UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2020
( ) For the transition period from __________ to __________
Commission file number: 0-22773
NETSOL TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
NEVADA | 95-4627685 | |
(State or other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer NO.) |
23975
Park Sorrento, Suite 250, Calabasas, CA 91302
(Address of principal executive offices) (Zip Code)
(818)
222-9195 / (818) 222-9197
(Issuer’s telephone/facsimile numbers, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||
Common Stock, $0.01 par value per share | NTWK | NASDAQ |
Indicate by check mark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
[X] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No[ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):
Large Accelerated Filer [ ] | Accelerated Filer [ ] | |
Non-accelerated Filer [X] | Smaller reporting company [X] | |
Emerging growth company [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes [ ] No [X]
The issuer had 12,137,045 shares issued and 11,640,467 outstanding of its $.01 par value Common Stock and no Preferred Stock outstanding as of November 6, 2020.
NETSOL TECHNOLOGIES, INC.
Page 2 |
Item 1. Financial Statements (Unaudited)
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
As of | As of | |||||||
September 30, 2020 | June 30, 2020 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 24,885,365 | $ | 20,166,830 | ||||
Accounts receivable, net of allowance of $279,903 and $435,611 | 6,732,575 | 10,131,752 | ||||||
Accounts receivable - related party, net of allowance of $1,373,099 and $90,594 | - | 1,282,505 | ||||||
Revenues in excess of billings, net of allowance of $91,250 and $188,914 | 18,430,766 | 17,198,281 | ||||||
Revenues in excess of billings - related party, net of allowance of $8,163 and $0 | - | 8,163 | ||||||
Other current assets, net of allowance of $1,243,633 and $0 | 2,616,769 | 3,108,180 | ||||||
Total current assets | 52,665,475 | 51,895,711 | ||||||
Revenues in excess of billings, net - long term | - | 1,300,289 | ||||||
Convertible note receivable - related party, net of allowance of $4,250,000 and $0 | - | 4,250,000 | ||||||
Property and equipment, net | 11,256,306 | 11,329,631 | ||||||
Right of use of assets - operating leases | 2,133,902 | 2,360,129 | ||||||
Long term investment | 2,417,291 | 2,387,692 | ||||||
Other assets | 41,175 | 41,992 | ||||||
Intangible assets, net | 5,032,630 | 5,391,077 | ||||||
Goodwill | 9,516,568 | 9,516,568 | ||||||
Total assets | $ | 83,063,347 | $ | 88,473,089 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 6,005,999 | $ | 5,680,837 | ||||
Current portion of loans and obligations under finance leases | 9,677,277 | 9,139,561 | ||||||
Current portion of operating lease obligations | 1,165,957 | 1,111,912 | ||||||
Unearned revenues | 2,775,600 | 4,095,472 | ||||||
Common stock to be issued | 88,324 | 88,324 | ||||||
Total current liabilities | 19,713,157 | 20,116,106 | ||||||
Loans and obligations under finance leases; less current maturities | 1,705,699 | 1,539,975 | ||||||
Operating lease obligations; less current maturities | 1,110,832 | 1,339,965 | ||||||
Total liabilities | 22,529,688 | 22,996,046 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, $.01 par value; 500,000 shares authorized; | - | - | ||||||
Common stock, $.01 par value; 14,500,000 shares authorized; 12,137,045 shares issued and 11,742,490 outstanding as of September 30, 2020 and 12,122,149 shares issued and 11,874,646 outstanding as of June 30, 2020 | 121,371 | 121,222 | ||||||
Additional paid-in-capital | 128,764,618 | 128,677,754 | ||||||
Treasury stock (at cost, 394,555 shares and 247,503 shares as of September 30, 2020 and June 30, 2020, respectively) | (1,920,645 | ) | (1,455,969 | ) | ||||
Accumulated deficit | (39,861,985 | ) | (34,269,817 | ) | ||||
Other comprehensive loss | (33,210,231 | ) | (34,085,047 | ) | ||||
Total NetSol stockholders’ equity | 53,893,128 | 58,988,143 | ||||||
Non-controlling interest | 6,640,531 | 6,488,900 | ||||||
Total stockholders’ equity | 60,533,659 | 65,477,043 | ||||||
Total liabilities and stockholders’ equity | $ | 83,063,347 | $ | 88,473,089 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Page 3 |
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
For the Three Months | ||||||||
Ended September 30, | ||||||||
2020 | 2019 | |||||||
Net Revenues: | ||||||||
License fees | $ | 3,475 | $ | 2,464,216 | ||||
Subscription and support | 5,171,863 | 4,606,376 | ||||||
Services | 7,472,040 | 6,418,891 | ||||||
Services - related party | - | 82,933 | ||||||
Total net revenues | 12,647,378 | 13,572,416 | ||||||
Cost of revenues: | ||||||||
Salaries and consultants | 4,526,649 | 4,454,964 | ||||||
Travel | 103,752 | 1,342,635 | ||||||
Depreciation and amortization | 707,249 | 719,665 | ||||||
Other | 928,153 | 944,524 | ||||||
Total cost of revenues | 6,265,803 | 7,461,788 | ||||||
Gross profit | 6,381,575 | 6,110,628 | ||||||
Operating expenses: | ||||||||
Selling and marketing | 1,609,604 | 1,743,868 | ||||||
Depreciation and amortization | 221,790 | 202,387 | ||||||
General and administrative | 3,427,636 | 3,918,613 | ||||||
Research and development cost | 85,989 | 672,970 | ||||||
Total operating expenses | 5,345,019 | 6,537,838 | ||||||
Income (loss) from operations | 1,036,556 | (427,210 | ) | |||||
Other income and (expenses) | ||||||||
Loss on sale of assets | (21,742 | ) | (289 | ) | ||||
Interest expense | (103,327 | ) | (63,663 | ) | ||||
Interest income | 200,821 | 399,229 | ||||||
Gain (loss) on foreign currency exchange transactions | 296,041 | (1,760,190 | ) | |||||
Share of net loss from equity investment | (107,850 | ) | (189,224 | ) | ||||
Other income | 87,272 | 18,326 | ||||||
Total other income (expenses) | 351,215 | (1,595,811 | ) | |||||
Net income (loss) before income taxes | 1,387,771 | (2,023,021 | ) | |||||
Income tax provision | (264,294 | ) | (238,238 | ) | ||||
Net income (loss) | 1,123,477 | (2,261,259 | ) | |||||
Non-controlling interest | (405,923 | ) | 433,312 | |||||
Net income (loss) attributable to NetSol | $ | 717,554 | $ | (1,827,947 | ) | |||
Net income per share: | ||||||||
Net income per common share | ||||||||
Basic | $ | 0.06 | $ | (0.16 | ) | |||
Diluted | $ | 0.06 | $ | (0.16 | ) | |||
Weighted average number of shares outstanding | ||||||||
Basic | 11,787,233 | 11,664,239 | ||||||
Diluted | 11,787,233 | 11,664,239 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Page 4 |
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
For the Three Months | ||||||||
Ended September 30, | ||||||||
2020 | 2019 | |||||||
Net income (loss) | $ | 717,554 | $ | (1,827,947 | ) | |||
Other comprehensive income (loss): | ||||||||
Translation adjustment | 1,094,724 | 1,487,701 | ||||||
Translation adjustment attributable to non-controlling interest | (219,908 | ) | (584,356 | ) | ||||
Net translation adjustment | 874,816 | 903,345 | ||||||
Comprehensive income (loss) attributable to NetSol | $ | 1,592,370 | $ | (924,602 | ) |
