Company Quick10K Filing
NetSol
Price5.55 EPS1
Shares12 P/E8
MCap65 P/FCF32
Net Debt-18 EBIT9
TEV47 TEV/EBIT5
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-13
10-Q 2019-12-31 Filed 2020-02-12
10-Q 2019-09-30 Filed 2019-11-12
10-K 2019-06-30 Filed 2019-09-23
10-Q 2019-03-31 Filed 2019-05-14
10-Q 2018-12-31 Filed 2019-02-13
10-Q 2018-09-30 Filed 2018-11-13
10-K 2018-06-30 Filed 2018-09-26
10-Q 2018-03-31 Filed 2018-05-14
10-Q 2017-12-31 Filed 2018-02-13
10-Q 2017-09-30 Filed 2017-11-09
10-K 2017-06-30 Filed 2017-09-28
10-Q 2017-03-31 Filed 2017-05-22
10-Q 2016-12-31 Filed 2017-02-14
10-Q 2016-09-30 Filed 2016-11-14
10-K 2016-06-30 Filed 2016-09-15
10-Q 2016-03-31 Filed 2016-05-10
10-Q 2015-12-31 Filed 2016-02-11
10-Q 2015-09-30 Filed 2015-11-12
10-K 2015-06-30 Filed 2015-09-15
10-Q 2015-03-31 Filed 2015-05-11
10-Q 2014-12-31 Filed 2015-02-12
10-Q 2014-09-30 Filed 2014-11-06
10-K 2014-06-30 Filed 2014-09-16
10-Q 2014-03-31 Filed 2014-05-14
10-Q 2013-12-31 Filed 2014-02-14
10-Q 2013-09-30 Filed 2013-11-08
10-K 2013-06-30 Filed 2013-09-12
10-Q 2013-03-31 Filed 2013-05-09
10-Q 2012-12-31 Filed 2013-02-12
10-Q 2012-09-30 Filed 2012-11-14
10-K 2012-06-30 Filed 2012-09-05
10-Q 2012-03-31 Filed 2012-05-07
10-Q 2011-12-31 Filed 2012-02-02
10-Q 2011-09-30 Filed 2011-11-08
10-K 2011-06-30 Filed 2011-09-16
10-Q 2011-03-31 Filed 2011-05-10
10-Q 2010-12-31 Filed 2011-02-11
10-Q 2010-09-30 Filed 2010-11-12
10-K 2010-06-30 Filed 2010-09-10
10-Q 2010-03-31 Filed 2010-05-13
10-Q 2009-12-31 Filed 2010-02-11
8-K 2020-07-30 Other Events
8-K 2020-06-26 Shareholder Vote
8-K 2020-04-30
8-K 2020-02-12
8-K 2019-12-23
8-K 2019-11-12
8-K 2019-10-30
8-K 2019-07-08
8-K 2019-06-10
8-K 2019-05-30
8-K 2019-05-14
8-K 2019-05-07
8-K 2019-02-13
8-K 2018-11-13
8-K 2018-10-30
8-K 2018-10-01
8-K 2018-06-12
8-K 2018-05-14
8-K 2018-05-01
8-K 2018-02-27
8-K 2018-02-13

NTWK 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Note 1 - Basis of Presentation and Principles of Consolidation
Note 2 - Accounting Policies
Note 3 - Revenue Recognition
Note 4 - Earnings per Share
Note 5 - Other Comprehensive Income and Foreign Currency
Note 6 - Related Party Transactions
Note 7 - Major Customers
Note 8 - Convertible Note Receivable - Related Party
Note 9 - Other Current Assets
Note 10 - Revenues in Excess of Billings - Long Term
Note 11 - Property and Equipment
Note 12 - Leases
Note 13 - Long Term Investment
Note 14 - Intangible Assets
Note 15 - Accounts Payable and Accrued Expenses
Note 16 - Debts
Note 17 - Stockholders' Equity
Note 18 - Incentive and Non - Statutory Stock Option Plan
Note 19 - Contingencies
Note 20 - Operating Segments
Note 21 - Non - Controlling Interest in Subsidiary
Note 22 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
Item 4. Controls and Procedures
Part II Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
EX-31.1 ex31-1.htm
EX-31.2 ex31-2.htm
EX-32.1 ex32-1.htm
EX-32.2 ex32-2.htm

NetSol Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
1058463422102012201420172020
Assets, Equity
201482-4-102012201420172020
Rev, G Profit, Net Income
1511730-42012201420172020
Ops, Inv, Fin

10-Q 1 form10-q.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2020

 

[  ] For the transition period from __________ to __________

 

Commission file number: 0-22773

 

NETSOL TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

 

NEVADA   95-4627685

(State or other Jurisdiction of

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

 

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

 

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

Yes [  ]   No [X]

 

The issuer had 12,038,697 shares issued and 11,791,194 outstanding of its $.01 par value Common Stock and no Preferred Stock outstanding as of May 8, 2020.

 

 

 

 

 

 

NETSOL TECHNOLOGIES, INC.

