NETSOL TECHNOLOGIES INC 10-K

ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITY (a) MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION - Common stock of NetSol Technologies, Inc. is listed and traded on NASDAQ Capital Market under the ticker symbol “NTWK”. The table shows the high and low intra-day prices of the Company’s common stock as reported on the composite tape of the NASDAQ for each quarter during the last two fiscal years. Fiscal Year 2021 High Low First Quarter $ 3.29 $ 2.52 Second Quarter $ 4.07 $ 2.35 Third Quarter $ 5.30 $ 3.80 Fourth Quarter $ 6.12 $ 3.71 Fiscal Year 2020 High Low First Quarter $ 6.45 $ 4.95 Second Quarter $ 5.85 $ 3.50 Third Quarter $ 4.50 $ 2.00 Fourth Quarter $ 3.65 $ 2.05 RECORD HOLDERS - As of September 16, 2021, the number of holders of record of the Company’s common stock was 144. DIVIDENDS - The Company has not paid dividends on its Common Stock in the past two fiscal years. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLAN The table shows information related to our equity compensation plans as of June 30, 2021: Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) Equity Compensation Plans approved by Security holders None None 425,004(1) Equity Compensation Plans not approved by Security holders None None None Total None None 425,004 (1) Represents 20,386 available for issuance under the 2005 Incentive and Nonstatutory Stock Option Plan, 98,196 under the 2013 Incentive and Nonstatutory Stock Option Plan and 306,422 under the 2015 Incentive and Nonstatutory Stock Option Plan. As of June 30, 2021, 6,985 shares of common stock have been granted as compensation, but have not yet vested. 13 (b) RECENT SALES OF UNREGISTERED SECURITIES None. (c) ISSUER PURCHASES OF EQUITY SECURITIES The repurchases provided in the table below were made through the year ended June 30, 2021: Issuer Purchases of Equity Securities (1) Month Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that may be Purchased Under the Plans or Programs Jul-20 21,940 $ 3.02 21,940 - Aug-20 125,112 $ 3.18 147,052 - Oct-20 102,023 $ 2.94 249,075 - Nov-20 124,715 $ 3.00 373,790 - Dec-20 73,206 $ 3.47 446,996 - Jan-21 92,440 $ 4.03 539,436 - Feb-21 30,021 $ 4.87 569,457 - Mar-21 34,231 $ 4.49 603,688 - Apr-21 45 $ 4.58 603,733 - May-21 30,078 $ 4.44 633,811 - Jun-21 35,207 $ 4.72 669,018 - Total 669,018 669,018 849,256 (1) The Board of Directors approved a repurchase of shares up to $2,000,000 on July 30, 2020. All shares permitted to be purchased under this July 2020 plan were purchased during the plan’s original date and prior to the conclusion of the extension of the plan. On May 21, 2021, the Board of Directors authorized an additional repurchase plan of up to $2,000,000 worth of shares of common stock. The plan was authorized commencing May 21, 2021 through November 20, 2021 subject to an additional six months extension at the discretion of management. As of June 30, 2021, the total number of shares that could be purchased under both plans was 849,256. The actual maximum number of shares will vary depending on the actual price paid per share purchased. The Company purchased a cumulative 669,018 shares of its common stock from the open market for cash proceeds of $2,364,781 at an average price of $3.53 per share during fiscal year ended June 30, 2021 from both repurchase plans. ITEM 6 – [Reserved] 14 ITEM 7- MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to assist in understanding our financial position and results of operations for the year ended June 30, 2021. It should be read together with our consolidated financial statements and related notes included under Item 8 of this Annual Report on Form 10-K. A few of our highlights for the fiscal year ended June 30, 2021 were: ● SCI Lease Corp, our first North American Ascent™ customer, successfully went live with NFS Ascent ® . ● Peter Minshall was appointed Executive Vice President for NetSol Technologies Americas. ● A leading captive finance company of a notable U.S. based auto manufacturer went live with LeasePak cloud. ● NETSOL’s U.S. based mobility startup, Otoz TM , launched its digital automotive retail platform for BMW Group Financial Services in the U.S. for its key brand Mini Anywhere. This represents NETSOL’s first retail platform solution in the North American market for Mini dealerships. ● Daimler Financial Services went live with NFS Ascent ® Retail Platform on a single code, single instance and involving multi-tenancy setup in Singapore. Daimler also went live with our NSF Ascent ® Retail Platform in Thailand and began the implementation process of our NSF Ascent ® Retail Platform in New Zealand and Australia. ● We entered into an agreement with an existing tier one finance company in China for them to upgrade to our NFS Ascent ® Retail and Wholesale platforms. The contract is expected to generate approximately $9,000,000 during the contract term. ● A Captive auto finance company of a leading German Auto manufacturer based in China went successfully live with our NFS Ascent ® Retail Platform. ● NETSOL and WRLD3D introduced NXT - a smart workplace platform to support companies to return to work safely. ● A rapidly growing U.K. bank serving small and medium-sized enterprises has successfully gone live with the NFS Ascent ® Retail Platform. This is our first go live of an NFS Ascent ® Retail client in the U.K. ● We entered into an agreement with a renowned financial services company in the U.S. to implement LeasePak, one of our legacy solutions. The contract is expected to generate approximately $1,000,000 over the life of the contract. ● The leasing division of a mid-sized regional bank in the U.S. went live with the SaaS version of our LeasePak solution. ● We started the NFS Ascent ® Retail implementation process for the subsidiary of a leading German Auto Manufacturer based in South Korea. ● We signed an agreement with Motorcycle Group “Motolease” to deploy our cloud-based version of our NFS Ascent ® platform. This agreement is the first official sale for NFS Ascent ® in the U.S. market. ● We generated approximately $2,100,000 of license revenue with the renewal of our NFS CAP and CMS legacy solutions with an existing customer in Thailand. ● We generated approximately $1,400,000 of license revenue from an existing customer due to the increase in contracts