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 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 for the period | - | - | - | - | 717,554 | - | 405,923 | 1,123,477 | ||||||||||||||||||||||||
Balance at September 30, 2020 | 12,137,045 | $ | 121,371 | $ | 128,764,618 | $ | (1,920,645 | ) | $ | (39,861,985 | ) | $ | (33,210,231 | ) | $ | 6,640,531 | $ | 60,533,659 |
(1) | Cumulative effect adjustment relates to the adoption of Accounting Standard Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Refer to Note 2 – Accounting Policies for more information. |
A statement of the changes in equity for the three months ended September 30, 2019 is provided below:
Other | ||||||||||||||||||||||||||||||||
Additional | Compre- | Non | Total | |||||||||||||||||||||||||||||
Common Stock | Paid-in | Treasury | Accumulated | hensive | Controlling | Stockholders’ | ||||||||||||||||||||||||||
Shares | Amount | Capital | Shares | Deficit | Loss | Interest | Equity | |||||||||||||||||||||||||
Balance at June 30, 2019 | 11,911,742 | $ | 119,117 | $ | 127,737,999 | $ | (1,455,969 | ) | $ | (35,206,898 | ) | $ | (33,125,006 | ) | $ | 8,414,987 | $ | 66,484,230 | ||||||||||||||
Exercise of subsidiary common stock options | - | - | (28,097 | ) | - | - | - | 39,718 | 11,621 | |||||||||||||||||||||||
Common stock issued for: | ||||||||||||||||||||||||||||||||
Services | 60,367 | 604 | 342,177 | - | - | - | - | 342,781 | ||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | 903,345 | 584,356 | 1,487,701 | ||||||||||||||||||||||||
Net loss for the period | - | - | - | - | (1,827,947 | ) | - | (433,312 | ) | (2,261,259 | ) | |||||||||||||||||||||
Balance at September 30, 2019 | 11,972,109 | $ | 119,721 | $ | 128,052,079 | $ | (1,455,969 | ) | $ | (37,034,845 | ) | $ | (32,221,661 | ) | $ | 8,605,749 | $ | 66,065,074 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Page 6 |
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months | ||||||||
Ended September 30, | ||||||||
2020 | 2019 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 1,123,477 | $ | (2,261,259 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 929,039 | 922,052 | ||||||
Provision for bad debts | (258,160 | ) | (38,621 | ) | ||||
Share of net loss from investment under equity method | 107,850 | 189,224 | ||||||
Loss on sale of assets | 21,742 | 289 | ||||||
Stock based compensation | 90,995 | 164,293 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 3,823,299 | 4,836,183 | ||||||
Accounts receivable - related party | - | 46,016 | ||||||
Revenues in excess of billing | 394,995 | (1,870,517 | ) | |||||
Revenues in excess of billing - related party | - | 66,330 | ||||||
Other current assets | (393,253 | ) | (278,677 | ) | ||||
Accounts payable and accrued expenses | 255,239 | 122,012 | ||||||
Unearned revenue | (1,383,619 | ) | (1,631,245 | ) | ||||
Net cash provided by operating activities | 4,711,604 | 266,080 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of property and equipment | (489,289 | ) | (321,125 | ) | ||||
Sales of property and equipment | 32,673 | 958 | ||||||
Convertible note receivable - related party | - | (435,000 | ) | |||||
Investment in associates | (60,500 | ) | - | |||||
Net cash used in investing activities | (517,116 | ) | (755,167 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from exercise of subsidiary options | - | 11,621 | ||||||
Purchase of treasury stock | (464,676 | ) | - | |||||
Proceeds from bank loans | 697,295 | - | ||||||
Payments on finance lease obligations and loans - net | (143,506 | ) | (147,376 | ) | ||||
Net cash provided by (used in) financing activities | 89,113 | (135,755 | ) | |||||
Effect of exchange rate changes | 434,934 | 879,857 | ||||||
Net increase in cash and cash equivalents | 4,718,535 | 255,015 | ||||||
Cash and cash equivalents at beginning of the period | 20,166,830 | 17,366,364 | ||||||
Cash and cash equivalents at end of period | $ | 24,885,365 | $ | 17,621,379 |
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
(CONTINUED) (UNAUDITED)
For the Three Months | ||||||||
Ended September 30, | ||||||||
2020 | 2019 | |||||||
SUPPLEMENTAL DISCLOSURES: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 142,430 | $ | 105,368 | ||||
Taxes | $ | 141,521 | $ | 151,375 | ||||
NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Assets recognized under operating lease | $ | - | $ | 3,011,814 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Page 8 |
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The Company designs, develops, markets, and exports proprietary software products to customers in the automobile financing and leasing, banking, and financial services industries worldwide. The Company also provides system integration, consulting, and IT products and services in exchange for fees from customers.
The consolidated condensed interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended June 30, 2020. The Company follows the same accounting policies in preparation of interim reports. Results of operations for the interim periods are not indicative of annual results.
The accompanying consolidated financial statements include the accounts of the Company as follows:
Wholly owned Subsidiaries
NetSol Technologies Americas, Inc. (“NTA”)
NetSol Connect (Private), Ltd. (“Connect”)
NetSol Technologies Australia Pty Ltd. (“Australia”)
NetSol Technologies Europe Limited (“NTE”)
NTPK (Thailand) Co. Limited (“NTPK Thailand”)
NetSol Technologies (Beijing) Co. Ltd. (“NetSol Beijing”)
Ascent Europe Ltd. (“AEL”)
Virtual Lease Services Holdings Limited (“VLSH”)
Virtual Lease Services Limited (“VLS”)
Virtual Lease Services (Ireland) Limited (“VLSIL”)
Majority-owned Subsidiaries
NetSol Technologies, Ltd. (“NetSol PK”)
NetSol Innovation (Private) Limited (“NetSol Innovation”)
NetSol Technologies Thailand Limited (“NetSol Thai”)
OTOZ, Inc. (“OTOZ”)
OTOZ (Thailand) Limited (“OTOZ Thai”)
Page 9 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)
For comparative purposes, prior year’s condensed consolidated financial statements have been reclassified to conform to report classifications of the current period. Below is the table of reclassified amounts:
For the Three Months Ended | ||||||||
September 30, 2019 | ||||||||
Originally reported | Reclassified | |||||||
REVENUES | ||||||||
License fees | $ | 2,679,145 | $ | 2,464,216 | ||||
Subscription and support | 4,391,447 | 4,606,376 | ||||||
Services | 6,418,891 | 6,418,891 | ||||||
Services - related party | 82,933 | 82,933 | ||||||
Total net revenues | $ | 13,572,416 | $ | 13,572,416 |
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 ($73,529) in each bank and in UK for GBP 85,000 ($108,974) in each bank. The Company maintains two bank accounts in China and six bank accounts in the UK. As of September 30, 2020, and June 30, 2020, the Company had uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $22,070,760 and $18,210,378, respectively. The Company has not experienced any losses in such accounts.
