   235,390    110,419    510,620    196,408 
Total operating expenses   5,988,719    5,955,806    12,071,352    11,300,825 
                     
Income from operations   1,653,868    86,503    1,014,258    1,123,059 
                     
Other income and (expenses)                    
Gain (loss) on sale of assets   (80,125)   (52,531)   (190,725)   (74,273)
Interest expense   (90,808)   (94,241)   (191,821)   (197,568)
Interest income   316,253    210,854    759,386    411,675 
Gain (loss) on foreign currency exchange transactions   901,016    13,981    2,185,164    310,022 
Share of net loss from equity investment   (79,818)   (43,685)   (240,783)   (151,535)
Other income   19,668    45,365    22,697    132,637 
Total other income (expenses)   986,186    79,743    2,343,918    430,958 
                     
Net income before income taxes   2,640,054    166,246    3,358,176    1,554,017 
Income tax provision   (201,506)   (245,434)   (369,133)   (509,728)
Net income (loss)   2,438,548    (79,188)   2,989,043    1,044,289 
Non-controlling interest   (1,031,763)   (162,916)   (1,394,289)   (568,839)
Net income (loss) attributable to NetSol  $1,406,785   $(242,104)  $1,594,754   $475,450 
                     
Net income (loss) per share:                    
Net income (loss) per common share                    
Basic  $0.13   $(0.02)  $0.14   $0.04 
Diluted  $0.13   $(0.02)  $0.14   $0.04 
                     
Weighted average number of shares outstanding                    
Basic   11,244,539    11,580,030   11,249,372    11,683,631 
Diluted   11,244,539    11,580,030   11,249,372    11,683,631 

 

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

 

Page 4

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

   2021   2020   2021   2020 
   For the Three Months   For the Six Months 
   Ended December 31,   Ended December 31, 
   2021   2020   2021   2020 
Net income (loss)  $1,406,785   $(242,104)  $1,594,754   $475,450 
Other comprehensive income (loss):                    
Translation adjustment   (1,466,995)   1,633,906    (4,751,391)   2,728,630 
Translation adjustment attributable to non-controlling interest   545,252    (483,826)   1,684,243    (703,734)
Net translation adjustment   (921,743)   1,150,080    (3,067,148)   2,024,896 
Comprehensive income (loss) attributable to NetSol  $485,042   $907,976   $(1,472,394)  $2,500,346 

 

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

 

Page 5

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

 

A statement of the changes in equity for the three months ended December 31, 2021 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, 2021   12,183,570   $121,836   $129,030,982   $(3,920,856)  $(38,613,313)  $(34,013,886)  $6,438,841   $59,043,604 
Common stock issued for:                                        
Services   2,500    25    9,875    -    -    -    -    9,900 
Fair value of subsidiary options issued   -    -    1,164    -    -    -    -    1,164 
Foreign currency translation adjustment   -    -    -    -    -    (921,743)   (545,252)   (1,466,995)
Net income for the year   -    -    -    -    1,406,785    -    1,031,763    2,438,548 
Balance at                                        
December 31, 2021   12,186,070   $121,861   $129,042,021   $(3,920,856)  $(37,206,528)  $(34,935,629)  $6,925,352   $60,026,221 

 

A statement of the changes in equity for the three months ended September 30, 2021 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, 2021   12,181,585   $121,816   $129,018,826   $(3,820,750)  $(38,801,282)  $(31,868,481)  $7,215,473   $61,865,602 
Subsidiary common stock issued for:                                        
-Services   -    -    167    -    -    -    (167)   - 
Common stock issued for:                                        
Services   1,985    20    11,989    -    -    -    -    12,009 
Purchase of treasury shares   -    -    -    (100,106)   -    -    -    (100,106)
Foreign currency translation adjustment   -    -    -    -    -    (2,145,405)   (1,138,991)   (3,284,396)
Net income   -    -    -    -    187,969    -    362,526    550,495 
Balance at                                        
September 30, 2021   12,183,570   $121,836   $129,030,982   $(3,920,856)  $(38,613,313)  $(34,013,886)  $6,438,841   $59,043,604 

 

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

 

Page 6

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

 

A statement of the changes in equity for the three months ended December 31, 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                                        
September 30, 2020   12,137,045   $121,371   $128,764,618   $(1,920,645)  $(39,861,985)  $(33,210,231)  $6,640,531   $60,533,659 
Common stock issued for:                                        
Services   10,413    105    58,563    -    -    -    -    58,668 
Purchase of treasury shares   -    -    -    (927,995)   -    -    -    (927,995)
Foreign currency translation adjustment   -    -    -    -    -    1,150,080    483,826    1,633,906 
Net income (loss) for the period   -    -    -    -    (242,104)   -    162,916    (79,188)
Balance at                                        
December 31, 2020   12,147,458   $121,476   $128,823,181   $(2,848,640)  $(40,104,089)  $(32,060,151)  $7,287,273   $61,219,050 

 

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

 

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

 

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

 

Page 7

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   2021   2020 
   For the Six Months 
   Ended December 31, 
   2021   2020 
Cash flows from operating activities:          
Net income  $2,989,043   $1,044,289 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
Depreciation and amortization   1,921,738    1,864,360 
Provision for bad debts   (33,815)   (175,575)
Share of net loss from investment under equity method   240,783    151,535 
Loss on sale of assets   190,725    74,273 
Stock based compensation   28,292    165,164 
Changes in operating assets and liabilities:          
Accounts receivable   (3,243,348)   5,479,516 
Revenues in excess of billing   (4,741,806)   4,540,271 
Other current assets   304,464    (252,781)
Accounts payable and accrued expenses   56,539    313,869 
Unearned revenue   (749,249)   (554,077)
Net cash provided by (used in) operating activities   (3,036,634)   12,650,844 
           
Cash flows from investing activities:          
Purchases of property and equipment   (773,953)   (1,249,895)
Sales of property and equipment   201,773    123,194 
Investment in associates   -    (93,000)
Net cash used in investing activities   (572,180)   (1,219,701)
           
Cash flows from financing activities:          
Purchase of treasury stock   (100,106)   (1,392,671)
Proceeds from bank loans   188,272    705,338 
Payments on finance lease obligations and loans - net   (715,121)   (175,352)
Net cash used in financing activities   (626,955)   (862,685)
Effect of exchange rate changes   (3,881,870)   1,268,359 
Net increase (decrease) in cash and cash equivalents   (8,117,639)   11,836,817 
Cash and cash equivalents at beginning of the period   33,705,154    20,166,830 
Cash and cash equivalents at end of period  $25,587,515   $32,003,647 

 

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

 

Page 8

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)

 

   For the Six Months 
   Ended December 31, 
   2021   2020 
SUPPLEMENTAL DISCLOSURES:          
Cash paid during the period for:          
Interest  $238,569   $219,412 
Taxes  $390,307   $366,695 
           
NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Assets acquired under finance lease  $-   $222,391 
Drivemate shares acquired for services rendered  $-   $1,300,000 
Shares issued to vendor for services received  $9,900   $- 

 

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

 

Page 9

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2021

(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, 2021. The Company follows the same accounting policies in preparation of interim reports. Results of operations for the interim periods are not indicative of annual results.

 

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

 

Wholly owned Subsidiaries

 

NetSol Technologies Americas, Inc. (“NTA”)

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

NetSol Technologies Australia Pty Ltd. (“Australia”)

NetSol Technologies Europe Limited (“NTE”)

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

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

Ascent Europe Ltd. (“AEL”)

Virtual Lease Services Holdings Limited (“VLSH”)

Virtual Lease Services Limited (“VLS”)

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

 

Majority-owned Subsidiaries

 

NetSol Technologies, Ltd. (“NetSol PK”)

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

NetSol Technologies Thailand Limited (“NetSol Thai”)

OTOZ, Inc. (“OTOZ”)

OTOZ (Thailand) Limited (“OTOZ Thai”)

 

Page 10

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2021

(Unaudited)

 

NOTE 2 – ACCOUNTING POLICIES

 

Use of Estimates

 

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

 

Concentration of Credit Risk

 

Cash includes cash on hand and demand deposits in accounts maintained within the United States as well as in foreign countries. Certain financial instruments, which subject the Company to concentration of credit risk, consist of cash and restricted cash. The Company maintains balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for the banks located in the United States. Balances at financial institutions within certain foreign countries are not covered by insurance except balances maintained in China are insured for RMB 500,000 ($78,616) in each bank and in UK for GBP 85,000 ($114,865) in each bank. The Company maintains two bank accounts in China and six bank accounts in the UK. As of December 31, 2021, and June 30, 2021, the Company had uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $23,506,089 and $31,662,035, 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.

 

Fair Value of Financial Instruments

 

The Company applies the provisions of Accounting Standards Codification (“ASC”) 820-10, “Fair Value Measurements and Disclosures.” ASC 820-10 defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. For certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and short-term debt, the carrying amounts approximate fair value due to their relatively short maturities. The carrying amounts of the convertible note receivable and the long-term debt approximate their fair values based on current interest rates for instruments with similar characteristics.

 

The three levels of valuation hierarchy are defined as follows:

 

Level 1: Valuations consist of unadjusted quoted prices in active markets for identical assets and liabilities and has the highest priority.
   
Level 2: Valuations rely on quoted prices in markets that are not active or observable inputs over the full term of the asset or liability.
   
Level 3: Valuations are based on prices or third party or internal valuation models that require inputs that are significant to the fair value measurement and are less observable and thus have the lowest priority.

 

Page 11

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2021

(Unaudited)

 

The Company’s financial assets that were measured at fair value on a recurring basis as of December 31, 2021, were as follows:

 

   Level 1   Level 2   Level 3   Total Assets 
Revenues in excess of billings - long term  $-   $-   $985,772   $985,772 
Total  $   -   $   -   $985,772   $985,772 

 

The Company’s financial assets that were measured at fair value on a recurring basis as of June 30, 2021, were as follows:

 

   Level 1   Level 2   Level 3   Total Assets 
Revenues in excess of billing - long term  $-   $-   $957,603   $957,603 
Total  $    -   $   -   $957,603   $957,603 

 

The reconciliation from June 30, 2021 to December 31, 2021 is as follows:

 

   Revenues in excess of billings - long term   Fair value discount   Total 
Balance at June 30, 2021  $1,024,382   $(66,779)  $957,603 
Amortization during the period   -    19,041    19,041 
Effect of Translation Adjustment   9,460    (332)   9,128 
Balance at December 31, 2021  $1,033,842   $(48,070)  $985,772 

 

Management analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity” and ASC 815, “Derivatives and Hedging.” Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments. In addition, the fair values of freestanding derivative instruments such as warrants and option derivatives are valued using the Black-Scholes model.