being serviced on their system. ● We effectively executed the share buyback plan with the purchase of 669,018 shares during the 2021 Fiscal Year. 15 Marketing and Business Development Activities Management has developed a growth strategy aimed at increasing competitiveness, enhancing global delivery capabilities and increasing financial strength to become a leading global IT institution in the leasing and finance space. The growth strategy contemplates the following enhanced activities and initiatives to accomplish these goals: ● Build strong C-level executive professional teams in each key location to execute our long-term strategy. ● Develop, groom and retain the next tier level management for leadership to navigate long term growth. ● Upgraded Bangkok and Beijing offices to support the growing and existing client relationships and new client acquisitions in the region. ● Strengthen the NETSOL brand in the Americas and Europe and further penetrate the APAC markets such as China, Thailand, Indonesia, Japan, Australia and New Zealand. ● Maintain the quality of our delivery, after delivery support, and client relationships. ● Further penetration of NFS Ascent ® into the leasing and financing sectors in China, APAC, Europe and North America by focusing on multi-national auto captive Fortune 500 companies. ● Pursue a well thought out strategy to diversify into complimentary verticals by way of organic expansion, partnerships and synergistic M&A. ● Continue to implement new tools, systems and processes, such as JIRA, and the Agile framework to further enhance productivity, efficiencies and operating margins. ● Offer a cloud enabled NFS Ascent ® at subscription-based pricing models to generate additional interest from prospects. ● Continue investing in Otoz TM and our innovation lab to generate new verticals for the business. Growth Prospects for NFS Ascent ® Growth prospects for NFS Ascent ® are linked to the maturing of the product portfolio and its growing customer base across different geographic and product markets. We are eyeing key international markets for growth in sales. Our sales strategy now carefully balances expansion into new geographic markets, including the Americas, Europe, and further penetration of our leading position in Asia Pacific. Growth in North America is expected to come from the potential market for replacement of legacy systems. NFS Ascent ® is aimed at providing a highly flexible and robust solution based on the latest technology and advanced architecture for the North American customers looking to replace their legacy systems. We believe that NFS Ascent ® can provide substantial competitive disruption to the market’s lagging technology provided by incumbent vendors. The existing customer base may also represent latent demand for increased service and maintenance revenues by offering business process optimization, customization and upgrade services. Growth in Europe will come from the introduction of NFS Ascent ® , which will allow NTE to support larger organizations than those typically selecting the existing LeaseSoft product set, and opens the door for European expansion. This is designed to attract larger license and professional services revenues across a wider geography. In addition, leveraging the core strengths of NFS Ascent ® will increasingly provide opportunities in the automotive sector where NTE is currently underrepresented. Growth in our traditionally strong base in Asia Pacific is expected through diversification across market segments to include new customers in related banking and commercial lending areas. At the same time, the existing customer base is tapped for increased service and maintenance revenues by offering enhanced features and new solutions to emerging customer needs. In addition, there is a potential for NFS Ascent ® in Asia Pacific in the form of existing customers who are looking for replacement of their current system. In China, we are a de facto leader in the leasing and finance enterprise solution domain. With this position, we continue to enjoy demand for the current NFS™ solution, as well as NFS Ascent ® . We will continue strengthening our position within existing multinational auto manufacturers, as well as, local Chinese captive finance and leasing companies. The Chinese auto leasing market is young and low on consumer penetration in comparison with the giant U.S. market. In Thailand, we established a sales headquarters, client service center, as well as a headquarters for Otoz TM . The NetSol Thai operation is the hub for our global markets and directly supports all APAC markets including China, Indonesia and Australia. Our operation in Bangkok serves a very robust and growing market for leasing companies and regional banks. 16 MATERIAL TRENDS AFFECTING NETSOL 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 with employees and executives working from home. Essentially, the decreased office and maintenance costs, as well as the sharply reduced travel expenses, should positively impact our financials. ● COVID-19 is creating new opportunities for our R&D teams to expand and monetize mobile and digital solutions in our space and complementary sectors. ● In developing markets, new interests are emerging from existing clients for upgrades and mobility platforms. ● Growing opportunities and dynamics of shared car ownership either through ride hailing and car sharing encouraging our innovation and development tools. ● Otoz TM platform is showing positive trajectory of interest from existing and new auto leasing and Tier 1 companies in all of our markets, including China, the US and Europe. ● Improved stability in US and Pakistan relationship boosting confidence and trade relations. ● The China Pakistan Economic Corridor (CPEC) investment, initiated by China, has exceeded $62 billion investment from the originally planned $46 billion on Pakistan energy and infrastructure sectors. ● China’s auto sector remains strong as our customers are constantly demanding ‘Change Requests’ or additional services and reflects resilience. Negative trends: ● The degree to which the COVID-19 pandemic impacts our future business globally, results of operations and financial condition will depend on future developments, which are uncertain, including but not limited to the duration, spread and severity of