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NETSOL TECHNOLOGIES INC - Quarter Report: 2022 September (Form 10-Q)

 

 

 

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 September 30, 2022

 

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)    

 

23975 Park Sorrento, Suite 250, Calabasas, CA 91302
(Address of principal executive offices) (Zip Code)

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

 

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

 

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

 

Indicate by check mark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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 12,209,230 shares issued and 11,270,199 outstanding of its $.01 par value Common Stock and no Preferred Stock outstanding as of November 6, 2022.

 

 

 

 

 

  

NETSOL TECHNOLOGIES, INC.

 

  Page No.
PART I. FINANCIAL INFORMATION  
Item 1. Financial Statements (Unaudited)  
Condensed Consolidated Balance Sheets as of September 30, 2022 and June 30, 2022 3
Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2022 and 2021 4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended September 30, 2022 and 2021 5
Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended September 30, 2022 and 2021 6
Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2022 and 2021 7
Notes to the Condensed Consolidated Financial Statements 9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
Item 3. Quantitative and Qualitative Disclosures about Market Risk 36
Item 4. Controls and Procedures 36
   
PART II. OTHER INFORMATION 37
Item 1. Legal Proceedings 37
Item 1A Risk Factors 37
Item 2. Unregistered Sales of Equity and Use of Proceeds 37
Item 3. Defaults Upon Senior Securities 37
Item 4. Mine Safety Disclosures 37
Item 5. Other Information 37
Item 6. Exhibits 37

 

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 
   September 30, 2022   June 30, 2022 
ASSETS          
Current assets:          
Cash and cash equivalents  $20,922,948   $23,963,797 
Accounts receivable, net of allowance of $153,580 and $166,231   7,319,856    8,669,202 
Revenues in excess of billings, net of allowance of $77,525 and $136,976   13,347,524    14,571,776 
Other current assets, net of allowance of $1,243,633 and $1,243,633   2,480,415    2,223,361 
Total current assets   44,070,743    49,428,136 
Revenues in excess of billings, net - long term   714,458    853,601 
Convertible note receivable - related party, net of allowance of $4,250,000 and $4,250,000   -    - 
Property and equipment, net   8,850,651    9,382,624 
Right of use of assets - operating leases   1,336,742    969,163 
Long term investment   1,059,368    1,059,368 
Other assets   529    25,546 
Intangible assets, net   1,110,617    1,587,670 
Goodwill   9,302,524    9,302,524 
Total assets  $66,445,632   $72,608,632 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable and accrued expenses  $7,029,527   $6,813,541 
Current portion of loans and obligations under finance leases   7,426,972    8,567,145 
Current portion of operating lease obligations   531,021    548,678 
Unearned revenue   3,982,198    4,901,562 
Total current liabilities   18,969,718    20,830,926 
Loans and obligations under finance leases; less current maturities   292,456    476,223 
Operating lease obligations; less current maturities   836,891    447,260 
Total liabilities   20,099,065    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; 12,209,230 shares issued and 11,270,199 outstanding as of September 30, 2022 and 12,196,570 shares issued and 11,257,539 outstanding as of June 30, 2022   122,093    121,966 
Additional paid-in-capital   128,420,519    128,218,247 
Treasury stock (at cost, 939,031 shares as of September 30, 2022 and June 30, 2022)   (3,920,856)   (3,920,856)
Accumulated deficit   (40,273,167)   (39,652,438)
Other comprehensive loss   (42,281,135)   (39,363,085)
Total NetSol stockholders’ equity   42,067,454    45,403,834 
Non-controlling interest   4,279,113    5,450,389 
Total stockholders’ equity   46,346,567    50,854,223 
Total liabilities and stockholders’ equity  $66,445,632   $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)

 

   2022   2021 
   For the Three Months 
   Ended September 30, 
   2022   2021 
Net Revenues:          
License fees  $249,960   $10,716 
Subscription and support   6,016,834    6,230,389 
Services   6,439,325    7,179,656 
Total net revenues   12,706,119    13,420,761 
           
Cost of revenues:          
Salaries and consultants   6,086,735    5,662,410 
Travel   392,345    214,132 
Depreciation and amortization   654,049    765,735 
Other   1,320,993    1,335,461 
Total cost of revenues   8,454,122    7,977,738 
           
