UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
(Mark One)
For
the quarterly period ended
Commission
file number:
(Exact name of Registrant as specified in its charter)
| (State or other Jurisdiction of | (I.R.S. Employer NO.) | |
| Incorporation or Organization) |
(Address of principal executive offices) (Zip Code)
(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 | ||
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.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):
| Large Accelerated Filer ☐ | Accelerated Filer ☐ | |
| Smaller
reporting company | ||
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes
☐
The issuer had 12,222,985 shares issued and outstanding of its $.01 par value Common Stock and no Preferred Stock outstanding as of February 10, 2023.
NETSOL TECHNOLOGIES, INC.
| Page 2 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
| As of | As of | |||||||
| December 31, 2022 | June 30, 2022 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net of allowance of $ | ||||||||
| Revenues in excess of billings, net of allowance of $ | ||||||||
| Other current assets, net of allowance of $ | ||||||||
| Total current assets | ||||||||
| Revenues in excess of billings, net - long term | ||||||||
| Convertible note receivable - related party, net of allowance of $ | ||||||||
| Property and equipment, net | ||||||||
| Right of use of assets - operating leases | ||||||||
| Long term investment | ||||||||
| Other assets | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Current portion of loans and obligations under finance leases | ||||||||
| Current portion of operating lease obligations | ||||||||
| Unearned revenue | ||||||||
| Total current liabilities | ||||||||
| Loans and obligations under finance leases; less current maturities | ||||||||
| Operating lease obligations; less current maturities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $ par value; shares authorized; | ||||||||
| Common stock, $ par value; shares authorized; shares issued and outstanding as of December 31, 2022 and shares issued and outstanding as of June 30, 2022 | ||||||||
| Additional paid-in-capital | ||||||||
| Treasury stock (at cost, sharesand as of December 31, 2022 and June 30, 2022) | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Other comprehensive loss | ( | ) | ( | ) | ||||
| Total NetSol stockholders’ equity | ||||||||
| Non-controlling interest | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| Page 3 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
| For the Three Months | For the Six Months | |||||||||||||||
| Ended December 31, | Ended December 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net Revenues: | ||||||||||||||||
| License fees | $ | $ | $ | $ | ||||||||||||
| Subscription and support | ||||||||||||||||
| Services | ||||||||||||||||
| Total net revenues | ||||||||||||||||
| Cost of revenues: | ||||||||||||||||
| Salaries and consultants | ||||||||||||||||
| Travel | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Other | ||||||||||||||||
| Total cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling and marketing | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Research and development cost | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ||||||||||||
| Other income and (expenses) | ||||||||||||||||
| Gain (loss) on sale of assets | ( | ) | ( | ) | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest income | ||||||||||||||||
| Gain on foreign currency exchange transactions | ||||||||||||||||
| Share of net loss from equity investment | ( | ) | ( | ) | ||||||||||||
| Other income (expense) | ||||||||||||||||
| Total other income (expenses) | ||||||||||||||||
| Net income (loss) before income taxes | ( | ) | ( | ) | ||||||||||||
| Income tax provision | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) | ( | ) | ( | ) | ||||||||||||
| Non-controlling interest | ( | ) | ( | ) | ||||||||||||
| Net income (loss) attributable to NetSol | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Net income (loss) per share: | ||||||||||||||||
| Net income (loss) per common share | ||||||||||||||||
| Basic | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Diluted | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Weighted average number of shares outstanding | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
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 Six Months | |||||||||||||||
| Ended December 31, | Ended December 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Translation adjustment | ( | ) | ( | ) | ( | ) | ||||||||||
| Translation adjustment attributable to non-controlling interest | ( | ) | ||||||||||||||
| Net translation adjustment | ( | ) | ( | ) | ( | ) | ||||||||||
| Comprehensive income (loss) attributable to NetSol | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| Page 5 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
A statement of the changes in equity for the three months ended December 31, 2022 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, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||
| Common stock issued for: | ||||||||||||||||||||||||||||||||
| Services | ||||||||||||||||||||||||||||||||
| Fair value of subsidiary options issued | - | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||||||||||
| Net income (loss) for the year | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||
A statement of the changes in equity for the three months ended September 30, 2022 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, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||
| Common stock issued for: | ||||||||||||||||||||||||||||||||
| Services | ||||||||||||||||||||||||||||||||
| Adjustment in APIC for change in subsidiary shares to non-controlling interest | - | ( | ) | |||||||||||||||||||||||||||||
| Fair value of subsidiary options issued | - | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Net income (loss) for the year | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| Page 6 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
A statement of the changes in equity for the three months ended December 31, 2021 is provided below:
| Other | ||||||||||||||||||||||||||||||||
| Additional | Compre- | Non | Total | |||||||||||||||||||||||||||||
| Common Stock | Paid-in | Treasury | Accumulated | hensive | Controlling | Stockholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Shares | Deficit | Loss | Interest | Equity | |||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||
| Common stock issued for: | ||||||||||||||||||||||||||||||||
| Services | ||||||||||||||||||||||||||||||||
| Fair value of subsidiary options issued | - | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Net income for the year | - | |||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||
A statement of the changes in equity for the three months ended September 30, 2021 is provided below:
| Other | ||||||||||||||||||||||||||||||||
| Additional | Compre- | Non | Total | |||||||||||||||||||||||||||||
| Common Stock | Paid-in | Treasury | Accumulated | hensive | Controlling | Stockholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Shares | Deficit | Loss | Interest | Equity | |||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||
| Subsidiary common stock issued for: | ||||||||||||||||||||||||||||||||
| -Services | - | ( | ) | |||||||||||||||||||||||||||||
| Common stock issued for: | ||||||||||||||||||||||||||||||||
| Services | ||||||||||||||||||||||||||||||||
| Purchase of treasury shares | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Net income | - | |||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| Page 7 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| For the Six Months | ||||||||
| Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | ( | ) | $ | ||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Provision for bad debts | ( | ) | ( | ) | ||||
| Share of net (gain) loss from investment under equity method | ( | ) | ||||||
| (Gain) loss on sale of assets | ( | ) | ||||||
| Stock based compensation | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Revenues in excess of billing | ( | ) | ( | ) | ||||
| Other current assets | ( | ) | ||||||
| Accounts payable and accrued expenses | ||||||||
| Unearned revenue | ( | ) | ( | ) | ||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Sales of property and equipment | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Purchase of treasury stock | ( | ) | ||||||
| Proceeds from bank loans | ||||||||
| Payments on finance lease obligations and loans - net | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Effect of exchange rate changes | ( | ) | ( | ) | ||||
| Net decrease in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents at beginning of the period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| Page 8 |
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
| For the Six Months | ||||||||
| Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Taxes | $ | $ | ||||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Shares issued to vendor for services received | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| Page 9 |
NETSOL TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
December 31, 2022
(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, 2022. The Company follows the same accounting policies in preparation of interim reports. Results of operations for the interim periods are not indicative of annual results.
The accompanying consolidated financial statements include the accounts of the Company as follows:
Wholly owned Subsidiaries
NetSol Technologies Americas, Inc. (“NTA”)
NetSol Connect (Private), Ltd. (“Connect”)
NetSol Technologies Australia Pty Ltd. (“Australia”)
NetSol Technologies Europe Limited (“NTE”)
NTPK (Thailand) Co. Limited (“NTPK Thailand”)
NetSol Technologies (Beijing) Co. Ltd. (“NetSol Beijing”)
Tianjin NuoJinZhiCheng Co., Ltd (“Tianjin”)
Ascent Europe Ltd. (“AEL”)
Virtual Lease Services Holdings Limited (“VLSH”)
Virtual Lease Services Limited (“VLS”)
Virtual Lease Services (Ireland) Limited (“VLSIL”)
Majority-owned Subsidiaries
NetSol Technologies, Ltd. (“NetSol PK”)
NetSol Innovation (Private) Limited (“NetSol Innovation”)
NetSol Technologies Thailand Limited (“NetSol Thai”)
Otoz, Inc. (“Otoz”)
Otoz (Thailand) Limited (“Otoz Thai”)
| Page 10 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
NOTE 2 – ACCOUNTING POLICIES
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The areas requiring significant estimates are provision for doubtful accounts, provision for taxation, useful life of depreciable assets, useful life of intangible assets, contingencies, assumptions used to determine the net present value of operating lease liabilities, and estimated contract costs. The estimates and underlying assumptions are reviewed on an ongoing basis. Actual results could differ from those estimates.
Concentration of Credit Risk
Cash
includes cash on hand and demand deposits in accounts maintained within the United States as well as in foreign countries. Certain financial
instruments, which subject the Company to concentration of credit risk, consist of cash and restricted cash. The Company maintains balances
at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for the banks located
in the United States. Balances at financial institutions within certain foreign countries are not covered by insurance except balances
maintained in China are insured for RMB
The Company’s operations are carried out globally. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments of each country and by the general state of the country’s economy. The Company’s operations in each foreign country are subject to specific considerations and significant risks not typically associated with companies in economically developed nations. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
Fair Value of Financial Instruments
The Company applies the provisions of Accounting Standards Codification (“ASC”) 820-10, “Fair Value Measurements and Disclosures.” ASC 820-10 defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. For certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and short-term debt, the carrying amounts approximate fair value due to their relatively short maturities. The carrying amounts of the convertible note receivable and the long-term debt approximate their fair values based on current interest rates for instruments with similar characteristics.
The three levels of valuation hierarchy are defined as follows:
| Level 1: | Valuations consist of unadjusted quoted prices in active markets for identical assets and liabilities and has the highest priority. |
| Level 2: | Valuations rely on quoted prices in markets that are not active or observable inputs over the full term of the asset or liability. |
| Level 3: | Valuations are based on prices or third party or internal valuation models that require inputs that are significant to the fair value measurement and are less observable and thus have the lowest priority. |
| Page 11 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
The Company’s financial assets that were measured at fair value on a recurring basis as of December 31, 2022, were as follows:
| Level 1 | Level 2 | Level 3 | Total Assets | |||||||||||||
| Revenues in excess of billings - long term | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The Company’s financial assets that were measured at fair value on a recurring basis as of June 30, 2022, were as follows:
| Level 1 | Level 2 | Level 3 | Total Assets | |||||||||||||
| Revenues in excess of billings - long term | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The reconciliation from June 30, 2022 to December 31, 2022 is as follows:
| Revenues in excess of billings - long term | Fair value discount | Total | ||||||||||
| Balance at June 30, 2022 | $ | $ | ( | ) | $ | |||||||
| Amortization during the period | ||||||||||||
| Transfers to short term | ( | ) | ( | ) | ||||||||
| Effect of Translation Adjustment | ( | ) | ||||||||||
| Balance at December 31, 2022 | $ | $ | ( | ) | $ | |||||||
Management analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity” and ASC 815, “Derivatives and Hedging.” Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments. In addition, the fair values of freestanding derivative instruments such as warrants and option derivatives are valued using the Black-Scholes model.