the pandemic, the availability, adoption and efficacy of vaccines, government responses and other actions to mitigate the spread of and to treat COVID-19, and when and to what extent normal business, economic and social activity and conditions resume. ● We are unable to predict the extent to which the pandemic impacts our customers and other partners and their financial conditions, but adverse effects on these parties could also adversely affect us. ● Most OEMs and auto sectors are experiencing a major slowdown due to lockdowns and health concerns. ● The C-level decision making to acquire new systems or even upgrade will be elongated due to uncertainty of the COVID-19 virus. ● Due to travel restrictions caused by COVID-19, it is increasingly difficult to conduct face to face meetings for global clients and new prospects removing the personal connection essential to some decision making. ● The COVID-19 pandemic has adversely affected live industry conferences and events, such as those held by the Equipment Leasing and Finance Association (ELFA), reducing leads and market exposure. ● Working from the office poses its own risk of virus spread until it vanishes completely. ● Political actions, including trade protection and national security policies of the U.S. and Chinese governments, such as tariffs or bans could in the future limit or prevent companies from transacting business with China and aggravate the global business environment. CRITICAL ACCOUNTING POLICIES Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Critical accounting policies for us include revenue recognition and multiple element arrangements, intangible assets, software development costs, and goodwill. 17 REVENUE RECOGNITION The Company determines revenue recognition through the following steps: ● Identification of the contract, or contracts, with a customer; ● Identification of the performance obligations in the contract; ● Determination of the transaction price; ● Allocation of the transaction price to the performance obligations in the contract; and ● Recognition of revenue when, or as, the Company satisfies a performance obligation. The Company records the amount of revenue and related costs by considering whether the entity is a principal (gross presentation) or an agent (net presentation) by evaluating the nature of its promise to the customer. Revenue is presented net of sales, value-added and other taxes collected from customers and remitted to government authorities. The Company has two primary revenue streams: core revenue and non-core revenue. Core Revenue The Company generates its core revenue from the following sources: (1) software licenses, (2) services, which include implementation and consulting services, and (3) subscription and support, which includes post contract support, of its enterprise software solutions for the lease and finance industry. The Company offers its software using the same underlying technology via two models: a traditional on-premises licensing model and a subscription model. The on-premises model involves the sale or license of software on a perpetual basis to customers who take possession of the software and install and maintain the software on their own hardware. Under the subscription delivery model, the Company provides access to its software on a hosted basis as a service and customers generally do not have the contractual right to take possession of the software. Non-Core Revenue The Company generates its non-core revenue by providing business process outsourcing (“BPO”), other IT services and internet services. Performance Obligations A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under Topic 606. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied by transferring the promised good or service to the customer. The Company identifies and tracks the performance obligations at contract inception so that the Company can monitor and account for the performance obligations over the life of the contract. The Company’s contracts which contain multiple performance obligations generally consist of the initial purchase of subscription or licenses and a professional services engagement. License purchases generally have multiple performance obligations as customers purchase post contract support and services in addition to the licenses. The Company’s single performance obligation arrangements are typically post contract support renewals, subscription renewals and services engagements. For contracts with multiple performance obligations where the contracted price differs from the standalone selling price (“SSP”) for any distinct good or service, the Company may be required to allocate the contract’s transaction price to each performance obligation using its best estimate for the SSP. 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. 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. 18 Post Contract Support Revenue from support services and product updates, referred to as subscription and support revenue, is recognized ratably over the term of the maintenance period, which in most instances is one year. Software license updates provide customers with rights to unspecified software product updates, 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. Significant Judgments More judgments and estimates are required under Topic 606 than were required under Topic 605. 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 (2) the method of recognizing revenue for installation/customization, and other services. The stand-alone selling price of the licenses was measured primarily through an analysis of pricing that management evaluated when quoting prices to customers. Although the Company has no history of selling its software separately from post contract support and other services, the Company does have historical experience with amending contracts with customers to provide additional modules of its software or providing those modules at an optional price. This information guides the Company in assessing the stand-alone selling price of the Company’s software, since the Company can observe instances where a customer had a particular component of the Company’s software that was essentially priced separate from other goods and services that the Company delivered to that customer. 