Gross profit   4,251,997    5,443,023 
           
Operating expenses:          
Selling and marketing   1,762,177    1,619,993 
Depreciation and amortization   190,954    214,271 
General and administrative   3,725,430    3,973,139 
Research and development cost   469,627    275,230 
Total operating expenses   6,148,188    6,082,633 
           
Loss from operations   (1,896,191)   (639,610)
           
Other income and (expenses)          
Gain (loss) on sale of assets   23,296    (110,600)
Interest expense   (121,610)   (101,013)
Interest income   431,857    443,133 
Gain on foreign currency exchange transactions   1,315,705    1,284,148 
Share of net loss from equity investment   -    (160,965)
Other income (expense)   2,320    3,029 
Total other income (expenses)   1,651,568    1,357,732 
           
Net income (loss) before income taxes   (244,623)   718,122 
Income tax provision   (193,348)   (167,627)
Net income (loss)   (437,971)   550,495 
Non-controlling interest   (182,758)   (362,526)
Net income (loss) attributable to NetSol  $(620,729)  $187,969 
           
Net income (loss) per share:          
Net income (loss) per common share          
Basic  $(0.06)  $0.02 
Diluted  $(0.06)  $0.02 
           
Weighted average number of shares outstanding          
Basic   11,257,539    11,254,205 
Diluted   11,257,539    11,254,205 

 

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)

 

   2022   2021 
   For the Three Months 
   Ended September 30, 
   2022   2021 
Net income (loss)  $(620,729)  $187,969 
Other comprehensive income (loss):          
Translation adjustment   (4,151,519)   (3,284,396)
Translation adjustment attributable to non-controlling interest   1,233,469    1,138,991 
Net translation adjustment   (2,918,050)   (2,145,405)
Comprehensive income (loss) attributable to NetSol  $(3,538,779)  $(1,957,436)

 

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

 

Page 5

 

 

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

 

A statement of the changes in equity for the three months ended September 30, 2022 is provided below:

 

   Shares   Amount   Capital   Shares   Deficit   Loss   Interest   Equity 
   Common Stock   Additional Paid-in   Treasury   Accumulated   Other Compre- hensive   Non Controlling   Total 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 September 30, 2021 is provided below:

 

   Common Stock   Additional Paid-in   Treasury   Accumulated   Other Compre- hensive   Non Controlling   Total 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 6

 

 

NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)

 

   2022   2021 
   For the Three Months 
   Ended September 30, 
   2022   2021 
Cash flows from operating activities:          
Net income (loss)  $(437,971)  $550,495 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:          
Depreciation and amortization   845,003    980,006 
Provision for bad debts   (47,479)   (45,274)
Share of net loss from investment under equity method   -    160,965 
(Gain) loss on sale of assets   (23,296)   110,600 
Stock based compensation   81,834    3,003 
Changes in operating assets and liabilities:          
Accounts receivable   815,132    (2,034,434)
Revenues in excess of billing   337,996    (1,952,228)
Other current assets   (340,390)   (35,342)
Accounts payable and accrued expenses   687,453    (43,293)
Unearned revenue   (619,425)   (1,086,151)
Net cash provided by (used in) operating activities   1,298,857    (3,391,653)
             
Cash flows from investing activities:          
Purchases of property and equipment   (1,347,601)   (216,112)
Sales of property and equipment   453,607    19,705 
Net cash used in investing activities   (893,994)   (196,407)
             
Cash flows from financing activities:          
Purchase of treasury stock   -    (100,106)
Payments on finance lease obligations and loans - net   (445,737)   (363,464)
Net cash used in financing activities   (445,737)   (463,570)
Effect of exchange rate changes   (2,999,975)   (2,653,648)
Net decrease in cash and cash equivalents   (3,040,849)   (6,705,278)
Cash and cash equivalents at beginning of the period   23,963,797    33,705,154 
Cash and cash equivalents at end of period  $20,922,948   $26,999,876 

 

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

 

Page 7

 

 

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

 

   For the Three Months 
   Ended September 30, 
   2022   2021 
SUPPLEMENTAL DISCLOSURES:          
Cash paid during the period for:          
Interest  $94,942   $191,835 
Taxes  $172,064   $155,098 

 

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

 

Page 8

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 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”)

 

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.