 

  Page No.
PART I. FINANCIAL INFORMATION  
Item 1. Financial Statements (Unaudited)  
Condensed Consolidated Balance Sheets as of March 31, 2020 and June 30, 2019 3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2020 and 2019 4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended March 31, 2020 and 2019 5
Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended March 31, 2020 and 2019 6
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2020 and 2019 10
Notes to the Condensed Consolidated Financial Statements 12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 36
Item 3. Quantitative and Qualitative Disclosures about Market Risk 50
Item 4. Controls and Procedures 50
   
PART II. OTHER INFORMATION  
Item 1. Legal Proceedings 51
Item 1A Risk Factors 51
Item 2. Unregistered Sales of Equity and Use of Proceeds 51
Item 3. Defaults Upon Senior Securities 51
Item 4. Mine Safety Disclosures 51
Item 5. Other Information 51
Item 6. Exhibits 51

 

 Page 2 

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

 

   As of   As of 
  March 31, 2020   June 30, 2019 
ASSETS        
Current assets:          
Cash and cash equivalents  $15,743,328   $17,366,364 
Accounts receivable, net of allowance of $364,383 and $192,786   12,900,412    12,332,714 
Accounts receivable, net of allowance of $54,307 and $166,075 - related party   1,332,575    3,266,600 
Revenues in excess of billings, net of allowance of $190,811 and $194,684   15,301,150    14,719,047 
Revenues in excess of billings - related party   8,245    110,827 
Convertible note receivable - related party   4,250,000    3,650,000 
Other current assets   3,593,365    3,146,264 
Total current assets   53,129,075    54,591,816 
Revenues in excess of billings, net - long term   1,282,898    1,281,492 
Property and equipment, net   11,553,814    12,096,855 
Right of use of assets - operating leases   2,690,777    - 
Long term investment   2,329,706    2,653,769 
Other assets   23,066    23,569 
Intangible assets, net   5,880,759    7,332,950 
Goodwill   9,516,568    9,516,568 
Total assets  $86,406,663   $87,497,019 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable and accrued expenses  $7,107,933   $7,476,560 
Current portion of loans and obligations under finance leases   8,794,858    6,905,597 
Current portion of operating lease obligations   1,146,696    - 
Unearned revenues   3,440,663    5,977,736 
Common stock to be issued   88,324    88,324 
Total current liabilities   20,578,474    20,448,217 
Loans and obligations under finance leases; less current maturities   305,702    564,572 
Operating lease obligations; less current maturities   1,635,866    - 
Total liabilities   22,520,042    21,012,789 
Commitments and contingencies          
Stockholders’ equity:          
Preferred stock, $.01 par value; 500,000 shares authorized;   -    - 

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

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

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

 

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

 

 Page 3 

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

 

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

 

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

 

 Page 4 

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

   For the Three Months   For the Nine Months 
   Ended March 31,   Ended March 31, 
   2020   2019   2020   2019 
Net income (loss)  $1,000,807   $1,267,560   $(241,165)  $5,085,778 
Other comprehensive income (loss):                    
Translation adjustment   (4,605,609)   (128,387)   (1,108,848)   (6,376,953)
Translation adjustment attributable to non-controlling interest   996,856    100,366    168,469    2,288,192 
Net translation adjustment   (3,608,753)   (28,021)   (940,379)   (4,088,761)
Comprehensive income (loss) attributable to NetSol  $(2,607,946)  $1,239,539   $(1,181,544)  $997,017 

 

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

 

 Page 5 

 

 

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

 

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

 

                       Other         
           Additional           Compre-   Non   Total 
   Common Stock   Paid-in   Treasury   Accumulated   hensive   Controlling   Stockholders’ 
   Shares   Amount   Capital   Shares   Deficit   Loss   Interest   Equity 
                                 
Balance at December 31, 2019   12,000,566   $120,006   $128,197,589   $(1,455,969)  $(36,448,870)  $(30,456,632)  $6,890,123   $66,846,247 
Common stock issued for:                                        
Services   38,131    381    176,509    -    -    -    -    176,890 
Foreign currency translation adjustment   -    -    -    -    -    (3,608,753)   (996,856)   (4,605,609)
Net income   -    -    -    -    1,000,807    -    468,286    1,469,093 
Balance at March 31, 2020   12,038,697   $120,387   $128,374,098   $(1,455,969)  $(35,448,063)  $(34,065,385)  $6,361,553   $63,886,621 

 

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

 

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

 

 Page 6 

 

 

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

 

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

 

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

 

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

 

 Page 7 

 

 

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

 

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

 

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

 

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

 

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

 

 Page 8 

 

 

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

 

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

 

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

 

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

 

 Page 9 

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

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

 

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

 

 Page 10 

 

 

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

 

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

 

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

 

 Page 11 

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

 

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

 

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

 

These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended June 30, 2019. The Company follows the same accounting policies in preparation of interim reports. Results of operations for the interim periods are not indicative of annual results.