The Company’s operations are carried out globally. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments of each country and by the general state of the country’s economy. The Company’s operations in each foreign country are subject to specific considerations and significant risks not typically associated with companies in economically developed nations. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
Page 10 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)
Fair Value of Financial Instruments
The Company applies the provisions of Accounting Standards Codification (“ASC”) 820-10, “Fair Value Measurements and Disclosures.” ASC 820-10 defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. For certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and short-term debt, the carrying amounts approximate fair value due to their relatively short maturities. The carrying amounts of the convertible note receivable and the long-term debt approximate their fair values based on current interest rates for instruments with similar characteristics.
The three levels of valuation hierarchy are defined as follows:
Level 1: | Valuations consist of unadjusted quoted prices in active markets for identical assets and liabilities and has the highest priority. |
Level 2: | Valuations rely on quoted prices in markets that are not active or observable inputs over the full term of the asset or liability. |
Level 3: | Valuations are based on prices or third party or internal valuation models that require inputs that are significant to the fair value measurement and are less observable and thus have the lowest priority. |
The Company’s financial assets that were measured at fair value on a recurring basis as of June 30, 2020, were as follows:
Level 1 | Level 2 | Level 3 | Total Assets | |||||||||||||
Revenues in excess of billing - long term | $ | - | $ | - | $ | 1,300,289 | $ | 1,300,289 | ||||||||
Total | $ | - | $ | - | $ | 1,300,289 | $ | 1,300,289 |
The reconciliation from June 30, 2020 to September 30, 2020 is as follows:
Revenues in excess of billings - long term | Fair value discount | Total | ||||||||||
Balance at June 30, 2019 | $ | 1,380,631 | $ | (99,139 | ) | $ | 1,281,492 | |||||
Amortization during the period | - | 55,344 | 55,344 | |||||||||
Effect of Translation Adjustment | (39,056 | ) | 2,509 | (36,547 | ) | |||||||
Balance at June 30, 2020 | $ | 1,341,575 | $ | (41,286 | ) | $ | 1,300,289 | |||||
Transfers to short term | (1,341,575 | ) | 41,286 | (1,300,289 | ) | |||||||
Balance at September 30, 2020 | $ | - | $ | - | $ | - |
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.
Page 11 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)
Recent Accounting Standards Adopted by the Company:
In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. Under the new standard, goodwill impairment would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. This ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods. Early adoption is permitted for interim or annual goodwill impairment test performed on testing dates after January 1, 2017. The Company adopted this standard on July 1, 2020 and the adoption did not have a material effect on our condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 introduced a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables, contract assets and held-to-maturity debt securities, which requires the Company to incorporate considerations of historical information, current information and reasonable and supportable forecasts. ASU 2016-13 also expands disclosure requirements.
The Company adopted the standard on July 1, 2020 using the modified retrospective approach. The adoption of ASU 2016-13 resulted in changes to the Company’s accounting policies for trade and other receivables, contract assets and convertible notes receivable. Based on the results of the Company’s evaluation, the adoption of ASU 2016-13 resulted in a one-time cumulative-effect adjustment through retained earnings of $6,784,300 to increase its allowance for credit losses related to the convertible notes receivable, interest receivable, accounts receivable, revenues in excess of billings, and other receivables.
The following table presents the impact of adopting ASC Topic 326 as of July 1, 2020:
Adjustment | ||||
to Adopt | ||||
Asset Classification | ASC Topic 326 | |||
Allowance for credit losses - accounts receivable | $ | 109,486 | ||
Allowance for credit losses - accounts receivable - related party | 1,282,505 | |||
Allowance for credit losses - revenue in excess of billings - related party | 8,163 | |||
Allowance for credit losses - convertible notes receivable - related party | 4,250,000 | |||
Allowance for credit losses - other current assets | 1,134,146 | |||
$ | 6,784,300 |
Accounts receivable includes trade accounts receivables from the Company’s customers, net of an allowance for credit risk. Accounts receivable are recorded at the invoiced amount and do not bear interest. In establishing the required allowance, management regularly reviews the composition of accounts receivable and analyzes customer credit worthiness, customer concentrations, current economic trends and changes in customer payment patterns. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Revenue in excess of billings, relates to services performed which were not billed, net of an allowance for credit risk. As customers are billed under the terms of the contract, the corresponding amount is transferred to accounts receivable. In establishing the required allowance, management regularly reviews the composition of and analyzes customer credit worthiness, customer concentrations, current economic trends, changes in customer payment patterns, the project status and assesses individual unbilled contract assets over a specific aging and amount. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
The convertible notes receivable represents loans provided to WRLD3D. The allowance for credit risk for the convertible notes is established based on various quantitative and qualitative factors including customer credit worthiness, current economic trends and changes in payment patterns. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Page 12 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)
NOTE 3 – REVENUE RECOGNITION
The Company determines revenue recognition through the following steps:
● | Identification of the contract, or contracts, with a customer; |
● | Identification of the performance obligations in the contract; |
● | Determination of the transaction price; |
● | Allocation of the transaction price to the performance obligations in the contract; and |
● | Recognition of revenue when, or as, the Company satisfies a performance obligation. |
The Company records the amount of revenue and related costs by considering whether the entity is a principal (gross presentation) or an agent (net presentation) by evaluating the nature of its promise to the customer. Revenue is presented net of sales, value-added and other taxes collected from customers and remitted to government authorities.
The Company has two primary revenue streams: core revenue and non-core revenue.
Core Revenue
The Company generates its core revenue from the following sources: (1) software licenses, (2) services, which include implementation and consulting services, and (3) subscription and support, which includes subscription revenue and post contract customer support, of its enterprise software solutions for the lease and finance industry. The Company offers its software using the same underlying technology via two models: a traditional on-premises licensing model and a subscription model. The on-premises model involves the sale or license of software on a perpetual basis to customers who take possession of the software and install and maintain the software on their own hardware. Under the subscription delivery model, the Company provides access to its software on a hosted basis as a service and customers generally do not have the contractual right to take possession of the software.
Non-Core Revenue
The Company generates its non-core revenue by providing business process outsourcing (“BPO”), other IT services and internet services.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under Topic 606. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied by transferring the promised good or service to the customer. The Company identifies and tracks the performance obligations at contract inception so that the Company can monitor and account for the performance obligations over the life of the contract.
The Company’s contracts which contain multiple performance obligations generally consist of the initial purchase of subscription or licenses and a professional services engagement. License purchases generally have multiple performance obligations as customers purchase maintenance and services in addition to the licenses. The Company’s single performance obligation arrangements are typically maintenance renewals, subscription renewals and services engagements.
For contracts with multiple performance obligations where the contracted price differs from the standalone selling price (“SSP”) for any distinct good or service, the Company may be required to allocate the contract’s transaction price to each performance obligation using its best estimate for the SSP.
Page 13 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)
Software Licenses
Transfer of control for software is considered to have occurred upon delivery of the product to the customer. The Company’s typical payment terms tend to vary by region, but its standard payment terms are within 30 days of invoice.
Subscription and Support
Subscription
Revenue from subscriptions is recognized ratably over the initial subscription period committed to by the customer commencing when the product is made available to the customer. The initial subscription period is typically 12 to 60 months. The Company generally invoices its customers in advance in quarterly or annual installments and typical payment terms provide that customers make payment within 30 days of invoice.