Recent Accounting Standards:
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, as if the acquirer had originated the contracts. ASU 2021-08 is effective for annual periods beginning after December 15, 2022, and interim periods within those years, with early adoption permitted. The Company does not expect the standard to have a material effect on its consolidated financial statements.
All other newly issued accounting pronouncements not yet effective have been deemed either immaterial or not applicable.
| Page 12 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
NOTE 3 – REVENUE RECOGNITION
The Company determines revenue recognition through the following steps:
| ● | Identification of the contract, or contracts, with a customer; |
| ● | Identification of the performance obligations in the contract; |
| ● | Determination of the transaction price; |
| ● | Allocation of the transaction price to the performance obligations in the contract; and |
| ● | Recognition of revenue when, or as, the Company satisfies a performance obligation. |
The Company records the amount of revenue and related costs by considering whether the entity is a principal (gross presentation) or an agent (net presentation) by evaluating the nature of its promise to the customer. Revenue is presented net of sales, value-added and other taxes collected from customers and remitted to government authorities.
The Company has two primary revenue streams: core revenue and non-core revenue.
Core Revenue
The Company generates its core revenue from the following sources: (1) software licenses, (2) services, which include implementation and consulting services, and (3) subscription and support, which includes 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.
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.
| Page 13 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
Subscription
Subscription revenue is recognized ratably over the initial subscription period committed to by the customer commencing when the product is made available to the customer. The initial subscription period is typically 12 to 60 months. The Company generally invoices its customers in advance in quarterly or annual installments and typical payment terms provide that customers make payment within 30 days of invoice.
Post Contract Support
Revenue from support services and product updates, referred to as subscription and support revenue, is recognized ratably over the term of the maintenance period, which in most instances is one year. Software license updates provide customers with rights to unspecified software product updates and patches released during the term of the support period on a when-and-if available basis. The Company’s customers purchase both product support and license updates when they acquire new software licenses. In addition, a majority of customers renew their support services contracts annually and typical payment terms provide that customers make payment within 30 days of invoice.
Professional Services
Revenue from professional services is typically comprised of implementation, development, data migration, training or other consulting services. Consulting services are generally sold on a time-and-materials or fixed fee basis and can include services ranging from software installation to data conversion and building non-complex interfaces to allow the software to operate in integrated environments. The Company recognizes revenue for time-and-materials arrangements as the services are performed. In fixed fee arrangements, revenue is recognized as services are performed as measured by costs incurred to date, compared to total estimated costs to complete the services project. Management applies judgment when estimating project status and the costs necessary to complete the services projects. A number of internal and external factors can affect these estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes. Services are generally invoiced upon milestones in the contract or upon consumption of the hourly resources and payments are typically due 30 days after invoice.
BPO and Internet Services
Revenue from BPO services is recognized based on the stage of completion which is measured by reference to labor hours incurred to date as a percentage of total estimated labor hours for each contract. Internet services are invoiced either monthly, quarterly or half yearly in advance to the customers and revenue is recognized ratably overtime on a monthly basis.
| Page 14 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
Disaggregated Revenue
The Company disaggregates revenue from contracts with customers by category — core and non-core, as it believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
The Company’s disaggregated revenue by category is as follows:
| For the Three Months | For the Six Months | |||||||||||||||
| Ended December 31, | Ended December 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Core: | ||||||||||||||||
| License | $ | $ | $ | $ | ||||||||||||
| Subscription and support | ||||||||||||||||
| Services | ||||||||||||||||
| Total core revenue, net | ||||||||||||||||
| Non-Core: | ||||||||||||||||
| Services | ||||||||||||||||
| Total non-core revenue, net | ||||||||||||||||
| Total net revenue | $ | $ | $ | $ | ||||||||||||
Significant Judgments
Due to the complexity of certain contracts, the actual revenue recognition treatment required under Topic 606 for the Company’s arrangements may be dependent on contract-specific terms and may vary in some instances.
Judgment is required to determine the SSP for each distinct performance obligation. The Company rarely licenses or sells products on a stand-alone basis, so the Company is required to estimate the range of SSPs for each performance obligation. In instances where SSP is not directly observable because the Company does not sell the license, product or service separately, the Company determines the SSP using information that may include market conditions and other observable inputs. In making these judgments, the Company analyzes various factors, including its pricing methodology and consistency, size of the arrangement, length of term, customer demographics and overall market and economic conditions. Based on these results, the estimated SSP is set for each distinct product or service delivered to customers.
The most significant inputs involved in the Company’s revenue recognition policies are: The (1) stand-alone selling prices of the Company’s software license, and the (2) the method of recognizing revenue for installation/customization, and other services.
The stand-alone selling price of the licenses was measured primarily through an analysis of pricing that management evaluated when quoting prices to customers. Although the Company has no history of selling its software separately from post contract support and other services, the Company does have historical experience with amending contracts with customers to provide additional modules of its software or providing those modules at an optional price. This information guides the Company in assessing the stand-alone selling price of the Company’s software, since the Company can observe instances where a customer had a particular component of the Company’s software that was essentially priced separate from other goods and services that the Company delivered to that customer.
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.
| Page 15 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
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 (unearned 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 unearned revenue when the Company has received or has the right to receive consideration but has not yet transferred goods or services to the customer.
The revenues in excess of billings are transferred to receivables when the rights to consideration become unconditional, usually upon completion of a milestone.
The Company’s revenues in excess of billings and unearned revenue are as follows:
| As of | As of | |||||||
| December 31, 2022 | June 30, 2022 | |||||||
| Revenues in excess of billings | $ | $ | ||||||
| Unearned revenue | $ | $ | ||||||
During
the three and six months ended December 31, 2022, the Company recognized revenue of $
| Page 16 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2022
(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 $
Unearned Revenue
The Company typically invoices its customers for subscription and support fees in advance on a quarterly or annual basis, with payment due at the start of the subscription or support term. Unpaid invoice amounts for non-cancelable license and services starting in future periods are included in accounts receivable and unearned revenue.
Practical Expedients and Exemptions
There are several practical expedients and exemptions allowed under Topic 606 that impact timing of revenue recognition and the Company’s disclosures. The Company has applied the following practical expedients:
● The Company does not evaluate a contract for a significant financing component if payment is expected within one year or less from the transfer of the promised items to the customer.
● The Company generally expenses sales commissions and sales agent fees when incurred when the amortization period would have been one year or less or the commissions are based on cashed received. These costs are recorded within sales and marketing expense in the Consolidated Statement of Operations.
● The Company does not disclose the value of unsatisfied performance obligations for contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed (applies to time-and-material engagements).
Costs to Obtain a Contract
The Company does not have a material amount of costs to obtain a contract capitalized at any balance sheet date. In general, the Company incurs few direct incremental costs of obtaining new customer contracts. The Company rarely incurs incremental costs to review or otherwise enter into contractual arrangements with customers. In addition, the Company’s sales personnel receive fees that are referred to as commissions, but that are based on more than simply signing up new customers. The Company’s sales personnel are required to perform additional duties beyond new customer contract inception dates, including fulfillment duties and collections efforts.
| Page 17 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
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. During the three and six months ended December 31, 2022 and 2021, there were outstanding dilutive instruments.
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, NetSol Thai and Otoz Thai use the Thai Baht; Australia uses the Australian dollar; and NetSol Beijing and Tianjin
use the Chinese Yuan as the functional currencies. NetSol Technologies, Inc., and its subsidiaries, NTA and Otoz, 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 $
NOTE 6 – MAJOR CUSTOMERS
During
the six months ended December 31, 2022, revenues from Daimler Financial Services (“DFS”) and BMW Financial (“BMW”)
were $
Accounts
receivable from DFS and BMW at December 31, 2022, were $
NOTE 7 – CONVERTIBLE NOTES RECEIVABLE – RELATED PARTY
The
Company has entered into multiple convertible note receivable agreements with WRLD3D. The convertible notes bear interest ranging from
| Page 18 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
The following table summarizes the convertible notes receivable from WRLD3D.
| Convertible | ||||||||||||||||
| Agreement | Interest | Maturity | Note | Accrued | ||||||||||||
| Date | Rate | Date | Amount | Interest | ||||||||||||
| May 25, 2017 | $ | $ | ||||||||||||||
| February 9, 2018 | ||||||||||||||||
| April 1, 2019 | ||||||||||||||||
| August 19, 2019 | ||||||||||||||||
| Less allowance for doubtful account | ( | ) | ( | ) | ||||||||||||
| Net Balance | $ | $ | ||||||||||||||
The
Company has accrued interest of $
NOTE 8 - OTHER CURRENT ASSETS
Other current assets consisted of the following:
| As of | As of | |||||||
| December 31, 2022 | June 30, 2022 | |||||||
| Prepaid Expenses | $ | $ | ||||||
| Advance Income Tax | ||||||||
| Employee Advances | ||||||||
| Security Deposits | ||||||||
| Other Receivables | ||||||||
| Other Assets | ||||||||
| Due From Related Party | ||||||||
| Less allowance for doubtful account | ( | ) | ( | ) | ||||
| Net Balance | $ | $ | ||||||
Due from related
party is the amount receivable from WRLD3D for which the Company has provided an allowance for credit loss for the full amount, leaving
a net balance of $
| Page 19 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
NOTE 9 – REVENUES IN EXCESS OF BILLINGS – LONG TERM
Revenues in excess of billings, net consisted of the following:
| As of | As of | |||||||
| December 31, 2022 | June 30, 2022 | |||||||
| Revenues in excess of billings - long term | $ | $ | ||||||
| Present value discount | ( | ) | ( | ) | ||||
| Net Balance | $ | $ | ||||||
Pursuant
to revenue recognition for contract accounting, the Company had recorded revenues in excess of billings long-term for amounts billable
after one year. During the three and six months ended December 31, 2022, the Company accreted $
NOTE 10 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
| As of | As of | |||||||
| December 31, 2022 | June 30, 2022 | |||||||
| Office Furniture and Equipment | $ | $ | ||||||
| Computer Equipment | ||||||||
| Assets Under Capital Leases | ||||||||
| Building | ||||||||
| Land | ||||||||
| Autos | ||||||||
| Improvements | ||||||||
| Subtotal | ||||||||
| Accumulated Depreciation | ( | ) | ( | ) | ||||
| Property and Equipment, Net | $ | $ | ||||||
For
the three and six months ended December 31, 2022, depreciation expense totaled $
Following is a summary of fixed assets held under finance leases as of December 31, 2022 and June 30, 2022:
| As of | As of | |||||||
| December 31, 2022 | June 30, 2022 | |||||||
| Vehicles | $ | $ | ||||||
| Total | ||||||||
| Less: Accumulated Depreciation - Net | ( | ) | ( | ) | ||||
| $ | $ | |||||||
| Page 20 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
Finance lease term and discount rate were as follows:
| As of | As of | |||||||
| December 31, 2022 | June 30, 2022 | |||||||
| Weighted average remaining lease term - Finance leases | ||||||||
| Weighted average discount rate - Finance leases | % | % | ||||||
NOTE 11 - LEASES
The Company leases
certain office space, office equipment and autos with remaining lease terms of
The Company treats a contract as a lease when the contract conveys the right to use a physically distinct asset for a period of time in exchange for consideration, or the Company directs the use of the asset and obtains substantially all the economic benefits of the asset. These leases are recorded as right-of-use (“ROU”) assets and lease obligation liabilities for leases with terms greater than 12 months. ROU assets represent the Company’s right to use an underlying asset for the entirety of the lease term. Lease liabilities represent the Company’s obligation to make payments over the life of the lease. A ROU asset and a lease liability are recognized at commencement of the lease based on the present value of the lease payments over the life of the lease. Initial direct costs are included as part of the ROU asset upon commencement of the lease. Since the interest rate implicit in a lease is generally not readily determinable for the operating leases, the Company uses an incremental borrowing rate to determine the present value of the lease payments. The incremental borrowing rate represents the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar lease term to obtain an asset of similar value.
