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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2023

 

For the transition period from __________ to __________

 

Commission file number: 0-22773

 

 

NETSOL TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

 

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

 

16000 Ventura Blvd., Suite 770, Encino, CA 91436
(Address of principal executive offices) (Zip Code)

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

 

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

 

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

 

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

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

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

 

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

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No

 

The issuer had 12,238,042 shares issued and 11,299,011 outstanding of its $.01 par value Common Stock and no Preferred Stock outstanding as of May 05, 2023.

 

 

 

 
 

 

NETSOL TECHNOLOGIES, INC.

 

    Page No.
PART I. FINANCIAL INFORMATION    
Item 1. Financial Statements (Unaudited)   3
Condensed Consolidated Balance Sheets as of March 31, 2023 and June 30, 2022   3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2023 and 2022   4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended March 31, 2023 and 2022   5
Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended March 31, 2023 and 2022   6
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2023 and 2022   9
Notes to the Condensed Consolidated Financial Statements   11
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations   32
Item 3.Quantitative and Qualitative Disclosures about Market Risk   47
Item 4.Controls and Procedures   47
     
PART II. OTHER INFORMATION    
Item 1.Legal Proceedings   48
Item 1A Risk Factors   48
Item 2.Unregistered Sales of Equity and Use of Proceeds   48
Item 3.Defaults Upon Senior Securities   48
Item 4.Mine Safety Disclosures   48
Item 5.Other Information   48
Item 6.Exhibits   48

 

Page 2

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets

 

(Unaudited)

 

   As of   As of 
   March 31, 2023   June 30, 2022 
ASSETS          
Current assets:          
Cash and cash equivalents  $15,259,497   $23,963,797 
Accounts receivable, net of allowance of $232,004 and $166,231   9,223,484    8,669,202 
Revenues in excess of billings, net of allowance of $43,334 and $136,976   13,741,884    14,571,776 
Other current assets   2,599,532    2,223,361 
Total current assets   40,824,397    49,428,136 
Revenues in excess of billings, net - long term   -    853,601 
Property and equipment, net   6,871,036    9,382,624 
Right of use of assets - operating leases   1,102,729    969,163 
Long term investment   1,066,878    1,059,368 
Other assets   425    25,546 
Intangible assets, net   381,878    1,587,670 
Goodwill   9,302,524    9,302,524 
Total assets  $59,549,867   $72,608,632 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable and accrued expenses  $7,098,206   $6,813,541 
Current portion of loans and obligations under finance leases   5,969,044    8,567,145 
Current portion of operating lease obligations   421,223    548,678 
Unearned revenue   4,167,655    4,901,562 
Total current liabilities   17,656,128    20,830,926 
Loans and obligations under finance leases; less current maturities   215,243    476,223 
Operating lease obligations; less current maturities   651,443    447,260 
Total liabilities   18,522,814    21,754,409 
Commitments and contingencies   -    - 
Stockholders’ equity:          
Preferred stock, $.01 par value; 500,000 shares authorized;   -    - 
Common stock, $.01 par value; 14,500,000 shares authorized; 12,238,042 shares issued and 11,299,011  outstanding as of March 31, 2023 12,196,570 shares issued and 11,257,539  outstanding as of June 30, 2022   122,382    121,966 
Additional paid-in-capital   128,536,955    128,218,247 
Treasury stock (at cost, 939,031 shares as of March 31, 2023 and June 30, 2022)   (3,920,856)   (3,920,856)
Accumulated deficit   (39,821,470)   (39,652,438)
Other comprehensive loss   (47,192,994)   (39,363,085)
Total NetSol stockholders’ equity   37,724,017    45,403,834 
Non-controlling interest   3,303,036    5,450,389 
Total stockholders’ equity   41,027,053    50,854,223 
Total liabilities and stockholders’ equity  $59,549,867   $72,608,632 

 

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)

 

   2023   2022   2023   2022 
   For the Three Months   For the Nine Months 
   Ended March 31,   Ended March 31, 
   2023   2022   2023   2022 
Net Revenues:                    
License fees  $1,982,985   $1,620,827   $2,248,829   $3,586,874 
Subscription and support   6,656,082    6,554,540    19,175,585    22,159,798 
Services   4,867,322    6,634,459    17,178,452    17,956,877 
Total net revenues   13,506,389    14,809,826    38,602,866    43,703,549 
                     
Cost of revenues:                    
Salaries and consultants   6,453,814    6,756,898    19,482,720    18,081,225 
Travel   724,431    256,730    1,752,074    753,698 
Depreciation and amortization   602,829    741,587    1,950,156    2,236,190 
Other   1,020,286    1,220,041    3,318,427    3,712,256 
Total cost of revenues   8,801,360    8,975,256    26,503,377    24,783,369 
                     