19 The Company recognizes revenue from implementation and customization services using the percentage of estimated “man-days” that the work requires. The Company believes the level of effort to complete the services is best measured by the amount of time (measured as an employee working for one day on implementation/customization work) that is required to complete the implementation or customization work. The Company reviews its estimate of man-days required to complete implementation and customization services each reporting period. Revenue is recognized over time for the Company’s subscription, post contract support and fixed fee professional services that are separate performance obligations. For the Company’s professional services, revenue is recognized over time, generally using costs incurred or hours expended to measure progress. Judgment is required in estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization, specification variances and testing requirement changes. If a group of agreements are entered at or near the same time and so closely related that they are, in effect, part of a single arrangement, such agreements are deemed to be combined as one arrangement for revenue recognition purposes. The Company exercises significant judgment to evaluate the relevant facts and circumstances in determining whether agreements should be accounted for separately or as a single arrangement. The Company’s judgments about whether a group of contracts comprise a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved. If a contract includes variable consideration, the Company exercises judgment in estimating the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer. When estimating variable consideration, the Company will consider all relevant facts and circumstances. Variable consideration will be estimated and included in the contract price only when it is probable that a significant reversal in the amount of revenue recognized will not occur. Contract Balances The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in receivables, contract assets (revenues in excess of billings), or contract liabilities (deferred revenue) on the Company’s Consolidated Balance Sheets. The Company records revenues in excess of billings when the Company has transferred goods or services but does not yet have the right to consideration. The Company records deferred revenue when the Company has received or has the right to receive consideration but has not yet transferred goods or services to the customer. Unearned Revenue The Company typically invoices its customers for subscription and support fees in advance on a quarterly or annual basis, with payment due at the start of the subscription or support term. Unpaid invoice amounts for non-cancellable license and services starting in future periods are included in accounts receivable and unearned revenue. Practical Expedients and Exemptions There are several practical expedients and exemptions allowed under Topic 606 that impact timing of revenue recognition and the Company’s disclosures. The Company has applied the following practical expedients: ● The Company does not evaluate a contract for a significant financing component if payment is expected within one year or less from the transfer of the promised items to the customer. ● The Company generally expenses sales commissions and sales agent fees when incurred when the amortization period would have been one year or less or the commissions are based on cashed received. These costs are recorded within sales and marketing expense in the Consolidated Statement of Operations. ● The Company does not disclose the value of unsatisfied performance obligations for contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed (applies to time-and-material engagements). 20 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, we incur few direct incremental costs of obtaining new customer contracts. We rarely incur incremental costs to review or otherwise enter into contractual arrangements with customers. In addition, our sales personnel receive fees that we refer to as commissions, but that are based on more than simply signing up new customers. Our sales personnel are required to perform additional duties beyond new customer contract inception dates, including fulfillment duties and collections efforts. INTANGIBLE ASSETS Intangible assets consist of product licenses, renewals, enhancements, copyrights, trademarks, trade names, and customer lists. Intangible assets with finite lives are amortized over the estimated useful life and are evaluated for impairment at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We assess recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If the future undiscounted cash flows are less than the carrying amount of these assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. SOFTWARE DEVELOPMENT COSTS Costs incurred to internally develop computer software products or to enhance an existing product are recorded as research and development costs and expensed when incurred until technological feasibility for the respective product is established. Thereafter, all software development costs are capitalized and reported at the lower of unamortized cost or net realizable value. Capitalization ceases when the product or enhancement is available for general release to customers. The Company makes on-going evaluations of the recoverability of its capitalized software projects by comparing the amount capitalized for each product to the estimated net realizable value of the product. If such evaluations indicate that the unamortized software development costs exceed the net realizable value, the Company writes off the amount which the unamortized software development costs exceed net realizable value. Capitalized and purchased computer software development costs are being amortized ratably based on the projected revenue associated with the related software or on a straight-line basis. STOCK-BASED COMPENSATION Our stock-based compensation expense is estimated at the grant date based on the award’s fair value as calculated by the Black-Scholes-Merton (BSM) option pricing model and is recognized as expense over the requisite service period. The BSM model requires various highly judgmental assumptions including expected volatility and expected term. If any of the assumptions used in the BSM model