 

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

 

Wholly owned Subsidiaries

NetSol Technologies Americas, Inc. (“NTA”)

OTOZ, Inc. (“OTOZ”)

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

NetSol Technologies Australia Pty Ltd. (“Australia”)

NetSol Technologies Europe Limited (“NTE”)

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

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

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”)

 

 Page 12 

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

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

 

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

 

NOTE 2 – ACCOUNTING POLICIES

 

Use of Estimates

 

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

 

Concentration of Credit Risk

 

Cash includes cash on hand and demand deposits in accounts maintained within the United States as well as in foreign countries. Certain financial instruments, which subject the Company to concentration of credit risk, consist of cash and restricted cash. The Company maintains balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for the banks located in the United States. Balances at financial institutions within certain foreign countries are not covered by insurance. As of March 31, 2020, and June 30, 2019, the Company had uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $14,677,110 and $16,124,339, respectively. The Company has not experienced any losses in such accounts.

 

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

 

 Page 13 

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

Fair Value of Financial Instruments

 

The Company applies the provisions of 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 assets that were measured at fair value on a recurring basis as of March 31, 2020, were as follows:

 

   Level 1   Level 2   Level 3   Total Assets 
Revenues in excess of billings - long term  $   -   $    -   $1,282,898   $1,282,898 
Total  $-   $-   $1,282,898   $1,282,898 

 

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

 

   Level 1   Level 2   Level 3   Total Assets 
Revenues in excess of billings - long term  $    -   $   -   $1,281,492   $1,281,492 
Total  $-   $-   $1,281,492   $1,281,492 

 

The reconciliation from June 30, 2019 to March 31, 2020 is as follows:

 

   Revenues in excess
of billings - long term
   Fair value discount   Total 
Balance at June 30, 2018  $1,445,245   $(238,576)  $1,206,669 
Effect of ASC 606 adoption   (1,445,245)   238,576    (1,206,669)
Additions   1,380,631    (99,139)   1,281,492 
Balance at June 30, 2019  $1,380,631   $(99,139)  $1,281,492 
Amortization during the period   -    41,621    41,621 
Effect of Translation Adjustment   (42,840)   2,625    (40,215)
Balance at March 31, 2020  $1,337,791   $(54,893)  $1,282,898 

 

 Page 14 

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

Management analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities 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.

 

New Accounting Pronouncements

 

Recent Accounting Standards Adopted by the Company:

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). This pronouncement requires lessees to recognize a liability for lease obligations, which represents the discounted obligation to make future lease payments, and a corresponding right-of-use (“ROU”) asset on the balance sheet. The Company adopted ASU 2016-02, along with related clarifications and improvements, as of July 1, 2019, using the modified retrospective approach, which allows the Company to apply ASC 840, Leases, in the comparative periods presented in the year of adoption. Accordingly, the comparative periods and disclosures have not been restated.

 

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

 

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

 

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

 

Adoption of the new standard resulted in the recording of a non-cash transitional adjustment to ROU assets and lease liabilities of $3,011,814 and $3,091,236, respectively, as of July 1, 2019. The difference between the ROU assets and lease liabilities represented existing deferred rent expense and prepaid rent that were derecognized and adjusted the ROU assets in the Condensed Consolidated Balance Sheets. The adoption of ASU 2016-02 did not materially impact the results of operations or cash flows.

 

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

 

In January 2017, the 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 will apply this guidance to applicable impairment tests after the adoption date.

 

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

 

 Page 15 

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

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

 

NOTE 3 – REVENUE RECOGNITION

 

The Company determines revenue recognition through the following steps:

 

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

 

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

 

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

 

Core Revenue

 

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

 

Non-Core Revenue

 

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

 

Performance Obligations

 

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

 

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

 

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

 

Subscription

 

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

 

 Page 16 

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

Software Licenses

 

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

 

Maintenance

 

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

 

Professional Services

 

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

 

BPO and Internet Services

 

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

 

Disaggregated Revenue

 

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

 

 Page 17 

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

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

 

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

 

Significant Judgments

 

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

 

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

 

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

 

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

 

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

 

 Page 18 

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

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

 

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

 

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

 

Contract Balances

 

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

 

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

 

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

 

   As of   As of 
   March 31, 2020   June 30, 2019 
         
Revenues in excess of billings  $16,592,293   $16,111,366 
           
Deferred Revenue  $3,440,663   $5,977,736 

 

During the three and nine months ended March 31, 2020, the Company recognized revenue of $586,899 and $5,638,097, respectively, that was included in the deferred revenue balance at the beginning of the period. All other activity in deferred revenue is due to the timing of invoicing in relation to the timing of revenue recognition.

 

 Page 19 

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted but unsatisfied performance obligations were approximately $63,609,872 as of March 31, 2020, of which the Company estimates to recognize approximately $13,066,505 in revenue over the next 12 months and the remainder over an estimated 5 years thereafter. Actual revenue recognition depends in part on the timing of software modules installed at various customer sites. Accordingly, some factors that affect the Company’s revenue, such as the availability and demand for modules within customer geographic locations, is not entirely within the Company’s control. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, and not to facilitate financing arrangements.