Gross profit   4,705,029    5,834,570    12,099,489    18,920,180 
                     
Operating expenses:                    
Selling and marketing   1,643,853    2,074,873    5,413,492    5,502,028 
Depreciation and amortization   180,137    206,346    569,313    633,481 
General and administrative   3,509,212    3,841,655    10,745,031    11,548,097 
Research and development cost   302,262    251,001    1,244,793    761,621 
Total operating expenses   5,635,464    6,373,875    17,972,629    18,445,227 
                     
Income (loss) from operations   (930,435)   (539,305)   (5,873,140)   474,953 
                     
Other income and (expenses)                    
Gain (loss) on sale of assets   (84,838)   8,770    (56,494)   (181,955)
Interest expense   (188,137)   (85,916)   (512,110)   (277,737)
Interest income   263,794    364,161    1,005,557    1,123,547 
Gain on foreign currency exchange transactions   5,385,591    499,516    7,358,519    2,684,680 
Share of net loss from equity investment   2,377    (76,798)   7,510    (317,581)
Other income (expense)   21,897    (30,296)   113,877    (7,599)
Total other income (expenses)   5,400,684    679,437    7,916,859    3,023,355 
                     
Net income before income taxes   4,470,249    140,132    2,043,719    3,498,308 
Income tax provision   (227,718)   (157,604)   (641,122)   (526,737)
Net income (loss)   4,242,531    (17,472)   1,402,597    2,971,571 
Non-controlling interest   (1,697,908)   (260,998)   (1,571,629)   (1,655,287)
Net income (loss) attributable to NetSol  $2,544,623   $(278,470)  $(169,032)  $1,316,284 
                     
Net income (loss) per share:                    
Net income (loss) per common share                    
Basic  $0.23   $(0.02)  $(0.01)  $0.12 
Diluted  $0.23   $(0.02)  $(0.01)  $0.12 
                     
Weighted average number of shares outstanding                    
Basic   11,283,954    11,249,606   11,270,466    11,249,449 
Diluted   11,283,954    11,249,606   11,270,466    11,249,449 

 

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)

 

   2023   2022   2023   2022 
   For the Three Months   For the Nine Months 
   Ended March 31,   Ended March 31, 
   2023   2022   2023   2022 
Net income (loss)  $2,544,623   $(278,470)  $(169,032)  $1,316,284 
Other comprehensive income (loss):                    
Translation adjustment   (7,628,982)   (2,269,229)   (11,428,326)   (7,020,620)
Translation adjustment attributable to non-controlling interest   2,447,328    464,452    3,598,417    2,148,695 
Net translation adjustment   (5,181,654)   (1,804,777)   (7,829,909)   (4,871,925)
Comprehensive income (loss) attributable to NetSol  $(2,637,031)  $(2,083,247)  $(7,998,941)  $(3,555,641)

 

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

 

Page 5

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

 

A statement of the changes in equity for the three months ended March 31, 2023 is provided below:

 

                       Other       -
           Additional           Compre-   Non   Total 
   Common Stock   Paid-in   Treasury   Accumulated   hensive   Controlling   Stockholders’ 
   Shares   Amount   Capital   Shares   Deficit   Loss   Interest   Equity 
                                 
Balance at December 31, 2022   12,222,985   $122,231   $128,484,714   $(3,920,856)  $(42,366,093)  $(42,011,340)  $4,052,456   $44,361,112 
Common stock issued for: Services   15,057    151    39,599    -    -    -    -    39,750 
Fair value of subsidiary options issued   -    -    12,642    -    -    -    -    12,642 
Foreign currency translation adjustment   -    -    -    -    -    (5,181,654)   (2,447,328)   (7,628,982)
Net income (loss) for the year   -    -    -    -    2,544,623    -    1,697,908    4,242,531 
Balance at March 31, 2023   12,238,042   $122,382   $128,536,955   $(3,920,856)  $(39,821,470)  $(47,192,994)  $3,303,036   $41,027,053 

 

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   12,209,230   $122,093   $128,420,519   $(3,920,856)  $(40,273,167)  $(42,281,135)  $4,279,113   $46,346,567 
Common stock issued for: Services   13,755    138    39,612    -    -    -    -    39,750 
Fair value of subsidiary options issued   -    -    24,583    -    -    -    -    24,583 
Foreign currency translation adjustment   -    -    -    -    -    269,795    82,380    352,175 
Net income (loss) for the year   -    -    -    -    (2,092,926)   -    (309,037)   (2,401,963)
Balance at December 31, 2022   12,222,985   $122,231   $128,484,714   $(3,920,856)  $(42,366,093)  $(42,011,340)  $4,052,456   $44,361,112 

 

Page 6

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

 