 

Recent Accounting Standards:

 

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

 

In August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”). ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock and results in fewer instruments with embedded conversion features being separately recognized from the host contract as compared with current standards. Those instruments that do not have a separately recognized embedded conversion feature will no longer recognize a debt issuance discount related to such a conversion feature and would recognize less interest expense on a periodic basis. Additionally, the ASU amends the calculation of the share dilution impact related to a conversion feature and eliminates the treasury method as an option. For instruments that do not have a component mandatorily settled in cash, the change will likely result in a higher amount of share dilution in the calculation of earnings per share. This ASU is effective for fiscal years (and interim periods within those fiscal years) beginning after December 15, 2021, which for the Company is the first quarter of fiscal 2023, with early adoption permitted beginning in the first quarter of fiscal 2022. The Company is currently assessing the impact and timing of adoption of this ASU.

 

Page 12

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2021

(Unaudited)

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting, which provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The elective amendments provide expedients to contract modification, affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by this guidance apply only to contracts, hedging relationships, and other transactions that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. This guidance is not applicable to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The guidance can be applied immediately through December 31, 2022. The Company will adopt this standard when LIBOR is discontinued and does not expect a material impact to its financial condition, results of operations or disclosures based on the current debt portfolio and capital structure.

 

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, as if the acquirer had originated the contracts. ASU 2021-08 is effective for annual periods beginning after December 15, 2022, and interim periods within those years, with early adoption permitted. The Company does not expect the standard to have a material effect on its consolidated financial statements.

 

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) subscription and support, 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.

 

Page 13

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2021

(Unaudited)

 

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 post contract support and services in addition to the licenses. The Company’s single performance obligation arrangements are typically post contract support renewals, subscription renewals and services engagements.

 

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

 

Software Licenses

 

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

 

Subscription

 

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.

 

Post Contract Support

 

Revenue from support services and product updates, referred to as subscription and support revenue, is recognized ratably over the term of the maintenance period, which in most instances is one year. Software license updates provide customers with rights to unspecified software product updates 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.

 

Page 14

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2021

(Unaudited)

 

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.

 

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

 

   For the Three Months   For the Six Months 
   Ended December 31,   Ended December 31, 
   2021   2020   2021   2020 
Core:                    
License  $1,955,331   $2,586,504   $1,966,047   $2,589,979 
Subscription and support   9,374,869    5,724,802    15,605,258    10,896,665 
Services   2,867,515    3,191,375    8,723,794    9,064,313 
Services - related party   -    -    -    - 
Total core revenue, net   14,197,715    11,502,681    26,295,099    22,550,957 
                    
Non-Core:                    
Services   1,275,247    1,618,779    2,598,624    3,217,881 
Total non-core revenue, net   1,275,247    1,618,779    2,598,624    3,217,881 
                     
Total net revenue  $15,472,962   $13,121,460   $28,893,723   $25,768,838 

 

Significant Judgments

 

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

 

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

 

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

 

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

 

Page 15

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2021

(Unaudited)

 

The Company recognizes 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.

 

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

 

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

 

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

 

Contract Balances

 

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

 

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

 

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

 

  

As of

December 31, 2021

  

As of June 30, 2021

 
         
Revenues in excess of billings  $19,715,794   $15,637,734 
           
Unearned revenue  $3,719,348   $4,556,626 

 

During the six months ended December 31, 2021, the Company recognized revenue of $2,710,059 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 16

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2021

(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 $45,996,382 as of December 31, 2021, of which the Company estimates to recognize approximately $16,566,939 in revenue over the next 12 months and the remainder over an estimated 6 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.

 

Unearned 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 unearned 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. The Company has applied the following practical expedients:

 

● 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 fulfillment duties and collections efforts.

 

Page 17

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2021

(Unaudited)

 

NOTE 4 – EARNINGS PER SHARE

 

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

 

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

 

   For the three months ended December 31, 2021   For the six months ended
December 31, 2021
 
   Net Income   Shares   Per Share   Net Income   Shares   Per Share 
Basic income per share:                              
Net income available to common shareholders  $1,406,785    11,244,539   $0.13   $1,594,754    11,249,372   $0.14 
Effect of dilutive securities                              
Share grants   -    -    -    -    -    - 
Diluted income per share  $1,406,785    11,244,539   $0.13   $1,594,754    11,249,372   $0.14 

 

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

 

For the three months ended December 31, 2020, 41,112 share grants were excluded from the shares used to calculate diluted earnings per share as their inclusion would have been anti-dilutive.

 

NOTE 5 – OTHER COMPREHENSIVE INCOME AND FOREIGN CURRENCY

 

The accounts of NTE, AEL, VLSH and VLS use the British Pound; VLSIL uses the Euro; NetSol PK, Connect, and NetSol Innovation use the Pakistan Rupee; NTPK Thailand and NetSol Thai use the Thai Baht; Australia uses the Australian dollar; and NetSol Beijing uses the Chinese Yuan as the functional currencies. NetSol Technologies, Inc., and its subsidiary, NTA, use the U.S. dollar as the functional currency. Assets and liabilities are translated at the exchange rate on the balance sheet date, and operating results are translated at the average exchange rate throughout the period. Accumulated translation losses classified as an item of accumulated other comprehensive loss in the stockholders’ equity section of the consolidated balance sheet were $34,935,629 and $31,868,481 as of December 31, 2021 and June 30, 2021, respectively. During the three and six months ended December 31, 2021, comprehensive income (loss) in the consolidated statements of comprehensive income (loss) included a translation loss attributable to NetSol of $(921,743) and $(3,067,148), respectively. During the three and six months ended December 31, 2020, comprehensive income (loss) in the consolidated statements of comprehensive income (loss) included a translation gain attributable to NetSol of $1,150,080 and $2,024,896, respectively.

 

Page 18

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2021

(Unaudited)

 

NOTE 6 – MAJOR CUSTOMERS

 

During the six months ended December 31, 2021, revenues from Daimler Financial Services (“DFS”) and BMW Financial (“BMW”) were $11,421,688 and $1,531,588, respectively representing 39.5% and 5.3%, respectively of revenues. During the six months ended December 31, 2020 revenues from these two customers were $5,402,152 and $3,051,244, respectively representing 21.0% and 11.8%, respectively of revenues. The revenue from these customers are shown in the Asia – Pacific segment.

 

Accounts receivable from DFS and BMW at December 31, 2021, were $1,163,468 and $1,601,071, respectively. Accounts receivable at June 30, 2021, were $462,861 and $35,063, respectively. Revenues in excess of billings at December 31, 2021 were $8,336,839 and $3,326,380 for DFS and BMW, respectively. Revenues in excess of billings at June 30, 2021, were $2,041,750 and $4,453,299 for DFS and BMW, respectively.

 

NOTE 7 – CONVERTIBLE NOTES RECEIVABLE – RELATED PARTY

 

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

 

The following table summarizes the convertible notes receivable from WRLD3D.

 

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

 

The Company has accrued interest of $701,062 at December 31, 2021 and June 30, 2021, which is included in “Other current assets”. As of July 1, 2020, the Company stopped accruing interest.

 

Page 19

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2021

(Unaudited)

 

NOTE 8 - OTHER CURRENT ASSETS

 

Other current assets consisted of the following:

 

  

As of

December 31, 2021

  

As of

June 30, 2021

 
         
Prepaid Expenses  $1,551,735   $1,987,556 
Advance Income Tax   359,964    344,699 
Employee Advances   65,848    28,816 
Security Deposits   253,778    281,464 
Other Receivables   57,605    143,258 
Other Assets   292,471    223,600 
Due From Related Party   1,243,633    1,243,633 
Total    3,825,034    4,253,026 
Less allowance for doubtful account   (1,243,633)   (1,243,633)
Net Balance  $2,581,401   $3,009,393 

 

Due from related party is the amount receivable from WRLD3D for which we have provided an allowance for credit loss for the full amount, leaving a net balance of $0.

 

NOTE 9 – REVENUES IN EXCESS OF BILLINGS – LONG TERM

 

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

 

   As of   As of 
   December 31, 2021   June 30, 2021 
         
Revenues in excess of billings - long term  $1,033,842   $1,024,382 
Present value discount   (48,070)   (66,779)
Net Balance  $985,772   $957,603 

 

Pursuant to revenue recognition for contract accounting, the Company had recorded revenues in excess of billings long-term for amounts billable after one year. During the three and six months ended December 31, 2021, the Company accreted $9,539 and $19,041, respectively. During the three and six months ended December 31, 2020, the Company accreted $27,766 and $41,826, respectively, which was recorded in interest income for that period. The Company used the discounted cash flow method with interest rates ranging from 4.65% to 6.25%.

 

Page 20

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2021

(Unaudited)

 

NOTE 10 - PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

  

As of

December 31, 2021

  

As of

June 30, 2021

 
         
Office Furniture and Equipment  $3,363,282   $3,440,501 
Computer Equipment   14,036,802    18,681,991 
Assets Under Capital Leases   584,322    1,136,128 
Building   5,547,302    6,205,210 
Land   1,432,435    1,608,024 
Autos   1,903,072    1,770,147 
Improvements   195,465    35,592 
Subtotal   27,062,680    32,877,593 
Accumulated Depreciation   (16,797,295)   (20,785,781)
Property and Equipment, Net  $10,265,385   $12,091,812 

 

For the three and six months ended December 31, 2021, depreciation expense was $527,463 and $1,067,185, respectively. Of these amounts, $314,599 and $640,050, respectively, are reflected in cost of revenues. For the three and six months ended December 31, 2020, depreciation expense was $485,456 and $981,723, respectively. Of these amounts, $263,884 and $538,361, respectively, are reflected in cost of revenues.