The Company reviews the impairment of ROU assets consistent with the approach applied for the Company’s other long-lived assets. The Company reviews the recoverability of long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on the Company’s ability to recover the carrying value of the asset from the expected undiscounted future pre-tax cash flows of the related operations.
The Company elected the practical expedient to exclude short-term leases (leases with original terms of 12 months or less) from ROU asset and lease liability accounts.
Lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred. Variable payments change due to facts or circumstances occurring after the commencement date, other than the passage of time, and do not result in a re-measurement of lease liabilities. The Company’s variable lease payments include payments for finance leases that are adjusted based on a change in the Karachi Inter Bank Offer Rate. The Company’s lease agreements do not contain any significant residual value guarantees or restrictive covenants.
| Page 21 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
Supplemental balance sheet information related to leases was as follows:
| As of | As of | |||||||
| December 31, 2022 | June 30, 2022 | |||||||
| Assets | ||||||||
| Operating lease assets, net | $ | $ | ||||||
| Liabilities | ||||||||
| Current | ||||||||
| Operating | $ | $ | ||||||
| Non-current | ||||||||
| Operating | ||||||||
| Total Lease Liabilities | $ | $ | ||||||
The components of lease cost were as follows:
| For the Three Months | For the Six Months | |||||||||||||||
| Ended December 31, | Ended December 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Amortization of finance lease assets | $ | $ | $ | $ | ||||||||||||
| Interest on finance lease obligation | ||||||||||||||||
| Operating lease cost | ||||||||||||||||
| Short term lease cost | ||||||||||||||||
| Sub lease income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total lease cost | $ | $ | $ | $ | ||||||||||||
Lease term and discount rate were as follows:
| As of | As of | |||||||
| December 31, 2022 | June 30, 2022 | |||||||
| Weighted average remaining lease term - Operating leases | ||||||||
| Weighted average discount rate - Operating leases | % | % | ||||||
| Page 22 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
Supplemental disclosures of cash flow information related to leases were as follows:
| For the Six Months | ||||||||
| Ended December 31 | ||||||||
| 2022 | 2021 | |||||||
| Operating cash flows related to operating leases | $ | $ | ||||||
| Operating cash flows related to finance leases | $ | $ | ||||||
| Financing cash flows related finance leases | $ | $ | ||||||
Maturities of operating lease liabilities were as follows as of December 31, 2022:
| Amount | ||||
| Within year 1 | $ | |||
| Within year 2 | ||||
| Within year 3 | ||||
| Within year 4 | ||||
| Within year 5 | ||||
| Thereafter | ||||
| Total Lease Payments | ||||
| Less: Imputed interest | ( | ) | ||
| Present Value of lease liabilities | ||||
| Less: Current portion | ( | ) | ||
| Non-Current portion | $ | |||
The
Company is a lessor for certain office space leased by the Company and sub-leased to others under non-cancelable leases. These lease
agreements provide for a fixed base rent and are currently on a month-by-month basis. All leases are considered operating leases. There
are no rights to purchase the premises and no residual value guarantees. For the three and six months ended December 31, 2022, the Company
received lease income of $
| Page 23 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
NOTE 12 – LONG TERM INVESTMENT
Drivemate – Related Party
The
Company and Drivemate Co., Ltd. (“Drivemate”) entered into a subscription agreement on April 25, 2019, (“Drivemate
Agreement”) whereby the Company purchased an equity interest of
Under the equity method of accounting, the Company recorded its share of net income of $ for the three and six months ended December 31, 2022, and the Company recorded its share of net income of $ and net loss of $ for the three and six months ended December 31, 2021, respectively.
WRLD3D-Related Party
On
March 2, 2017, the Company purchased a
Under the equity method of accounting, the Company recorded its share of net loss of $for the three and six months ended December 31, 2022, and the Company recorded its share of net loss of $ and $ for the three and six months ended December 31, 2021, respectively.
The following table reflects the above investments at December 31, 2022.
| Drivemate | WRLD3D | Total | ||||||||||
| Gross investment | $ | $ | $ | |||||||||
| Cumulative net loss on investment | ( | ) | ( | ) | ( | ) | ||||||
| Cumulative other comprehensive income (loss) | ( | ) | ( | ) | ||||||||
| Net investment | $ | $ | $ | |||||||||
The following table reflects the above investments at June 30, 2022.
| Drivemate | WRLD3D | Total | ||||||||||
| Gross investment | $ | $ | $ | |||||||||
| Cumulative net loss on investment | ( | ) | ( | ) | ( | ) | ||||||
| Cumulative other comprehensive income (loss) | ( | ) | ( | ) | ||||||||
| Net investment | $ | $ | $ | |||||||||
| Page 24 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
NOTE 13 - INTANGIBLE ASSETS
Intangible assets consisted of the following:
| As of | As of | |||||||
| December 31, 2022 | June 30, 2022 | |||||||
| Product Licenses - Cost | $ | $ | ||||||
| Effect of Translation Adjustment | ( | ) | ( | ) | ||||
| Accumulated Amortization | ( | ) | ( | ) | ||||
| Net Balance | $ | $ | ||||||
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 $
NOTE 14 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
| As of | As of | |||||||
| December 31, 2022 | June 30, 2022 | |||||||
| Accounts Payable | $ | $ | ||||||
| Accrued Liabilities | ||||||||
| Accrued Payroll | ||||||||
| Accrued Payroll Taxes | ||||||||
| Taxes Payable | ||||||||
| Other Payable | ||||||||
| Total | $ | $ | ||||||
| Page 25 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
NOTE 15 – DEBTS
Notes payable and finance leases consisted of the following:
| As of December 31, 2022 | ||||||||||||||||
| Current | Long-Term | |||||||||||||||
| Name | Total | Maturities | Maturities | |||||||||||||
| D&O Insurance | (1 | ) | $ | $ | $ | |||||||||||
| Bank Overdraft Facility | (2 | ) | ||||||||||||||
| Term Finance Facility | (3 | ) | ||||||||||||||
| Loan Payable Bank - Export Refinance | (4 | ) | ||||||||||||||
| Loan Payable Bank - Running Finance | (5 | ) | ||||||||||||||
| Loan Payable Bank - Export Refinance II | (6 | ) | ||||||||||||||
| Loan Payable Bank - Export Refinance III | (7 | ) | ||||||||||||||
| Sale and Leaseback Financing | (8 | ) | ||||||||||||||
| Term Finance Facility | (9 | ) | ||||||||||||||
| Insurance Financing | (10 | ) | ||||||||||||||
| Subsidiary Finance Leases | (11 | ) | ||||||||||||||
| $ | $ | $ | ||||||||||||||
| As of June 30, 2022 | ||||||||||||||||
| Current | Long-Term | |||||||||||||||
| Name | Total | Maturities | Maturities | |||||||||||||
| D&O Insurance | (1 | ) | $ | $ | $ | |||||||||||
| Bank Overdraft Facility | (2 | ) | ||||||||||||||
| Term Finance Facility | (3 | ) | ||||||||||||||
| Loan Payable Bank - Export Refinance | (4 | ) | ||||||||||||||
| Loan Payable Bank - Running Finance | (5 | ) | ||||||||||||||
| Loan Payable Bank - Export Refinance II | (6 | ) | ||||||||||||||
| Loan Payable Bank - Export Refinance III | (7 | ) | ||||||||||||||
| Sale and Leaseback Financing | (8 | ) | ||||||||||||||
| Term Finance Facility | (9 | ) | ||||||||||||||
| Insurance Financing | (10 | ) | ||||||||||||||
| Subsidiary Finance Leases | (11 | ) | ||||||||||||||
| $ | $ | $ | ||||||||||||||
| (1) |
| Page 26 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
| (2) |
| 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 |
| (3) |
| (4) |
| (5) |
| (6) |
| (7) |
| (8) |
| Page 27 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
| (9) |
| (10) |
| (11) |
Following are the aggregate minimum future lease payments under finance leases as of December 31, 2022:
| Amount | ||||
| Minimum Lease Payments | ||||
| Within year 1 | $ | |||
| Within year 2 | ||||
| Total Minimum Lease Payments | ||||
| Interest Expense relating to future periods | ( | ) | ||
| Present Value of minimum lease payments | ||||
| Less: Current portion | ( | ) | ||
| Non-Current portion | $ | |||
Following are the aggregate future long term debt payments as of December 31, 2022
| Amount | ||||
| Loan Payments | ||||
| Within year 1 | $ | |||
| Within year 2 | ||||
| Within year 3 | ||||
| Total Loan Payments | ||||
| Less: Current portion | ( | ) | ||
| Non-Current portion | $ | |||
| Page 28 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
NOTE 16 - STOCKHOLDERS’ EQUITY
During
the three and six months ended December 31, 2022, the Company issued and 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 $
NOTE 17 – 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 18 – OPERATING SEGMENTS
The
Company has identified
The following table presents a summary of identifiable assets as of December 31, 2022 and June 30, 2022:
| As of | As of | |||||||
| December 31, 2022 | June 30, 2022 | |||||||
| Identifiable assets: | ||||||||
| Corporate headquarters | $ | $ | ||||||
| North America | ||||||||
| Europe | ||||||||
| Asia - Pacific | ||||||||
| Consolidated | $ | $ | ||||||
The following table presents a summary of investment under equity method as of December 31, 2022 and June 30, 2022:
| As of | As of | |||||||
| December 31, 2022 | June 30, 2022 | |||||||
| Investment in associates under equity method: | ||||||||
| Corporate headquarters | $ | $ | ||||||
| Asia - Pacific | ||||||||
| Consolidated | $ | $ | ||||||
| Page 29 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
The following table presents a summary of operating information for the three and six months ended December 31:
| For the Three Months | For the Six Months | |||||||||||||||
| Ended December 31, | Ended December 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues from unaffiliated customers: | ||||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||
| Europe | ||||||||||||||||
| Asia - Pacific | ||||||||||||||||
| Revenue from affiliated customers | ||||||||||||||||
| Asia - Pacific | ||||||||||||||||
| Consolidated | $ | $ | $ | $ | ||||||||||||
| Intercompany revenue | ||||||||||||||||
| Europe | $ | $ | $ | $ | ||||||||||||
| Asia - Pacific | ||||||||||||||||
| Eliminated | $ | $ | $ | $ | ||||||||||||
| Net income (loss) after taxes and before non-controlling interest: | ||||||||||||||||
| Corporate headquarters | $ | ( | ) | $ | $ | $ | ||||||||||
| North America | ( | ) | ( | ) | ||||||||||||
| Europe | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Asia - Pacific | ( | ) | ( | ) | ||||||||||||
| Consolidated | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Depreciation and amortization: | ||||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||
| Europe | ||||||||||||||||
| Asia - Pacific | ||||||||||||||||
| Consolidated | $ | $ | $ | $ | ||||||||||||
| Interest expense: | ||||||||||||||||
| Corporate headquarters | $ | $ | $ | $ | ||||||||||||
| North America | ||||||||||||||||
| Europe | ||||||||||||||||
| Asia - Pacific | ||||||||||||||||
| Consolidated | $ | $ | $ | $ | ||||||||||||
| Income tax expense: | ||||||||||||||||
| Corporate headquarters | $ | $ | $ | $ | ( | ) | ||||||||||
| North America | ||||||||||||||||
| Europe | ||||||||||||||||
| Asia - Pacific | ||||||||||||||||
| Consolidated | $ | $ | $ | $ | ||||||||||||
| Page 30 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