A statement of the changes in equity for the three months ended September 30, 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   12,196,570   $121,966   $128,218,247   $(3,920,856)  $(39,652,438)  $(39,363,085)  $5,450,389   $50,854,223 
Common stock issued for: Services    12,660    127    39,623    -    -    -    -    39,750 
Adjustment in APIC for change in subsidiary shares to non-controlling interest   -    -    120,565    -    -    -    (120,565)   - 
Fair value of subsidiary options issued   -    -    42,084    -    -    -    -    42,084 
Foreign currency translation adjustment   -    -    -    -    -    (2,918,050)   (1,233,469)   (4,151,519)
Net income (loss) for the year   -    -    -    -    (620,729)   -    182,758    (437,971)
Balance at September 30, 2022   12,209,230   $122,093   $128,420,519   $(3,920,856)  $(40,273,167)  $(42,281,135)  $4,279,113   $46,346,567 

 

A statement of the changes in equity for the three months ended March 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 December 31, 2021   12,186,070   $121,861   $129,042,021   $(3,920,856)  $(37,206,528)  $(34,935,629)  $6,925,352   $60,026,221 
Common stock issued for: Services   5,500    55    22,170    -    -    -    -    22,225 
Fair value of subsidiary options issued             20,595    -    -    -    -    20,595 
Foreign currency translation adjustment   -    -    -    -         (1,804,777)   (464,452)   (2,269,229)
Net income (loss)   -    -    -    -    (278,470)        260,998    (17,472)
Balance at March 31, 2022   12,191,570   $121,916   $129,084,786   $(3,920,856)  $(37,484,998)  $(36,740,406)  $6,721,898   $57,782,340 

 

Page 7

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

 

A statement of the changes in equity for the three months ended December 31, 2021 is provided below:

 

                       Other         
           Additional           Compre-   Non   Total 
   Common Stock   Paid-in   Treasury   Accumulated   hensive   Controlling   Stockholders’ 
   Shares   Amount   Capital   Shares   Deficit   Loss   Interest   Equity 
Balance at September 30, 2021   12,183,570   $121,836   $129,030,982   $(3,920,856)  $(38,613,313)  $(34,013,886)  $6,438,841   $59,043,604 
Common stock issued for: Services   2,500    25    9,875    -    -    -    -    9,900 
Fair value of subsidiary options issued   -    -    1,164    -    -    -    -    1,164 
Foreign currency translation adjustment   -    -    -    -    -    (921,743)   (545,252)   (1,466,995)
Net income for the year   -    -    -    -    1,406,785    -    1,031,763    2,438,548 
Balance at December 31, 2021   12,186,070   $121,861   $129,042,021   $(3,920,856)  $(37,206,528)  $(34,935,629)  $6,925,352   $60,026,221 

 

A statement of the changes in equity for the three months ended September 30, 2021 is provided below:

 

                       Other         
           Additional           Compre-   Non   Total 
   Common Stock   Paid-in   Treasury   Accumulated   hensive   Controlling   Stockholders’ 
   Shares   Amount   Capital   Shares   Deficit   Loss   Interest   Equity 
Balance at June 30, 2021   12,181,585   $121,816   $129,018,826   $(3,820,750)  $(38,801,282)  $(31,868,481)  $7,215,473   $61,865,602 
Subsidiary common stock issued for: -Services    -    -    167    -    -    -    (167)   - 
Common stock issued for: Services    1,985    20    11,989    -    -    -    -    12,009 
Purchase of treasury shares   -    -    -    (100,106)   -    -    -    (100,106)
Foreign currency translation adjustment   -    -    -    -    -    (2,145,405)   (1,138,991)   (3,284,396)
Net income   -    -    -    -    187,969    -    362,526    550,495 
Balance at September 30, 2021   12,183,570   $121,836   $129,030,982   $(3,920,856)  $(38,613,313)  $(34,013,886)  $6,438,841   $59,043,604 

 

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

 

Page 8

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   2023   2022 
   For the Nine Months 
   Ended March 31, 
   2023   2022 
Cash flows from operating activities:          
Net income  $1,402,597   $2,971,571 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   2,519,469    2,869,671 
Provision for bad debts   7,648    6,897 
Share of net (gain) loss from investment under equity method   (7,510)   317,581 
(Gain) loss on sale of assets   56,494    181,955 
Stock based compensation   198,559    78,225 
Changes in operating assets and liabilities:          
Accounts receivable   (1,855,899)   (3,404,247)
Revenues in excess of billing   240,324    (385,971)
Other current assets   (621,731)   53,173 
Accounts payable and accrued expenses   1,321,289    14,918 
Unearned revenue   (696,621)   2,822,178 
Net cash provided by operating activities   2,564,619    5,525,951 
           
Cash flows from investing activities:          
Purchases of property and equipment   (1,575,059)   (1,680,856)
Sales of property and equipment   153,402    321,251 
Net cash used in investing activities   (1,421,657)   (1,359,605)
           
Cash flows from financing activities:          
Purchase of treasury stock   -    (100,106)
Proceeds from bank loans   270,292    312,467 
Payments on finance lease obligations and loans - net   (787,641)   (1,045,464)
Net cash used in financing activities   (517,349)   (833,103)
Effect of exchange rate changes   (9,329,913)   (6,465,085)
Net decrease in cash and cash equivalents   (8,704,300)   (3,131,842)
Cash and cash equivalents at beginning of the period   23,963,797    33,705,154 
Cash and cash equivalents at end of period  $15,259,497   $30,573,312 