 

Following is a summary of fixed assets held under finance leases as of December 31, 2021 and June 30, 2021:

 

  

As of

December 31, 2021

  

As of

June 30, 2021

 
Computers and Other Equipment  $-   $169,487 
Furniture and Fixtures   -    57,509 
Vehicles   584,322    909,132 
Total   584,322    1,136,128 
Less: Accumulated Depreciation - Net   (265,010)   (627,119)
   $319,312   $509,009 

 

Finance lease term and discount rate were as follows:

 

  

As of

December 31, 2021

  

As of

June 30, 2021

 
         
Weighted average remaining lease term - Finance leases    1.99 Years     0.55 Years 
           
Weighted average discount rate - Finance leases   7.6%   5.6%

 

 

Page 21

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2021

(Unaudited)

 

NOTE 11 - LEASES

 

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

 

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

 

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

 

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

 

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

 

Supplemental balance sheet information related to leases was as follows:

 

   As of   As of 
   December 31, 2021   June 30, 2021 
Assets          
Operating lease assets, net  $1,029,294   $1,345,869 
           
Liabilities          
Current          
Operating  $770,559   $857,729 
Non-current          
Operating   319,613    564,257 
Total Lease Liabilities  $1,090,172   $1,421,986 

 

Page 22

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2021

(Unaudited)

 

The components of lease cost were as follows:

 

                 
   For the Three Months   For the Six Months 
   Ended December 31,   Ended December 31, 
   2021   2020   2021   2020 
                 
Amortization of finance lease assets  $21,895   $31,926   $42,928   $77,179 
Interest on finance lease obligation   3,212    6,953    8,148    18,645 
Operating lease cost   97,827    310,740    380,778    630,826 
Short term lease cost   38,781    13,493    38,781    30,071 
Sub lease income   (8,950)   (8,738)   (18,105)   (17,362)
Total lease cost  $152,765   $354,374   $452,530   $739,359 

 

Lease term and discount rate were as follows:

 

   As of   As of 
   December 31, 2021   June 30, 2021 
         
Weighted average remaining lease term - Operating leases    1.65 Years     1.78 Years 
           
Weighted average discount rate - Operating leases   5.9%   5.7%

 

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

 

           
   For the Six Months 
   Ended December 31 
   2021   2020 
         
Cash flows related to lease liabilities          
Operating cash flows related to operating leases  $393,765   $529,970 
           
Operating cash flows from finance leases  $3,531   $13,767 
           
Financing cash flows from finance leases  $54,844   $168,624 

 

Page 23

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2021

(Unaudited)

 

Maturities of operating lease liabilities were as follows as of December 31, 2021:

 

   Amount 
Within year 1  $809,508 
Within year 2   262,760 
Within year 3   62,912 
Within year 4   744 
Within year 5   744 
Thereafter   1,859 
Total Lease Payments   1,138,527 
Less: Imputed interest   (48,355)
Present Value of lease liabilities   1,090,172 
Less: Current portion   (770,559)
Non-Current portion  $319,613 

 

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 are currently on a month by month basis. All leases are considered operating leases. There are no rights to purchase the premises and no residual value guarantees. For the three and six months ended December 31, 2021, the Company received lease income of $8,950 and $18,105, respectively. For the three and six months ended December 31, 2020, the Company received lease income of $8,738 and $17,362, respectively.

 

NOTE 12 – LONG TERM INVESTMENT

 

Drivemate

 

The Company and Drivemate Co., Ltd. (“Drivemate”) entered into a subscription agreement on April 25, 2019, (“Drivemate Agreement”) whereby the Company purchased an equity interest of 30% in Drivemate. Per the Drivemate Agreement, the Company purchased 5,469 preferred shares for $1,800,000 consisting of $500,000 cash to be paid over a two-year period and $1,300,000 to be provided in services. The Company has paid the $500,000 in cash and has provided services of $1,300,000. Pursuant to the agreement, the number of shares to be issued is adjusted as necessary to result in an equity ownership equal to 30% of the issued and outstanding shares at the final payment date. As of December 31, 2021, the Company has been issued 8,178 shares equal to 30% of Drivemate. Per the Drivemate Agreement, the Company appointed two directors to the Drivemate board. The Company determined that it met the significant influence criteria since two of the four directors are appointed by the Company and the Company owns 30% of Drivemate; therefore, the Company accounts for the investment using the equity method of accounting.

 

The Company provided services of $12,528 during the three and six months ended December 31, 2021 and did not provide any services during the three and six months ended December 31, 2020.

 

Under the equity method of accounting, the Company recorded its share of net income of $4,666 and net loss of $58,905 for the three and six months ended December 31, 2021, respectively and the Company recorded its share of net income of $3,324 and $3,919 for the three and six months ended December 31, 2020, respectively.

 

Page 24

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2021

(Unaudited)

 

WRLD3D-Related Party

 

On March 2, 2017, the Company purchased a 4.9% interest in WRLD3D, a non-public company, for $1,111,111. The Company paid $555,556 at the initial closing and $555,555 on September 1, 2017. NetSol PK, the subsidiary of the Company, purchased a 12.2% investment in WRLD3D, for $2,777,778 which was earned by providing IT and enterprise software solutions.

 

NetSol PK has not provided services to WRLD3D for the three and six months ended December 31, 2021 and December 31, 2020. Accounts receivable and revenue in excess of billing were $1,373,099 and $8,163 at December 31, 2021, respectively. The Company has established an allowance for the full amounts of these accounts.

 

Under the equity method of accounting, the Company recorded its share of net loss of $84,484 and $181,878 for the three and six months ended December 31, 2021, and the Company recorded its share of net loss of $47,009 and $155,454 for the three and six months ended December 31, 2020, respectively.

 

The following table reflects the above investments at December 31, 2021.

 

 SCHEDULE OF LONG TERM INVESTMENT

   Drivemate   WRLD3D   Total 
Gross investment  $1,800,000   $3,888,889   $5,688,889 
Cumulative net loss on investment   (103,521)   (2,103,266)   (2,206,787)
Cumulative other comprehensive income (loss)   -    (565,101)   (565,101)
Net investment  $1,696,479   $1,220,522   $2,917,001 

 

NOTE 13 - INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

SCHEDULE OF INTANGIBLE ASSETS

  

As of

December 31, 2021

  

As of

June 30, 2021

 
         
Product Licenses - Cost  $47,244,997   $47,244,997 
Effect of Translation Adjustment   (16,960,809)   (14,440,001)
Accumulated Amortization   (27,626,984)   (28,900,340)
Net Balance  $2,657,204   $3,904,656 

 

(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 $2,657,204 will be amortized over the next 1.75 years. Amortization expense for the three and six months ended December 31, 2021was $414,269 and $854,553, respectively. Amortization expense for the three and six months ended December 31, 2020 was $449,865 and $882,637, respectively.

 

(B) Future Amortization

 

Estimated amortization expense of intangible assets is as follows:

 

SUMMARY OF ESTIMATED AMORTIZATION EXPENSE OF INTANGIBLE ASSETS

Period ended:    
December 31, 2022  $1,638,846 
December 31, 2023   1,018,358 
Net Balance   $2,657,204 

 

Page 25

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2021

(Unaudited)

 

NOTE 14 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following:

 

SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES

  

As of

December 31, 2021

  

As of

June 30, 2021

 
         
Accounts Payable  $871,445   $1,067,937 
Accrued Liabilities   2,945,196    2,662,666 
Accrued Payroll   1,454,765    1,782,512 
Accrued Payroll Taxes   294,979    295,349 
Taxes Payable   568,880    608,121 
Other Payable   259,515    279,450 
Total  $6,394,780   $6,696,035 

 

NOTE 15 – DEBTS

 

Notes payable and finance leases consisted of the following:

    As of December 31, 2021 
        Current   Long-Term 
Name   Total   Maturities   Maturities 
              
D&O Insurance (1) $146,959   $146,959   $- 
Bank Overdraft Facility (2)  -    -    - 
Term Finance Facility (3)  979,250    979,250    - 
Loan Payable Bank - Export Refinance (4)  2,817,219    2,817,219    - 
Loan Payable Bank - Running Finance (5)  -    -    - 
Loan Payable Bank - Export Refinance II (6)  2,141,086    2,141,086    - 
Loan Payable Bank - Running Finance II (7)  -    -    - 
Loan Payable Bank - Export Refinance III (8)  3,944,107    3,944,107    - 
Sale and Leaseback Financing (9)  64,193    26,442    37,751 
Term Finance Facility (10)  44,280    19,708    24,572 
Insurance Financing (11)  20,264    20,264    - 
     10,157,358    10,095,035    62,323 
Subsidiary Finance Leases (12)  110,912    52,958    57,954 
    $10,268,270   $10,147,993   $120,277 

 

    As of June 30, 2021 
        Current   Long-Term 
Name   Total   Maturities   Maturities 
              
D&O Insurance (1) $73,143   $73,143   $- 
Bank Overdraft Facility (2)  -    -    - 
Term Finance Facility (3)  1,648,818    1,090,259    558,559 
Loan Payable Bank - Export Refinance (4)  3,162,555    3,162,555    - 
Loan Payable Bank - Running Finance (5)  -    -    - 
Loan Payable Bank - Export Refinance II (6)  2,403,542    2,403,542    - 
Loan Payable Bank - Running Finance II (7)  -    -    - 
Loan Payable Bank - Export Refinance III (8)  4,427,578    4,427,578    - 
Sale and Leaseback Financing (9)  85,313    28,183    57,130 
Term Finance Facility (10)  55,182    19,644    35,538 
Insurance Financing (11)  41,774    41,774    - 
     11,897,905    11,246,678    651,227 
Subsidiary Finance Leases (12)  168,107    119,493    48,614 
    $12,066,012   $11,366,171   $699,841 

 

(1) The Company finances Directors’ and Officers’ (“D&O”) liability insurance and Errors and Omissions (“E&O”) liability insurance, for which the D&O and E&O balances are renewed on an annual basis and, as such, are recorded in current maturities. The interest rate on these financings were ranging from 5.0% to 7.0% as of December 31, 2021 and June 30, 2021.

 

Page 26

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2021

(Unaudited)

 

(2)The Company’s subsidiary, NTE, has an overdraft facility with HSBC Bank plc whereby the bank would cover any overdrafts up to £300,000, or approximately $405,405. The annual interest rate was 5.12% as of December 31, 2021. The total outstanding balance as of December 31, 2021 and June 30, 2021 was £Nil.

 

This overdraft facility requires that the aggregate amount of invoiced trade debtors (net of provisions for bad and doubtful debts and excluding intra-group debtors) of NTE, not exceeding 90 days old, will not be less than an amount equal to 200% of the facility. As of December 31, 2021, NTE was in compliance with this covenant.