changes significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience and our expectations regarding future pre-vesting termination behavior of employees. To the extent our actual forfeiture rate is different from our estimate; stock-based compensation expense is adjusted accordingly. GOODWILL Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination. Goodwill is reviewed for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the carrying amount of goodwill may be impaired. In conducting its annual impairment test, the Company first reviews qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If factors indicate that the fair value of the reporting unit is less than its carrying amount, the Company performs a quantitative assessment and the fair value of the reporting unit is determined by analyzing the expected present value of future cash flows. If the carrying value of the reporting unit continues to exceed its fair value, the fair value of the reporting unit’s goodwill is calculated and an impairment loss equal to the excess is recorded. 21 Recent Accounting Pronouncement See Note 2 “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K, for a full description of recent accounting pronouncements, including the expected dates of adoption. RESULTS OF OPERATIONS THE YEAR ENDED JUNE 30, 2021 COMPARED TO THE YEAR ENDED JUNE 30, 2020 The following table sets forth the items in our consolidated statement of operations for the years ended June 30, 2021 and 2020 as a percentage of revenues. For the Years Ended June 30, 2021 % 2020 % Net Revenues: License fees $ 6,249,924 11.4 % $ 3,260,891 5.8 % Subscription and support 22,173,745 40.4 % 20,254,917 35.9 % Services 26,448,171 48.2 % 32,555,690 57.8 % Services - related party 48,775 0.1 % 300,821 0.5 % Total net revenues 54,920,615 100.0 % 56,372,319 100.0 % Cost of revenues: Salaries and consultants 20,969,298 38.2 % 18,821,738 33.4 % Travel 663,403 1.2 % 4,181,742 7.4 % Depreciation and amortization 2,990,689 5.4 % 2,897,371 5.1 % Other 3,944,197 7.2 % 3,508,098 6.2 % Total cost of revenues 28,567,587 52.0 % 29,408,949 52.2 % Gross profit 26,353,028 48.0 % 26,963,370 47.8 % Operating expenses: Selling and marketing 6,555,004 11.9 % 6,450,663 11.4 % Depreciation and amortization 965,625 1.8 % 834,583 1.5 % General and administrative 15,437,382 28.1 % 17,138,832 30.4 % Research and development cost 674,168 1.2 % 1,468,954 2.6 % Total operating expenses 23,632,179 43.0 % 25,893,032 45.9 % Income from operations 2,720,849 5.0 % 1,070,338 1.9 % Other income and (expenses) Gain (loss) on sale of assets (191,935 ) -0.3 % 23,103 0.0 % Interest expense (394,289 ) -0.7 % (346,856 ) -0.6 % Interest income 1,017,432 1.9 % 1,569,536 2.8 % Gain (loss) on foreign currency exchange transactions (597,433 ) -1.1 % 398,610 0.7 % Share of net loss from equity investment (253,819 ) -0.5 % (605,864 ) -1.1 % Other income 987,444 1.8 % 224,224 0.4 % Total other income (expenses) 567,400 1.0 % 1,262,753 2.2 % Net income before income taxes 3,288,249 6.0 % 2,333,091 4.1 % Income tax provision (1,026,617 ) -1.9 % (1,141,068 ) -2.0 % Net income 2,261,632 4.1 % 1,192,023 2.1 % Non-controlling interest (483,375 ) -0.9 % (254,942 ) -0.5 % Net income attributable to NetSol $ 1,778,257 3.2 % $ 937,081 1.7 % 22 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 21 “Segment Information and Geographic Areas” within the Notes to the 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 Years Change in Change due (Unfavorable) Ended June 30, Constant to Currency Change as 2021 % 2020 % Currency Fluctuation Reported Net Revenues: $ 54,920,615 100.0 % $ 56,372,319 100.0 % $ (2,351,850 ) $ 900,146 $ (1,451,704 ) Cost of revenues: 28,567,587 52.0 % 29,408,949 52.2 % 1,039,764 (198,402 ) 841,362 Gross profit 26,353,028 48.0 % 26,963,370 47.8 % (1,312,086 ) 701,744 (610,342 ) Operating expenses: 23,632,179 43.0 % 25,893,032 45.9 % 2,298,574 (37,721 ) 2,260,853 Income (loss) from operations $ 2,720,849 5.0 % $ 1,070,338 1.9 % $ 986,488 $ 664,023 $ 1,650,511 Net revenues for the years ended June 30, 2021 and 2020 by segment are as follows: 2021 2020 Revenue % Revenue % North America $ 3,724,547 6.8 % $ 4,444,862 7.9 % Europe 11,283,499 20.5 % 11,914,071 21.1 % Asia-Pacific 39,912,569 72.7 % 40,013,386 71.0 % Total $ 54,920,615 100.0 % $ 56,372,319 100.0 % Revenues License Fees License fees for the year ended June 30, 2021 were $6,249,924 compared to $3,260,891 for the year ended June 30, 2020 reflecting an increase of $2,989,033 with a change in constant currency of $2,633,782. The increase in license revenue for the fiscal year ended June 30, 2021 compared to 2020 is primarily due to the increase in license revenue recognized for the GAC, TIL and BMW contracts to implement our NFS Ascent ® Retail Platform. In the fiscal year ended June 30, 2021, we recorded $2,400,000 of license revenue for the GAC NFS Ascent ® contract, $2,100,000 for the TIL NFS Ascent ® contract, and $1,400,000 for the BMW NFS Ascent ® contract. In fiscal year ended June 30, 2020, we recorded $2,500,000 of license revenue for the DFS, 12 country NFS Ascent ® contract, $470,000 for an NFS Ascent ® contract in the U.K., and $1,540,000 from license revenues through sales of our regional offerings in China, Australia, the U.S. and the U.K. 23 Subscription and Support Subscription and support fees for the year ended June 30, 2021, were $22,173,745 compared to $20,254,917 for the year ended June 30, 2020 reflecting an increase of $1,918,828 with a change in constant currency of $1,754,369. The increase in subscription and support fees is due to going live with several markets related to the DFS contract and going live with the BMW contract. Subscription and support fees begin once a customer has “gone live” with our product. Subscription and support fees are recurring in nature, and we anticipate these fees to gradually increase as we implement both our NFS legacy products and NFS Ascent ® . Services Services income for the year ended June 30, 2021, was $26,448,171 compared to $32,555,690 for the year ended June 30, 2020, reflecting a decrease of $6,107,519 with a decrease in constant currency of $6,485,196. The decrease in services revenue is due to the decrease in implementation revenue associated with customers who have gone live with our products. Services revenue is