 

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

 

Page 9

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)

 

   For the Nine Months 
   Ended March 31, 
   2023   2022 
SUPPLEMENTAL DISCLOSURES:          
Cash paid during the period for:          
Interest  $378,720   $332,239 
Taxes  $706,658   $694,161 
           
NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Shares issued to vendor for services received  $-   $19,525 

 

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

 

Page 10

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(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 Ascent Middle East Computer Equipment Trading LLC (“Namecet”)

NetSol Technologies Thailand Limited (“NetSol Thai”)

Otoz, Inc. (“Otoz”)

Otoz (Thailand) Limited (“Otoz Thai”)

 

Page 11

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(Unaudited)

 

NOTE 2 – ACCOUNTING POLICIES

 

Use of Estimates

 

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

 

Concentration of Credit Risk

 

Cash includes cash on hand and demand deposits in accounts maintained within the United States as well as in foreign countries. Certain financial instruments, which subject the Company to concentration of credit risk, consist of cash and restricted cash. The Company maintains balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for the banks located in the United States. Balances at financial institutions within certain foreign countries are not covered by insurance except balances maintained in China are insured for RMB 500,000 ($72,780) in each bank and in the UK for GBP 85,000 ($104,938) in each bank. The Company maintains three bank accounts in China and nine bank accounts in the UK. As of March 31, 2023, and June 30, 2022, the Company had uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $13,089,660 and $22,758,963, respectively. The Company has not experienced any losses in such accounts.

 

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

 

Fair Value of Financial Instruments

 

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

 

The three levels of valuation hierarchy are defined as follows:

 

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

 

Page 12

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(Unaudited)

 

The Company did not have any financial assets that were measured at fair value on a recurring basis at March 31, 2023.

 

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  $      -   $     -   $853,601   $853,601 
Total  $-   $-   $853,601   $853,601 

 

 

The reconciliation from June 30, 2022 to March 31, 2023 is as follows:

 

   Revenues in excess of billings - long term   Fair value discount   Total 
Balance at June 30, 2022  $881,940   $(28,339)  $853,601 
Amortization during the period   -    28,029    28,029 
Transfers to short term   (890,794)   -    (890,794)
Effect of Translation Adjustment   8,854    310    9,164 
Balance at March 31, 2023  $-   $-   $- 

 

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 13

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(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 14

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(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 15

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(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:

 

   2023   2022   2023   2022 
   For the Three Months   For the Nine Months 
   Ended March 31,   Ended March 31, 
   2023   2022   2023   2022 
Core:                
License  $1,982,985   $1,620,827   $2,248,829   $3,586,874 
Subscription and support   6,656,082    6,554,540    19,175,585    22,159,798 
Services   3,869,444    5,416,635    14,109,271    14,140,429 
Total core revenue, net   12,508,511    13,592,002    35,533,685    39,887,101 
                     
Non-Core:                    
Services   997,878    1,217,824    3,069,181    3,816,448 
Total non-core revenue, net   997,878    1,217,824    3,069,181    3,816,448 
                     
Total net revenue  $13,506,389   $14,809,826   $38,602,866   $43,703,549 

 

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 16

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(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 
   March 31, 2023   June 30, 2022 
         
Revenues in excess of billings  $13,741,884   $15,425,377 
           
Unearned revenue  $4,167,655   $4,901,562 

 

During the three and nine months ended March 31, 2023, the Company recognized revenue of $484,239 and $3,268,811 that was included in the unearned revenue balance at the beginning of the period. All other activity in unearned revenue is due to the timing of invoicing in relation to the timing of revenue recognition.

 

Page 17

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(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 $33.6MM as of March 31, 2023, of which the Company estimates to recognize approximately $15.2MM in revenue over the next 12 months and the remainder over an estimated 3 years thereafter. Actual revenue recognition depends in part on the timing of software modules installed at various customer sites. Accordingly, some factors that affect the Company’s revenue, such as the availability and demand for modules within customer geographic locations, is not entirely within the Company’s control. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, and not to facilitate financing arrangements.

 

Unearned Revenue

 

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

 

Practical Expedients and Exemptions

 

There are several practical expedients and exemptions allowed under Topic 606 that impact timing of revenue recognition and the Company’s disclosures. The Company has applied the following practical expedients:

 

● The Company does not evaluate a contract for a significant financing component if payment is expected within one year or less from the transfer of the promised items to the customer.

 

● The Company generally expenses sales commissions and sales agent fees when incurred when the amortization period would have been one year or less or the commissions are based on cashed received. These costs are recorded within sales and marketing expense in the Consolidated Statement of Operations.

 

● The Company does not disclose the value of unsatisfied performance obligations for contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed (applies to time-and-material engagements).