 

Page 9

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2022

(Unaudited)

 

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 ($70,323) in each bank and in the UK for GBP 85,000 ($94,444) in each bank. The Company maintains three bank accounts in China and nine bank accounts in the UK. As of September 30, 2022, and June 30, 2022, the Company had uninsured deposits related to cash deposits in accounts maintained within foreign entities of approximately $18,393,548 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.

 

The Company’s financial assets that were measured at fair value on a recurring basis as of September 30, 2022, were as follows:

 

   Level 1   Level 2   Level 3   Total Assets 
Revenues in excess of billings - long term  $    -   $     -   $714,458   $714,458 
Total  $-   $-   $714,458   $714,458 

 

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 

 

Page 10

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2022

(Unaudited)

 

The reconciliation from June 30, 2022 to September 30, 2022 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   -    9,369    9,369 
Transfers to short term   (93,245)   -    (93,245)
Effect of Translation Adjustment   (55,581)   314    (55,267)
Balance at September 30, 2022  $733,114   $(18,656)  $714,458 

 

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 August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”). ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock and results in fewer instruments with embedded conversion features being separately recognized from the host contract as compared with current standards. Those instruments that do not have a separately recognized embedded conversion feature will no longer recognize a debt issuance discount related to such a conversion feature and would recognize less interest expense on a periodic basis. Additionally, the ASU amends the calculation of the share dilution impact related to a conversion feature and eliminates the treasury method as an option. For instruments that do not have a component mandatorily settled in cash, the change will likely result in a higher amount of share dilution in the calculation of earnings per share. This ASU is effective for fiscal years (and interim periods within those fiscal years) beginning after December 15, 2021, which for the Company is the first quarter of fiscal 2023. The adoption of ASU No. 2020-06 did not have a material impact on the Company’s financial condition, results of operations or disclosures.

 

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.

 

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.

 

Page 11

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2022

(Unaudited)

 

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.

 

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.

 

Page 12

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2022

(Unaudited)

 

BPO and Internet Services

 

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

 

Disaggregated Revenue

 

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

 

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

 

    1    2 
   For the Three Months 
   Ended September 30, 
   2022   2021 
Core:          
License  $249,960   $10,716 
Subscription and support   6,016,834    6,230,389 
Services   5,421,366    5,856,279 
Total core revenue, net   11,688,160    12,097,384 
           
Non-Core:          
Services   1,017,959    1,323,377 
Total non-core revenue, net   1,017,959    1,323,377 
           
Total net revenue  $12,706,119   $13,420,761 

 

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 13

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 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:

 

    1    2 
   As of   As of 
   September 30, 2022   June 30, 2022 
           
Revenues in excess of billings  $14,061,982   $15,425,377 
           
Unearned revenue  $3,982,198   $4,901,562 

 

During the three months ended September 30, 2022, the Company recognized revenue of $2,108,715 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.

 

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 $38,252,000 as of September 30, 2022, of which the Company estimates to recognize approximately $15,400,000 in revenue over the next 12 months and the remainder over an estimated 5 years thereafter. Actual revenue recognition depends in part on the timing of software modules installed at various customer sites. Accordingly, some factors that affect the Company’s revenue, such as the availability and demand for modules within customer geographic locations, is not entirely within the Company’s control. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, and not to facilitate financing arrangements.

 

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.

 

Page 14

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2022

(Unaudited)

 

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.

 

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 months ended September 30, 2022 and 2021, 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 and NetSol 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 subsidiary, NTA, use the U.S. dollar as the functional currency. Assets and liabilities are translated at the exchange rate on the balance sheet date, and operating results are translated at the average exchange rate throughout the period. Accumulated translation losses classified as an item of accumulated other comprehensive loss in the stockholders’ equity section of the consolidated balance sheet were $42,281,135 and $39,363,085 as of September 30, 2022 and June 30, 2022, respectively. During the three months ended September 30, 2022 and 2021, comprehensive income (loss) in the consolidated statements of comprehensive income (loss) included a translation loss attributable to NetSol of $2,918,050 and $2,145,405, respectively.