derived from services provided to both current customers as well as services provided to new customers as part of the implementation process. Services – Related Party Services income from related party for the year ended June 30, 2021 was $48,775 compared to $300,821 for the year ended June 30, 2020 reflecting a decrease of $252,046 with a decrease in constant currency of $254,805. The decrease in related party service revenue is due to a decrease in revenue due to less services performed for WRLD3D. Gross Profit The gross profit was $26,353,028 for the year ended June 30, 2021 as compared with $26,963,370 for the year ended June 30, 2020. This is a decrease of $610,342 with a decrease in constant currency of $1,312,086. The gross profit percentage for the year ended June 30, 2021 increased to 48.0% from 47.8% for the year ended June 30, 2020. The cost of sales was $28,567,587 for the year ended June 30, 2021 compared to $29,408,949 for the year ended June 30, 2020 for a decrease of $841,362 and on a constant currency basis a decrease of $1,039,764. As a percentage of sales, cost of sales decreased from 52.2% for the year ended June 30, 2020 to 52.0% for the year ended June 30, 2021. Salaries and consultant fees increased by $2,147,560 from $18,821,738 for the year ended June 30, 2020 to $20,969,298 for the year ended June 30, 2021 and on a constant currency basis increased by $1,984,188. The increase in salaries is due to the increase in the number of technical employees and the annual increase in salaries and wages. We had 932, 1,009, and 1,036 technical employees as of June 30, 2019, 2020 and 2021, respectively. As a percentage of sales, salaries and consultant expense increased from 33.4% for the year ended June 30, 2020 to 38.2% for the year ended June 30, 2021. Travel decreased by $3,518,339 from $4,181,742 for the year ended June 30, 2020 to $663,403 for the year ended June 30, 2021 and on a constant currency basis decreased by $3,558,950. The decrease in travel is due to the COVID-19 Pandemic. As a percentage of sales, travel expense decreased from 7.4% for year ended June 30, 2020 to 1.2% for the year ended June 30, 2021. Depreciation and amortization expense increased to $2,990,689 compared to $2,897,371 for the year ended June 30, 2020 or an increase of $93,318 and on a constant currency basis an increase of $123,117. Operating Expenses Operating expenses were $23,632,179 for the year ended June 30, 2021 compared to $25,893,032, for the year ended June 30, 2020 for a decrease of 8.7% or $2,260,853 and on a constant currency basis a decrease of 9.0% or $2,298,574. As a percentage of sales, it decreased from 45.9% to 43.0%. The decrease in operating expenses was primarily due to decreases in general and administrative expenses and research and development cost offset by an increase in selling and marketing expenses, salaries and wages and depreciation expense. Selling and marketing expenses increased $104,341 or 1.6% and on a constant currency basis an increase of $42,010 or 0.7%. The increase in selling and marketing expenses is due to increase in our salaries and commissions, and business development costs to market and sell NFS Ascent ® globally. 24 General and administrative expenses were $15,437,382 for the year ended June 30, 2021 compared to $17,138,832 at June 30, 2020 or a decrease of $1,701,450 or 9.9% and on a constant currency basis a decrease of $1,641,828 or 9.6%. The decrease is primarily due to a reduction of approximately $795,000 related to a withholding tax on dividends and by customers, approximately $395,000 of reduced travel expenses, approximately $56,000 of reduced professional services, approximately $517,000 related to the decrease in the provision for doubtful accounts and approximately $157,000 reduction in rent expense offset by an increase in salaries of approximately $402,000. Research and development costs were $674,168 for the year ended June 30, 2021 compared to $1,468,954 at June 30, 2020 or a decrease of $794,786 or 54.1% and on constant currency basis a decrease of $799,928 or 54.5%. The decrease in research and development costs is due to less spending on our innovation initiatives with Blockchain, AI, and IoT. Income/Loss from Operations Income from operations was $2,720,849 for the year ended June 30, 2021 compared to $1,070,338 for the year ended June 30, 2020. This represents an increase of $1,650,511 with an increase of $986,488 on a constant currency basis for the year ended June 30, 2021 compared with the year ended June 30, 2020. As a percentage of sales, income from operations was 5.0% for the year ended June 30, 2021 compared to 1.9% for the year ended June 30, 2020. Other Income and Expense Other income was $567,400 for the year ended June 30, 2021 compared to $1,262,753 for the year ended June 30, 2020. This represents a decrease of $695,353 with a decrease of $893,154 on a constant currency basis. The decrease is primarily due to the interest income and foreign currency exchange transactions. Interest income was $1,017,432 for the year ended June 30, 2021 compared to $1,569,536 for the period ended June 30, 2020. This represent a decrease of $552,104 or a change of $557,829 on constant currency basis. We did not accrue any interest income on the convertible notes receivable for the year ended June 30, 2021 compared to $372,314 for the year ended June 30, 2020. The majority of the contracts with NetSol PK are either in U.S. dollars or Euros; therefore, the currency fluctuations will lead to foreign currency exchange gains or losses depending on the value of the PKR compared to the U.S. Dollar and the Euro. During the year ended June 30, 2021, we recognized a loss of $597,433 in foreign currency exchange transactions compared to a gain of $398,610 for the year ended June 30, 2020. During the year ended June 30, 2021, the value of the U.S. dollar and the Euro decreased 5.9% and 0.5%, respectively, compared to the PKR. During the year ended June 30, 2020, the value of the U.S. dollar and the Euro increased 3.1% and 1.8%, respectively, compared to the PKR. Non-controlling Interest For the year ended June 30, 2021 and 2020, the net income attributable to non-controlling interest was $483,375 and $254,942, respectively. The increase in non-controlling interest is primarily due to the increase in net income of NetSol PK. Net Income/Loss Attributable to NetSol Net income was $1,778,257 for the year ended June 30, 2021 compared to $937,081 for the year ended June 30, 2020. This is an increase of $841,176 with a decrease of $9,399 on a constant currency basis, compared to the prior year. For the year ended June 30, 2021, net income per share was $0.15 for basic and diluted shares. For the year ended June 30, 2020, net income per share was $0.08 for basic and diluted shares. 