Support
Revenue from support services and product updates, referred to as post contract customer support revenue, is recognized ratably over the term of the maintenance period, which in most instances is one year. Software license updates provide customers with rights to unspecified software product updates, maintenance releases and patches released during the term of the support period on a when-and-if available basis. The Company’s customers purchase both product support and license updates when they acquire new software licenses. In addition, a majority of customers renew their support services contracts annually and typical payment terms provide that customers make payment within 30 days of invoice.
Professional Services
Revenue from professional services is typically comprised of implementation, development, data migration, training or other consulting services. Consulting services are generally sold on a time-and-materials or fixed fee basis and can include services ranging from software installation to data conversion and building non-complex interfaces to allow the software to operate in integrated environments. The Company recognizes revenue for time-and-materials arrangements as the services are performed. In fixed fee arrangements, revenue is recognized as services are performed as measured by costs incurred to date, compared to total estimated costs to complete the services project. Management applies judgment when estimating project status and the costs necessary to complete the services projects. A number of internal and external factors can affect these estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes. Services are generally invoiced upon milestones in the contract or upon consumption of the hourly resources and payments are typically due 30 days after invoice.
BPO and Internet Services
Revenue from BPO services is recognized based on the stage of completion which is measured by reference to labor hours incurred to date as a percentage of total estimated labor hours for each contract. Internet services are invoiced either monthly, quarterly or half yearly in advance to the customers and revenue is recognized ratably overtime on a monthly basis.
Page 14 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)
Disaggregated Revenue
The Company disaggregates revenue from contracts with customers by category — core and non-core, as it believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
The Company’s disaggregated revenue by category is as follows:
For the Three Months | ||||||||
Ended September 30, | ||||||||
2020 | 2019 | |||||||
Core: | ||||||||
License | $ | 3,475 | $ | 2,679,145 | ||||
Subscription and support | 5,171,863 | 4,391,447 | ||||||
Services | 5,872,938 | 4,626,269 | ||||||
Services - related party | - | 82,933 | ||||||
Total core revenue, net | 11,048,276 | 11,779,794 | ||||||
Non-Core: | ||||||||
Services | 1,599,102 | 1,792,622 | ||||||
Total non-core revenue, net | 1,599,102 | 1,792,622 | ||||||
Total net revenue | $ | 12,647,378 | $ | 13,572,416 |
Significant Judgments
Due to the complexity of certain contracts, the actual revenue recognition treatment required under Topic 606 for the Company’s arrangements may be dependent on contract-specific terms and may vary in some instances.
Judgment is required to determine the SSP for each distinct performance obligation. The Company rarely licenses or sells products on a stand-alone basis, so the Company is required to estimate the range of SSPs for each performance obligation. In instances where SSP is not directly observable because the Company does not sell the license, product or service separately, the Company determines the SSP using information that may include market conditions and other observable inputs. In making these judgments, the Company analyzes various factors, including its pricing methodology and consistency, size of the arrangement, length of term, customer demographics and overall market and economic conditions. Based on these results, the estimated SSP is set for each distinct product or service delivered to customers.
The most significant inputs involved in the Company’s revenue recognition policies are: The (1) stand-alone selling prices of the Company’s software license, and the (2) the method of recognizing revenue for installation/customization, and other services.
The stand-alone selling price of the licenses was measured primarily through an analysis of pricing that management evaluated when quoting prices to customers. Although the Company has no history of selling its software separately from post contract customer support and other services, the Company does have historical experience with amending contracts with customers to provide additional modules of its software or providing those modules at an optional price. This information guides the Company in assessing the stand-alone selling price of the Company’s software, since the Company can observe instances where a customer had a particular component of the Company’s software that was essentially priced separate from other goods and services that the Company delivered to that customer.
The Company recognized revenue from implementation and customization services using the percentage of estimated “man-days” that the work requires. The Company believes the level of effort to complete the services is best measured by the amount of time (measured as an employee working for one day on implementation/customization work) that is required to complete the implementation or customization work. The Company reviews its estimate of man-days required to complete implementation and customization services each reporting period.
Page 15 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)
Revenue is recognized over time for the Company’s subscription, post contract customer support and fixed fee professional services that are separate performance obligations. For the Company’s professional services, revenue is recognized over time, generally using costs incurred or hours expended to measure progress. Judgment is required in estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization, specification variances and testing requirement changes.
If a group of agreements are entered at or near the same time and so closely related that they are, in effect, part of a single arrangement, such agreements are deemed to be combined as one arrangement for revenue recognition purposes. The Company exercises significant judgment to evaluate the relevant facts and circumstances in determining whether agreements should be accounted for separately or as a single arrangement. The Company’s judgments about whether a group of contracts comprise a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved.
If a contract includes variable consideration, the Company exercises judgment in estimating the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer. When estimating variable consideration, the Company will consider all relevant facts and circumstances. Variable consideration will be estimated and included in the contract price only when it is probable that a significant reversal in the amount of revenue recognized will not occur.
Contract Balances
The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in receivables, contract assets (revenues in excess of billings), or contract liabilities (deferred revenue) on the Company’s Consolidated Balance Sheets. The Company records revenues in excess of billings when the Company has transferred goods or services but does not yet have the right to consideration. The Company records deferred revenue when the Company has received or has the right to receive consideration but has not yet transferred goods or services to the customer.
The revenues in excess of billings are transferred to receivables when the rights to consideration become unconditional, usually upon completion of a milestone.
The Company’s revenues in excess of billings and deferred revenue are as follows:
As of | As of | |||||||
September 30, 2020 | June 30, 2020 | |||||||
Revenues in excess of billings | $ | 18,430,766 | $ | 18,506,733 | ||||
Deferred Revenue | $ | 2,775,600 | $ | 4,095,472 |
During the three months ended September 30, 2020, the Company recognized revenue of $3,027,636 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
September 30, 2020
(Unaudited)
Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted but unsatisfied performance obligations were approximately $55,260,261 as of September 30, 2020, of which the Company estimates to recognize approximately $11,819,660 in revenue over the next 12 months and the remainder over an estimated 5 years thereafter. Actual revenue recognition depends in part on the timing of software modules installed at various customer sites. Accordingly, some factors that affect the Company’s revenue, such as the availability and demand for modules within customer geographic locations, is not entirely within the Company’s control. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, and not to facilitate financing arrangements.
Deferred Revenue
The Company typically invoices its customers for subscription and support fees in advance on a quarterly or annual basis, with payment due at the start of the subscription or support term. Unpaid invoice amounts for non-cancelable license and services starting in future periods are included in accounts receivable and deferred revenue.
Practical Expedients and Exemptions
There are several practical expedients and exemptions allowed under Topic 606 that impact timing of revenue recognition and the Company’s disclosures. Below is a list of practical expedients applied by the Company:
● | The Company does not evaluate a contract for a significant financing component if payment is expected within one year or less from the transfer of the promised items to the customer. |
● | The Company generally expenses sales commissions and sales agent fees when incurred when the amortization period would have been one year or less or the commissions are based on cashed received. These costs are recorded within sales and marketing expense in the Consolidated Statement of Operations. |
● | The Company does not disclose the value of unsatisfied performance obligations for contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed (applies to time-and-material engagements). |
Costs to Obtain a Contract
The Company does not have a material amount of costs to obtain a contract capitalized at any balance sheet date. In general, the Company incurs few direct incremental costs of obtaining new customer contracts. The Company rarely incurs incremental costs to review or otherwise enter into contractual arrangements with customers. In addition, the Company’s sales personnel receive fees that are referred to as commissions, but that are based on more than simply signing up new customers. The Company’s sales personnel are required to perform additional duties beyond new customer contract inception dates, including fulfilment duties and collections efforts.