(2)The Company’s subsidiary, NTE, has an overdraft facility with HSBC Bank plc whereby the bank would cover any overdrafts up to £300,000, or approximately $405,405. The annual interest rate was 5.12% as of December 31, 2021. The total outstanding balance as of December 31, 2021 and June 30, 2021 was £Nil. Thisoverdraft facility requires that the aggregate amount of invoiced trade debtors (net of provisions for bad and doubtful debts and excluding intra-group debtors) of NTE, not exceeding 90 days old, will not be less than an amount equal to 200% of the facility. As of December 31, 2021, NTE was in compliance with this covenant.
(3)The Company’s subsidiary, NetSol PK, has a term finance facility from Askari Bank Limited, approved by the Government of Pakistan to protect the employment situation during the COVID-19 pandemic. This is a term loan payable in three years. The availed facility amount was Rs. 173,797,255 or $979,250, at December 31, 2021, which is shown as current. The availed facility amount was Rs. 260,678,818 or $1,648,818, at June 30, 2021, of which $1,090,259 is shown as current and the remaining $558,559 is shown as long term. The interest rate for the loan was 3% at December 31, 2021 and June 30, 2021.

 

(4)The Company’s subsidiary, NetSol PK, has an export refinance facility with Askari Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every nine months. The total facility amount is Rs. 500,000,000 or $2,817,219 at December 31, 2021 and Rs. 500,000,000 or $3,162,555 at June 30, 2021. The interest rate for the loan was 3% at December 31, 2021 and June 30, 2021.

 

(5)The Company’s subsidiary, NetSol PK, has a running finance facility with Askari Bank Limited, secured by NetSol PK’s assets. The total facility amount is Rs. 75,000,000 or $422,583, at December 31, 2021. The balance outstanding at December 31, 2021 and June 30, 2021 was Rs. Nil. The interest rate for the loan was 12.5% and 9.5% at December 31, 2021 and June 30, 2021, respectively.

 

This facility requires NetSol PK to maintain a long-term debt equity ratio of 60:40 and the current ratio of 1:1. As of December 31, 2021, NetSol PK was in compliance with this covenant.

 

(5) The Company’s subsidiary, NetSol PK, has a running finance facility with Askari Bank Limited, secured by NetSol PK’s assets. The total facility amount is Rs. 75,000,000 or $422,583, at December 31, 2021. The balance outstanding at December 31, 2021 and June 30, 2021 was Rs. Nil. The interest rate for the loan was 12.5% and 9.5% at December 31, 2021 and June 30, 2021, respectively. This facility requires NetSol PK to maintain a long-term debt equity ratio of 60:40 and the current ratio of 1:1. As of December 31, 2021, NetSol PK was in compliance with this covenant.

(6)The Company’s subsidiary, NetSol PK, has an export refinance facility with Samba Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every nine months. The total facility amount is Rs. 380,000,000 or $2,141,086 and Rs. 380,000,000 or $2,403,542 at December 31, 2021 and June 30, 2021, respectively. The interest rate for the loan was 3% at December 31, 2021 and June 30, 2021.

 

(7)The Company’s subsidiary, NetSol PK, has a running finance facility with Samba Bank Limited, secured by NetSol PK’s assets. The total facility amount is Rs. 120,000,000 or $676,133 and Rs. 120,000,000 or $759,013, at December 31, 2021 and June 30, 2021, respectively. The interest rate for the loan was 12.0% and 9.0% at December 31, 2021 and June 30, 2021, respectively. The balance outstanding at December 31, 2021 and June 30, 2021 was Rs. Nil.

 

During the tenure of the loan, the facilities from Samba Bank Limited require NetSol PK to maintain at a minimum a current ratio of 1:1, an interest coverage ratio of 4 times, a leverage ratio of 2 times, and a debt service coverage ratio of 4 times. As of December 31, 2021, NetSol PK was in compliance with these covenants.

 

(8)The Company’s subsidiary, NetSol PK, has an export refinance facility with Habib Metro Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every nine months. The total facility amount is Rs. 900,000,000 or $5,070,994 and Rs. 900,000,000 or $5,692,600, at December 31, 2021 and June 30, 2021, respectively. NetSol PK used Rs. 700,000,000 or $3,944,107 and Rs. 700,000,000 or $4,427,578, at December 31, 2021 and June 30, 2021, respectively. The interest rate for the loan was 3% at December 31, 2021 and June 30, 2021.

 

(9)The Company’s subsidiary, NetSol PK, availed sale and leaseback financing from First Habib Modaraba secured by the transfer of the vehicles’ title. As of December 31 2021, NetSol PK used Rs. 11,392,924 or $64,193 of which $37,751 was shown as long term and $26,442 as current. As of June 30, 2021, NetSol PK used Rs. 13,487,949 or $85,313 of which $57,130 was shown as long term and $28,183 as current. The interest rate for the loan was 9.0% at December 31, 2021, and June 30, 2021.

 

Page 27

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2021

(Unaudited)

 

(10)In March 2019, the Company’s subsidiary, VLS, entered into a loan agreement. The loan amount was £69,549, or $93,985, for a period of 5 years with monthly payments of £1,349, or $1,823. As of December 31, 2021, the subsidiary has used this facility up to $44,280, of which $24,572 was shown as long-term and $19,708 as current. As of June 30, 2021, the subsidiary has used this facility up to $55,182, of which $35,538 was shown as long-term and $19,644 as current. The interest rate was 6.14% at December 31, 2021 and June 30, 2021.

 

(11)The Company’s subsidiary, VLS, finances Directors’ and Officers’ (“D&O”) liability insurance, and the $20,264 and $41,774 was recorded in current maturities, at December 31, 2021 and June 30, 2021, respectively. The interest rate on this financing ranged from 9.7% to 12.7% as of December 31, 2021 and was 9.7% as of June 30, 2021.

 

(12)The Company leases various fixed assets under finance lease arrangements expiring in various years through 2024. The assets and liabilities under finance leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are secured by the assets themselves. Depreciation of assets under finance leases is included in depreciation expense for the three months ended December 31, 2021 and 2020.

 

Following is the aggregate minimum future lease payments under finance leases as of December 31, 2021:

   Amount 
Minimum Lease Payments     
Within year 1  $59,099 
Within year 2   44,749 
Within year 3   16,756 
Total Minimum Lease Payments   120,604 
Interest Expense relating to future periods   (9,692)
Present Value of minimum lease payments   110,912 
Less: Current portion   (52,958)
Non-Current portion  $57,954 

 

Following is the aggregate future long term debt payments as of December 31, 2021

   Amount
Loan Payments     
Within year 1  $1,025,400 
Within year 2   49,859 
Within year 3   12,464 
Total Loan Payments   1,087,723 
Less: Current portion   (1,025,400)
Non-Current portion  $62,323 

 

NOTE 16 - STOCKHOLDERS’ EQUITY

 

During the three and six months ended December 31, 2021, the Company issued nil and 1,985 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 $12,009.

 

During the three and six months ended December 31, 2021, the Company issued 2,500 shares of common stock for services received from one of its vendor. These shares were valued at the fair market value of $9,900.

 

During the three and six months ended December 31, 2021, the Company purchased nil and 22,510 shares of its own stock for $100,106 pursuant to the Company’s stock repurchase plan.

 

Page 28

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2021

(Unaudited)

 

NOTE 17 – SHARE BASED PAYMENTS

 

The following table summarizes stock grants awarded as compensation:

 

SUMMARY OF UNVESTED STOCK GRANTS AWARDED AS COMPENSATION

   # of shares   Weighted Average Grant Date Fair Value ($) 
Unvested, June 30, 2021   6,985   $5.75 
Granted   -   $- 
Vested   (1,985)  $6.05 
Forfeited / Cancelled   -   $- 
Unvested, December 31, 2021   5,000   $5.69 

 

For the three and six months ended December 31, 2021, the Company recorded compensation expense of $14,225 and $17,228, respectively. For the three and six months ended December 31, 2020, the Company recorded compensation expense of $74,167 and $164,784, respectively. The compensation expense related to the unvested stock grants as of December 31, 2021 was $14,225 which will be recognized during the fiscal year 2022.

 

NOTE 18 – CONTINGENCIES

 

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

 

NOTE 19 – OPERATING SEGMENTS

 

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

 

The following table presents a summary of identifiable assets as of December 31, 2021 and June 30, 2021:

SUMMARY OF IDENTIFIABLE ASSETS

   As of   As of 
   December 31,
2021
   June 30,
2021
 
Identifiable assets:          
Corporate headquarters  $2,147,024   $2,067,474 
North America   5,978,111    6,073,616 
Europe   9,763,859    10,363,611 
Asia - Pacific   63,609,797    68,101,560 
Consolidated  $81,498,791   $86,606,261 

 

The following table presents a summary of investment under equity method as of December 31, 2021 and June 30, 2021:

SUMMARY OF INVESTMENT UNDER EQUITY METHOD

   As of   As of 
   December 31,
2021
   June 30,
2021
 
Investment in associates under equity method:          
Corporate headquarters  $346,491   $396,403 
Asia - Pacific   2,575,176    2,759,449 
Consolidated  $2,921,667   $3,155,852 

 

Page 29

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2021

(Unaudited)

 

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

SUMMARY OF OPERATING INFORMATION

   For the Three Months   For the Six Months 
   Ended December 31,   Ended December 31, 
   2021   2020   2021   2020 
Revenues from unaffiliated customers:                    
North America  $1,060,379   $1,016,556   $1,990,613   $1,829,434 
Europe   2,122,094    2,726,206    5,394,993    5,878,097 
Asia - Pacific   12,290,489    9,378,698    21,508,117    18,061,307 
    15,472,962    13,121,460    28,893,723    25,768,838 
Revenue from affiliated customers                    
Asia - Pacific   -    -    -    - 
    -    -    -    - 
Consolidated  $15,472,962   $13,121,460   $28,893,723   $25,768,838 
                     
Intercompany revenue                    
Europe  $116,479   $126,757   $243,677   $265,913 
Asia - Pacific   774,364    3,125,729    3,334,464    5,284,357 
Eliminated  $890,843   $3,252,486   $3,578,141   $5,550,270 
                     
Net income (loss) after taxes and before non-controlling interest:                    
Corporate headquarters  $138,089   $1,173,146   $266,633   $2,340,941 
North America   (58,915)   (47,019)   (127,008)   (328,816)
Europe   (589,882)   173,085    (398,439)   776,101 
Asia - Pacific   2,949,256    (1,378,400)   3,247,857    (1,743,937)
Consolidated  $2,438,548   $(79,188)  $2,989,043   $1,044,289 
                     
Depreciation and amortization:                    
North America  $527   $998   $1,093   $2,952 
Europe   100,646    108,929    199,494    216,937 
Asia - Pacific   840,559    825,394    1,721,151    1,644,471 
Consolidated  $941,732   $935,321   $1,921,738   $1,864,360 
                     