 

NOTE 6 – MAJOR CUSTOMERS

 

During the three months ended September 30, 2022, revenues from Daimler Financial Services (“DFS”) and BMW Financial (“BMW”) were $3,591,807 and $1,469,147, respectively representing 28.3% and 11.6%, respectively of revenues. During the three months ended September 30, 2021, revenues from DFS and BMW were $3,542,284 and $891,679, respectively representing 26.4% and 6.6%, respectively of revenues. The revenue from these customers is shown in the Asia – Pacific segment.

 

Accounts receivable from DFS and BMW at September 30, 2022, were $600,925 and $132,392, respectively. Accounts receivable at June 30, 2022, were $2,005,463 and $2,498,645, respectively. Revenues in excess of billings at September 30, 2022 were $1,804,728 and $2,533,172 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.

 

Page 15

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2022

(Unaudited)

 

NOTE 7 – CONVERTIBLE NOTES RECEIVABLE – RELATED PARTY

 

The Company has entered into multiple convertible note receivable agreements with WRLD3D. The convertible notes bear interest ranging from 5% to 10% with various maturity dates. The convertible notes have conversion features which allow the Company to convert the notes into shares of WRLD3D stock upon the occurrence of certain events. The Company has a security interest in all of WRLD3D’s personal property, inventory, equipment, general intangibles, financial assets, investment property, securities, deposit accounts and the proceeds thereof.

 

The following table summarizes the convertible notes receivable from WRLD3D.

 

          Convertible     
Agreement  Interest   Maturity  Note   Accrued 
Date  Rate   Date  Amount   Interest 
May 25, 2017   5%  March 2, 2018  $750,000   $110,202 
February 9, 2018   10%  March 31, 2019   2,500,000    500,773 
April 1, 2019   10%  March 31, 2020   600,000    57,648 
August 19, 2019   10%  March 31, 2020   400,000    32,439 
            4,250,000    701,062 
Less allowance for doubtful account        (4,250,000)   (701,062)
Net Balance          $-   $- 

 

The Company has accrued interest of $701,062 at September 30, 2022 and June 30, 2022, which is included in “Other current assets”. As of July 1, 2020, the Company stopped accruing interest.

 

NOTE 8 - OTHER CURRENT ASSETS

 

Other current assets consisted of the following:

 

   As of   As of 
   September 30, 2022   June 30, 2022 
         
Prepaid Expenses  $1,356,902   $1,389,370 
Advance Income Tax   199,320    202,783 
Employee Advances   90,550    87,627 
Security Deposits   331,301    236,909 
Other Receivables   61,614    21,581 
Other Assets   440,728    285,091 
Due From Related Party   1,243,633    1,243,633 
Total   3,724,048    3,466,994 
Less allowance for doubtful account   (1,243,633)   (1,243,633)
Net Balance  $2,480,415   $2,223,361 

 

 

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 $0.

 

NOTE 9 – REVENUES IN EXCESS OF BILLINGS – LONG TERM

 

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

 

   As of   As of 
   September 30, 2022   June 30, 2022 
         
Revenues in excess of billings - long term  $733,114   $881,940 
Present value discount   (18,656)   (28,339)
Net Balance  $714,458   $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 months ended September 30, 2022 and 2021, the Company accreted $9,369 and $9,502, 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%.

 

Page 16

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2022

(Unaudited)

 

NOTE 10 - PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

   As of   As of 
   September 30, 2022   June 30, 2022 
         
Office Furniture and Equipment  $2,792,403   $3,021,586 
Computer Equipment   11,147,529    11,388,856 
Assets Under Capital Leases   58,616    305,081 
Building   4,357,506    4,818,650 
Land   1,114,891    1,237,965 
Autos   2,411,407    2,503,990 
Improvements   215,538    175,560 
Subtotal   22,097,890    23,451,688 
Accumulated Depreciation   (13,247,239)   (14,069,064)
Property and Equipment, Net  $8,850,651   $9,382,624 

 

For the three months ended September 30, 2022 and 2021, depreciation expense totaled $522,183 and $539,722, respectively. Of these amounts, $331,229 and $325,451, respectively, are reflected in cost of revenues.