 

Deferred Revenue

 

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

 

Practical Expedients and Exemptions

 

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

 

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

 

Costs to Obtain a Contract

 

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

 

 Page 20 

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

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

 

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

 

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

 

   For the Three Months   For the Nine Months 
   Ended March 31,   Ended March 31, 
   2020   2019   2020   2019 
                 
Share Grants   101,790    -    101,790    - 
    101,790    -    101,790    - 

 

 Page 21 

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

NOTE 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 $34,065,385 and $33,125,006 as of March 31, 2020 and June 30, 2019, respectively. During the three and nine months ended March 31, 2020, comprehensive income (loss) in the consolidated statements of comprehensive income (loss) included a translation loss attributable to NetSol of $3,608,753 and $940,379, respectively. During the three and nine months ended March 31, 2019, comprehensive income (loss) in the consolidated statements of comprehensive income (loss) included a translation loss attributable to NetSol of $28,021 and $4,088,761, respectively.

 

NOTE 6 – RELATED PARTY TRANSACTIONS

 

NetSol-Innovation

 

In November 2004, the Company entered into a joint venture with 1insurer, formerly Innovation Group, called NetSol-Innovation. NetSol-Innovation provided support services to 1insurer. During the three and nine months ended March 31, 2020, NetSol Innovation provided $Nil services. During the three and nine months ended March 31, 2019, NetSol Innovation provided services of $Nil and $67,286, respectively. Accounts receivable at March 31, 2020 and June 30, 2019 were $Nil and $2,130,041, respectively.

 

NOTE 7 – MAJOR CUSTOMERS

 

During the nine months ended March 31, 2020, revenues from Daimler Financial Services (“DFS”) and BMW Financial (“BMW”) were $11,906,959 and $6,893,438, respectively representing 27.8% and 16.1%, respectively of revenues. During the nine months ended March 31, 2019, revenues from DFS and BMW were $17,137,545 and $10,339,704, respectively representing 33.9% and 20.5%, respectively of revenues. The revenue from these customers are shown in the Asia – Pacific segment.

 

Accounts receivable from DFS and BMW at March 31, 2020, were $5,186,256 and $3,271,459, respectively. Accounts receivable at June 30, 2019, were $7,917,814 and $159,322, respectively. Revenues in excess of billings at March 31, 2020 were $5,982,097 and $5,365,137, respectively. Revenues in excess of billings at June 30, 2019, were $4,371,081 and $5,472,043, respectively. Included in this amount was $1,282,898 and $1,281,492 shown as long term at March 31, 2020 and June 30, 2019, respectively.

 

NOTE 8 – CONVERTIBLE NOTE RECEIVABLE – RELATED PARTY

 

The Company entered into an agreement with WRLD3D, whereby the Company was issued a Convertible Promissory Note (the “August 2019 Note”) which was fully executed on August 19, 2019. The maximum principal amount of $400,000 was paid on September 9, 2019. The August 2019 Note bears interest at 10% per annum and all unpaid interest and principal is due and payable upon request on or after March 31, 2020. 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 August 2019 Note is convertible upon the occurrence of the following events:

 

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

 

 Page 22 

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

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

 

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

 

The following table summarizes the convertible notes receivable from WRLD3D.

 

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

 

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

 

NOTE 9 - OTHER CURRENT ASSETS

 

Other current assets consisted of the following:

 

   As of   As of 
   March 31, 2020   June 30, 2019 
         
Prepaid Expenses  $968,504   $991,528 
Advance Income Tax   482,518    800,798 
Employee Advances   125,653    33,778 
Security Deposits   282,596    147,668 
Other Receivables   1,534,222    733,826 
Other Assets   199,872    438,666 
Total  $3,593,365   $3,146,264 

 

 Page 23 

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

NOTE 10 – REVENUES IN EXCESS OF BILLINGS – LONG TERM

 

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

 

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

 

Pursuant to revenue recognition for contract accounting, the Company had recorded revenues in excess of billings long-term for amounts billable after one year. During the three and nine months ended March 31, 2020, the Company accreted $13,940 and $41,621 which was recorded in interest income for that period. The Company used the discounted cash flow method with an interest rate of 4.35%.

 

NOTE 11 - PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

   As of   As of 
   March 31, 2020   June 30, 2019 
         
Office Furniture and Equipment  $3,132,869   $3,125,382 
Computer Equipment   19,077,749    18,905,603 
Assets Under Capital Leases   1,553,868    1,720,490 
Building   5,905,714    6,021,939 
Land   1,528,091    1,559,111 
Capital Work In Progress   12,899    - 
Autos   1,301,193    1,024,754 
Improvements   87,609    111,165 
Subtotal   32,599,992    32,468,444 
Accumulated Depreciation   (21,046,178)   (20,371,589)
Property and Equipment, Net  $11,553,814   $12,096,855 

 

For the three and nine months ended March 31, 2020, depreciation expense totaled $479,350 and $1,429,463, respectively. Of these amounts, $273,315 and $805,562, respectively, are reflected in cost of revenues. For the three and nine months ended March 31, 2019, depreciation expense totaled $606,641 and $1,704,606, respectively. Of these amounts, $354,199 and $1,046,153, respectively, are reflected in cost of revenues.