25 Non-GAAP Financial Measures Regulation S-K Item 10(e), “Use of Non-GAAP Financial Measures in Commission Filings,” defines and prescribes the conditions for use of non-GAAP financial information. Our measures of adjusted EBITDA and adjusted EBITDA per basic and diluted share meet the definition of a non-GAAP financial measure. We define the non-GAAP measures as follows: ● EBITDA is GAAP net income before net interest expense, income tax expense, depreciation and amortization. ● Non-GAAP adjusted EBITDA is EBITDA plus stock-based compensation expense. ● Adjusted EBITDA per basic and diluted share – Adjusted EBITDA allocated to common stock divided by the weighted average shares outstanding and diluted shares outstanding. We use non-GAAP measures internally to evaluate the business and believe that presenting non-GAAP measures provides useful information to investors regarding the underlying business trends and performance of our ongoing operations as well as useful metrics for monitoring our performance and evaluating it against industry peers. The non-GAAP financial measures presented should be used in addition to, and in conjunction with, results presented in accordance with GAAP, and should not be relied upon to the exclusion of GAAP financial measures. Management strongly encourages investors to review our consolidated financial statements in their entirety and not to rely on any single financial measure in evaluating the Company. The non-GAAP measures reflect adjustments based on the following items: EBITDA : We report EBITDA as a non-GAAP metric by excluding the effect of net interest expense, income tax expense, depreciation and amortization from net income because doing so makes internal comparisons to our historical operating results more consistent. In addition, we believe providing an EBITDA calculation is a more useful comparison of our operating results to the operating results of our peers. Stock-based compensation expense : We have excluded the effect of stock-based compensation expense from the non-GAAP adjusted EBITDA and non-GAAP adjusted EBITDA per basic and diluted share calculations. Although stock-based compensation expense is calculated in accordance with current GAAP and constitutes an ongoing and recurring expense, such expense is excluded from non-GAAP results because it is not an expense which generally requires cash settlement by NetSol, and therefore is not used by us to assess the profitability of our operations. We also believe the exclusion of stock-based compensation expense provides a more useful comparison of our operating results to the operating results of our peers. Non-controlling interest: We add back the non-controlling interest in calculating gross adjusted EBITDA and then subtract out the income taxes, depreciation and amortization and net interest expense attributable to the non-controlling interest to arrive at a net adjusted EBITDA. 26 Our reconciliation of the non-GAAP financial measures of adjusted EBITDA and non-GAAP earnings per basic and diluted share to the most comparable GAAP measures for the years ended June 30, 2021 and 2020 are as follows: For the Year Ended For the Year Ended June 30, 2021 June 30, 2020 Net Income (loss) attributable to NetSol $ 1,778,257 $ 937,081 Non-controlling interest 483,375 254,942 Income taxes 1,026,617 1,141,068 Depreciation and amortization 3,956,314 3,731,954 Interest expense 394,289 346,856 Interest (income) (1,017,432 ) (1,569,536 ) EBITDA $ 6,621,420 $ 4,842,365 Add back: Non-cash stock-based compensation 342,153 808,616 Adjusted EBITDA, gross $ 6,963,573 $ 5,650,981 Less non-controlling interest (a) (1,588,701 ) (1,330,352 ) Adjusted EBITDA, net $ 5,374,872 $ 4,320,629 Weighted Average number of shares outstanding Basic 11,499,983 11,734,648 Diluted 11,499,983 11,784,414 Basic adjusted EBITDA $ 0.47 $ 0.37 Diluted adjusted EBITDA $ 0.47 $ 0.37 (a) The reconciliation of adjusted EBITDA of non-controlling interest to net income attributable to non-controlling interest is as follows Net Income (loss) attributable to non-controlling interest $ 483,375 $ 254,942 Income Taxes 147,688 223,675 Depreciation and amortization 1,115,734 1,060,605 Interest expense 121,740 100,373 Interest (income) (319,674 ) (391,644 ) EBITDA $ 1,548,863 $ 1,247,951 Add back: Non-cash stock-based compensation 39,838 82,401 Adjusted EBITDA of non-controlling interest $ 1,588,701 $ 1,330,352 27 LIQUIDITY AND CAPITAL RESOURCES Our cash position was $33,705,154 at June 30, 2021, compared to $20,166,830 at June 30, 2020. Net cash provided by operating activities was $15,725,923 for the year ended June 30, 2021 compared to $3,972,426 for the year ended June 30, 2020. At June 30, 2021, we had current assets of $55,578,774 and current liabilities of $23,476,561. We had accounts receivable of $4,184,096 at June 30, 2021 compared to $11,414,257 at June 30, 2020. We had revenues in excess of billings of $15,637,734 at June 30, 2021 compared to $18,506,733 at June 30, 2020 of which $957,603 and $1,300,289 are shown as long term as of June 30, 2021 and 2020, respectively. The long-term portion was discounted by $66,779 and $41,286 at June 30, 2021 and 2020, respectively, using the discounted cash flow method with interest rates ranging from 4.65% to 6.25% and 4.35%, for the years ended June 30, 2021 and 2020, respectively. During the year ended June 30, 2021, our revenues in excess of billings were reclassified to accounts receivable pursuant to billing requirements detailed in each contract. The combined totals for accounts receivable and revenues in excess of billings decreased by $10,099,160 from $29,920,990 at June 30, 2020 to $19,821,830 at June 30, 2021. Accounts payable and accrued expenses, and current portions of loans and lease obligations amounted to $6,696,035 and $11,366,171, respectively at June 30, 2021. The