Page 17 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)
NOTE 4 – EARNINGS PER SHARE
Basic earnings per share are computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.
The components of basic and diluted earnings per share were as follows:
For the three months ended September 30, 2020 | ||||||||||||
Net Income | Shares | Per Share | ||||||||||
Basic income per share: | ||||||||||||
Net income available to common shareholders | $ | 717,554 | 11,787,233 | $ | 0.06 | |||||||
Effect of dilutive securities | ||||||||||||
Share grants | - | - | - | |||||||||
Diluted income per share | $ | 717,554 | 11,787,233 | $ | 0.06 |
For the three months ended September 30, 2019 | ||||||||||||
Net Loss | Shares | Per Share | ||||||||||
Basic loss per share: | ||||||||||||
Net loss available to common shareholders | $ | (1,827,947 | ) | 11,664,239 | $ | (0.16 | ) | |||||
Effect of dilutive securities | ||||||||||||
Share grants | - | - | - | |||||||||
Diluted loss per share | $ | (1,827,947 | ) | 11,664,239 | $ | (0.16 | ) |
The following potential dilutive shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would be anti-dilutive.
For the Three Months | ||||||||
Ended September 30, | ||||||||
2020 | 2019 | |||||||
Stock Options | - | 40,386 | ||||||
Share Grants | 51,525 | 138,052 | ||||||
51,525 | 178,438 |
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 $33,210,231 and $34,085,047 as of September 30, 2020 and June 30, 2020, respectively. During the three months ended September 30, 2020 and 2019, comprehensive income (loss) in the consolidated statements of comprehensive income (loss) included a translation gain attributable to NetSol of $874,816 and $903,345, respectively.
Page 18 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)
NOTE 6 – MAJOR CUSTOMERS
During the three months ended September 30, 2020, revenues from Daimler Financial Services (“DFS”) and BMW Financial (“BMW”) were $2,598,652 and $2,485,229, respectively representing 20.6% and 19.7%, respectively of revenues. During the three months ended September 30, 2019 revenues from these two customers were $5,041,367 and $951,369 representing 37.1% and 7.0% of revenues. The revenue from these customers are shown in the Asia – Pacific segment.
Accounts receivable from DFS and BMW at September 30, 2020, were $1,994,215 and $190,217, respectively. Accounts receivable at June 30, 2020, were $4,821,468 and $474,271, respectively. Revenues in excess of billings at September 30, 2020 were $5,287,222 and $6,873,337 for DFS and BMW, respectively. Revenues in excess of billings at June 30, 2020, were $5,709,226 and $6,977,375 for DFS and BMW, respectively. Included in this amount was $Nil and $1,300,289 shown as long term at September 30, 2020 and June 30, 2020, respectively.
NOTE 7 – CONVERTIBLE NOTES RECEIVABLE – RELATED PARTY
The Company has entered into multiple convertible note receivable agreements with WRLD3D. The convertible notes bear interest ranging from 5% to 10% with various maturity dates. The convertible notes have conversion features which allow the Company to convert the notes into shares of WRLD3D stock upon the occurrence of certain events. The Company has a security interest in all of WRLD3D’s personal property, inventory, equipment, general intangibles, financial assets, investment property, securities, deposit accounts and the proceeds thereof.
The following table summarizes the convertible notes receivable from WRLD3D.
Convertible | |||||||||||||||
Agreement | Interest | Maturity | Note | Accrued | |||||||||||
Date | Rate | Date | Amount | Interest | |||||||||||
May 25, 2017 | 5 | % | March 2, 2018 | $ | 750,000 | $ | 110,202 | ||||||||
February 9, 2018 | 10 | % | March 31, 2019 | 2,500,000 | 500,773 | ||||||||||
April 1, 2019 | 10 | % | March 31, 2020 | 600,000 | 57,648 | ||||||||||
August 19, 2019 | 10 | % | March 31, 2020 | 400,000 | 32,439 | ||||||||||
4,250,000 | 701,062 | ||||||||||||||
Less allowance for doubtful account | (4,250,000 | ) | (701,062 | ) | |||||||||||
Net Balance | $ | - | $ | - |
The Company has accrued interest of $701,062 at September 30, 2020 and June 30, 2020, respectively, which is included in “Other current assets”. As of July 1, 2020, the Company is not accruing interest.
Page 19 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)
NOTE 8 - OTHER CURRENT ASSETS
Other current assets consisted of the following:
As of | As of | |||||||
September 30, 2020 | June 30, 2020 | |||||||
Prepaid Expenses | $ | 1,132,187 | $ | 1,035,415 | ||||
Advance Income Tax | 378,484 | 355,482 | ||||||
Employee Advances | 259,119 | 44,415 | ||||||
Security Deposits | 280,903 | 270,403 | ||||||
Other Receivables | 113,265 | 1,239,221 | ||||||
Other Assets | 452,811 | 163,244 | ||||||
Total | $ | 2,616,769 | $ | 3,108,180 |
NOTE 9 – REVENUES IN EXCESS OF BILLINGS – LONG TERM
Revenues in excess of billings, net consisted of the following:
As of | As of | |||||||
September 30, 2020 | June 30, 2020 | |||||||
Revenues in excess of billings - long term | $ | - | $ | 1,341,575 | ||||
Present value discount | - | (41,286 | ) | |||||
Net Balance | $ | - | $ | 1,300,289 |
Pursuant to revenue recognition for contract accounting, the Company had recorded revenues in excess of billings long-term for amounts billable after one year. During the three months ended September 30, 2020 and 2019, the Company accreted $14,060 and $13,860, respectively, which was recorded in interest income for that period. The Company used the discounted cash flow method with an interest rate of 4.35%. During the quarter, the long-term amount was reclassified as short term upon meeting the billing criteria.
Page 20 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)
NOTE 10 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
As of | As of | |||||||
September 30, 2020 | June 30, 2020 | |||||||
Office Furniture and Equipment | $ | 3,215,079 | $ | 3,143,833 | ||||
Computer Equipment | 19,813,029 | 19,256,543 | ||||||
Assets Under Capital Leases | 1,464,654 | 1,443,423 | ||||||
Building | 5,929,559 | 5,848,813 | ||||||
Land | 1,534,455 | 1,512,905 | ||||||
Capital Work In Progress | 28,042 | 27,648 | ||||||
Autos | 1,234,049 | 1,348,405 | ||||||
Improvements | 36,053 | 36,929 | ||||||
Subtotal | 33,254,920 | 32,618,499 | ||||||
Accumulated Depreciation | (21,998,614 | ) | (21,288,868 | ) | ||||
Property and Equipment, Net | $ | 11,256,306 | $ | 11,329,631 |
For the three months ended September 30, 2020 and 2019, depreciation expense totaled $496,267 and $465,451, respectively. Of these amounts, $274,477 and $263,064, respectively, are reflected in cost of revenues.