 

Costs to Obtain a Contract

 

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

 

Page 18

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(Unaudited)

 

NOTE 4 – EARNINGS PER SHARE

 

Basic earnings per share are computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. During the three and nine months ended March 31, 2023 and 2022, there were no 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; Namecet uses AED; 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 $47,192,994 and $39,363,085 as of March 31, 2023 and June 30, 2022, respectively. During the three and nine months ended March 31, 2023, comprehensive income (loss) in the consolidated statements of comprehensive income (loss) included a translation loss attributable to NetSol of $(5,181,654) and $(7,829,909), respectively. During the three and nine months ended March 31, 2022, comprehensive income (loss) in the consolidated statements of comprehensive income (loss) included a translation loss attributable to NetSol of $(1,804,777) and $(4,871,925), respectively.

 

NOTE 6 – MAJOR CUSTOMERS

 

During the nine months ended March 31, 2023, revenues from Daimler Financial Services (“DFS”) and BMW Financial (“BMW”) were $10,824,636, and $3,208,649, respectively representing 28.0% and 8.3%, respectively of revenues. During the nine months ended March 31, 2022, revenues from Daimler Financial Services (“DFS”) and BMW Financial (“BMW”) were $15,692,171 and $3,203,536, respectively representing 35.9% and 7.3%, respectively of revenues. The revenue from these customers is shown in the Asia – Pacific segment.

 

Accounts receivable from DFS and BMW at March 31, 2023, were $2,284,979 and $1,104,698, respectively. Accounts receivable at June 30, 2022, were $2,005,463 and $2,498,645, respectively. Revenues in excess of billings at March 31, 2023 were $2,016,970 and $2,002,579 for DFS and BMW, respectively. Revenues in excess of billings at June 30, 2022, were $365,863 and $2,199,381 for DFS and BMW, respectively.

 

NOTE 7 - OTHER CURRENT ASSETS

 

Other current assets consisted of the following:

 

   As of   As of 
   March 31, 2023   June 30, 2022 
         
Prepaid Expenses  $1,438,244   $1,389,370 
Advance Income Tax   218,352    202,783 
Employee Advances   64,454    87,627 
Security Deposits   241,160    236,909 
Other Receivables   188,157    21,581 
Other Assets   449,165    285,091 
Net Balance  $2,599,532   $2,223,361 

 

Page 19

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(Unaudited)

 

NOTE 8 – REVENUES IN EXCESS OF BILLINGS – LONG TERM

 

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

 

   As of   As of 
   March 31, 2023   June 30, 2022 
         
Revenues in excess of billings - long term  $        -   $881,940 
Present value discount   -    (28,339)
Net Balance  $-   $853,601 

 

Pursuant to revenue recognition for contract accounting, the Company had recorded revenues in excess of billings long-term for amounts billable after one year. During the three and nine months ended March 31, 2023, the Company accreted $9,372 and $28,029, respectively. During the three and nine months ended March 31, 2022, the Company accreted $9,546 and $28,587, respectively, which was recorded in interest income for that period. The Company used the discounted cash flow method with interest rates ranging from 4.65% to 6.25%.

 

NOTE 9 - PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

   As of   As of 
   March 31, 2023   June 30, 2022 
         
Office Furniture and Equipment  $2,671,137   $3,021,586 
Computer Equipment   9,023,276    11,388,856 
Assets Under Capital Leases   47,112    305,081 
Building   3,537,674    4,818,650 
Land   896,086    1,237,965 
Autos   1,920,072    2,503,990 
Improvements   212,431    175,560 
Subtotal   18,307,788    23,451,688 
Accumulated Depreciation   (11,436,752)   (14,069,064)
Property and Equipment, Net  $6,871,036   $9,382,624 

 

For the three and nine months ended March 31, 2023, depreciation expense totaled $507,314 and $1,598,325, respectively. Of these amounts, $327,177 and $1,029,012, respectively, are reflected in cost of revenues. For the three and nine months ended March 31, 2022, depreciation expense was $540,822 and $1,608,007, respectively. Of these amounts, $334,476 and $974,526, respectively, are reflected in cost of revenues.

 

Following is a summary of fixed assets held under finance leases as of March 31, 2023 and June 30, 2022:

 

   As of   As of 
   March 31, 2023   June 30, 2022 
Vehicles  $47,112   $305,081 
Total   47,112    305,081 
Less:  Accumulated Depreciation - Net   (15,218)   (145,658)
Fixed assets held under finance leases, Total  $31,894   $159,423 

 

Page 20

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(Unaudited)

 

Finance lease term and discount rate were as follows:

 

   As of   As of 
   March 31, 2023   June 30, 2022 
         
Weighted average remaining lease term - Finance leases   1.42 Years    2.39 Years 
           
Weighted average discount rate - Finance leases   16.4%   12.5%

 

NOTE 10 - LEASES

 

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

 

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

 

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

 

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

 

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

 

Page 21

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(Unaudited) 

 

Supplemental balance sheet information related to leases was as follows:

 

   As of   As of 
   March 31, 2023   June 30, 2022 
Assets          
Operating lease assets, net  $1,102,729   $969,163 
           