Interest expense:                    
Corporate headquarters  $9,565   $4,897   $20,006   $10,931 
North America   -    726    -    1,935 
Europe   2,488    1,961    6,284    4,027 
Asia - Pacific   78,755    86,657    165,531    180,675 
Consolidated  $90,808   $94,241   $191,821   $197,568 
                     
Income tax expense:                    
Corporate headquarters  $-   $-   $800   $- 
North America   -    -    1,600    - 
Europe   9,524    92,359    9,524    204,037 
Asia - Pacific   191,982    153,075    357,209    305,691 
Consolidated  $201,506   $245,434   $369,133   $509,728 

 

Page 30

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

December 31, 2021

(Unaudited)

 

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

SUMMARY OF CAPITAL EXPENDITURES

   For the Six Months 
   Ended December 31, 
   2021   2020 
Capital expenditures:          
North America  $-   $1,521 
Europe   89,451    301,233 
Asia - Pacific   684,502    947,141 
Consolidated  $773,953   $1,249,895 

 

NOTE 20 – NON-CONTROLLING INTEREST IN SUBSIDIARY

 

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

SCHEDULE OF BALANCE OF NON-CONTROLLING INTEREST

SUBSIDIARY  Non-Controlling Interest %   Non-Controlling Interest at December 31, 2021 
         
NetSol PK   33.88%  $6,832,666 
NetSol-Innovation   33.88%   127,969 
NetSol Thai   0.006%   (145)
OTOZ Thai   5.60%   701 
OTOZ   5.59%   (35,839)
Total       $6,925,352 

 

SUBSIDIARY  Non-Controlling Interest %   Non-Controlling Interest at
June 30, 2021
 
         
NetSol PK   33.88%  $7,101,883 
NetSol-Innovation   33.88%   136,611 
NetSol Thai   0.006%   (208)
OTOZ Thai   0.006%   (52)
OTOZ   5.00%   (22,761)
Total       $7,215,473 

 

The Company’s subsidiary, OTOZ, issued 19,633 shares to one of its employees as part of their employment agreement resulting in an increase of non-controlling interest from 5.0% to 5.59%.

 

The effective shareholding of the non-controlling interest for OTOZ Thai increased to 5.6%.

 

NOTE 21 – INCOME TAXES

 

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

 

During the three and six months ended December 31, 2021, the Company recorded an income tax provision of $201,506 and $369,133, respectively, resulting in an effective tax rate of 7.6% and 11.0%, respectively. During the three and six months ended December 31, 2020, the Company recorded an income tax provision of $245,434 and $509,728, respectively, resulting in an effective tax rate of 147.6% and 32.8%, respectively.

 

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

 

The following discussion is intended to assist in an understanding of the Company’s financial position and results of operations for the three and six months ended December 31, 2021. 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, 2021, and the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

 

Our website is located at www.netsoltech.com, and our investor relations website is located at http://ir.netsoltech.com. The following filings are available through our investor relations website after we file with the SEC: Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and our Proxy Statements for our annual meetings of stockholders. These filings are also available for download free of charge on our investor relations website. We also provide a link to the section of the SEC’s website at www.sec.gov that has all of our public filings, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, our Proxy Statements and other ownership related filings. Further, a copy of this Quarterly Report on Form 10-Q is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.

 

We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases, and blogs as part of our investor relations website and on social media platforms linked to our corporate website. Investors and others can receive notifications of new information posted on our investor relations website by signing up for e-mail alerts. Further corporate governance information, including our committee charters and code of conduct, is also available on our investor relations website at http:// netsoltech.com/about-us. The content of our websites is not intended to be incorporated by reference into this or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.

 

Forward-Looking Information

 

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

 

Business Overview

 

NetSol Technologies, Inc. (NasdaqCM: NTWK) is a worldwide provider of IT and enterprise software solutions. We believe that our solutions constitute mission critical applications for clients, as they encapsulate end-to-end business processes, facilitating faster processing and increased transactions.

 

Our primary sources of revenues have been licensing, subscriptions, modification, enhancement and support of our suite of financial applications, under the brand name NFS Ascent® for leading businesses in the global finance and leasing space. With constant innovation being a major part of NETSOL’s DNA, we have enabled NFS Ascent® deployment on the cloud with several implementations already live and some underway. This shift to the cloud will enable NETSOL’s new customers to opt for a subscription-based pricing model rather than the traditional licensing model.

 

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

 

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Founded in 1997, NetSol is headquartered in Calabasas, California. While the Company follows a global strategy for sales and delivery of its portfolio of solutions and services, it continues to maintain regional offices in the following locations:

 

  North America   Los Angeles Area
  Europe   London Metropolitan area and Horsham in the UK
  Asia Pacific   Lahore, Karachi, Bangkok, Beijing, Shanghai, Jakarta and Sydney

 

NETSOL believes that our strong technology solutions offer our customers a return on their investment and allows us to thrive in a hyper competitive and mature global marketplace. Our solutions are bolstered by our people. NETSOL believes that people are the drivers of success; therefore, we invest heavily in our hiring, training and retention of top-notch staff to ensure not only successful selling, but also the ongoing satisfaction of our clients. Taken together, this “selling and attentive servicing” approach creates a distinctive advantage for NETSOL and a unique value for its customers. NETSOL continues to underpin its proven and effective business model which is a combination of careful cost arbitrage, subject matter expertise, domain experience, scalability and proximity with its global and regional customers.

 

Our primary offerings include the following:

 

NFS Ascent®

 

NFS Ascent®, the Company’s next generation platform, offers a technologically advanced solution for the auto and equipment finance and leasing industry. NFS Ascent’s® architecture and user interfaces were designed based on the Company’s collective experience with global Fortune 500 companies over the past 40 years combined with UX design concepts. The platform’s framework allows auto captive and asset finance companies to rapidly transform legacy driven technology into a state-of-the-art IT and business process environment. At the core of the NFS Ascent® platform, is a lease accounting and contract processing engine, which allows for an array of interest calculation methods, as well as robust accounting of multi-billion-dollar lease portfolios. NFS Ascent®, with its distributed and clustered deployment across parallel application and high-volume data servers, enables finance companies to process voluminous data in a hyper speed environment. NFS Ascent® has been developed using the latest tools and technologies and its n-tier SOA architecture allows the system to greatly improve a myriad of areas including, but not limited to, scalability, performance, fault tolerance and security. Our premier, next generation solution NFS Ascent® is now also available on the cloud via SaaS/subscription-based pricing. With swift, seamless deployments and easy scalability, it is an extremely adaptive retail and wholesale platform for the global finance and leasing industry. This cloud-version of NFS Ascent® is offered via flexible, value-driven subscription-based pricing options without the need to pay any upfront license fees.

 

NFS Digital

 

NFS Digital is a combination of our core strengths, domain, and technology. Our insight into the evolving landscape along with our valuable experience enables us to define sound digital transformation strategies and compliment them with smart digital solutions so our customers always remain competitive and relevant to the dynamic environment. Our digital transformation solutions are extremely robust and can be used with or without our core, next-gen solution (NFS Ascent®) to effectively augment and enhance our customer’s ecosystem. NFS Digital includes Self-Point of Sale, Mobile Account, Mobile Point of Sale, Mobile Dealer, Mobile Auditor, Mobile Collector and Mobile Field Investigator.

 

Otoz

 

Otoz Digital Auto Retail

 

Otoz provides a white-labelled SaaS platform to OEMs, auto-captives, dealers and start-ups that helps them launch short and long-term on-demand mobility models (car-share and car subscription) and digital retail in minimum time. Our white-label, turn-key platform helps dealers to make the move into digital era by offering an end-to-end car buying experience completely online. Digital auto-retail is not a one-size-fits-all. Otoz provides a flexible, configurable and scalable turn-key platform that helps define, launch and scale a variety of retail products (finance, lease, buy, etc.). Otoz platform empowers dealers to compete in digital era by addressing a range of customer segments with varied needs.

 

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Otoz Ecosystem

 

The Otoz powerful Application Program Interface (API) based architecture allows OEMs, auto-captives and dealerships to integrate with a plethora of providers to offer an end-to-end Omni-channel digital car finance and lease experience. Out-of-the-box APIs by Otoz help dealers and auto-captives connect with ecosystem partners which are crucial for running their auto retail business. It includes, finance and insurance products, trade-in tools, fraud checks, CRM system, websites (Tier 1 – Tier 3), marketing toolkit, inventory feeds, Know Your Customers (KYC), payment processors, vehicle delivery providers etc. In addition, Otoz is equipped with smart lead generation and product analytics capabilities. It empowers dealers with the capability to convert qualified leads and never lose contact with customers. The product analytics capability allows us to improve the customer journey by addressing friction points, herein improving customer experience and conversions – a win-win scenario for dealers and customers.

 

Otoz Platform

 

A fully digital, white label platform for lease, finance, and cash transactions that delivers a frictionless customer experience.

 

Otoz platform consists of two components the Dealer Tool and the Customer Application (APP) of a Dealer Tool which provides for a myriad of services including account creation, order management work queue, user roles and rights, tax configurator, customer KYC reports, vehicle delivery scheduling, payment gateways and inventory management, finance and insurance products feed and prioritization, dealer fee management and ecosystem APIs. The Customer App permits the dealer to work with the customer to get a vehicle via cash, finance or lease, manage vehicle delivery and pick-up scheduling, buy finance and insurance products, buy accessories, paperless license checks, personalized pricing, vehicle options, trade-in valuation, credit application and decision, paperless contracts and e-signing, digital payments and a deal builder.

 

Other Products

 

The Company continues to support its North America and European legacy systems including LeasePak and LeaseSoft.

 

Highlights

 

Listed below are a few of NetSol’s highlights for the quarter ended December 31, 2021:

 

We went live in Japan and Australia with various NFS Ascent® and NFS implementations with Daimler Truck Financial Services GmbH (“DTFS”). These implementations were on time as per requirements of the Clients. The implementations will generate over $4,000,000 in revenues including license revenue, services revenue and support revenue over the next four years.

 

We renegotiated a support contract with DFS which will generate over $10,000,000 on top of the previously projected revenues from the same contract, to be recognized over the next four years.

 

We generated approximately $1,500,000 by implementing change requests from various customers across multiple regions.

 

We renegotiated the support contract with BMW in China to additionally generate approximately $400,000 above the previously expected revenues.

 

We signed a contract with a commercial finance organization in Australia, which is part of a bigger finance network to implement NFS Ascent®. This SaaS implementation is expected to generate approximately $500,000 in subscriptions and services over the next five years.

 

We progressed to the UAT stage in the implementation process of our NFS Ascent® Suite for DFS in India.