 

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

 

   As of   As of 
   September 30, 2022   June 30, 2022 
Vehicles  $58,616   $305,081 
Total   58,616    305,081 
Less: Accumulated Depreciation - Net   (13,073)   (145,658)
Fixed assets held under finance leases, Total  $45,543   $159,423 

 

Finance lease term and discount rate were as follows:

 

   As of   As of 
   September 30, 2022   June 30, 2022 
         
Weighted average remaining lease term - Finance leases   2.55 Years    2.39 Years 
           
Weighted average discount rate - Finance leases   16.0%   12.5%

 

NOTE 11 - LEASES

 

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

 

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

 

Page 17

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2022

(Unaudited)

 

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

 

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

 

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

 

Supplemental balance sheet information related to leases was as follows:

 

   As of   As of 
   September 30, 2022   June 30, 2022 
Assets          
Operating lease assets, net  $1,336,742   $969,163 
           
Liabilities          
Current          
Operating  $531,021   $548,678 
Non-current          
Operating   836,891    447,260 
Total Lease Liabilities  $1,367,912   $995,938 

 

The components of lease cost were as follows:

 

    1    2 
   For the Three Months 
   Ended September 30, 
   2022   2021 
         
Amortization of finance lease assets  $2,896   $21,033 
Interest on finance lease obligation   1,807    4,936 
Operating lease cost   118,522    282,951 
Short term lease cost   66,636    - 
Sub lease income   (7,812)   (9,155)
Total lease cost  $182,049   $299,765 

 

Lease term and discount rate were as follows:

 

   As of   As of 
   September 30, 2022   June 30, 2022 
         
Weighted average remaining lease term - Operating leases   3.32 Years    3.34 Years 
           
Weighted average discount rate - Operating leases   3.9%   4.2%

 

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

 

    1    2 
   For the Three Months 
   Ended September 30 
   2022   2021 
         
Operating cash flows related to operating leases  $122,121   $272,478 
           
Operating cash flows related to finance leases  $1,807   $3,502 
           
Financing cash flows related finance leases  $3,679   $48,908 

 

Page 18

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2022

(Unaudited)

 

Maturities of operating lease liabilities were as follows as of September 30, 2022:

 

   Amount 
Within year 1  $569,691 
Within year 2   381,217 
Within year 3   323,713 
Within year 4   138,102 
Within year 5   28,237 
Thereafter   1,013 
Total Lease Payments   1,441,973 
Less: Imputed interest   (74,061)
Present Value of lease liabilities   1,367,912 
Less: Current portion   (531,021)
Non-Current portion  $836,891 

 

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 months ended September 30, 2022 and 2021, the Company received lease income of $7,812 and $9,155, respectively.

 

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 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 September 30, 2022, 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 loss of $nil and $63,571 for the three months ended September 30, 2022 and 2021, respectively.

 

WRLD3D-Related Party

 

On March 2, 2017, the Company purchased a 4.9% interest in WRLD3D, a non-public company, for $1,111,111. The Company paid $555,556 at the initial closing and $555,555 on September 1, 2017. NetSol PK, the subsidiary of the Company, purchased a 12.2% investment in WRLD3D, for $2,777,778 which was earned by providing IT and enterprise software solutions.

 

Under the equity method of accounting, the Company recorded its share of net loss of $nil and $97,394 for the three months ended September 30, 2022 and 2021, respectively.

 

The following table reflects the above investments at September 30, 2022.

 

   Drivemate   WRLD3D   Total 
Gross investment  $1,800,000   $3,888,889   $5,688,889 
Cumulative net loss on investment   (740,632)   (3,238,647)   (3,979,279)
Cumulative other comprehensive income (loss)   -    (650,242)   (650,242)
Net investment  $1,059,368   $-   $1,059,368 

 

Page 19

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2022

(Unaudited)

 

The following table reflects the above investments at June 30, 2022.