The following table presents a summary of capital expenditures for the six months ended December 31:
| For the Six Months | ||||||||
| Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Capital expenditures: | ||||||||
| North America | $ | $ | ||||||
| Europe | ||||||||
| Asia - Pacific | ||||||||
| Consolidated | $ | $ | ||||||
NOTE 19 – NON-CONTROLLING INTEREST IN SUBSIDIARY
The Company had non-controlling interests in several of its subsidiaries. The balance of non-controlling interest was as follows:
| SUBSIDIARY | Non-Controlling Interest % | Non-Controlling Interest at December 31, 2022 | ||||||
| NetSol PK | % | $ | ||||||
| NetSol-Innovation | % | ( | ) | |||||
| NetSol Thai | % | ( | ) | |||||
| Otoz Thai | % | ( | ) | |||||
| Otoz | % | ( | ) | |||||
| Total | $ | |||||||
| SUBSIDIARY | Non-Controlling Interest % | Non-Controlling Interest at June 30, 2022 | ||||||
| NetSol PK | % | $ | ||||||
| NetSol-Innovation | % | |||||||
| NetSol Thai | % | ( | ) | |||||
| Otoz Thai | % | ( | ) | |||||
| Otoz | % | ( | ) | |||||
| Total | $ |
The
Company’s subsidiary, Otoz, issued shares to one of its employees as part of their employment agreement resulting in an
increase of non-controlling interest from
| Page 31 |
NETSOL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
The following schedule discloses the effect to the Company’s equity due to the changes in the Company’s ownership interest in Otoz and Otoz Thai.
| For the Three Months | For the Six Months | |||||||||||||||
| Ended December 31, | Ended December 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net income (loss) attributable to NetSol | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Transfer (to) from non-controlling interest | ||||||||||||||||
| Increase in paid-in capital for issuance of shares of Otoz, Inc. common stock | ||||||||||||||||
| Net transfer (to) from non-controlling interest | ||||||||||||||||
| Change from net income (loss) attributable to NetSol and transfer (to) from non-controlling interest | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
NOTE 20 – INCOME TAXES
The current tax provision is based on taxable income for the year determined in accordance with the prevailing law for taxation of income. The charge for tax on income is calculated at the current rates of taxation as applicable after considering tax credit and tax rebates available, if any. We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Our effective tax rate is lower than the U.S. statutory rate primarily because of more earnings realized in countries that have lower statutory tax rates. Our effective tax rate in the future will depend on the portion of our profits earned within and outside the United States. Income from the export of computer software and its related services developed in Pakistan is exempt from tax through June 30, 2025; however, tax at the applicable rates is charged to the income from revenue generated from other than core business activities.
During
the three and six months ended December 31, 2022, the Company recorded an income tax provision of $
| Page 32 |
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 months ended December 31, 2022. 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, 2022, 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 https://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 https://netsoltech.com/about-us. The content of our websites is not intended to be incorporated by reference into this or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
Forward-Looking Information
This report contains certain forward-looking statements and information relating to the Company that is based on the beliefs of its management as well as assumptions made by and information currently available to its management. When used in this report, the words “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”, and similar expressions as they relate to the Company or its management, are intended to identify forward-looking statements. These statements reflect management’s current view of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions. Should any of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this report as anticipated, estimated or expected. The Company’s realization of its business aims could be materially and adversely affected by any technical or other problems in, or difficulties with, planned funding and technologies, third party technologies which render the Company’s technologies obsolete, the unavailability of required third party technology licenses on commercially reasonable terms, the loss of key research and development personnel, the inability or failure to recruit and retain qualified research and development personnel, or the adoption of technology standards which are different from technologies around which the Company’s business ultimately is built. The Company does not intend to update these forward-looking statements.
Business Overview
NetSol Technologies, Inc. (NasdaqCM: NTWK) is a worldwide provider of IT and enterprise software solutions. We believe that our solutions constitute mission critical applications for clients, as they encapsulate end-to-end business processes, facilitating faster processing and increased transactions.
Our primary sources of revenues have been licensing, subscriptions, modification, enhancement and support of our suite of financial applications, under the brand name NFS Ascent® for leading businesses in the global finance and leasing space. With constant innovation being a major part of NETSOL’s DNA, we have enabled NFS Ascent® deployment on the cloud with several implementations already live and some underway. This shift to the cloud will enable NETSOL’s new customers to opt for a subscription-based pricing model rather than the traditional licensing model.
NETSOL’s clients include blue chip organizations, Dow-Jones 30 Industrials, Fortune 500 manufacturers, financial institutions, global vehicle manufacturers and enterprise technology providers, all of which are serviced by NETSOL’s strategically placed support and delivery locations around the globe.
| Page 33 |
Founded in 1997, NetSol is headquartered in Los Angeles County, California. While the Company follows a global strategy for sales and delivery of its portfolio of solutions and services, it continues to maintain regional offices in the following locations:
| ● | North America | Los Angeles Area | ||
| ● | Europe | London Metropolitan area and Horsham in the UK | ||
| ● | Asia Pacific | Lahore, Karachi, Bangkok, Beijing, Shanghai, Jakarta and Sydney |
NETSOL believes that our strong technology solutions offer our customers a return on their investment and allows us to thrive in a hyper competitive and mature global marketplace. Our solutions are bolstered by our people. NETSOL believes that people are the drivers of success; therefore, we invest heavily in our hiring, training and retention of top-notch staff to ensure not only successful selling, but also the ongoing satisfaction of our clients. Taken together, this “selling and attentive servicing” approach creates a distinctive advantage for NETSOL and a unique value for its customers. NETSOL continues to underpin its proven and effective business model which is a combination of careful cost arbitrage, subject matter expertise, domain experience, scalability and proximity with its global and regional customers.
Our primary offerings include the following:
NFS Ascent®
NFS Ascent®, the Company’s next generation platform, offers a technologically advanced solution for the auto and equipment finance and leasing industry. NFS Ascent’s® architecture and user interfaces were designed based on the Company’s collective experience with global Fortune 500 companies over the past 40 years combined with UX design concepts. The platform’s framework allows auto captive and asset finance companies to rapidly transform legacy driven technology into a state-of-the-art IT and business process environment. At the core of the NFS Ascent® platform, is a lease accounting and contract processing engine, which allows for an array of interest calculation methods, as well as robust accounting of multi-billion-dollar lease portfolios. NFS Ascent®, with its distributed and clustered deployment across parallel application and high-volume data servers, enables finance companies to process voluminous data in a hyper speed environment. NFS Ascent® has been developed using the latest tools and technologies and its n-tier SOA architecture allows the system to greatly improve a myriad of areas including, but not limited to, scalability, performance, fault tolerance and security. Our premier, next generation solution NFS Ascent® is now also available on the cloud via SaaS/subscription-based pricing. With swift, seamless deployments and easy scalability, it is an extremely adaptive retail and wholesale platform for the global finance and leasing industry. This cloud-version of NFS Ascent® is offered via flexible, value-driven subscription-based pricing options without the need to pay any upfront license fees.
NFS Digital
NFS Digital is a combination of our core strengths, domain, and technology. Our insight into the evolving landscape along with our valuable experience enables us to define sound digital transformation strategies and compliment them with smart digital solutions so our customers always remain competitive and relevant to the dynamic environment. Our digital transformation solutions are extremely robust and can be used with or without our core, next-gen solution (NFS Ascent®) to effectively augment and enhance our customer’s ecosystem. NFS Digital includes Self-Point of Sale, Mobile Account, Mobile Point of Sale, Mobile Dealer, Mobile Auditor, Mobile Collector and Mobile Field Investigator.
OTOZ
Otoz Digital Auto Retail
Otoz provides a white-labelled SaaS platform to OEMs, auto-captives, dealers and start-ups that helps them launch short and long-term on-demand mobility models (car-share and car subscription) and digital retail in minimum time. Our white-label, turn-key platform helps dealers to make the move into digital era by offering an end-to-end car buying experience completely online. Digital auto-retail is not a one-size-fits-all. Otoz provides a flexible, configurable and scalable turn-key platform that helps define, launch and scale a variety of retail products (finance, lease, buy, etc.). Otoz platform empowers dealers to compete in digital era by addressing a range of customer segments with varied needs.
| Page 34 |
Otoz Ecosystem
The Otoz powerful Application Program Interface (API) based architecture allows OEMs, auto-captives and dealerships to integrate with a plethora of providers to offer an end-to-end Omni-channel digital car finance and lease experience. Out-of-the-box APIs by Otoz help dealers and auto-captives connect with ecosystem partners which are crucial for running their auto retail business. It includes, finance and insurance products, trade-in tools, fraud checks, CRM system, websites (Tier 1 – Tier 3), marketing toolkit, inventory feeds, Know Your Customers (KYC), payment processors, and vehicle delivery providers amongst others. In addition, Otoz is equipped with smart lead generation and product analytics capabilities. It empowers dealers with the capability to convert qualified leads and never lose contact with customers. The product analytics capability allows us to improve the customer journey by addressing friction points, herein improving customer experience and conversions – a win-win scenario for dealers and customers.