Liabilities          
Current          
Operating  $421,223   $548,678 
Non-current          
Operating   651,443    447,260 
Total Lease Liabilities  $1,072,666   $995,938 

 

The components of lease cost were as follows:

 

   2023   2022   2023   2022 
   For the Three Months   For the Nine Months 
   Ended March 31,   Ended March 31, 
   2023   2022   2023   2022 
                 
Amortization of finance lease assets  $7,706   $16,273   $13,701   $59,201 
Interest on finance lease obligation   1,043    5,632    4,402    13,780 
Operating lease cost   115,392    137,270    346,993    518,048 
Short term lease cost   39,356    128,008    143,978    166,789 
Sub lease income   (8,099)   (8,907)   (23,697)   (27,012)
Total lease cost  $155,398   $278,276   $485,377   $730,806 

 

Lease term and discount rate were as follows:

 

   As of   As of 
   March 31, 2023   June 30, 2022 
         
Weighted average remaining lease term - Operating leases   3.39 Years    3.34 Years 
           
Weighted average discount rate - Operating leases   3.3%   4.2%

 

 

Page 22

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(Unaudited)

 

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

 

   2023   2022 
   For the Nine Months 
   Ended March 31 
   2023   2022 
         
         
Operating cash flows related to operating leases  $358,778   $504,447 
           
Operating cash flows related to finance leases  $4,472   $3,553 
           
Financing cash flows related finance leases  $24,362   $55,399 

 

Maturities of operating lease liabilities were as follows as of March 31, 2023:

 

   Amount 
Within year 1  $450,939 
Within year 2   367,359 
Within year 3   213,770 
Within year 4   92,657 
Within year 5   465 
Thereafter   582 
Total Lease Payments   1,125,772 
Less: Imputed interest   (53,106)
Present Value of lease liabilities   1,072,666 
Less:  Current portion   (421,223)
Non-Current portion  $651,443 

 

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 nine months ended March 31, 2023, the Company received lease income of $8,099 and $23,697, respectively. For the three and nine months ended March 31, 2022, the Company received lease income of $8,907 and $27,012, respectively.

 

Page 23

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(Unaudited) 

 

NOTE 11 – 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 30% in Drivemate. Per the Drivemate Agreement, the Company purchased 5,469 preferred shares for $1,800,000 consisting of $500,000 cash to be paid over a two-year period and $1,300,000 to be provided in services. The Company has paid the $500,000 in cash and has provided services of $1,300,000. Pursuant to the agreement, the number of shares to be issued is adjusted as necessary to result in an equity ownership equal to 30% of the issued and outstanding shares at the final payment date. As of March 31, 2023, the Company has been issued 8,178 shares equal to 30% of Drivemate. Per the Drivemate Agreement, the Company appointed two directors to the Drivemate board. The Company determined that it met the significant influence criteria since two of the four directors are appointed by the Company and the Company owns 30% of Drivemate; therefore, the Company accounts for the investment using the equity method of accounting.

 

Under the equity method of accounting, the Company recorded its share of net income of $2,377 and $7,510 for the three and nine months ended March 31, 2023, respectively and the Company recorded its share of net income of $4,712 and net loss of $54,193 for the three and nine months ended March 31, 2022, respectively.

 

The following table reflects the above investments at March 31, 2023 and June 30, 2022.

 

   As of   As of 
   March 31, 2023   June 30, 2022 
Gross investment  $1,800,000   $1,800,000 
Cumulative net loss on investment   (733,122)   (740,632)
Net investment  $1,066,878   $1,059,368 

 

 

NOTE 12 - INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

 

   As of   As of 
   March 31, 2023   June 30, 2022 
         
Product Licenses - Cost  $47,244,997   $47,244,997 
Effect of Translation Adjustment   (24,664,606)   (19,914,206)
Accumulated Amortization   (22,198,513)   (25,743,121)
Net Balance  $381,878   $1,587,670 

 

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 $381,878 will be amortized over one year. Amortization expense for the three and nine months ended March 31, 2023, was $275,652 and $921,144, respectively. Amortization expense for the three and nine months ended March 31, 2022 was $407,111 and $1,261,664, respectively.

 

Page 24

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(Unaudited)

 

NOTE 13 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following:

 

   As of   As of 
   March 31, 2023   June 30, 2022 
         
Accounts Payable  $987,963   $1,175,527 
Accrued Liabilities   4,102,715    3,507,415 
Accrued Payroll   1,182,049    1,397,605 
Accrued Payroll Taxes   150,020    153,416 
Taxes Payable   325,586    328,755 
Other Payable   349,873    250,823 
Total  $7,098,206   $6,813,541 

 

NOTE 14 – DEBTS

 

Notes payable and finance leases consisted of the following:

 

    As of March 31, 2023 
           Current   Long-Term 
Name      Total   Maturities   Maturities 
                 