 

   Drivemate   WRLD3D   Total 
Gross investment  $1,800,000   $3,888,889   $5,688,889 
Cumulative net loss on investment   (740,632)   (3,238,647)   (3,979,279)
Cumulative other comprehensive income (loss)   -    (650,242)   (650,242)
Net investment  $1,059,368   $-   $1,059,368 

  

NOTE 13 - INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

 

   As of   As of 
   September 30, 2022   June 30, 2022 
         
Product Licenses - Cost  $47,244,997   $47,244,997 
Effect of Translation Adjustment   (21,828,001)   (19,914,206)
Accumulated Amortization   (24,306,379)   (25,743,121)
Net Balance  $1,110,617   $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 $1,110,617 will be amortized over one year. Amortization expense for the three months ended September 30, 2022 and 2021 was $322,820 and $440,284, respectively.

 

NOTE 14 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following:

 

   As of   As of 
   September 30, 2022   June 30, 2022 
         
Accounts Payable  $1,192,101   $1,175,527 
Accrued Liabilities   3,559,319    3,507,415 
Accrued Payroll   1,462,209    1,397,605 
Accrued Payroll Taxes   143,409    153,416 
Taxes Payable   398,392    328,755 
Other Payable   274,097    250,823 
Total  $7,029,527   $6,813,541 

 

Page 20

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2022

(Unaudited)

 

NOTE 15 – DEBTS

 

Notes payable and finance leases consisted of the following:

 

      As of September 30, 2022 
          Current   Long-Term 
Name     Total   Maturities   Maturities 
                
D&O Insurance  (1)  $34,344   $34,344   $- 
Bank Overdraft Facility  (2)   -    -    - 
Term Finance Facility  (3)   190,425    190,425    - 
Loan Payable Bank - Export Refinance  (4)   2,192,694    2,192,694    - 
Loan Payable Bank - Running Finance  (5)   -    -    - 
Loan Payable Bank - Export Refinance II  (6)   1,666,447    1,666,447    - 
Loan Payable Bank - Export Refinance III  (7)   3,069,772    3,069,772    - 
Sale and Leaseback Financing  (8)   407,166    144,372    262,794 
Term Finance Facility  (9)   24,348    16,966    7,382 
Insurance Financing  (10)   79,234    79,234    - 
       7,664,430    7,394,254    270,176 
Subsidiary Finance Leases  (11)   54,998    32,718    22,280 
      $7,719,428   $7,426,972   $292,456 

 

      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 7.0% as of September 30, 2022 and June 30, 2022.

 

(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 $333,333. The annual interest rate was 5.5% as of September 30, 2022. The total outstanding balance as of September 30, 2022 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 September 30, 2022, NTE was in compliance with this covenant.

 

Page 21

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2022

(Unaudited)

 

(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. 43,422,699 or $190,425, at September 30, 2022, which is shown as current. 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% at September 30, 2022 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 $2,192,694 at September 30, 2022 and Rs. 500,000,000 or $2,434,749 at June 30, 2022. The interest rate for the loan was 10% and 3% at September 30, 2022 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 $235,057, at September 30, 2022. The balance outstanding at September 30, 2022 and June 30, 2022 was Rs. Nil. The interest rate for the loan was 17.8% and 14.0% at September 30, 2022 and June 30, 2022, respectively.

 

This facility requires NetSol PK to maintain a long-term debt equity ratio of 60:40 and the current ratio of 1:1. As of September 30, 2022, 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 $1,666,447 and Rs. 380,000,000 or $1,850,409 at September 30, 2022 and June 30, 2022, respectively. The interest rate for the loan was 10% and 3% at September 30, 2022 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 September 30, 2022, 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 $3,946,849 and Rs. 900,000,000 or $4,382,548, at September 30, 2022 and June 30, 2022, respectively. NetSol PK used Rs. 700,000,000 or $3,069,772 and Rs. 700,000,000 or $3,408,648, at September 30, 2022 and June 30, 2022, respectively. The interest rate for the loan was 10% and 3% at September 30, 2022 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 September 30, 2022, NetSol PK used Rs. 92,846,015 or $407,166 of which $262,794 was shown as long term and $144,372 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 September 30, 2022, and June 30, 2022.

 

(9)In March 2019, the Company’s subsidiary, VLS, entered into a loan agreement. The loan amount was £69,549, or $77,277, for a period of 5 years with monthly payments of £1,349, or $1,499. As of September 30, 2022, the subsidiary has used this facility up to $24,348, of which $7,382 was shown as long-term and $16,966 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 September 30, 2022 and June 30, 2022.