Otoz Platform
A fully digital, white label platform for lease, finance, and cash transactions that delivers a frictionless customer experience.
Otoz platform consists of two components the Dealer Tool and the Customer Application (APP) of a Dealer Tool which provides for a myriad of services including account creation, order management work queue, user roles and rights, tax configurator, customer KYC reports, vehicle delivery scheduling, payment gateways and inventory management, finance and insurance products feed and prioritization, dealer fee management and ecosystem APIs. The Customer App permits the dealer to work with the customer to get a vehicle via cash, finance or lease, manage vehicle delivery and pick-up scheduling, buy finance and insurance products, buy accessories, paperless license checks, personalized pricing, vehicle options, trade-in valuation, credit application and decision, paperless contracts and e-signing, digital payments and a deal builder.
Other Products
The Company continues to support its North America and European legacy systems including LeasePak and LeaseSoft.
Highlights
Listed below are a few of NetSol’s highlights for the quarter ended December 31, 2022:
| ● | We signed a new agreement with a tier 1 automotive company in the U.S. to implement and license our Otoz mobility solution which will manage back-office operations for vehicle subscriptions. | |
| ● | Otoz went live with its 37th dealer and now has dealers in 16 states. | |
| ● | Our sales pipeline continues to be strong with the addition of some new prospects who have registered their interests in NFS Ascent®, digital, and legacy solutions across various regions pushing the total pipeline size to approximately $250 million. | |
| ● | We effectively generated approximately $1.0 million by successfully implementing change requests from various customers across multiple regions. | |
| ● | The organization successfully achieved ACE partnership status in cloud services domain by partnering with Amazon Web Services (AWS). We anticipate that this partnership will help the business grow its cloud services vertical over the coming periods. | |
| ● | NetSol achieved the first Go-Live milestone for the finance company of a leading Swedish bank by effectively implementing its invoice factoring system. |
| Page 35 |
Management has identified the following material trends affecting NetSol.
Positive trends:
| ● | According to S&P Global Mobility, new vehicles sales globally are expected to reach 84 million units in 2023 for a 5.6% increase. U.S. sales volumes are expected to reach approximately 15 million units, an estimated increase of 7% from the projected 2022 levels. | |
| ● | Reduction of the U.S. inflation rate over the last few months. | |
| ● | The elimination of travel related COVID-19 testing increases opportunities to meet face to face with current and potential customers. | |
| ● | NFS Ascent® SaaS offerings and major on-premise license offerings are gaining traction in both mid and large size auto captives in the North American and European markets. | |
| ● | The auto and banking sectors continue momentum towards increased mobility and digital solutions according to Forbes and Insider Intelligence 2022. | |
| ● | Otoz retail platform is showing a steady growth of interest from existing and new auto leasing and Tier 1 companies in all of our markets. | |
| ● | The China Pakistan Economic Corridor (CPEC) investment, initiated by China, has exceeded $65 billion investment, from the originally planned $46 billion, in Pakistan energy and infrastructure sectors. | |
| ● | China’s auto sector remains strong which includes government year-end incentives, with customers requesting additional services reflecting the resilience of our offerings. | |
| ● | There has been an aggressive uptick in business development activities in the US and China. | |
| ● | There is a growing interest from long-time customers in upgrading from our legacy NFS solution to Ascent®. |
Negative trends:
| ● | General economic conditions in our geographic markets; geopolitical tensions, including trade wars, tariffs and/or sanctions in geographic areas; Global pandemics, including COVID-19; and, global conflicts or disasters that impact the global economy or one or more sectors of the global economy. |
| ● | A global recession fear impacts the future expansions and budgets in every country and every sector. |
| ● | Continued interest rate increases by the U.S. Federal Reserve Board in 2023 restricting buying power for consumers. |
| ● | The negative currency impact on our financial statements due to the devaluation of the Pakistan Rupee and the British Pound Sterling in comparison to the US Dollar. |
| ● | Political, monetary and economic challenges and higher inflation rate than other regional countries impacting Pakistan exports. |
| ● | Inflation and higher interest rates have greatly increased the cost of doing business, including salaries and benefits worldwide, affecting profitability. |
| ● | War and hostility between Russia and Ukraine continue to foster global uncertainty. |
| ● | The decline by over 20% in 2022 of the U.S. markets including the NASDAQ index and the Russell 2000 index limiting access to capital markets. |
| ● | Working from the office might not return to pre-pandemic levels which may affect employee collaboration potentially lessening efficiency. |
| ● | The Pakistan political environment will likely remain unsteady until new elections are called. |
| Page 36 |
CHANGES IN FINANCIAL CONDITION
Quarter Ended December 31, 2022 Compared to the Quarter Ended December 31, 2021
The following table sets forth the items in our unaudited condensed consolidated statement of operations for the three months ended December 31, 2022 and 2021 as a percentage of revenues.
| For the Three Months | ||||||||||||||||
| Ended December 31, | ||||||||||||||||
| 2022 | % | 2021 | % | |||||||||||||
| Net Revenues: | ||||||||||||||||
| License fees | $ | 15,884 | 0.1 | % | $ | 1,955,331 | 12.6 | % | ||||||||
| Subscription and support | 6,502,669 | 52.5 | % | 9,374,869 | 60.6 | % | ||||||||||
| Services | 5,871,805 | 47.4 | % | 4,142,762 | 26.8 | % | ||||||||||
| Total net revenues | 12,390,358 | 100.0 | % | 15,472,962 | 100.0 | % | ||||||||||
| Cost of revenues: | ||||||||||||||||
| Salaries and consultants | 6,942,171 | 56.0 | % | 5,661,917 | 36.6 | % | ||||||||||
| Travel | 635,298 | 5.1 | % | 282,836 | 1.8 | % | ||||||||||
| Depreciation and amortization | 693,278 | 5.6 | % | 728,868 | 4.7 | % | ||||||||||
| Other | 977,148 | 7.9 | % | 1,156,754 | 7.5 | % | ||||||||||
| Total cost of revenues | 9,247,895 | 74.6 | % | 7,830,375 | 50.6 | % | ||||||||||
| Gross profit | 3,142,463 | 25.4 | % | 7,642,587 | 49.4 | % | ||||||||||
| Operating expenses: | ||||||||||||||||
| Selling and marketing | 2,007,462 | 16.2 | % | 1,807,162 | 11.7 | % | ||||||||||
| Depreciation and amortization | 198,222 | 1.6 | % | 212,864 | 1.4 | % | ||||||||||
| General and administrative | 3,510,389 | 28.3 | % | 3,733,303 | 24.1 | % | ||||||||||
| Research and development cost | 472,904 | 3.8 | % | 235,390 | 1.5 | % | ||||||||||
| Total operating expenses | 6,188,977 | 49.9 | % | 5,988,719 | 38.7 | % | ||||||||||
| Income (loss) from operations | (3,046,514 | ) | -24.6 | % | 1,653,868 | 10.7 | % | |||||||||
| Other income and (expenses) | ||||||||||||||||
| Gain (loss) on sale of assets | 5,048 | 0.0 | % | (80,125 | ) | -0.5 | % | |||||||||
| Interest expense | (202,363 | ) | -1.6 | % | (90,808 | ) | -0.6 | % | ||||||||
| Interest income | 309,906 | 2.5 | % | 316,253 | 2.0 | % | ||||||||||
| Gain (loss) on foreign currency exchange transactions | 657,223 | 5.3 | % | 901,016 | 5.8 | % | ||||||||||
| Share of net loss from equity investment | 5,133 | 0.0 | % | (79,818 | ) | -0.5 | % | |||||||||
| Other income (expense) | 89,660 | 0.7 | % | 19,668 | 0.1 | % | ||||||||||
| Total other income (expenses) | 864,607 | 7.0 | % | 986,186 | 6.4 | % | ||||||||||
| Net income (loss) before income taxes | (2,181,907 | ) | -17.6 | % | 2,640,054 | 17.1 | % | |||||||||
| Income tax provision | (220,056 | ) | -1.8 | % | (201,506 | ) | -1.3 | % | ||||||||
| Net income (loss) | (2,401,963 | ) | -19.4 | % | 2,438,548 | 15.8 | % | |||||||||
| Non-controlling interest | 309,037 | 2.5 | % | (1,031,763 | ) | -6.7 | % | |||||||||
| Net income (loss) attributable to NetSol | $ | (2,092,926 | ) | -16.9 | % | $ | 1,406,785 | 9.1 | % | |||||||
| Net income (loss) per share: | ||||||||||||||||
| Net income (loss) per common share | ||||||||||||||||
| Basic | $ | (0.19 | ) | $ | 0.13 | |||||||||||
| Diluted | $ | (0.19 | ) | $ | 0.13 | |||||||||||
| Weighted average number of shares outstanding | ||||||||||||||||
| Basic | 11,270,199 | 11,244,539 | ||||||||||||||
| Diluted | 11,270,199 | 11,244,539 | ||||||||||||||
| Page 37 |
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 18 “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 December 31, | Constant | Currency | Change as | |||||||||||||||||||||||||
| 2022 | % | 2021 | % | Currency | Fluctuation | Reported | ||||||||||||||||||||||
| Net Revenues: | $ | 12,390,358 | 100.0 | % | $ | 15,472,962 | 100.0 | % | $ | (871,575 | ) | $ | (2,211,029 | ) | $ | (3,082,604 | ) | |||||||||||
| Cost of revenues: | 9,247,895 | 74.6 | % | 7,830,375 | 50.6 | % | (3,496,455 | ) | 2,078,935 | (1,417,520 | ) | |||||||||||||||||
| Gross profit | 3,142,463 | 25.4 | % | 7,642,587 | 49.4 | % | (4,368,030 | ) | (132,094 | ) | (4,500,124 | ) | ||||||||||||||||
| Operating expenses: | 6,188,977 | 49.9 | % | 5,988,719 | 38.7 | % | (1,222,100 | ) | 1,021,842 | (200,258 | ) | |||||||||||||||||
| Income (loss) from operations | $ | (3,046,514 | ) | -24.6 | % | $ | 1,653,868 | 10.7 | % | $ | (5,590,130 | ) | $ | 889,748 | $ | (4,700,382 | ) | |||||||||||
Net revenues for the three months ended December 31, 2022 and 2021 are broken out among the segments as follows:
| 2022 | 2021 | |||||||||||||||
| Revenue | % | Revenue | % | |||||||||||||
| North America | $ | 1,597,852 | 12.9 | % | $ | 1,060,379 | 6.9 | % | ||||||||
| Europe | 2,845,701 | 23.0 | % | 2,122,094 | 13.7 | % | ||||||||||
| Asia-Pacific | 7,946,805 | 64.1 | % | 12,290,489 | 79.4 | % | ||||||||||
| Total | $ | 12,390,358 | 100.0 | % | $ | 15,472,962 | 100.0 | % | ||||||||
Revenues
License fees
License fees for the three months ended December 31, 2022 were $15,884 compared to $1,955,331 for the three months ended December 31, 2021 reflecting a decrease of $1,939,447 with a decrease in constant currency of $1,939,167. During the three months ended December 31, 2021, we recognized approximately $1,920,000 related to a new agreement with DTFS for the sale of both our legacy and Ascent product® for their new business segment in the Japanese and Australian markets.
| Page 38 |
Subscription and support
Subscription and support fees for the three months ended December 31, 2022 were $6,502,669 compared to $9,374,869 for the three months ended December 31, 2021 reflecting a decrease of $2,872,200 with a decrease in constant currency of $1,717,959. The reason for the decrease in subscription and support revenue is that in the three months ended December 31, 2021, we recorded a one-time post contract support revenue of approximately $3,480,00 using the catch-up approach. Subscription and support fees begin once a customer has “gone live” with our product. Subscription and support fees are recurring in nature, and we anticipate these fees to gradually increase as we implement both our NFS legacy products and NFS Ascent®.