 

 Page 24 

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

Following is a summary of fixed assets held under finance leases as of March 31, 2020 and June 30, 2019:

 

   As of   As of 
   March 31, 2020   June 30, 2019 
Computers and Other Equipment  $328,998   $324,466 
Furniture and Fixtures   51,119    65,084 
Vehicles   1,173,751    1,330,940 
Total   1,553,868    1,720,490 
Less: Accumulated Depreciation - Net   (652,372)   (538,564)
   $901,496   $1,181,926 

 

Finance lease term and discount rate were as follows:

 

   As of 
   March 31, 2020 
     
Weighted average remaining lease term - Finance leases   1.65 Years 
      
Weighted average discount rate - Finance leases   13.0%

 

NOTE 12 - LEASES

 

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

 

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

 

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

 

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

 

 Page 25 

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

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

 

Supplemental balance sheet information related to leases was as follows:

 

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

 

The components of lease cost were as follows:

 

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

 

Lease term and discount rate were as follows:

 

   As of 
   March 31, 2020 
     
Weighted average remaining lease term - Operating leases   2.66 Years 
      
Weighted average discount rate - Operating leases   5.6%

 

 Page 26 

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

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

 

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

 

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

 

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

 

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

 

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

 

The Company is a lessor for certain office space leased by the Company and sub-leased to others under non-cancelable leases. These lease agreements provide for a fixed base rent and terminate by July 2021. All leases are considered operating leases. There are no rights to purchase the premises and no residual value guarantees. For the three and nine months ended March 31, 2020, the Company received $8,514 and $25,227 of lease income.

 

 Page 27 

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

NOTE 13 – LONG TERM INVESTMENT

 

Drivemate

 

The Company and Drivemate Co., Ltd. (“Drivemate”) entered into a subscription agreement (“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 paid $250,000 on May 2, 2019 and received 760 shares for a 5.27% holding in Drivemate. The remaining $250,000 will be paid in $62,500 increments beginning 15 months from the date of the Drivemate Agreement signing with the final payment due 24 months from the date of the Drivemate Agreement signing. Per the Drivemate Agreement, the Company appointed two directors to the Drivemate board. The Company determined that it met the significant influence criteria since two of the four directors are appointed by the Company and the Company is to own 30% of Drivemate at the final payment date; therefore, the Company accounts for the investment using the equity method of accounting.

 

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

 

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

 

WRLD3D-Related Party

 

On March 2, 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.

 

During the three and nine months ended March 31, 2020, NetSol PK provided services valued at $61,842 and $202,199, respectively, which is recorded as services-related party. During the three months and nine months ended March 31, 2019, NetSol PK provided services valued at $156,996 and $494,333, respectively, which is recorded as services-related party. Accounts receivable at March 31, 2020 and June 30, 2019 were $1,332,575 and $1,020,589, respectively. Revenue in excess of billings at March 31, 2020 and June 30, 2019 were $8,245 and $110,827, respectively.

 

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

 

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

 

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

 

 Page 28 

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

NOTE 14 - INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

 

   As of   As of 
   March 31, 2020   June 30, 2019 
         
Product Licenses - Cost  $47,244,997   $47,244,997 
Effect of Translation Adjustment   (15,833,112)   (15,343,727)
Accumulated Amortization   (25,531,126)   (24,568,320)
Net Balance  $5,880,759   $7,332,950 

 

(A) Product Licenses

 

Product licenses include internally developed original license issues, renewals, enhancements, copyrights, trademarks, and trade names. Product licenses are amortized on a straight-line basis over their respective lives, and the unamortized amount of $5,880,759 will be amortized over the next 3.5 years. Amortization expense for the three and nine months ended March 31, 2020 was $464,322 and $1,386,092, respectively. Amortization expense for the three and nine months ended March 31, 2019 was $520,455 and $1,646,153, respectively.

 

(B) Future Amortization

 

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

 

Year ended:    
March 31, 2021  $1,748,286 
March 31, 2022   1,748,286 
March 31, 2023   1,748,286 
March 31, 2024   635,901 
   $5,880,759 

 

NOTE 15 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following:

 

   As of   As of 
   March 31, 2020   June 30, 2019 
         
Accounts Payable  $1,711,503   $1,156,498 
Accrued Liabilities   4,478,601    5,055,358 
Accrued Payroll & Taxes   553,223    793,503 
Taxes Payable   196,376    326,386 
Other Payable   168,230    144,815 
Total  $7,107,933   $7,476,560 

 

 Page 29 

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

NOTE 16 – DEBTS

 

Notes payable and finance leases consisted of the following:

 

       As of March 31, 2020 
           Current   Long-Term 
Name      Total   Maturities   Maturities 
                 
D&O Insurance   (1)  $164,731   $164,731   $- 
Bank Overdraft Facility   (2)   -    -    - 
Loan Payable Bank - Export Refinance   (3)   3,005,350    3,005,350    - 
Loan Payable Bank - Running Finance   (4)   -    -    - 
Loan Payable Bank - Export Refinance II   (5)   2,284,065    2,284,065    - 
Loan Payable Bank - Running Finance II   (6)   -    -    - 
Loan Payable Bank - Export Refinance III   (7)   3,005,350    3,005,350    - 
Related Party Loan   (8)   69,425    16,174    53,251 
         8,528,921    8,475,670    53,251 
Subsidiary Finance Leases   (9)   571,639    319,188    252,451 
        $9,100,560   $8,794,858   $305,702 

 

       As of June 30, 2019 
           Current   Long-Term 
Name      Total   Maturities   Maturities 
                 