 

(10)The Company’s subsidiary, VLS, finances Directors’ and Officers’ (“D&O”) liability insurance, and the $79,234 and $96,781 was recorded in current maturities, at September 30, 2022 and June 30, 2022, respectively. The interest rate on this financing ranged from 9.7% to 12.7% as of September 30, 2022 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 months ended September 30, 2022 and 2021.

 

Page 22

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2022

(Unaudited)

 

Following is the aggregate minimum future lease payments under finance leases as of September 30, 2022:

 

   Amount 
Minimum Lease Payments     
Within year 1  $37,312 
Within year 2   22,390 
Within year 3   1,058 
Total Minimum Lease Payments   60,760 
Interest Expense relating to future periods   (5,762)
Present Value of minimum lease payments   54,998 
Less: Current portion   (32,718)
Current portion of loans and obligations under finance leases     
Non-Current portion  $22,280 
Loans and obligations under finance leases; less current maturities     

 

Following is the aggregate future long term debt payments as of September 30, 2022

 

   Amount 
Loan Payments     
Within year 1  $351,765 
Within year 2   164,169 
Within year 3   106,005 
Total Loan Payments   621,939 
Less: Current portion   (351,763)
Non-Current portion  $270,176 

 

NOTE 16 - STOCKHOLDERS’ EQUITY

 

During the three months ended September 30, 2022, the Company issued 12,660 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.

 

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

 

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

 

   As of   As of 
   September 30, 2022   June 30, 2022 
Identifiable assets:          
Corporate headquarters  $1,758,935   $844,178 
North America   6,548,741    6,442,219 
Europe   8,354,174    8,727,530 
Asia - Pacific   49,783,782    56,594,705 
Consolidated  $66,445,632   $72,608,632 

 

Page 23

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2022

(Unaudited)

 

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

 

   As of   As of 
   September 30, 2022   June 30, 2022 
Investment in associates under equity method:          
Corporate headquarters  $-   $- 
Asia - Pacific   1,059,368    1,059,368 
Consolidated  $1,059,368   $1,059,368 

 

The following table presents a summary of operating information for the three months ended September 30:

 

   For the Three Months 
   Ended September 30, 
   2022   2021 
Revenues from unaffiliated customers:          
North America  $1,125,288   $930,234 
Europe   2,247,335    3,272,899 
Asia - Pacific   9,333,496    9,217,628 
    12,706,119    13,420,761 
Revenue from affiliated customers          
Asia - Pacific   -    - 
    -    - 
Consolidated  $12,706,119   $13,420,761 
           
Intercompany revenue          
Europe  $95,725   $127,198 
Asia - Pacific   1,729,953    2,560,100 
Eliminated  $1,825,678   $2,687,298 
           
Net income (loss) after taxes and before non-controlling interest:          
Corporate headquarters  $1,327,200   $128,544 
North America   (18,947)   (68,093)
Europe   (319,755)   191,443 
Asia - Pacific   (1,426,469)   298,601 
Consolidated  $(437,971)  $550,495 
           
Depreciation and amortization:          
North America  $482   $566 
Europe   75,171    98,848 
Asia - Pacific   769,350    880,592 
Consolidated  $845,003   $980,006 
           
Interest expense:          
Corporate headquarters  $2,480   $10,441 
North America   -    - 
Europe   3,638    3,796 
Asia - Pacific   115,492    86,776 
Consolidated  $121,610   $101,013 
           
Income tax expense:          
Corporate headquarters  $-   $800 
North America   -    1,600 
Europe   -    - 
Asia - Pacific   193,348    165,227 
Consolidated  $193,348   $167,627 

 

Page 24

 

 

NETSOL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2022

(Unaudited)

 

The following table presents a summary of capital expenditures for the three months ended September 30:

 

   For the Three Months 
   Ended September 30, 
   2022   2021 
Capital expenditures:          
North America  $1,133   $- 
Europe   -    54,380 
Asia - Pacific   1,346,468    161,732 
Consolidated  $1,347,601   $216,112 

 

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
September 30, 2022
 
         
NetSol PK   32.38%  $4,474,385 
NetSol-Innovation   32.38%   (10,332)
NetSol Thai   0.006%   (184)
OTOZ Thai   10.95%   (19,803)
OTOZ   10.94%   (164,953)
Total       $4,279,113 