Services
Services income for the three months ended December 31, 2022 was $5,871,805 compared to $4,142,762 for the three months ended December 31, 2021 reflecting an increase of $1,729,043 with an increase in constant currency of $2,785,551. The increase is primarily due to services provided for ongoing implementations plus additional change requests.
Gross Profit
The gross profit was $3,142.463, for the three months ended December 31, 2022 compared with $7,642,587 for the three months ended December 31, 2021. This is a decrease of $4,500,124 with a decrease in constant currency of $4,368,030. The gross profit percentage for the three months ended December 31, 2022 also decreased to 25.4% from 49.4% for the three months ended December 31, 2021. The cost of sales was $9,247,895 for the three months ended December 31, 2022 compared to $7,830,375 for the three months ended December 31, 2021 for an increase of $1,417,520 and on a constant currency basis an increase of $3,496,455. As a percentage of sales, cost of sales increased from 50.6% for the three months ended December 31, 2021 to 74.6% for the three months ended December 31, 2022.
Salaries and consultant fees increased by $1,280,254 from $5,661,917 for the three months ended December 31, 2021 to $6,942,171 for the three months ended December 31, 2022 and on a constant currency basis increased by $2,839,566. The increase is due to annual salary raises and new hirings. As a percentage of sales, salaries and consultant expense increased from 36.6% for the three months ended December 31, 2021 to 56.0% for the three months ended December 31, 2022.
Travel expense was $635,298 for the three months ended December 31, 2022 compared to $282,836 for the three months ended December 31, 2021 for an increase of $352,462 with an increase in constant currency of $495,136. The increase in travel expense is due to the increase in travel as countries begin lifting travel restrictions.
Depreciation and amortization expense decreased to $693,278 compared to $728,868 for the three months ended December 31, 2021 or a decrease of $35,590 and on a constant currency basis an increase of $157,621.
Other costs decreased to $977,148 for the three months ended December 31, 2022 compared to $1,156,754 for the three months ended December 31, 2021 or a decrease of $179,606 and on a constant currency basis an increase of $4,132.
Operating Expenses
Operating expenses were $6,188,977 for the three months ended December 31, 2022 compared to $5,988,719, for the three months ended December 31, 2021 for an increase of 3.3% or $200,258 and on a constant currency basis an increase of 20.4% or $1,222,100. As a percentage of sales, it increased from 38.7% to 50.0%. The increase in operating expenses was primarily due to increases in selling expenses and research and development costs offset by a decrease in general and administrative expenses.
Selling expenses were $2,007,462 for the three months ended December 31, 2022 compared to $1,807,162, for the three months ended December 31, 2021 for an increase of $200,300 and on a constant currency basis an increase of $531,194.
| Page 39 |
General and administrative expenses were $3,510,389 for the three months ended December 31, 2022 compared to $3,733,303 at December 31, 2021 or a decrease of $222,914 or 6.0% and on a constant currency basis an increase of $303,647 or 8.1%. During the three months ended December 31, 2022, salaries decreased by approximately $22,012 and increased $327,696 on a constant currency basis, and other general and administrative expenses decreased approximately $200,902 or decreased by $24,049 on a constant currency basis.
Research and development cost was $472,904 for the three months ended December 31, 2022 compared to $235,390, for the three months ended December 31, 2021 for an increase of $237,514 and on a constant currency basis an increase of $357,628.
Income/Loss from Operations
Loss from operations was $3,046,514 for the three months ended December 31, 2022 compared to income from operations of $1,653,868 for the three months ended December 31, 2021. This represents an increase in the loss of $4,700,382 with an increase in the loss of $5,590,130 on a constant currency basis for the three months ended December 31, 2022 compared with the three months ended December 31, 2021. As a percentage of sales, loss from operations was 24.6% for the three months ended December 31, 2022 compared to income from operations of 10.7% for the three months ended December 31, 2021.
Other Income and Expense
Other income was $864,607 for the three months ended December 31, 2022 compared to $986,186 for the three months ended December 31, 2021. This represents a decrease of $121,579 with an increase of $88,885 on a constant currency basis. The decrease is primarily due to the foreign currency exchange transactions. The majority of the contracts with NetSol PK are either in U.S. dollars or Euros; therefore, the currency fluctuations will lead to foreign currency exchange gains or losses depending on the value of the PKR compared to the U.S. dollar and the Euro. During the three months ended December 31, 2022, we recognized a gain of $657,223 in foreign currency exchange transactions compared to $901,016 for the three months ended December 31, 2021. During the three months ended December 31, 2022, the value of the U.S. dollar decreased 0.7% and the Euro increased 8.5%, compared to the PKR. During the three months ended December 31, 2021, the value of the U.S. dollar and the Euro increased 3.8% and 1.6%, respectively, compared to the PKR.
Non-controlling Interest
For the three months ended December 31, 2022, the net loss attributable to non-controlling interest was $309,037, compared to net income of $1,031,763 for the three months ended December 31, 2021. The decrease in non-controlling interest is primarily due to the decrease in net income of NetSol PK.
Net loss attributable to NetSol
The net loss was $2,092,926 for the three months ended December 31, 2022 compared to net income of $1,406,785 for the three months ended December 31, 2021. This is a decrease of $3,499,711 with a decrease of $4,142,007 on a constant currency basis, compared to the prior year. For the three months ended December 31, 2022, net loss per share was $0.19 for basic and diluted shares compared to net income per share of $0.13 for basic and diluted shares for the three months ended December 31, 2021.
| Page 40 |
Six Months Ended December 31, 2022 Compared to the Six Months Ended December 31, 2021
The following table sets forth the items in our unaudited condensed consolidated statement of operations for the six months ended December 31, 2022 and 2021 as a percentage of revenues.
| For the Six Months | ||||||||||||||||
| Ended December 31, | ||||||||||||||||
| 2022 | % | 2021 | % | |||||||||||||
| Net Revenues: | ||||||||||||||||
| License fees | $ | 265,844 | 1.1 | % | $ | 1,966,047 | 6.8 | % | ||||||||
| Subscription and support | 12,519,503 | 49.9 | % | 15,605,258 | 54.0 | % | ||||||||||
| Services | 12,311,130 | 49.1 | % | 11,322,418 | 39.2 | % | ||||||||||
| Total net revenues | 25,096,477 | 100.0 | % | 28,893,723 | 100.0 | % | ||||||||||
| Cost of revenues: | ||||||||||||||||
| Salaries and consultants | 13,028,906 | 51.9 | % | 11,324,327 | 39.2 | % | ||||||||||
| Travel | 1,027,643 | 4.1 | % | 496,968 | 1.7 | % | ||||||||||
| Depreciation and amortization | 1,347,327 | 5.4 | % | 1,494,603 | 5.2 | % | ||||||||||
| Other | 2,298,141 | 9.2 | % | 2,492,215 | 8.6 | % | ||||||||||
| Total cost of revenues | 17,702,017 | 70.5 | % | 15,808,113 | 54.7 | % | ||||||||||
| Gross profit | 7,394,460 | 29.5 | % | 13,085,610 | 45.3 | % | ||||||||||
| Operating expenses: | ||||||||||||||||
| Selling and marketing | 3,769,639 | 15.0 | % | 3,427,155 | 11.9 | % | ||||||||||
| Depreciation and amortization | 389,176 | 1.6 | % | 427,135 | 1.5 | % | ||||||||||
| General and administrative | 7,235,819 | 28.8 | % | 7,706,442 | 26.7 | % | ||||||||||
| Research and development cost | 942,531 | 3.8 | % | 510,620 | 1.8 | % | ||||||||||
| Total operating expenses | 12,337,165 | 49.2 | % | 12,071,352 | 41.8 | % | ||||||||||
| Loss from operations | (4,942,705 | ) | -19.7 | % | 1,014,258 | 3.5 | % | |||||||||
| Other income and (expenses) | ||||||||||||||||
| Gain (loss) on sale of assets | 28,344 | 0.1 | % | (190,725 | ) | -0.7 | % | |||||||||
| Interest expense | (323,973 | ) | -1.3 | % | (191,821 | ) | -0.7 | % | ||||||||
| Interest income | 741,763 | 3.0 | % | 759,386 | 2.6 | % | ||||||||||
| Gain (loss) on foreign currency exchange transactions | 1,972,928 | 7.9 | % | 2,185,164 | 7.6 | % | ||||||||||
| Share of net loss from equity investment | 5,133 | 0.0 | % | (240,783 | ) | -0.8 | % | |||||||||
| Other income (expense) | 91,980 | 0.4 | % | 22,697 | 0.1 | % | ||||||||||
| Total other income (expenses) | 2,516,175 | 10.0 | % | 2,343,918 | 8.1 | % | ||||||||||
| Net income (loss) before income taxes | (2,426,530 | ) | -9.7 | % | 3,358,176 | 11.6 | % | |||||||||
| Income tax provision | (413,404 | ) | -1.6 | % | (369,133 | ) | -1.3 | % | ||||||||
| Net income (loss) | (2,839,934 | ) | -11.3 | % | 2,989,043 | 10.3 | % | |||||||||
| Non-controlling interest | 126,279 | 0.5 | % | (1,394,289 | ) | -4.8 | % | |||||||||
| Net income (loss) attributable to NetSol | $ | (2,713,655 | ) | -10.8 | % | $ | 1,594,754 | 5.5 | % | |||||||
| Net income (loss) per share: | ||||||||||||||||
| Net income (loss) per common share | ||||||||||||||||
| Basic | $ | (0.24 | ) | $ | 0.14 | |||||||||||
| Diluted | $ | (0.24 | ) | $ | 0.14 | |||||||||||
| Weighted average number of shares outstanding | ||||||||||||||||
| Basic | 11,263,869 | 11,249,372 | ||||||||||||||
| Diluted | 11,263,869 | 11,249,372 | ||||||||||||||
| Page 41 |
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 18 “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 Six Months | Change in | Change due to | (Unfavorable) | |||||||||||||||||||||||||
| Ended December 31, | Constant | Currency | Change as | |||||||||||||||||||||||||
| 2022 | % | 2021 | % | Currency | Fluctuation | Reported | ||||||||||||||||||||||
| Net Revenues: | $ | 25,096,477 | 100.0 | % | $ | 28,893,723 | 100.0 | % | $ | 1,227,120 | $ | (5,024,366 | ) | $ | (3,797,246 | ) | ||||||||||||
| Cost of revenues: | 17,702,017 | 70.5 | % | 15,808,113 | 54.7 | % | (6,331,372 | ) | 4,437,468 | (1,893,904 | ) | |||||||||||||||||