 

We entered into a strategic partnership with CGI in a bid to gain further traction in Europe. This partnership is expected to not only expand the current business pipeline in Europe but will also help in successfully delivering future SaaS implementations across Europe and other regions.

 

We were awarded a Five-Star Premier Business Partnership Level Status with the American Financial Services Association.

 

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Management has identified the following material trends affecting NetSol.

 

Positive trends:

 

NFS Ascent® SaaS offering is gaining traction in mid-size auto captives and financial institutions in North American and European markets and is consistent with our transformation strategy as market size has expanded globally.

 

Mobility and digital transformation is the new norm showing acceleration in every sector particularly in auto and banking.

 

COVID-19 has created new dynamics for businesses and corporations with employees and executives working from home. Essentially, the decreased office and maintenance costs, as well as the sharply reduced travel expenses, have positively impacted our financials.

 

Since September 2021, we have over 40% of employees working from the office in all of our global locations.

 

The work environment created by COVID-19 has led our R&D teams to expand and monetize mobile and digital solutions in our space and complementary sectors in an effort to anticipate customer needs.

 

In developing markets, new interests are emerging from existing clients for upgrades and mobility platforms.

 

Growing opportunities and dynamics of shared car ownership either through ride hailing or car sharing encourage the use of our innovation and development tools.

 

Otoz platform is showing positive trajectory of interest from existing and new auto leasing and Tier 1 companies in all of our markets, including China, the US and Europe.

 

Improved stability in US and Pakistan relationship boosting confidence and trade relations.

 

The China Pakistan Economic Corridor (CPEC) investment, initiated by China, has exceeded $62 billion investment from the originally planned $46 billion on Pakistan energy and infrastructure sectors.

 

China’s auto sector remains strong as our customers are constantly demanding ‘Change Requests’ or additional services and reflects resilience.

 

Negative trends:

 

The degree to which the COVID-19 pandemic impacts our future business globally, results of operations and financial condition will depend on future developments, which are uncertain, including but not limited to the duration, spread and severity of the pandemic, the availability, adoption and efficacy of vaccines, government responses and other actions to mitigate the spread of and to treat COVID-19, and when and to what extent normal business, economic and social activity and conditions resume.

 

We are unable to predict the extent to which the pandemic impacts our customers and other partners and their financial conditions, but adverse effects on these parties could also adversely affect us.

 

Most OEMs and auto sectors are experiencing a major slowdown due to lockdowns, health concerns and component part supply chain issues.

 

The C-level decision making to acquire new systems or even upgrade will be elongated due to uncertainty of the COVID-19 virus.

 

Due to travel restrictions caused by COVID-19, it has been difficult to conduct face to face meetings for global clients and new prospects removing the personal connection essential to some decision making.

 

The COVID-19 pandemic has adversely affected live industry conferences and events, such as those held by the Equipment Leasing and Finance Association (ELFA), reducing leads and market exposure.

 

Working from the office continues to pose its own risk of virus spread until it ameliorated.

 

Political actions, including trade protection and national security policies of the U.S. and Chinese governments, such as tariffs or bans could in the future limit or prevent companies from transacting business with China and aggravate the global business environment.

 

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CHANGES IN FINANCIAL CONDITION

 

Quarter Ended December 31, 2021 Compared to the Quarter Ended December 31, 2020

 

The following table sets forth the items in our unaudited condensed consolidated statement of operations for the three months ended December 31, 2021 and 2020 as a percentage of revenues.

 

   For the Three Months 
   Ended December 31, 
   2021   %   2020   % 
Net Revenues:                    
License fees  $1,955,331    12.6%  $2,586,504    19.7%
Subscription and support   9,374,869    60.6%   5,724,802    43.6%
Services   4,142,762    26.8%   4,810,154    36.7%
Total net revenues   15,472,962    100.0%   13,121,460    100.0%
                     
Cost of revenues:                    
Salaries and consultants   5,661,917    36.6%   5,294,662    40.4%
Travel   282,836    1.8%   159,174    1.2%
Depreciation and amortization   728,868    4.7%   713,749    5.4%
Other   1,156,754    7.5%   911,566    6.9%
Total cost of revenues   7,830,375    50.6%   7,079,151    54.0%
                     
Gross profit   7,642,587    49.4%   6,042,309    46.0%
Operating expenses:                    
Selling and marketing   1,807,162    11.7%   1,558,027    11.9%
Depreciation and amortization   212,864    1.4%   221,572    1.7%
General and administrative   3,733,303    24.1%   4,065,788    31.0%
Research and development cost   235,390    1.5%   110,419    0.8%
Total operating expenses   5,988,719    38.7%   5,955,806    45.4%
                     
Income from operations   1,653,868    10.7%   86,503    0.7%
Other income and (expenses)                    
Gain (loss) on sale of assets   (80,125)   -0.5%   (52,531)   -0.4%
Interest expense   (90,808)   -0.6%   (94,241)   -0.7%
Interest income   316,253    2.0%   210,854    1.6%
Gain (loss) on foreign currency exchange transactions   901,016    5.8%   13,981    0.1%
Share of net loss from equity investment   (79,818)   -0.5%   (43,685)   -0.3%
Other income   19,668    0.1%   45,365    0.3%
Total other income (expenses)   986,186    6.4%   79,743    0.6%
                     
Net income before income taxes   2,640,054    17.1%   166,246    1.3%
Income tax provision   (201,506)   -1.3%   (245,434)   -1.9%
Net income (loss)   2,438,548    15.8%   (79,188)   -0.6%
Non-controlling interest   (1,031,763)   -6.7%   (162,916)   -1.2%
Net income (loss) attributable to NetSol  $1,406,785    9.1%  $(242,104)   -1.8%

 

Page 36

 

 

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 19 “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

(Unfavorable)

  

Favorable

(Unfavorable)

Change

  

Total

Favorable

 
   For the Three Months   Change in   due to   (Unfavorable) 
   Ended December 31,   Constant   Currency   Change as 
   2021   %   2020   %   Currency   Fluctuation   Reported 
                             
Net Revenues:  $15,472,962    100.0%  $13,121,460    100.0%  $2,991,365   $(639,863)  $2,351,502 
                                    
Cost of revenues:   7,830,375    50.6%   7,079,151    54.0%   (1,178,913)   427,689    (751,224)
                                    
Gross profit   7,642,587    49.4%   6,042,309    46.0%   1,812,452    (212,174)   1,600,278 
                                    
Operating expenses:   5,988,719    38.7%   5,955,806    45.4%   (224,992)   192,079    (32,913)
                                    
Income (loss) from operations  $1,653,868    10.7%  $86,503    0.7%  $1,587,460   $(20,095)  $1,567,365 

 

Net revenues for the quarter ended December 31, 2021 and 2020 are broken out among the segments as follows:

 

   2021   2020 
   Revenue   %   Revenue   % 
                 
North America  $1,060,379    6.9%  $1,016,556    7.7%
Europe   2,122,094    13.7%   2,726,206    20.8%
Asia-Pacific   12,290,489    79.4%   9,378,698    71.5%
Total  $15,472,962    100.0%  $13,121,460    100.0%

 

Revenues

 

License fees

 

License fees for the three months ended December 31, 2021 were $1,955,331 compared to $2,586,504 for the three months ended December 31, 2020 reflecting a decrease of $631,173 with a change in constant currency of $469,465. During the three months ended December 31, 2021, we recognized approximately $1,920,000 related to a new agreement with DTFS for the sale of both our legacy and Ascent product® for their new business segment in the Japanese and Australian markets. During the three months ended December 31, 2020, the Company recognized approximately $2,410,000 of revenue related to a new agreement with an existing tier one finance company in China to upgrade to our NFS Ascent® Retail and Wholesale platforms.

 

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Subscription and support

 

Subscription and support fees for the three months ended December 31, 2021 were $9,374,869 compared to $5,724,802 for the three months ended December 31, 2020 reflecting an increase of $3,650,067 with a change in constant currency of $4,170,753. The major increase is related to the revised ceiling amount for post contract support due to the software customizations related to the DFS contract. The Company recorded a one-time post contract support revenue of approximately $3,480,000 using the catch-up approach during the three months ended December 31, 2021. In addition, the Company will recognize approximately $7,931,000 of additional subscription and support revenue over the remaining four years of the contract. Subscription and support fees begin once a customer has “gone live” with our product. Subscription and support fees are recurring in nature, and we anticipate these fees to gradually increase as we implement both our NFS legacy products and NFS Ascent®.

 

Services

 

Services income for the three months ended December 31, 2021 was $4,142,762 compared to $4,810,154 for the three months ended December 31, 2020 reflecting a decrease of $667,392 with a decrease in constant currency of $709,923. The decrease is primarily due to the reduction in implementation services as certain implementations are nearing completion or have gone live. 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.

 

Gross Profit

 

The gross profit was $7,642,587, for the three months ended December 31, 2021 as compared with $6,042,309 for the three months ended December 31, 2020. This is an increase of $1,600,278 with a change in constant currency of $1,812,452. The gross profit percentage for the three months ended December 31, 2021 also increased to 49.4% from 46.0% for the three months ended December 31, 2020. The cost of sales was $7,830,375 for the three months ended December 31, 2021 compared to $7,079,151 for the three months ended December 31, 2020 for an increase of $751,224 and on a constant currency basis an increase of $1,178,913. As a percentage of sales, cost of sales decreased from 54.0% for the three months ended December 31, 2020 to 50.6% for the three months ended December 31, 2021.

 

Salaries and consultant fees increased by $367,255 from $5,294,662 for the three months ended December 31, 2020 to $5,661,917 for the three months ended December 31, 2021 and on a constant currency basis increased by $666,430. The increase is due to increases in salaries that had been decreased as part of our cost savings measure due to the COVID-19 pandemic last year, annual salary raises, and new hirings. As a percentage of sales, salaries and consultant expense decreased from 40.4% for the three months ended December 31, 2020 to 36.6% for the three months ended December 31, 2021.

 

Travel expense was $282,836 for the three months ended December 31, 2021 compared to $159,174 for the three months ended December 31, 2020 for an increase of $123,662 with an increase in constant currency of $133,039. The increase in travel expense is due to the increase in travel as countries begin lifting travel restrictions.

 

Depreciation and amortization expense increased to $728,868 compared to $713,749 for the three months ended December 31, 2020 or an increase of $15,119 and on a constant currency basis an increase of $76,963.

 

Other cost increased to $1,156,754 for the three months ended December 31, 2021 compared to $911,566 for the three months ended December 31, 2020 or an increase of $245,188 and on constant currency basis an increase of $302,481. The increase is mainly due to increase in repair and maintenance cost and computer cost.