D&O Insurance   (1)  $179,887   $179,887   $- 
Bank Overdraft Facility   (2)   -    -    - 
Term Finance Facility   (3)   -    -    - 
Loan Payable Bank - Export Refinance   (4)   1,762,363    1,762,363    - 
Loan Payable Bank - Running Finance   (5)   -    -    - 
Loan Payable Bank - Export Refinance II   (6)   1,339,396    1,339,396    - 
Loan Payable Bank - Export Refinance III   (7)   2,467,308    2,467,308    - 
Sale and Leaseback Financing   (8)   358,939    149,396    209,543 
Term Finance Facility   (9)   17,773    17,773    - 
Insurance Financing   (10)   22,594    22,594    - 
         6,148,260    5,938,717    209,543 
Subsidiary Finance Leases   (11)   36,027    30,327    5,700 
        $6,184,287   $5,969,044   $215,243 

 

       As of June 30, 2022 
           Current   Long-Term 
Name      Total   Maturities   Maturities 
                 
D&O Insurance   (1)  $89,552   $89,552   $- 
Bank Overdraft Facility   (2)   -    -    - 
Term Finance Facility   (3)   423,101    423,101    - 
Loan Payable Bank - Export Refinance   (4)   2,434,749    2,434,749    - 
Loan Payable Bank - Running Finance   (5)   -    -    - 
Loan Payable Bank - Export Refinance II   (6)   1,850,409    1,850,409    - 
Loan Payable Bank - Export Refinance III   (7)   3,408,648    3,408,648    - 
Sale and Leaseback Financing   (8)   619,108    189,226    429,882 
Term Finance Facility   (9)   31,204    18,339    12,865 
Insurance Financing   (10)   118,026    118,026    - 
         8,974,797    8,532,050    442,747 
Subsidiary Finance Leases   (11)   68,571    35,095    33,476 
        $9,043,368   $8,567,145   $476,223 

 

(1)The Company finances Directors’ and Officers’ (“D&O”) liability insurance and Errors and Omissions (“E&O”) liability insurance, for which the D&O and E&O balances are renewed on an annual basis and, as such, are recorded in current maturities. The interest rate on these financings were ranging from 5.0% to 7.9% and 5.0% to 7.0% as of March 31, 2023 and June 30, 2022, respectively.

 

Page 25

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(Unaudited)

 

(2)The Company’s subsidiary, NTE, has an overdraft facility with HSBC Bank plc whereby the bank would cover any overdrafts up to £300,000, or approximately $370,370. The annual interest rate was 5.5% as of March 31, 2023. The total outstanding balance as of March 31, 2023 and June 30, 2022 was £Nil.

 

This overdraft facility requires that the aggregate amount of invoiced trade debtors (net of provisions for bad and doubtful debts and excluding intra-group debtors) of NTE, not exceeding 90 days old, will not be less than an amount equal to 200% of the facility. As of March 31, 2023, NTE was in compliance with this covenant.

 

(3) The Company’s subsidiary, NetSol PK, has a term finance facility from Askari Bank Limited, approved by the Government of Pakistan to protect the employment situation during the COVID-19 pandemic. This is a term loan payable in three years. The availed facility amount was Rs. nil or $nil, at March 31, 2023. The availed facility amount is Rs. 86,887,974 or $423,101, at June 30, 2022, which is shown as current. The interest rate for the loan was 3.0% at March 31, 2023 and June 30, 2022.

 

(4) The Company’s subsidiary, NetSol PK, has an export refinance facility with Askari Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every nine months. The total facility amount is Rs. 500,000,000 or $1,762,363 at March 31, 2023 and Rs. 500,000,000 or $2,434,749 at June 30, 2022. The interest rate for the loan was 17.0% and 3.0% at March 31, 2023 and June 30, 2022, respectively.

 

(5) The Company’s subsidiary, NetSol PK, has a running finance facility with Askari Bank Limited, secured by NetSol PK’s assets. The total facility amount is Rs. 53,000,000 or $188,925, at March 31, 2023. The balance outstanding at March 31, 2023 and June 30, 2022 was Rs. Nil. The interest rate for the loan was 24.0% and 14.0% at March 31, 2023 and June 30, 2022, respectively.
   
 

This facility requires NetSol PK to maintain a long-term debt equity ratio of 60:40 and a current ratio of 1:1. As of March 31, 2023, NetSol PK was in compliance with this covenant.

 

(6) The Company’s subsidiary, NetSol PK, has an export refinance facility with Samba Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every nine months. The total facility amount is Rs. 380,000,000 or $1,339,936 and Rs. 380,000,000 or $1,850,409 at March 31, 2023 and June 30, 2022, respectively. The interest rate for the loan was 10.0% and 3.0% at March 31, 2023 and June 30, 2022, respectively.
   
 

During the tenure of the loan, the facilities from Samba Bank Limited require NetSol PK to maintain at a minimum a current ratio of 1:1, an interest coverage ratio of 4 times, a leverage ratio of 2 times, and a debt service coverage ratio of 4 times. As of March 31, 2023, NetSol PK was in compliance with these covenants.