D&O Insurance   (1)  $67,671   $67,671   $- 
Bank Overdraft Facility   (2)   -    -    - 
Loan Payable Bank - Export Refinance   (3)   3,066,355    3,066,355    - 
Loan Payable Bank - Running Finance   (4)   325,034    325,034    - 
Loan Payable Bank - Export Refinance II   (5)   2,330,431    2,330,431    - 
Loan Payable Bank - Running Finance II   (6)   735,925    735,925    - 
Loan Payable Bank - Export Refinance III   (7)   -    -    - 
Related Party Loan   (8)   82,969    15,838    67,131 
         6,608,385    6,541,254    67,131 
Subsidiary Finance Leases   (9)   861,784    364,343    497,441 
        $7,470,169   $6,905,597   $564,572 

 

(1) The Company finances Directors’ and Officers’ (“D&O”) liability insurance and Errors and Omissions (“E&O”) liability insurance, 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 March 31, 2020 and June 30, 2019.

 

(2) The Company’s subsidiary, NTE, has an overdraft facility with HSBC Bank plc whereby the bank would cover any overdrafts up to £300,000, or approximately $370,370. The annual interest rate was 5.12% as of March 31, 2020. Total outstanding balance as of March 31, 2020 was £Nil.

 

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

 

 Page 30 

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

(3) The Company’s subsidiary, NetSol PK, has an export refinance facility with Askari Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every nine months. Total facility amount is Rs. 500,000,000 or $3,005,350 at March 31, 2020 and Rs. 500,000,000 or $3,066,355 at June 30, 2019. The interest rate for the loan was 3% at March 31, 2020 and June 30, 2019.

 

(4) The Company’s subsidiary, NetSol PK, has a running finance facility with Askari Bank Limited, secured by NetSol PK’s assets. Total facility amount is Rs. 75,000,000 or $450,802, at March 31, 2020. NetSol PK used Rs. Nil, or $Nil at March 31, 2020. The interest rate for the loan was 13.2% and 13.0% at March 31, 2020 and June 30, 2019, respectively.

 

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

 

(5) The Company’s subsidiary, NetSol PK, has an export refinance facility with Samba Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every nine months. Total facility amount is Rs. 380,000,000 or $2,284,065 and Rs. 380,000,000 or $2,330,431 at March 31, 2020 and June 30, 2019, respectively. The interest rate for the loan was 3% at March 31, 2020 and June 30, 2019.

 

(6) The Company’s subsidiary, NetSol PK, has a running finance facility with Samba Bank Limited, secured by NetSol PK’s assets. Total facility amount is Rs. 120,000,000 or $721,284 and Rs. 120,000,000 or $735,925, at March 31, 2020 and June 30, 2019, respectively. The interest rate for the loan was 12.9% and 14.3% at March 31, 2020 and June 30, 2019, respectively. Total outstanding balance at March 31, 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 March 31, 2020, NetSol PK was in compliance with these covenants.

 

(7) The Company’s subsidiary, NetSol PK, has an export refinance facility with Habib Metro Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every nine months. Total facility amount is Rs. 900,000,000 or $5,409,629 and NetSol PK used Rs. 500,000,000 or $3,005,350 at March 31, 2020. The interest rate for the loan was 3% at March 31, 2020.

 

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

 

(9) The Company leases various fixed assets under 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 March 31, 2020 and 2019.

 

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NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

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

 

   Amount 
Minimum Lease Payments     
Within year 1  $365,384 
Within year 2   228,102 
Within year 3   19,852 
Within year 4   18,198 
Total Minimum Lease Payments   631,536 
Interest Expense relating to future periods   (59,897)
Present Value of minimum lease payments   571,639 
Less: Current portion   (319,188)
Non-Current portion  $252,451 

 

NOTE 17 - STOCKHOLDERS’ EQUITY

 

During the nine months ended March 31, 2020, the Company issued 42,818 shares of common stock for services rendered by officers of the Company. These shares were valued at the fair market value of $239,799.

 

During the nine months ended March 31, 2020, the Company issued 21,615 shares of common stock for services rendered by the independent members of the Board of Directors as part of their board compensation. These shares were valued at the fair market value of $106,601.

 

During the nine months ended March 31, 2020, the Company issued 62,522 shares of its common stock to employees pursuant to the terms of their employment agreements valued at $319,066.

 

NOTE 18 - INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN

 

Common stock purchase options consisted of the following:

 

OPTIONS:                
                 
   # of shares   Weighted Average Exercise Price   Weighted Average Remaining Contractual Life (in years)   Aggregated Intrinsic Value 
Outstanding and exercisable, June 30, 2019   40,386   $6.50    0.61   $404 
Granted   -    -           
Exercised   -    -           
Expired / Cancelled   (40,386)  $6.50           
Outstanding and exercisable, March 31, 2020   -    -    -   $- 

 

During the nine months ended March 31, 2020, 40,386 options outstanding and exercisable, became expired.