 

Operating Expenses

 

Operating expenses were $5,988,719 for the three months ended December 31, 2021 compared to $5,955,806, for the three months ended December 31, 2020 for an increase of 0.60% or $32,913 and on a constant currency basis an increase of 3.8% or $224,992. As a percentage of sales, it decreased from 45.4% to 38.7%. The increase in operating expenses was primarily due to increases in selling expenses and research and development costs off set by decrease in general and administrative expenses.

 

Selling expenses were $1,807,162 for the three months ended December 31, 2021 compared to $1,558,027, for the three months ended December 31, 2020 for an increase of $249,135 and on constant currency basis an increase of $330,431.

 

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General and administrative expenses were $3,733,303 for the three months ended December 31, 2021 compared to $4,065,788 at December 31, 2020 or a decrease of $332,485 or 8.2% and on a constant currency basis a decrease of $248,398 or 6.1%. During the three months ended December 31, 2021, salaries decreased by approximately $20,778 and increased $41,105 on a constant currency basis, and other general and administrative expenses decreased approximately $312,726 or $290,017 on a constant currency basis.

 

Research and development cost was $235,390 for the three months ended December 31, 2021 compared to $110,419, for the three months ended December 31, 2020 for an increase of $124,971 and on constant currency basis an increase of $145,160.

 

Income/Loss from Operations

 

Income from operations was $1,653,868 for the three months ended December 31, 2021 compared to $86,503 for the three months ended December 31, 2020. This represents an increase of $1,567,365 with an increase of $1,587,460 on a constant currency basis for the three months ended December 31, 2021 compared with the three months ended December 31, 2020. As a percentage of sales, income from operations was 10.7% for the three months ended December 31, 2021 compared to 1.0% for the three months ended December 31, 2020.

 

Other Income and Expense

 

Other income was $986,186 for the three months ended December 31, 2021 compared to $79,743 for the three months ended December 31, 2020. This represents an increase of $906,443 with an increase of $990,441 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 PKR compared to the U.S. dollar and the Euro. During the three months ended December 31, 2021, we recognized a gain of $901,016 in foreign currency exchange transactions compared to a gain of $13,981 for the three months ended December 31, 2020. During the three months ended December 31, 2021, the value of the U.S. dollar and the Euro increased 3.8% and 1.6%, respectively, compared to the PKR. During the three months ended December 31, 2020, the value of the U.S. dollar decreased 3.3% and the value of the Euro increased 1.2%, respectively, compared to the PKR.

 

Non-controlling Interest

 

For the three months ended December 31, 2021, the net income attributable to non-controlling interest was $1,031,763, compared to $162,916 for the three months ended December 31, 2020. The increase in non-controlling interest is primarily due to the increase in net income of NetSol PK.

 

Net Income (loss) attributable to NetSol

 

Net income was $1,406,785 for the three months ended December 31, 2021 compared to a net loss of $242,104 for the three months ended December 31, 2020. This is an increase of $1,648,889 with an increase of $1,641,692 on a constant currency basis, compared to the prior year. For the three months ended December 31, 2021, net income per share was $0.13 for basic and diluted shares compared to a net loss per share $0.02 for basic and diluted shares for the three months ended December 31, 2020.

 

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Six Months Ended December 31, 2021 Compared to the Six Months Ended December 31, 2020

 

The following table sets forth the items in our unaudited condensed consolidated statement of operations for the six months ended December 31, 2021 and 2020 as a percentage of revenues.

 

   For the Six Months 
   Ended December 31, 
   2021   %   2020   % 
Net Revenues:                    
License fees  $1,966,047    6.8%  $2,589,979    10.1%
Subscription and support   15,605,258    54.0%   10,896,665    42.3%
Services   11,322,418    39.2%   12,282,194    47.7%
Total net revenues   28,893,723    100.0%   25,768,838    100.0%
                     
Cost of revenues:                    
Salaries and consultants   11,324,327    39.2%   9,821,311    38.1%
Travel   496,968    1.7%   262,926    1.0%
Depreciation and amortization   1,494,603    5.2%   1,420,998    5.5%
Other   2,492,215    8.6%   1,839,719    7.1%
Total cost of revenues   15,808,113    54.7%   13,344,954    51.8%
                     
Gross profit   13,085,610    45.3%   12,423,884    48.2%
Operating expenses:                    
Selling and marketing   3,427,155    11.9%   3,167,631    12.3%
Depreciation and amortization   427,135    1.5%   443,362    1.7%
General and administrative   7,706,442    26.7%   7,493,424    29.1%
Research and development cost   510,620    1.8%   196,408    0.8%
Total operating expenses   12,071,352    41.8%   11,300,825    43.9%
                     
Income from operations   1,014,258    3.5%   1,123,059    4.4%
Other income and (expenses)                    
Gain (loss) on sale of assets   (190,725)   -0.7%   (74,273)   -0.3%
Interest expense   (191,821)   -0.7%   (197,568)   -0.8%
Interest income   759,386    2.6%   411,675    1.6%
Gain (loss) on foreign currency exchange transactions   2,185,164    7.6%   310,022    1.2%
Share of net loss from equity investment   (240,783)   -0.8%   (151,535)   -0.6%
Other income   22,697    0.1%   132,637    0.5%
Total other income (expenses)   2,343,918    8.1%   430,958    1.7%
                     
Net income before income taxes   3,358,176    11.6%   1,554,017    6.0%
Income tax provision   (369,133)   -1.3%   (509,728)   -2.0%
Net income   2,989,043    10.3%   1,044,289    4.1%
Non-controlling interest   (1,394,289)   -4.8%   (568,839)   -2.2%
Net income attributable to NetSol  $1,594,754    5.5%  $475,450    1.8%

 

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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 19 “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.

 

   For the Three Months  

Favorable

(Unfavorable)

Change in

  

Favorable

(Unfavorable)

Change

due to

  

Total

Favorable

(Unfavorable)

 
   Ended December 31,   Constant   Currency   Change as 
   2021   %   2020   %   Currency   Fluctuation   Reported 
                             
Net Revenues:  $28,893,723    100.0%  $25,768,838    100.0%  $3,471,902   $(347,017)  $3,124,885 
                                    
Cost of revenues:   15,808,113    54.7%   13,344,954    51.8%   (2,698,220)   235,061    (2,463,159)
                                    
Gross profit   13,085,610    45.3%   12,423,884    48.2%   773,682    (111,956)   661,726 
                                    
Operating expenses:   12,071,352    41.8%   11,300,825    43.9%   (838,248)   67,721    (770,527)
                                    
Income (loss) from operations  $1,014,258    3.5%  $1,123,059    4.4%  $(64,566)  $(44,235)  $(108,801)

 

Net revenues for the six months ended December 31, 2021 and 2020 are broken out among the segments as follows:

 

   2021   2020 
   Revenue   %   Revenue   % 
                 
North America  $1,990,613    6.9%  $1,829,434    7.1%
Europe   5,394,993    18.7%   5,878,097    22.8%
Asia-Pacific   21,508,117    74.4%   18,061,307    70.1%
Total  $28,893,723    100.0%  $25,768,838    100.0%

 

Revenues

 

License fees

 

License fees for the six months ended December 31, 2021 were $1,966,047 compared to $2,589,979 for the six months ended December 31, 2020 reflecting a decrease of $623,932 with a change in constant currency of $462,780. During the six months ended December 31, 2021, we recognized approximately $1,920,000 related to a new agreement with DTFS for the sale of both our legacy and Ascent product® for their new business segment in the Japanese and Australian markets. During the six months ended December 31, 2020, the Company recognized approximately $2,410,000 of revenue related to a new agreement with an existing tier one finance company in China to upgrade to our NFS Ascent® Retail and Wholesale platforms.

 

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Subscription and support

 

Subscription and support fees for the six months ended December 31, 2021 were $15,605,258 compared to $10,896,665 for the six months ended December 31, 2020 reflecting an increase of $4,708,593 with a change in constant currency of $5,074,240. The major increase is related to the revised ceiling amount for post contract support due to the software customizations related to the DFS contract. The Company recorded a one-time post contract support revenue of approximately $3,480,000 using the catch-up approach during the six months ended December 31, 2021. In addition, the Company will recognize approximately $7,931,000 of additional subscription and support revenue over the remaining four years of the contract. Subscription and support fees begin once a customer has “gone live” with our product. Subscription and support fees are recurring in nature, and we anticipate these fees to gradually increase as we implement both our NFS legacy products and NFS Ascent®.

 

Services

 

Services income for the six months ended December 31, 2021 was $11,322,418 compared to $12,282,194 for the six months ended December 31, 2020 reflecting a decrease of $959,776 with a decrease in constant currency of $1,139,558. The decrease is primarily due to the reduction in implementation services as certain implementations are nearing completion or have gone live. 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.

 

Gross Profit

 

The gross profit was $13,085,610, for the six months ended December 31, 2021 as compared with $12,423,884 for the six months ended December 31, 2020. This is an increase of $661,726 with a change in constant currency of $773,682. The gross profit percentage for the six months ended December 31, 2021 decreased to 45.3% from 48.2% for the six months ended December 31, 2020. The cost of sales was $15,808,113 for the six months ended December 31, 2021 compared to $13,344,954 for the six months ended December 31, 2020 for an increase of $2,463,159 and on a constant currency basis an increase of $2,698,220. As a percentage of sales, cost of sales increased from 51.8% for the six months ended December 31, 2020 to 54.7% for the six months ended December 31, 2021.

 

Salaries and consultant fees increased by $1,503,016 from $9,821,311 for the six months ended December 31, 2020 to $11,324,327 for the six months ended December 31, 2021 and on a constant currency basis increased by $1,667,575. The increase is due to increases in salaries that had been decreased as part of our cost savings measure due to the COVID-19 pandemic last year, annual salary raises, and new hirings. As a percentage of sales, salaries and consultant expense increased from 38.1% for the six months ended December 31, 2020 to 39.2% for the six months ended December 31, 2021.

 

Travel expense was $496,968 for the six months ended December 31, 2021 compared to $262,926 for the six months ended December 31, 2020 for an increase of $234,042 with an increase in constant currency of $234,351. The increase in travel expense is due to the increase in travel as countries begin lifting travel restrictions.

 

Depreciation and amortization expense increased to $1,494,603 compared to $1,420,998 for the six months ended December 31, 2020 or an increase of $73,605 and on a constant currency basis an increase of $122,301.