| Gross profit | 7,394,460 | 29.5 | % | 13,085,610 | 45.3 | % | (5,104,252 | ) | (586,898 | ) | (5,691,150 | ) | ||||||||||||||||
| Operating expenses: | 12,337,165 | 49.2 | % | 12,071,352 | 41.8 | % | (2,525,894 | ) | 2,260,081 | (265,813 | ) | |||||||||||||||||
| Income (loss) from operations | $ | (4,942,705 | ) | -19.7 | % | $ | 1,014,258 | 3.5 | % | $ | (7,630,146 | ) | $ | 1,673,183 | $ | (5,956,963 | ) | |||||||||||
Net revenues for the six months ended December 31, 2022 and 2021 are broken out among the segments as follows:
| 2022 | 2021 | |||||||||||||||
| Revenue | % | Revenue | % | |||||||||||||
| North America | $ | 2,723,140 | 10.9 | % | $ | 1,990,613 | 6.9 | % | ||||||||
| Europe | 5,093,036 | 20.3 | % | 5,394,993 | 18.7 | % | ||||||||||
| Asia-Pacific | 17,280,301 | 68.9 | % | 21,508,117 | 74.4 | % | ||||||||||
| Total | $ | 25,096,477 | 100.0 | % | $ | 28,893,723 | 100.0 | % | ||||||||
Revenues
License fees
License fees for the six months ended December 31, 2022 were $265,844 compared to $1,966,047 for the six months ended December 31, 2021 reflecting a decrease of $1,700,203 with a decrease in constant currency of $1,625,032. During the six months ended December 31, 2022, we recognized approximately $188,000 related to a new agreement with the Government of Khyber Pakhtunkhwa for the sale of our Ascent® product. During the six months ended December 31, 2021, we recognized approximately $1,920,000 related to a new agreement with DTFS for the sale of both our legacy and Ascent product® for their new business segment in the Japanese and Australian markets.
| Page 42 |
Subscription and support
Subscription and support fees for the six months ended December 31, 2022 were $12,519,503 compared to $15,605,258 for the six months ended December 31, 2021 reflecting a decrease of $3,085,755 with a decrease in constant currency of $686,454. The reason for the decrease in subscription and support revenue is that in the six months ended December 31, 2021, we recorded a one-time post contract support revenue of approximately $3,480,000 using the catch-up approach. Subscription and support fees begin once a customer has “gone live” with our product. Subscription and support fees are recurring in nature, and we anticipate these fees to gradually increase as we implement both our NFS legacy products and NFS Ascent®.
Services
Services income for the six months ended December 31, 2022 was $12,311,130 compared to $11,322,418 for the six months ended December 31, 2021 reflecting an increase of $988,712 with an increase in constant currency of $3,538,606. The increase is primarily due to services provided for ongoing implementations plus additional change requests.
Gross Profit
The gross profit was $7,394,460, for the six months ended December 31, 2022 compared with $13,085,610 for the six months ended December 31, 2021. This is a decrease of $5,691,150 with a decrease in constant currency of $5,104,252. The gross profit percentage for the six months ended December 31, 2022 also decreased to 29.5% from 45.3% for the six months ended December 31, 2021. The cost of sales was $17,702,017 for the six months ended December 31, 2022 compared to $15,808,113 for the six months ended December 31, 2021 for an increase of $1,893,904 and on a constant currency basis an increase of $6,331,372. As a percentage of sales, cost of sales increased from 54.7% for the six months ended December 31, 2021 to 70.5% for the six months ended December 31, 2022.
Salaries and consultant fees increased by $1,704,579 from $11,324,327 for the six months ended December 31, 2021 to $13,028,906 for the six months ended December 31, 2022 and on a constant currency basis increased by $4,910,006. The increase is due to annual salary raises and new hirings. As a percentage of sales, salaries and consultant expense increased from 39.2% for the six months ended December 31, 2021 to 51.9% for the six months ended December 31, 2022.
Travel expense was $1,027,643 for the six months ended December 31, 2022 compared to $496,968 for the six months ended December 31, 2021 for an increase of $530,675 with an increase in constant currency of $787,416. The increase in travel expense is due to the increase in travel as countries begin lifting travel restrictions.
Depreciation and amortization expense decreased to $1,347,327 compared to $1,494,603 for the six months ended December 31, 2021 or a decrease of $147,276 and on a constant currency basis an increase of $278,982.
Other costs decreased to $2,298,141 for the six months ended December 31, 2022 compared to $2,492,215 for the six months ended December 31, 2021 or a decrease of $194,074 and on a constant currency basis an increase of $354,968. The increase on a constant currency basis is mainly due to increases in computer costs.
Operating Expenses
Operating expenses were $12,337,165 for the six months ended December 31, 2022 compared to $12,071,352, for the six months ended December 31, 2021 for an increase of 2.2% or $265,813 and on a constant currency basis an increase of 9.3% or $2,525,894. As a percentage of sales, it increased from 41.8% to 49.2%. The increase in operating expenses was primarily due to increases in selling expenses and research and development costs offset by a decrease in general and administrative expenses.
Selling expenses were $3,769,639 for the six months ended December 31, 2022 compared to $3,427,155, for the six months ended December 31, 2021 for an increase of $342,484 and on a constant currency basis an increase of $1,044,521.
| Page 43 |
General and administrative expenses were $7,235,819 for the six months ended December 31, 2022 compared to $7,706,442 at December 31, 2021 or a decrease of $470,623 or 6.1% and on a constant currency basis an increase of $719,580 or 6.1%. During the six months ended December 31, 2022, salaries decreased by approximately $311,994 and increased $416,313 on a constant currency basis, and other general and administrative expenses decreased approximately $158,629 and increased $303,267 on a constant currency basis.
Research and development cost was $942,531 for the six months ended December 31, 2022 compared to $510,620, for the six months ended December 31, 2021 for an increase of $431,911 and on a constant currency basis an increase of $704,845.
Income/Loss from Operations
Loss from operations was $4,942,705 for the six months ended December 31, 2022 compared to income from operations of $1,014,258 for the six months ended December 31, 2021. This represents an increase in the loss of $5,956,963 with an increase in the loss of $7,630,146 on a constant currency basis for the six months ended December 31, 2022 compared with the six months ended December 31, 2021. As a percentage of sales, loss from operations was 19.7% for the six months ended December 31, 2022 compared to income from operations of 3.5% for the six months ended December 31, 2021.
Other Income and Expense
Other income was $2,516,175 for the six months ended December 31, 2022 compared to $2,343,918 for the six months ended December 31, 2021. This represents an increase of $172,257 with an increase of $968,923 on a constant currency basis. The increase is due to a decrease in the loss of sale of assets of $219,069 and on a constant currency basis $228,787, a decrease in the loss on equity investments of $245,916 and on a constant currency basis $246,374, offset by a decrease in the gain on foreign currency exchange transactions of $212,236 and on a constant currency basis an increase in gain of $428,568.
Non-controlling Interest
For the six months ended December 31, 2022, the net loss attributable to non-controlling interest was $126,279, compared to net income of $1,394,289 for the six months ended December 31, 2021. The decrease in non-controlling interest is primarily due to the decrease in net income of NetSol PK.
Net loss attributable to NetSol
The net loss was $2,713,655 for the six months ended December 31, 2022 compared to net income of $1,594,754 for the six months ended December 31, 2021. This is a decrease of $4,308,409 with a decrease of $5,233,005 on a constant currency basis, compared to the prior year. For the six months ended December 31, 2022, net loss per share was $0.24 for basic and diluted shares compared to net income per share of $0.14 for basic and diluted shares for the six months ended December 31, 2021.
| Page 44 |
Non-GAAP Financial Measures
Regulation S-K Item 10(e), “Use of Non-GAAP Financial Measures in Commission Filings,” defines and prescribes the conditions for use of non-GAAP financial information. Our measures of adjusted EBITDA and adjusted EBITDA per basic and diluted share meet the definition of a non-GAAP financial measure.
We define the non-GAAP measures as follows:
| ● | EBITDA is GAAP net income or loss before net interest expense, income tax expense, depreciation and amortization. | |
| ● | Non-GAAP adjusted EBITDA is EBITDA plus stock-based compensation expense. | |
| ● | Adjusted EBITDA per basic and diluted share – Adjusted EBITDA allocated to common stock divided by the weighted average shares outstanding and diluted shares outstanding. |
We use non-GAAP measures internally to evaluate the business and believe that presenting non-GAAP measures provides useful information to investors regarding the underlying business trends and performance of our ongoing operations as well as useful metrics for monitoring our performance and evaluating it against industry peers. The non-GAAP financial measures presented should be used in addition to, and in conjunction with, results presented in accordance with GAAP, and should not be relied upon to the exclusion of GAAP financial measures. Management strongly encourages investors to review our consolidated financial statements in their entirety and not to rely on any single financial measure in evaluating the Company.
The non-GAAP measures reflect adjustments based on the following items:
EBITDA: We report EBITDA as a non-GAAP metric by excluding the effect of net interest expense, income tax expense, depreciation and amortization from net income or loss because doing so makes internal comparisons to our historical operating results more consistent. In addition, we believe providing an EBITDA calculation is a more useful comparison of our operating results to the operating results of our peers.