 

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NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

The following table summarizes stock grants awarded as compensation:

 

   # of shares   Weighted Average Grant Date Fair Value ($) 
Unvested, June 30, 2019   81,515   $5.88 
Granted   148,221   $5.27 
Vested   (126,955)  $5.24 
Forfeited / Cancelled   (991)  $6.05 
Unvested, March 31, 2020   101,790   $5.79 

 

For the three and nine months ended March 31, 2020, the Company recorded compensation expense of $236,702 and $565,287, respectively. For the three and nine months ended March 31, 2019, the Company recorded compensation expense of $110,939 and $980,682, respectively. The compensation expense related to the unvested stock grants as of March 31, 2019 was $539,603 which will be recognized during the fiscal years 2020 through 2022.

 

NOTE 19 – 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 20 – 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.

 

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NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

The following table presents a summary of identifiable assets as of March 31, 2020 and June 30, 2019:

 

   As of   As of 
   March 31, 2020   June 30, 2019 
Identifiable assets:          
Corporate headquarters  $4,263,871   $2,947,727 
North America   5,441,314    5,730,928 
Europe   9,689,483    8,399,033 
Asia - Pacific   67,011,995    70,419,331 
Consolidated  $86,406,663   $87,497,019 

 

The following table presents a summary of investment under equity method as of March 31, 2020 and June 30, 2019:

 

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

 

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

 

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

 

 Page 34 

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

The following table presents a summary of capital expenditures for the nine months ended March 31:

 

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

 

NOTE 21 – NON-CONTROLLING INTEREST IN SUBSIDIARY

 

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

 

SUBSIDIARY  Non-Controlling Interest %  

Non-Controlling Interest at

March 31, 2020

 
         
NetSol PK   33.88%  $6,203,015 
NetSol-Innovation   49.90%   158,549 
NetSol Thai   0.006%   (11)
Total       $6,361,553 

 

SUBSIDIARY  Non-Controlling Interest %  

Non-Controlling Interest at

June 30, 2019

 
         
NetSol PK   33.80%  $6,993,491 
NetSol-Innovation   49.90%   1,421,528 
NetSol Thai   0.006%   (32)
Total       $8,414,987 

 

NetSol PK

 

During the nine months ended March 31, 2020, employees of NetSol PK exercised 114,000 options of common stock and NetSol PK received cash of $11,261. Due to the exercise of options, the non-controlling interest increased from 33.80% to 33.88%. During the nine months ended March 31, 2020, NetSol PK paid a cash dividend of $1,610,909.

 

NetSol Innovation

 

During the nine months ended March 31, 2020, NetSol Innovation paid a cash dividend of $2,778,453.

 

NOTE 22 – SUBSEQUENT EVENTS

 

COVID-19

 

The recent outbreak of the coronavirus, also known as "COVID-19", has spread across the globe and is impacting worldwide economic activity. Conditions surrounding the coronavirus continue to rapidly evolve and government authorities have implemented emergency measures to mitigate the spread of the virus. The outbreak and the related mitigation measures have had and will continue to have a material adverse impact on global economic conditions as well as on the Company's business activities. The extent to which COVID-19 may impact the Company's business activities will depend on future developments, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions, business disruptions, and the effectiveness of actions taken in the United States and other countries to contain and treat the disease. These events are highly uncertain and, as such, the Company cannot determine their financial impact at this time. No adjustments have been made to the amounts reported in these condensed consolidated financial statements as a result of this matter.

 

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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 nine months ended March 31, 2020. The following discussion should be read in conjunction with the information included within our Annual Report on Form 10-K for the year ended June 30, 2019, and the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

 

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

 

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

 

Forward-Looking Information

 

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

 

Business Overview

 

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

 

The Company’s primary source of revenue is the licensing, customization, enhancement and maintenance of its suite of financial applications under the brand name NFS™ (NetSol Financial Suite) and NFS Ascent® for leading businesses in the global lease and finance industry.

 

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

 

 Page 36 

 

 

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

 

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

 

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

 

NFS Ascent®

 

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

 

NFS Digital

 

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

 

LeasePak

 

In North America, NTA has and continues to develop the LeasePak CMS product which is now tailored to be an offering on the Microsoft Azure™ cloud. LeasePak streamlines the lease and loan management lifecycle, enabling superior portfolio management, flexible financial products (lease or loan terms) and sophisticated financial analysis and management to reduce operating costs, simplify accounting and improve profits. It is scalable from a basic offering to a collection of highly specialized add on modules for systems, portfolios and accounting methods for virtually all sizes and complexity of operations. It is the centerpiece of vehicle leasing infrastructure at leading Fortune 500 banks and Automotive Captives, as well as for some of the industry’s leading independent lessors. It handles every aspect of the lease or loan lifecycle, including credit application origination, credit adjudication, pricing, documentation, booking, payments, customer service, collections, midterm adjustments, and end-of-term options for asset disposition and remarketing.