 

Other cost increased to $2,492,215 for the six months ended December 31, 2021 compared to $1,839,719 for the six months ended December 31, 2020 or an increase of $652,496 and on constant currency basis an increase of $673,993. The increase is mainly due to a one time hosting cost of $302,000 and increase in repair and maintenance cost and computer cost.

 

Operating Expenses

 

Operating expenses were $12,071,352 for the six months ended December 31, 2021 compared to $11,300,825, for the six months ended December 31, 2020 for an increase of 6.8% or $770,527 and on a constant currency basis an increase of 7.4% or $838,248. As a percentage of sales, it decreased from 43.9% to 41.8%. The increase in operating expenses was primarily due to increases in general and administrative expenses and research and development costs.

 

Selling expenses were $3,427,155 for the six months ended December 31, 2021 compared to $3,167,631, for the six months ended December 31, 2020 for an increase of $259,524 and on constant currency basis an increase of $314,785.

 

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General and administrative expenses were $7,706,442 for the six months ended December 31, 2021 compared to $7,493,424 at December 31, 2020 for an increase of $213,018 or 2.8% and on a constant currency basis an increase of $205,203 or 2.8%. During the six months ended December 31, 2021, salaries increased by approximately $207,154 or $221,131 on a constant currency basis, and professional services increased approximately $119,054 or $109,451 on constant currency basis and other general and administrative expenses decreased approximately $113,190 or $125,379 on a constant currency basis.

 

Research and development cost was $510,620 for the six months ended December 31, 2021 compared to $196,408, for the six months ended December 31, 2020 for an increase of $314,212 and on constant currency basis an increase of $334,542.

 

Income from Operations

 

Income from operations was $1,014,258 for the six months ended December 31, 2021 compared to $1,123,059 for the six months ended December 31, 2020. This represents a decrease of $108,801 with a decrease of $64,566 on a constant currency basis for the six months ended December 31, 2021 compared with the six months ended December 31, 2020. As a percentage of sales, income from operations was 3.5% for the six months ended December 31, 2021 compared to income from operations of 4.4% for the six months ended December 31, 2020.

 

Other Income and Expense

 

Other income was $2,343,918 for the six months ended December 31, 2021 compared to $430,958 for the six months ended December 31, 2020. This represents an increase of $1,912,960 with an increase of $1,977,646 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 PKR compared to the U.S. dollar and the Euro. During the six months ended December 31, 2021, we recognized a gain of $2,185,164 in foreign currency exchange transactions compared to a gain of $310,022 for the six months ended December 31, 2020. During the six months ended December 31, 2021, the value of the U.S. dollar and the Euro increased 12.3% and 7.2%, respectively, compared to the PKR. During the six months ended December 31, 2020, the value of the U.S. dollar and the Euro increased 3.5% and 13.2%, respectively, compared to the PKR.

 

Non-controlling Interest

 

For the six months ended December 31, 2021, the net income attributable to non-controlling interest was $1,394,289, compared to $568,839 for the six months ended December 31, 2020. The increase in non-controlling interest is primarily due to the increase in net income of NetSol PK.

 

Net Income attributable to NetSol

 

Net income was $1,594,754 for the six months ended December 31, 2021 compared to $475,450 for the six months ended December 31, 2020. This is an increase of $1,119,304 with an increase of $1,113,401 on a constant currency basis, compared to the prior year. For the six months ended December 31, 2021, net income per share was $0.14 for basic and diluted shares compared to $0.04 for basic and diluted shares for the six months ended December 31, 2020.

 

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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 plus 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.

 

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.

 

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.

 

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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 six months ended December 31, 2021 and 2020 are as follows:

 

   For the Three Months Ended   For the Three Months Ended   For the Six months Ended   For the Six months Ended 
   December 31, 2021   December 31, 2020   December 31, 2021   December 31, 2020 
                 
Net Income (loss) attributable to NetSol  $1,406,785   $(242,104)  $1,594,754   $475,450 
Non-controlling interest   1,031,763    162,916    1,394,289    568,839 
Income taxes   201,506    245,434    369,133    509,728 
Depreciation and amortization   941,732    935,321    1,921,738    1,864,360 
Interest expense   90,808    94,241    191,821    197,568 
Interest (income)   (316,253)   (210,854)   (759,386)   (411,675)
EBITDA  $3,356,341   $984,954   $4,712,349   $3,204,270 
Add back:                    
Non-cash stock-based compensation   25,289    74,169    28,292    165,164 
Adjusted EBITDA, gross  $3,381,630   $1,059,123   $4,740,641   $3,369,434 
Less non-controlling interest (a)   (1,293,037)   (441,853)   (1,881,916)   (1,140,697)
Adjusted EBITDA, net  $2,088,593   $617,270   $2,858,725   $2,228,737 
                     
Weighted Average number of shares outstanding                    
Basic   11,244,539    11,580,030    11,249,372    11,683,631 
Diluted   11,244,539    11,580,030    11,249,372    11,683,631 
                     
Basic adjusted EBITDA  $0.19   $0.05   $0.25   $0.19 
Diluted adjusted EBITDA  $0.19   $0.05   $0.25   $0.19 
                     
(a)The reconciliation of adjusted EBITDA of non-controlling interest to net income attributable to non-controlling interest is as follows                    
                    
Net Income (loss) attributable to non-controlling interest  $1,031,763   $162,916   $1,394,289   $568,839 
Income Taxes   61,761    44,233    114,427    92,882 
Depreciation and amortization   273,822    264,535    561,453    529,100 
Interest expense   26,682    28,824    56,082    60,344 
Interest (income)   (101,385)   (67,207)   (244,729)   (133,164)
EBITDA  $1,292,643   $433,301   $1,881,522   $1,118,001 
Add back:                    
Non-cash stock-based compensation   394    8,552    394    22,696 
Adjusted EBITDA of non-controlling interest  $1,293,037   $441,853   $1,881,916   $1,140,697 

 

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LIQUIDITY AND CAPITAL RESOURCES

 

Our cash position was $25,587,515 at December 31, 2021, compared to $33,705,154 at June 30, 2021.

 

Net cash used in operating activities was $3,036,634 for the six months ended December 31, 2021 compared to cash provided by operating activities $12,650,844 for the six months ended December 31, 2020. At December 31, 2021, we had current assets of $54,089,697 and current liabilities of $21,032,680. We had accounts receivable of $7,190,759 at December 31, 2021 compared to $4,184,096 at June 30, 2021. We had revenues in excess of billings of $19,715,794 at December 31, 2021 compared to $15,637,734 at June 30, 2021 of which $985,772 and $957,603 is shown as long term as of December 31, 2021 and June 30, 2021, respectively. The long-term portion was discounted by $48,070 and $66,779 at December 31, 2021 and June 30, 2021, respectively, using the discounted cash flow method with interest rates ranging from 4.65% to 6.25%. During the six months ended December 31, 2021, 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 increased by $7,084,723 from $19,821,830 at June 30, 2021 to $26,906,553 at December 31, 2021. Accounts payable and accrued expenses, and current portions of loans and lease obligations amounted to $6,394,780 and $10,147,993, respectively at December 31, 2021. Accounts payable and accrued expenses, and current portions of loans and lease obligations amounted to $6,696,035 and $11,366,171, respectively at June 30, 2021.

 

The average days sales outstanding for the six months ended December 31, 2021 and 2020 were 137 and 174 days, respectively, for each period. The days sales outstanding have been calculated by taking into consideration the average combined balances of accounts receivable and revenues in excess of billings.

 

Net cash used in investing activities was $572,180 for the six months ended December 31, 2021, compared to $1,219,701 for the six months ended December 31, 2020. We had purchases of property and equipment of $773,953 compared to $1,249,895 for the six months ended December 31, 2020. For the six months ended December 31, 2020, we invested $93,000, in Drivemate.

 

Net cash used in financing activities was $626,955 for the six months ended December 31, 2021, compared to $862,685 for the six months ended December 31, 2020. For the six months ended December 31, 2021, we purchased 22,510 shares of our own stock for $100,106 compared to the purchase of 446,996 shares for $1,392,671 for the same period last year. The six months ended December 31, 2021 included the cash inflow of $188,272 from bank proceeds compared to $705,338 for the same period last year. During the six months ended December 31, 2021, we had net payments for bank loans and finance leases of $715,121 compared to $175,352 for the six months ended December 31, 2020. 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 15 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 subscription and support agreements, intercompany charges for corporate services, and through the exercise of options and warrants. As of December 31, 2021, we had approximately $25.6 million of cash, cash equivalents and marketable securities of which approximately $23.5 million is held by our foreign subsidiaries. As of June 30, 2021, we had approximately $33.7 million of cash, cash equivalents and marketable securities of which approximately $31.7 million was held by our foreign subsidiaries.

 

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 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) 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 ($2,817,219) and a running finance facility of Rupees 75 million ($422,583). NetSol PK has an approved facility for export refinance from another Habib Metro Bank Limited amounting to Rupees 900 million ($5,070,994). These facilities require 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. 380 million ($2,141,086) and a running finance facility of Rs. 120 million ($676,133) from Samba 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.

 

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 strategic 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 U.S. GAAP, and they conform to general practices in our industry. We apply critical accounting policies consistently from period to period and intend that any change in methodology occur in an appropriate manner. There have been no significant changes to our accounting policies and estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021.

 

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.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risks.

 

None.

 

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 effective.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal controls over financial reporting during the three months ended December 31, 2021, 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

 

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, 2021:

 

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 
Aug-2021   22,510   $4.45    691,528      
Total   691,528         691,528    849,256 

 

  (1) The Board of Directors approved a repurchase of shares up to $2,000,000 on July 30, 2020. All shares permitted to be purchased under this July 2020 plan were purchased during the plan’s original date and prior to the conclusion of the extension of the plan. On May 21, 2021, the Board of Directors authorized an additional repurchase plan of up to $2,000,000 worth of shares of common stock. The plan was authorized commencing May 21, 2021 through November 20, 2021 subject to an additional six months extension at the discretion of management. As of December 31, 2021, the total number of shares that could be purchased under both plans was 849,256. The actual maximum number of shares will vary depending on the actual price paid per share purchased.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

31.1   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CEO)
31.2   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CFO)
32.1   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CEO)
32.2   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CFO)

 

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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 14, 2022 /s/ Najeeb U. Ghauri
  NAJEEB U. GHAURI
    Chief Executive Officer
     
Date: February 14, 2022 /s/ Roger K. Almond
    ROGER K. ALMOND
    Chief Financial Officer
    Principal Accounting Officer

 

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