Following is a summary of fixed assets held under finance leases as of September 30, 2020 and June 30, 2020:
As of | As of | |||||||
September 30, 2020 | June 30, 2020 | |||||||
Computers and Other Equipment | $ | 340,351 | $ | 328,621 | ||||
Furniture and Fixtures | 53,086 | 51,119 | ||||||
Vehicles | 1,071,217 | 1,063,683 | ||||||
Total | 1,464,654 | 1,443,423 | ||||||
Less:Accumulated Depreciation - Net | (727,380 | ) | (667,096 | ) | ||||
$ | 737,274 | $ | 776,327 |
Finance lease term and discount rate were as follows:
As of | ||||
September 30, 2020 | ||||
Weighted average remaining lease term - Finance leases | 1.22 Years | |||
Weighted average discount rate - Finance leases | 7.7 | % |
Page 21 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)
NOTE 11 - LEASES
The Company leases certain office space, office equipment and autos with remaining lease terms of one year to 10 years under leases classified as financing and operating. For certain leases, the Company has options to extend the lease term for additional periods ranging from one year to 10 years.
The Company treats a contract as a lease when the contract conveys the right to use a physically distinct asset for a period of time in exchange for consideration, or the Company directs the use of the asset and obtains substantially all the economic benefits of the asset. These leases are recorded as right-of-use (“ROU”) assets and lease obligation liabilities for leases with terms greater than 12 months. ROU assets represent the Company’s right to use an underlying asset for the entirety of the lease term. Lease liabilities represent the Company’s obligation to make payments over the life of the lease. A ROU asset and a lease liability are recognized at commencement of the lease based on the present value of the lease payments over the life of the lease. Initial direct costs are included as part of the ROU asset upon commencement of the lease. Since the interest rate implicit in a lease is generally not readily determinable for the operating leases, the Company uses an incremental borrowing rate to determine the present value of the lease payments. The incremental borrowing rate represents the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar lease term to obtain an asset of similar value. The Company used the incremental borrowing rate on July 1, 2019 for all leases that commenced prior to that date. For finance leases, the Company used the incremental borrowing rate implicit in the lease.
The Company reviews the impairment of ROU assets consistent with the approach applied for the Company’s other long-lived assets. The Company reviews the recoverability of long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on the Company’s ability to recover the carrying value of the asset from the expected undiscounted future pre-tax cash flows of the related operations.
The Company elected the practical expedient to exclude short-term leases (leases with original terms of 12 months or less) from ROU asset and lease liability accounts.
Lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred. Variable payments change due to facts or circumstances occurring after the commencement date, other than the passage of time, and do not result in a re-measurement of lease liabilities. The Company’s variable lease payments include payments for finance leases that are adjusted based on a change in the Karachi Inter Bank Offer Rate. The Company’s lease agreements do not contain any significant residual value guarantees or restrictive covenants.
Supplemental balance sheet information related to leases was as follows:
As of | As of | |||||||
September 30, 2020 | June 30, 2020 | |||||||
Assets | ||||||||
Operating lease assets, net | $ | 2,133,902 | $ | 2,360,129 | ||||
Liabilities | ||||||||
Current | ||||||||
Operating | $ | 1,165,957 | $ | 1,111,912 | ||||
Non-current | ||||||||
Operating | 1,110,832 | 1,339,965 | ||||||
Total Lease Liabilities | $ | 2,276,789 | $ | 2,451,877 |
Page 22 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)
The components of lease cost were as follows:
For the Three Months | ||||||||
Ended September 30, | ||||||||
2020 | 2019 | |||||||
Amortization of finance lease assets | $ | 45,253 | $ | 26,330 | ||||
Interest on finance lease obligation | 11,692 | 22,918 | ||||||
Operating lease cost | 320,086 | 263,577 | ||||||
Short term lease cost | 16,578 | 74,110 | ||||||
Sub lease income | (8,624 | ) | (8,199 | ) | ||||
Total lease cost | $ | 384,985 | $ | 378,736 |
Lease term and discount rate were as follows:
As of | ||||
September 30, 2020 | ||||
Weighted average remaining lease term - Operating leases | 2.26 Years | |||
Weighted average discount rate - Operating leases | 5.6 | % |
Supplemental disclosures of cash flow information related to leases were as follows:
For the Three Months Ended | ||||||||
September 30, 2020 | September 30, 2019 | |||||||
Cash flows related to lease liabilities | ||||||||
Operating cash flows related to operating leases | $ | 269,783 | $ | 232,268 |
Maturities of operating lease liabilities were as follows as of September 30, 2020:
Amount | ||||
Within year 1 | $ | 1,256,971 | ||
Within year 2 | 801,053 | |||
Within year 3 | 300,565 | |||
Within year 4 | 58,591 | |||
Within year 5 | 797 | |||
Thereafter | 2,988 | |||
Total Lease Payments | 2,420,965 | |||
Less: Imputed interest | (144,176 | ) | ||
Present Value of lease liabilities | 2,276,789 | |||
Less: Current portion | (1,165,957 | ) | ||
Non-Current portion | $ | 1,110,832 |
Page 23 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)
The Company is a lessor for certain office space leased by the Company and sub-leased to others under non-cancelable leases. These lease agreements provide for a fixed base rent and terminate by July 2021. All leases are considered operating leases. There are no rights to purchase the premises and no residual value guarantees. For the three months ended September 30, 2020 and 2019, the Company received lease income of $8,624 and $8,199, respectively.
NOTE 12 – LONG TERM INVESTMENT
Drivemate
The Company and Drivemate Co., Ltd. (“Drivemate”) entered into a subscription agreement on April 25, 2019, (“Drivemate Agreement”) whereby the Company will purchase an equity interest of 30% in Drivemate. Per the Drivemate Agreement, the Company will purchase 5,469 preferred shares for $1,800,000 consisting of $500,000 cash and $1,300,000 in services. The Company has paid $405,000 and has received 1,267 shares. The remaining $95,000 will be paid in increments based on the contract with the final payment due 24 months from the date of the Drivemate Agreement signing. As of September 30, 2020, the Company owns 6.23% of Drivemate. Per the Drivemate Agreement, the Company appointed two directors to the Drivemate board. The Company determined that it met the significant influence criteria since two of the four directors are appointed by the Company and the Company is to own 30% of Drivemate at the final payment date; therefore, the Company accounts for the investment using the equity method of accounting.
During the three months ended September 30, 2020 and 2019, the Company performed $Nil and $204,615 of services, respectively.
Under the equity method of accounting, the Company recorded its share of net income of $595 and share of net loss of $5,392 for the three months ended September 30, 2020 and 2019, respectively.
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 months ended September 30, 2020, and has provided services of $82,933 for the three months ended September 30, 2019, which is recorded as services-related party. Accounts receivable and revenue in excess of billing were $1,373,099 and $8,163 at June 30, 2020, respectively. Upon adoption of ASC 326, an allowance was established for the full amounts of these accounts. The net balances of accounts receivable and revenues in excess of billing were $Nil at September 30, 2020.
Under the equity method of accounting, the Company recorded its share of net loss of $108,445 and $183,832 for the three months ended September 30, 2020 and 2019, respectively.
The following table reflects the above investments at September 30, 2020.