Stock-based compensation expense: We have excluded the effect of stock-based compensation expense from the non-GAAP adjusted EBITDA and non-GAAP adjusted EBITDA per basic and diluted share calculations. Although stock-based compensation expense is calculated in accordance with current GAAP and constitutes an ongoing and recurring expense, such expense is excluded from non-GAAP results because it is not an expense which generally requires cash settlement by NetSol, and therefore is not used by us to assess the profitability of our operations. We also believe the exclusion of stock-based compensation expense provides a more useful comparison of our operating results to the operating results of our peers.
Non-controlling interest: We add back the non-controlling interest in calculating gross adjusted EBITDA and then subtract out the income taxes, depreciation and amortization and net interest expense attributable to the non-controlling interest to arrive at a net adjusted EBITDA.
| Page 45 |
Our reconciliation of the non-GAAP financial measures of adjusted EBITDA and non-GAAP earnings per basic and diluted share to the most comparable GAAP measures for the three and six months ended December 31, 2022 and 2021 are as follows:
| For the Three Months | For the Six Months | |||||||||||||||
| Ended December 31, | Ended December 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net Income (loss) attributable to NetSol | $ | (2,092,926 | ) | $ | 1,406,785 | $ | (2,713,655 | ) | $ | 1,594,754 | ||||||
| Non-controlling interest | (309,037 | ) | 1,031,763 | (126,279 | ) | 1,394,289 | ||||||||||
| Income taxes | 220,056 | 201,506 | 413,404 | 369,133 | ||||||||||||
| Depreciation and amortization | 891,500 | 941,732 | 1,736,503 | 1,921,738 | ||||||||||||
| Interest expense | 202,363 | 90,808 | 323,973 | 191,821 | ||||||||||||
| Interest (income) | (309,906 | ) | (316,253 | ) | (741,763 | ) | (759,386 | ) | ||||||||
| EBITDA | $ | (1,397,950 | ) | $ | 3,356,341 | $ | (1,107,817 | ) | $ | 4,712,349 | ||||||
| Add back: | ||||||||||||||||
| Non-cash stock-based compensation | 64,333 | 25,289 | 146,167 | 28,292 | ||||||||||||
| Adjusted EBITDA, gross | $ | (1,333,617 | ) | $ | 3,381,630 | $ | (961,650 | ) | $ | 4,740,641 | ||||||
| Less non-controlling interest (a) | 7,363 | (1,293,037 | ) | (392,172 | ) | (1,881,916 | ) | |||||||||
| Adjusted EBITDA, net | $ | (1,326,254 | ) | $ | 2,088,593 | $ | (1,353,822 | ) | $ | 2,858,725 | ||||||
| Weighted Average number of shares outstanding | ||||||||||||||||
| Basic | 11,270,199 | 11,244,539 | 11,263,869 | 11,249,372 | ||||||||||||
| Diluted | 11,270,199 | 11,244,539 | 11,263,869 | 11,249,372 | ||||||||||||
| Basic adjusted EBITDA | $ | (0.12 | ) | $ | 0.19 | $ | (0.12 | ) | $ | 0.25 | ||||||
| Diluted adjusted EBITDA | $ | (0.12 | ) | $ | 0.19 | $ | (0.12 | ) | $ | 0.25 | ||||||
| (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 | $ | (309,037 | ) | $ | 1,031,763 | $ | (126,279 | ) | $ | 1,394,289 | ||||||
| Income Taxes | 68,406 | 61,761 | 128,316 | 114,427 | ||||||||||||
| Depreciation and amortization | 255,584 | 273,822 | 493,917 | 561,453 | ||||||||||||
| Interest expense | 62,736 | 26,682 | 100,132 | 56,082 | ||||||||||||
| Interest (income) | (93,012 | ) | (101,385 | ) | (225,501 | ) | (244,729 | ) | ||||||||
| EBITDA | $ | (15,323 | ) | $ | 1,292,643 | $ | 370,585 | $ | 1,881,522 | |||||||
| Add back: | ||||||||||||||||
| Non-cash stock-based compensation | 7,960 | 394 | 21,587 | 394 | ||||||||||||
| Adjusted EBITDA of non-controlling interest | $ | (7,363 | ) | $ | 1,293,037 | $ | 392,172 | $ | 1,881,916 | |||||||
| Page 46 |
LIQUIDITY AND CAPITAL RESOURCES
Our cash position was $20,946,722 at December 31, 2022, compared to $23,963,797 at June 30, 2022.
Net cash provided by operating activities was $1,689,543 for the six months ended December 31, 2022 compared to net cash used in operating activities of $3,036,634 for the six months ended December 31, 2021. At December 31, 2022, we had current assets of $43,076,510 and current liabilities of $19,358,221. We had accounts receivable of $4,595,675 at December 31, 2022 compared to $8,669,202 at June 30, 2022. We had revenues in excess of billings of $15,389,951 at December 31, 2022 compared to $15,425,377 at June 30, 2022 of which $604,358 and $853,601 is shown as long term as of December 31, 2022 and June 30, 2022, respectively. The long-term portion was discounted by $9,376 and $28,339 at December 31, 2022 and June 30, 2022, respectively, using the discounted cash flow method with interest rates ranging from 4.65% to 6.25%. During the six months ended December 31, 2022, 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 $4,108,953 from $24,094,579 at June 30, 2022 to $19,985,626 at December 31, 2022. Accounts payable and accrued expenses, and current portions of loans and lease obligations amounted to $7,423,248 and $7,386,750, respectively at December 31, 2022. Accounts payable and accrued expenses, and current portions of loans and lease obligations amounted to $6,813,541 and $8,567,145, respectively at June 30, 2022.
The average days sales outstanding for the six months ended December 31, 2022 and 2021 were 162 and 137 days, respectively, for each period. The days sales outstanding have been calculated by taking into consideration the average combined balances of accounts receivable and revenues in excess of billings.
Net cash used in investing activities was $1,182,042 for the six months ended December 31, 2022, compared to $572,180 for the six months ended December 31, 2021. We had purchases of property and equipment of $1,252,325 compared to $773,953 for the six months ended December 31, 2021.
Net cash used in financing activities was $537,180 for the six months ended December 31, 2022, compared to $626,955 for the six months ended December 31, 2021. For the six months ended December 31, 2021, we purchased 22,510 shares of our own stock for $100,106. The six months ended December 31, 2021 included the cash inflow of $188,272 from bank proceeds. During the six months ended December 31, 2022, we had net payments for bank loans and finance leases of $537,180 compared to $715,121 for the six months ended December 31, 2021. We are operating in various geographical regions of the world through our various subsidiaries. Those subsidiaries have financial arrangements from various financial institutions to meet both their short and long-term funding requirements. These loans will become due at different maturity dates as described in Note 15 of the financial statements. We are in compliance with the covenants of the financial arrangements and there is no default, which may lead to early payment of these obligations. We anticipate paying back all these obligations on their respective due dates from its own sources.
We typically fund the cash requirements for our operations in the U.S. through our license, services, and subscription and support agreements, intercompany charges for corporate services, and through the exercise of options and warrants. As of December 31, 2022, we had approximately $20.9 million of cash, cash equivalents and marketable securities of which approximately $18.6 million is held by our foreign subsidiaries. As of June 30, 2022, we had approximately $24.0 million of cash, cash equivalents and marketable securities of which approximately $22.8 million was held by our foreign subsidiaries.
We remain open to strategic relationships that would provide value added benefits. The focus will remain on continuously improving cash reserves internally and reduced reliance on external capital raise.
As a growing company, we have on-going capital expenditure needs based on our short term and long-term business plans. Although our requirements for capital expenses vary from time to time, for the next 12 months, we anticipate needing $2.5 million for APAC, U.S. and Europe new business development activities and infrastructure enhancements, which we expect to provide from current operations.
While there is no guarantee that any of these methods will result in raising sufficient funds to meet our capital needs or that even if available will be on terms acceptable to us, we will be very cautious and prudent about any new capital raise given the global market uncertainties. However, we are very conscious of the dilutive effect and price pressures in raising equity-based capital.
| Page 47 |
Financial Covenants
Our UK based subsidiary, NTE, has an approved overdraft facility of £300,000 ($361,446) which requires that the aggregate amount of invoiced trade debtors (net of provisions for bad and doubtful debts and excluding intra-group debtors) of NTE, not exceeding 90 days old, will not be less than an amount equal to 200% of the facility. The Pakistani subsidiary, NetSol PK has an approved facility for export refinance from Askari Bank Limited amounting to Rupees 500 million ($2,208,285) and a running finance facility of Rupees 53 million ($236,728). NetSol PK has an approved facility for export refinance from another Habib Metro Bank Limited amounting to Rupees 900 million ($3,974,914). 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 ($1,678,297) from Samba Bank Limited. During the tenure of loan, these two facilities require NetSol PK to maintain at a minimum a current ratio of 1:1, an interest coverage ratio of 4 times, a leverage ratio of 2 times, and a debt service coverage ratio of 4 times.
As of the date of this report, we are in compliance with the financial covenants associated with our borrowings. The maturity dates of the borrowings of respective subsidiaries may accelerate if they do not comply with these covenants. In case of any change in control in subsidiaries, they may have to repay their respective credit facilities.
CRITICAL ACCOUNTING POLICIES
Our condensed consolidated financial statements are prepared applying certain critical accounting policies. The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective, or complex judgments. Critical accounting policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variations and may significantly affect our reported results and financial position for the period or in future periods. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on our future financial condition and results of operations. Our financial statements are prepared in accordance with U.S. GAAP, and they conform to general practices in our industry. We apply critical accounting policies consistently from period to period and intend that any change in methodology occur in an appropriate manner. There have been no significant changes to our accounting policies and estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.
RECENT ACCOUNTING PRONOUNCEMENTS
For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 2 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report.
Item 3. Quantitative and Qualitative Disclosures about Market Risks.
None.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Chief Financial Officer and Chief Executive Officer concluded that our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting during the three months ended December 31, 2022, that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15d – 15(f)).
| Page 48 |
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 1A. Risk Factors
NA
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
| 31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CEO) | |
| 31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CFO) | |
| 32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CEO) | |
| 32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CFO) | |
| 101. | INS Inline XBRL Instance Document | |
| 101. | SCH Inline XBRL Taxonomy Extension Schema Document | |
| 101. | CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101. | DFE Inline XBRL Taxonomy Extension definition Linkbase Document | |
| 101. | LAB Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101. | PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
| Page 49 |
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| NETSOL TECHNOLOGIES, INC. | ||
| Date: | February 14, 2023 | /s/ Najeeb U. Ghauri |
| NAJEEB U. GHAURI | ||
| Chief Executive Officer | ||
| Date: | February 14, 2023 | /s/ Roger K. Almond |
| ROGER K. ALMOND | ||
| Chief Financial Officer | ||
| Principal Accounting Officer | ||
| Page 50 |