 

(7) The Company’s subsidiary, NetSol PK, has an export refinance facility with Habib Metro Bank Limited, secured by NetSol PK’s assets. This is a revolving loan that matures every nine months. The total facility amount is Rs. 900,000,000 or $3,172,253 and Rs. 900,000,000 or $4,382,548, at March 31, 2023 and June 30, 2022, respectively. NetSol PK used Rs. 700,000,000 or $2,467,308 and Rs. 700,000,000 or $3,408,648, at March 31, 2023 and June 30, 2022, respectively. The interest rate for the loan was 10.0% and 3.0% at March 31, 2023 and June 30, 2022, respectively.

 

(8) The Company’s subsidiary, NetSol PK, availed sale and leaseback financing from First Habib Modaraba secured by the transfer of the vehicles’ title. As of March 31, 2023, NetSol PK used Rs. 101,834,660 or $358,939 of which $209,543 was shown as long term and $149,396 as current. As of June 30, 2022, NetSol PK used Rs. 127,140,038 or $619,108 of which $429,882 was shown as long term and $189,226 as current. The interest rate for the loan was 9.0% to 16.0% at March 31, 2023, and June 30, 2022.

 

Page 26

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(Unaudited)

 

(9) In March 2019, the Company’s subsidiary, VLS, entered into a loan agreement. The loan amount was £69,549, or $85,863, for a period of 5 years with monthly payments of £1,349, or $1,665. As of March 31, 2023, the subsidiary has used this facility up to $17,773, which was shown as current. As of June 30, 2022, the subsidiary has used this facility up to $31,204, of which $12,865 was shown as long-term and $18,339 as current. The interest rate was 6.14% at March 31, 2023 and June 30, 2022.

 

(10) The Company’s subsidiary, VLS, finances Directors’ and Officers’ (“D&O”) liability insurance, and the $22,594 and $118,026 was recorded in current maturities, at March 31, 2023 and June 30, 2022, respectively. The interest rate on this financing ranged from 9.7% to 12.7% as of March 31, 2023 and June 30, 2022.

 

(11) The Company leases various fixed assets under finance lease arrangements expiring in various years through 2025. The assets and liabilities under finance leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are secured by the assets themselves. Depreciation of assets under finance leases is included in depreciation expense for the three and nine months ended March 31, 2023 and 2022.

 

Following are the aggregate minimum future lease payments under finance leases as of March 31, 2023:

 

   Amount 
Minimum Lease Payments     
Within year 1  $33,135 
Within year 2   6,052 
Total Minimum Lease Payments   39,187 
Interest Expense relating to future periods   (3,160)
Present Value of minimum lease payments   36,027 
Less: Current portion   (30,327)
Current portion of loans and obligations under finance leases     
Non-Current portion  $5,700 
Loans and obligations under finance leases; less current maturities     

 

Following are the aggregate future long term debt payments as of March 31, 2023

 

   Amount 
Loan Payments     
Within year 1  $167,169 
Within year 2   156,040 
Within year 3   53,503 
Total Loan Payments   376,712 
Less: Current portion   (167,169)
Non-Current portion  $209,543 

 

Page 27

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(Unaudited)

 

NOTE 15 - STOCKHOLDERS’ EQUITY

 

During the three and nine months ended March 31, 2023, the Company issued 15,057 and 41,472 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 $39,750 and $119,250, respectively.

 

NOTE 16 – 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 17 – OPERATING SEGMENTS

 

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

 

The following table presents a summary of identifiable assets as of March 31, 2023 and June 30, 2022:

 

   As of   As of 
   March 31, 2023   June 30, 2022 
Identifiable assets:          
Corporate headquarters  $1,633,771   $844,178 
North America   6,332,955    6,442,219 
Europe   8,351,282    8,727,530 
Asia - Pacific   43,231,859    56,594,705 
Consolidated  $59,549,867   $72,608,632 

 

The following table presents a summary of investment under equity method as of March 31, 2023 and June 30, 2022:

 

   As of   As of 
   March 31, 2023   June 30, 2022 
Investment in associates under equity method:          
Asia - Pacific  $1,066,878   $1,059,368 
Consolidated  $1,066,878   $1,059,368 

 

Page 28

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2023

(Unaudited)

 

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

 

   For the Three Months   For the Nine Months 
   Ended March 31,   Ended March 31, 
   2023   2022   2023   2022 
Revenues from unaffiliated customers:                    
North America  $1,365,556   $1,113,820   $4,088,696   $3,104,433 
Europe   2,550,372    2,088,918    7,643,408    7,483,911 
Asia - Pacific   9,590,461    11,607,088    26,870,762    33,115,205 
    13,506,389    14,809,826    38,602,866    43,703,549 
Revenue from affiliated customers                    
Asia - Pacific   -    -    -    - 
    -    -    -    - 
Consolidated  $13,506,389   $14,809,826   $