Drivemate | WRLD3D | Total | ||||||||||
Gross investment | $ | 405,000 | $ | 3,888,889 | $ | 4,293,889 | ||||||
Cumulative net loss on investment | (18,878 | ) | (1,432,217 | ) | (1,451,095 | ) | ||||||
Cumulative other comprehensive income (loss) | - | (425,503 | ) | (425,503 | ) | |||||||
Net investment | $ | 386,122 | $ | 2,031,169 | $ | 2,417,291 |
Page 24 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)
NOTE 13 - INTANGIBLE ASSETS
Intangible assets consisted of the following:
As of | As of | |||||||
September 30, 2020 | June 30, 2020 | |||||||
Product Licenses - Cost | $ | 47,244,997 | $ | 47,244,997 | ||||
Effect of Translation Adjustment | (15,659,211 | ) | (16,045,322 | ) | ||||
Accumulated Amortization | (26,553,156 | ) | (25,808,598 | ) | ||||
Net Balance | $ | 5,032,630 | $ | 5,391,077 |
(A) Product Licenses
Product licenses include internally developed original license issues, renewals, enhancements, copyrights, trademarks, and trade names. Product licenses are amortized on a straight-line basis over their respective lives, and the unamortized amount of $5,032,630 will be amortized over the next 3 years. Amortization expense for the three months ended September 30, 2020 and 2019 was $432,772 and $456,601, respectively.
(B) Future Amortization
Estimated amortization expense of intangible assets over the next five years is as follows:
Period ended: | ||||
September 30, 2021 | $ | 1,755,567 | ||
September 30, 2022 | 1,755,567 | |||
September 30, 2023 | 1,521,496 | |||
$ | 5,032,630 |
NOTE 14 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
As of | As of | |||||||
September 30, 2020 | June 30, 2020 | |||||||
Accounts Payable | $ | 1,318,477 | $ | 1,351,158 | ||||
Accrued Liabilities | 3,882,782 | 3,349,624 | ||||||
Accrued Payroll & Taxes | 426,673 | 537,888 | ||||||
Taxes Payable | 252,907 | 303,996 | ||||||
Other Payable | 125,160 | 138,171 | ||||||
Total | $ | 6,005,999 | $ | 5,680,837 |
Page 25 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)
NOTE 15 – DEBTS
Notes payable and finance leases consisted of the following:
As of September 30, 2020 | ||||||||||||||
Current | Long-Term | |||||||||||||
Name | Total | Maturities | Maturities | |||||||||||
D&O Insurance | (1) | $ | 17,234 | $ | 17,234 | $ | - | |||||||
Paycheck Protection Program Loans | (2) | 469,721 | 212,589 | 257,132 | ||||||||||
Bank Overdraft Facility | (3) | - | - | - | ||||||||||
Term Finance Facility | (4) | 2,103,507 | 822,457 | 1,281,050 | ||||||||||
Loan Payable Bank - Export Refinance | (5) | 3,017,866 | 3,017,866 | - | ||||||||||
Loan Payable Bank - Running Finance | (6) | - | - | - | ||||||||||
Loan Payable Bank - Export Refinance II | (7) | 2,293,577 | 2,293,577 | - | ||||||||||
Loan Payable Bank - Running Finance II | (8) | - | - | - | ||||||||||
Loan Payable Bank - Export Refinance III | (9) | 3,017,867 | 3,017,867 | - | ||||||||||
Term Finance Facility | (10) | 63,825 | 17,318 | 46,507 | ||||||||||
10,983,597 | 9,398,908 | 1,584,689 | ||||||||||||
Subsidiary Finance Leases | (11) | 399,379 | 278,369 | 121,010 | ||||||||||
$ | 11,382,976 | $ | 9,677,277 | $ | 1,705,699 |
As of June 30, 2020 | ||||||||||||||
Current | Long-Term | |||||||||||||
Name | Total | Maturities | Maturities | |||||||||||
D&O Insurance | (1) | $ | 81,728 | $ | 81,728 | $ | - | |||||||
Paycheck Protection Program Loans | (2) | 469,721 | 182,669 | 287,052 | ||||||||||
Bank Overdraft Facility | (3) | - | - | - | ||||||||||
Term Finance Facility | (4) | 1,380,878 | 354,337 | 1,026,541 | ||||||||||
Loan Payable Bank - Export Refinance | (5) | 2,975,482 | 2,975,482 | - | ||||||||||
Loan Payable Bank - Running Finance | (6) | - | - | - | ||||||||||
Loan Payable Bank - Export Refinance II | (7) | 2,261,365 | 2,261,365 | - | ||||||||||
Loan Payable Bank - Running Finance II | (8) | - | - | - | ||||||||||
Loan Payable Bank - Export Refinance III | (9) | 2,975,483 | 2,975,483 | - | ||||||||||
Term Finance Facility | (10) | 65,473 | 16,423 | 49,050 | ||||||||||
10,210,130 | 8,847,487 | 1,362,643 | ||||||||||||
Subsidiary Finance Leases | (11) | 469,406 | 292,074 | 177,332 | ||||||||||
$ | 10,679,536 | $ | 9,139,561 | $ | 1,539,975 |
(1) The Company finances Directors’ and Officers’ (“D&O”) liability insurance and Errors and Omissions (“E&O”) liability insurance, for which the D&O and E&O balances are renewed on an annual basis and, as such, are recorded in current maturities. The interest rate on these financings were ranging from 5.0% to 7.0% as of September 30, 2020 and June 30, 2020.
(2) The Company and its subsidiary, NTA, received Paycheck Protection Program loans of $469,721 introduced by the U.S. Government during the COVID-19 Pandemic. This loan is forgivable if the Company meets the criteria set by the U.S. Government. The loans carry an interest rate of 1% and have a maturity date of two years from the date of the disbursement of the loan. As of September 30, 2020, the Company has not applied for the loan forgiveness.
(3) The Company’s subsidiary, NTE, has an overdraft facility with HSBC Bank plc whereby the bank would cover any overdrafts up to £300,000, or approximately $384,615. The annual interest rate was 5.12% as of September 30, 2020. The total outstanding balance as of September 30, 2020 was £Nil.
Page 26 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)
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 September 30, 2020, NTE was in compliance with this covenant.
(4) The Company’s subsidiary, NetSol PK, has a term finance facility from Askari Bank Limited, approved by the Government of Pakistan to protect the employment situation during the Pandemic COVID-19. This is a term loan payable in three years. The availed facility amount was Rs. 348,509,008 or $2,103,507, at September 30, 2020, of which $719,364 is shown as current and the remaining $1,384,143 is shown as long term. The availed facility amount was Rs. 232,042,664 or $1,380,878, at June 30, 2020, of which $354,337 is shown as current and the remaining $1,026,541 is shown as long term. The interest rate for the loan was 3% at September 30, 2020 and June 30, 2020.
(5) The Company’s subsidiary, NetSol PK, has an export refinance facility with Askari Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every nine months. The total facility amount is Rs. 500,000,000 or $3,017,867 at September 30, 2020 and Rs. 500,000,000 or $2,975,482 at June 30, 2020. The interest rate for the loan was 3% at September 30, 2020 and June 30, 2020.
(6) The Company’s subsidiary, NetSol PK, has a running finance facility with Askari Bank Limited, secured by NetSol PK’s assets. The total facility amount is Rs. 75,000,000 or $452,680, at September 30, 2020. The balance outstanding at September 30, 2020 and June 30, 2020 was Rs. Nil. The interest rate for the loan was 9.25% and 7.2% at September 30, 2020 and June 30, 2020, respectively.
This facility requires NetSol PK to maintain a long-term debt equity ratio of 60:40 and the current ratio of 1:1. As of September 30, 2020, NetSol PK was in compliance with this covenant.