 

LeasePak-SaaS

 

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

 

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LeaseSoft

 

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

 

Highlights

 

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

 

  We generated close to $2.0 million from the successful implementation of change requests from various customers across multiple regions.
  One of the largest independently owned finance companies in the UK had a successful go live with our LeaseSoft application.
  We signed a contract with one of the leading banks in the UK to implement its NFS Ascent® Retail Platform. This has now marked the first retail customer of NFS Ascent® in Europe.
  Our innovation lab project “OTOZ” entered into a contract with the captive auto finance company of a leading German auto manufacturer in China to launch its pilot program in China.
  We upsold system enhancements during the implementation phase worth approximately $4.0 million of additional revenue to the captive auto finance company of a leading German Auto manufacturer in China.
  We delivered our NFS Ascent® Retail system to the first NFS Ascent® customer in North America.
  We delivered our NFS Ascent® Retail platform to the captive auto finance company of a notable Japanese equipment manufacturer in Australia/New Zealand.
  The leading captive finance company of a notable Japanese bank in Indonesia implemented the i-OPS (i-operations) system in a bid to extend their market reach by allowing their call center workforce contact prospects and act as an additional channel for lead generation.

 

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

 

Management has identified the following material trends affecting NetSol.

 

Positive trends:

 

  NFS Ascent® SaaS offering is gaining traction in mid-size auto captives in North American and European markets.
  Mobility and digital transformation is the new norm showing acceleration in every sector particularly in auto and banking.
  On Cloud demand for our solution is on the rise.
  COVID -19 has created new dynamics for businesses and corporations to have employees and executives work from home. Essentially, the decreased office and maintenance costs as well as the sharply reduced travel expenses, should positively impact our financials.
  COVID-19 is creating newer opportunities in our space or complementary sectors while our R&D teams are exploring new windows to monetize.
  Latin American markets, primarily in Mexico, remain largely untapped.
  In developing markets, new interests are emerging from existing clients for upgradation and mobility platform.
  Growing opportunities and dynamics of shared car ownership either through ride hailing and car sharing encouraging our innovation and development tools.
  Strong engagement and continued traction by tier 1 existing and new customers in the OTOZ platform.
  Improved stability in US and Pakistan relationship boosting confidence and trade relations.
  China’s China Pakistan Economic Corridor (CPEC) investment has exceeded $62 billion investment from the originally planned $46 billion on Pakistan energy and infrastructure sectors.

 

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Negative trends:

 

  COVID-19 has caused a global recession that will adversely impact every one of our business sectors. NetSol Board member, Shahid Burki, a renowned World Bank economist (1974 to 1999), warns that the COVID-19 crisis will bring about important global change. The United States is heading towards a major economic slowdown and what we are seeing, therefore, is not a typical recession but a hurricane.
  Most OEMs and auto sectors are experiencing major slowdown due to lockdowns and health concerns.
  The C-level decision making to acquire new systems or even upgrade will be elongated due to uncertainty of the COVID-19 virus.
  The steep drop of global oil prices reflects a sudden drop in transportation, air travels and road travels. The lockdowns worldwide present layers of challenges for every business worldwide.
  Regional tensions between US and Iran could further accelerate.
  US and China trade conflicts tend to further aggravate the global business environment.

 

CHANGES IN FINANCIAL CONDITION

 

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

 

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

 

   For the Three Months 
   Ended March 31, 
   2020   %   2019   %  
Net Revenues:                    
License fees  $312,133    2.3%  $2,536,320    14.8%
Maintenance fees   4,934,635    36.5%   3,704,756    21.6%
Services   8,222,227    60.8%   10,728,983    62.6%
Services - related party   61,842    0.5%   156,996    0.9%
Total net revenues   13,530,837    100.0%   17,127,055    100.0%
                     
Cost of revenues:                    
Salaries and consultants   4,850,438    35.8%   4,833,611    28.2%
Travel   1,052,033    7.8%   1,793,964    10.5%
Depreciation and amortization   737,637    5.5%   874,654    5.1%
Other   868,491    6.4%   1,067,506    6.2%
Total cost of revenues   7,508,599    55.5%   8,569,735    50.0%
                     
Gross profit   6,022,238    44.5%   8,557,320    50.0%
Operating expenses:                    
Selling and marketing   1,587,821    11.7%   1,864,990    10.9%
Depreciation and amortization   206,035    1.5%   252,442    1.5%
General and administrative   4,151,394    30.7%   3,833,209    22.4%
Research and development cost   453,050    3.3%   513,770    3.0%
Total operating expenses   6,398,300    47.3%   6,464,411    37.7%
                     
Income from operations   (376,062)   -2.8%   2,092,909    12.2%
Other income and (expenses)                    
Gain (loss) on sale of assets   129    0.0%   16,380    0.1%
Interest expense   (94,395)   -0.7%   (70,447)   -0.4%
Interest income   448,368    3.3%   201,084    1.2%
Gain (loss) on foreign currency exchange transactions   1,770,894    13.1%   47,218    0.3%
Share of net loss from equity investment   (78,502)   -0.6%   (245,389)   -1.4%
Other income   17,012    0.1%   3,116    0.0%
Total other income (expenses)   2,063,506    15.3%   (48,038)   -0.3%
                     
Net income (loss) before income taxes   1,687,444    12.5%   2,044,871    11.9%
Income tax provision   (218,351)   -1.6%   (275,476)   -1.6%
Net income (loss)   1,469,093    10.9%   1,769,395    10.3%
Non-controlling interest   (468,286)   -3.5%   (501,835)   -2.9%
Net income (loss) attributable to NetSol  $1,000,807    7.4%  $1,267,560    7.4%

 

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

 

 

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