average days sales outstanding for the years ended June 30, 2021 and 2020 were 165 and 200 days respectively. The days sales outstanding have been calculated by taking into consideration the average combined balances of accounts receivable and revenue in excess of billings. Net cash used by investing activities amounted to $2,518,550 for the year ended June 30, 2021, compared to $2,054,890 for the year ended June 30, 2020. We had net purchases of property and equipment of $2,363,050 compared to $1,270,965 for the comparable period last fiscal year. We did not invest in short-term convertible notes for the year ended June 30, 2021, compared to $600,000, for the fiscal year ended June 30, 2020. For the year ended June 30, 2021 and 2020, we invested $155,500 and $94,500, respectively, in DriveMate. Net cash used in financing activities was $1,165,565 compared to net cash provided by financing activities of $1,700,293, for the years ended June 30, 2021, and 2020, respectively. During the year ended June 30, 2021, we purchased 669,018 shares of our common stock from the open market for $2,364,781 compared to zero shares of common stock for the year ended June 30, 2020. The year ended June 30, 2021, included cash inflow of $1,898,013 from bank proceeds compared to $4,221,203 for the same period last year. During the year ended June 30, 2021, we had net payments for bank loans and capital leases of $698,797 compared to $611,913 for the year ended June 30, 2020. We are operating in various geographical regions of the world through our various subsidiaries. Those subsidiaries have financial arrangements from various financial institutions to meet both their short and long-term funding requirements. These loans will become due at different maturity dates as described in Note 15 of the financial statements. We are in compliance with the covenants of the financial arrangements and there is no default which may lead to early payment of these obligations. We anticipate paying back all these obligations on their respective due dates. We typically fund the cash requirements for our operations in the U.S. through our license, services, and maintenance agreements, intercompany charges for corporate services, and through the exercise of options. As of June 30, 2021, we had approximately $33.7 million of cash, cash equivalents and marketable securities of which approximately $31.7 million is held by our foreign subsidiaries. As of June 30, 2020, we have approximately $20.2 million of cash, cash equivalents and marketable securities of which approximately $18.2 million is held by our foreign subsidiaries. We remain open to strategic relationships that would provide value added benefits. The focus will remain on continuously improving cash reserves internally and reduced reliance on external capital raise. As a growing company, we have on-going capital expenditure needs based on our short term and long-term business plans. Although our requirements for capital expenses vary from time to time, for the next 12 months, we anticipate needing working capital of $2 to $3 million for APAC, U.S. and European new business development activities and infrastructure enhancements. While there is no guarantee that any of these methods will result in raising sufficient funds to meet our capital needs or that even if available will be on terms acceptable to us, we will be very cautious and prudent about any new capital raise given the global market uncertainties. However, we are very conscious of the dilutive effect and price pressures in raising equity-based capital. 28 Financial Covenants Our UK based subsidiary, NTE, has an approved overdraft facility of £300,000 ($416,667) which requires that the aggregate amount of invoiced trade debtors (net of provisions for bad and doubtful debts and excluding intra-group debtors) of NTE, not exceeding 90 days old, will not be less than an amount equal to 200% of the facility. The Pakistani subsidiary, NetSol PK has an approved facility for export refinance from Askari Bank Limited amounting to Rupees 500 million ($3,162,555) and a running finance facility of Rupees 75 million ($474,383). NetSol PK has an approved facility for export refinance from Habib Metro Bank Limited amounting to Rupees 900 million ($5,692,600). These facilities require NetSol PK to maintain a long-term debt equity ratio of 60:40 and the current ratio of 1:1. NetSol PK also has an approved export refinance facility of Rs. 380 million ($2,403,542) and a running finance facility of Rs. 120 million ($759,013) from Samba Bank Limited. During the tenure of loan, these two facilities require NetSol PK to maintain at a minimum a current ratio of 1:1, an interest coverage ratio of 4 times, a leverage ratio of 2 times, and a debt service coverage ratio of 4 times. As of the date of this report, we are in compliance with the financial covenants associated with our borrowings. The maturity dates of the borrowings of respective subsidiaries may accelerate if they do not comply with these covenants. In case of any change in control in subsidiaries, they may have to repay their respective credit facilities. Dividends and Redemption It has been our policy to invest earnings in growth rather than distribute earnings as common stock dividends. This policy, under which common stock dividends have not been paid since our inception is expected to continue but is subject to regular review by the Board of Directors. Contractual Obligations Our contractual obligations are as follows: Payment due by period Contractual Obligation Total 0 - 1 year 1-3 Years 3-5 Years More than 5 years Debt Obligations D&O Insurance $ 73,143 $ 73,143 $ - $ - $ - Term Finance Facility 1,648,818 1,090,259 558,559 - Loan Payable Bank - Export Refinance 3,162,555 3,162,555 - - - Loan Payable Bank - Export Refinance II 2,403,542 2,403,542 - - - Loan Payable Bank - Export Refinance III 4,427,578 4,427,578 - - - Term Finance Facility 55,182 19,644 35,538 - - Sale and Leaseback Financing 85,313 28,183 57,130 - - Insurance financing 41,774 41,774 - - - Subsidiary Finance Leases 168,107 119,493 48,614 - - Operating Lease Obligations 1,421,986 867,279 550,736 1,589 2,382 Total $ 13,487,998 $ 12,233,450 $ 1,250,577 $ 1,589 $ 2,382 Off-Balance Sheet Arrangements We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations. 29