(7) The Company’s subsidiary, NetSol PK, has an export refinance facility with Samba Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every nine months. The total facility amount is Rs. 380,000,000 or $2,297,577 and Rs. 380,000,000 or $2,261,366 at September 30, 2020 and June 30, 2020, respectively. The interest rate for the loan was 3% at September 30, 2020 and June 30, 2020.
(8) The Company’s subsidiary, NetSol PK, has a running finance facility with Samba Bank Limited, secured by NetSol PK’s assets. The total facility amount is Rs. 120,000,000 or $724,288 and Rs. 120,000,000 or $714,116, at September 30, 2020 and June 30, 2020, respectively. The interest rate for the loan was 8.75% and 7.7% at September 30, 2020 and June 30, 2020, respectively. The balance outstanding at September 30, 2020 and June 30, 2020 was Rs. Nil.
During the tenure of loan, the facilities from Samba Bank Limited require NetSol PK to maintain at a minimum a current ratio of 1:1, an interest coverage ratio of 4 times, a leverage ratio of 2 times, and a debt service coverage ratio of 4 times. As of September 30, 2020, NetSol PK was in compliance with these covenants.
(9) The Company’s subsidiary, NetSol PK, has an export refinance facility with Habib Metro Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every nine months. The total facility amount is Rs. 900,000,000 or $5,432,158 and NetSol PK used Rs. 500,000,000 or $3,017,867 at September 30, 2020. The total facility amount is Rs. 900,000,000 or $5,355,868 and NetSol PK used Rs. 500,000,000 or $2,975,482 at June 30, 2020. The interest rate for the loan was 3% at September 30, 2020 and June 30, 2020.
(10) In March 2019, the Company’s subsidiary, VLS, entered into a loan agreement. The loan amount was £69,549, or $85,863, for a period of 5 years with monthly payments of £1,349, or $1,666. As of September 30, 2020, the subsidiary has used this facility up to $61,462, of which $44,785 was shown as long-term and $16,677 as current. The interest rate was 6.14% at September 30, 2020.
(11) The Company leases various fixed assets under finance lease arrangements expiring in various years through 2024. The assets and liabilities under finance leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are secured by the assets themselves. Depreciation of assets under finance leases is included in depreciation expense for the three months ended September 30, 2020 and 2019.
Page 27 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)
Following is the aggregate minimum future lease payments under finance leases as of September 30, 2020:
Amount | ||||
Minimum Lease Payments | ||||
Within year 1 | $ | 295,594 | ||
Within year 2 | 96,239 | |||
Within year 3 | 20,615 | |||
Within year 4 | 8,590 | |||
Total Minimum Lease Payments | 421,038 | |||
Interest Expense relating to future periods | (21,659 | ) | ||
Present Value of minimum lease payments | 399,379 | |||
Less: Current portion | (278,369 | ) | ||
Non-Current portion | $ | 121,010 |
NOTE 16 - STOCKHOLDERS’ EQUITY
During the three months ended September 30, 2020, the Company issued 3,020 shares of common stock for services rendered by officers of the Company. These shares were valued at the fair market value of $17,068.
During the three months ended September 30, 2020, the Company issued 1,983 shares of common stock for services rendered by the independent members of the Board of Directors as part of their board compensation. These shares were valued at the fair market value of $11,997.
During the three months ended September 30, 2020, the Company issued 9,893 shares of its common stock to employees pursuant to the terms of their employment agreements valued at $57,948.
NOTE 17 - INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN
The following table summarizes stock grants awarded as compensation:
# of shares | Weighted Average Grant Date Fair Value ($) | |||||||
Unvested, June 30, 2020 | 66,421 | $ | 5.88 | |||||
Granted | - | $ | - | |||||
Vested | (14,896 | ) | $ | 5.84 | ||||
Forfeited / Cancelled | - | $ | - | |||||
Unvested, September 30, 2020 | 51,525 | $ | 5.73 |
For the three months ended September 30, 2020 and 2019, the Company recorded compensation expense of $90,617 and $164,293, respectively. The compensation expense related to the unvested stock grants as of September 30, 2020 was $282,612 which will be recognized during the fiscal years 2021 through 2022.
Page 28 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)
NOTE 18 – CONTINGENCIES
From time to time, the Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business including tax assessments. The Company defends itself vigorously against any such claims. When (i) it is probable that an asset has been impaired or a liability has been incurred and (ii) the amount of the loss can be reasonably estimated, the Company records the estimated loss. The Company provides disclosure in the notes to the consolidated financial statements for loss contingencies that do not meet both conditions if there is a reasonable possibility that a loss may have been incurred that would be material to the financial statements. Significant judgment is required to determine the probability that a liability has been incurred and whether such liability is reasonably estimable. The Company bases accruals on the best information available at the time, which can be highly subjective. The final outcome of these matters could vary significantly from the amounts included in the accompanying consolidated financial statements.
NOTE 19 – OPERATING SEGMENTS
The Company has identified three segments for its products and services; North America, Europe and Asia-Pacific. Our reportable segments are business units located in different global regions. Each business unit provides similar products and services; license fees for leasing and asset-based software, related maintenance fees, and implementation and IT consulting services. Separate management of each segment is required because each business unit is subject to different operational issues and strategies due to their particular regional location. The Company accounts for intra-company sales and expenses as if the sales or expenses were to third parties and eliminates them in the consolidation.
The following table presents a summary of identifiable assets as of September 30, 2020 and June 30, 2020:
As of | As of | |||||||
September 30, 2020 | June 30, 2020 | |||||||
Identifiable assets: | ||||||||
Corporate headquarters | $ | 3,563,228 | $ | 4,508,724 | ||||
North America | 5,879,871 | 5,949,653 | ||||||
Europe | 10,948,153 | 10,856,814 | ||||||
Asia - Pacific | 62,672,095 | 67,157,898 | ||||||
Consolidated | $ | 83,063,347 | $ | 88,473,089 |
The following table presents a summary of investment under equity method as of September 30, 2020 and June 30, 2020:
As of | As of | |||||||
September 30, 2020 | June 30, 2020 | |||||||
Investment in associates under equity method: | ||||||||
Corporate headquarters | $ | 441,729 | $ | 473,692 | ||||
Asia - Pacific | 1,975,562 | 1,914,000 | ||||||
Consolidated | $ | 2,417,291 | $ | 2,387,692 |
Page 29 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)
The following table presents a summary of operating information for the three months ended September 30:
For the Three Months | ||||||||
Ended September 30, | ||||||||
2020 | 2019 | |||||||
Revenues from unaffiliated customers: | ||||||||
North America | $ | 812,878 | $ | 977,175 | ||||
Europe | 3,151,891 | 2,592,339 | ||||||
Asia - Pacific | 8,682,609 | 9,919,969 | ||||||
12,647,378 | 13,489,483 | |||||||
Revenue from affiliated customers | ||||||||
Asia - Pacific | - | 82,933 | ||||||
- | 82,933 | |||||||
Consolidated | $ | 12,647,378 | $ | 13,572,416 | ||||
Intercompany revenue | ||||||||
Europe | $ | 139,156 | $ | 146,825 | ||||
Asia - Pacific | 2,158,628 | 1,064,766 | ||||||
Eliminated | $ | 2,297,784 | $ | 1,211,591 | ||||
Net income (loss) after taxes and before non-controlling interest: | ||||||||
Corporate headquarters | $ | 1,167,795 | $ | (864,210 | ) | |||