 

SUBSIDIARY  Non-Controlling Interest %   Non-Controlling Interest at
June 30, 2022
 
         
NetSol PK   32.38%  $5,479,905 
NetSol-Innovation   32.38%   49,146 
NetSol Thai   0.006%   (196)
OTOZ Thai   5.60%   (30,768)
OTOZ   5.59%   (47,698)
Total       $5,450,389 

 

The Company’s subsidiary, OTOZ, issued 191,011 shares to one of its employees as part of their employment agreement resulting in an increase of non-controlling interest from 5.59% to 10.94%. The effective shareholding of the non-controlling interest for OTOZ Thai increased to 10.95%.

 

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.

 

    1    2 
   For the Three Months 
   Ended September 30, 
   2022   2021 
         
 Net income (loss) attributable to NetSol  $(620,729)  $187,969 
Transfer (to) from non-controlling interest          
Increase in paid-in capital for issuance of 191,011 shares of OTOZ Inc. common stock   120,565    - 
Net transfer (to) from non-controlling interest   120,565    - 
 Change from net income (loss) attributable to NetSol and transfer (to) from non-controlling interest  $(500,164)  $187,969 

 

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 months ended September 30, 2022 and 2021, the Company recorded an income tax provision of $193,348 and $167,627, respectively. The tax is derived from non-core business activities generated from Netsol PK.

 

Page 25

 

 

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 September 30, 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 http://ir.netsoltech.com. The following filings are available through our investor relations website after we file with the SEC: Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and our Proxy Statements for our annual meetings of stockholders. These filings are also available for download free of charge on our investor relations website. We also provide a link to the section of the SEC’s website at www.sec.gov that has all of our public filings, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, our Proxy Statements and other ownership related filings. Further, a copy of this Quarterly Report on Form 10-Q is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.

 

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

 

Forward-Looking Information

 

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

 

Business Overview

 

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

 

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.

 

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

 

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

 

Page 26

 

 

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.

 

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.

 

Page 27

 

 

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 September 30, 2022:

 

  We partnered with Amazon Web Services to offer cloud computing services, providing an innovative transformation of our cloud-based solutions. Since this launch, we have already signed our first customer, a leading software house based in the US. We signed a contract with a tier 1 automotive company in the U.S. for our Otoz mobility solution which will manage the back-office operations for vehicle subscriptions.
     
  We launched a new product offering – Flex, which is a cloud-based ready-to-use calculation engine that guarantees precise calculations at all stages of the contract lifecycle. We successfully signed our first Flex contract with European Merchant Bank.
     
  Otoz went live with its 28th dealer and is now with dealers in 13 states. The onboarding of these new dealers will help the business generate approximately $0.750 million to $1 million in annual recurring revenues.
     
  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 $200 million.
     
  We have expanded our footprint within China by opening a new office in Tianjin. This office will support both the ongoing delivery operations as well as the professional services vertical growth within China. Two new statements of work signed with BAIC and BYD by the China team for Professional Services will be delivered and supported by Tianjin team.
     
  We effectively generated approximately $2.0 million by successfully implementing change requests from various customers across multiple regions.
     
  We successfully renegotiated an existing maintenance contract with a leading finance company of a U.S. based auto manufacturer in China increasing the annual maintenance fees to $500K from $280K.

 

Page 28

 

 

Management has identified the following material trends affecting NetSol.

 

Positive trends:

 

  Most countries no longer require COVID-19 testing and other travel restrictions have been lifted which increases opportunities to meet face to face with current and potential customers.
     
  NFS Ascent® SaaS offering is gaining traction in mid-size auto captives in North American and European markets.
     
  The auto and banking sectors continue momentum towards increased mobility and digital solutions.
     
  In developing markets, we continue to see interest from existing clients for upgrades and mobility platforms.
     
  Otoz TM 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 $62 billion investment from the originally planned $46 billion on Pakistan energy and infrastructure sectors.
     
  China’s auto sector remains strong with customers requesting additional services reflecting the resilience of our offerings.
     
  There has been an increase in business development activities in the US, the UK, and the Scandinavian regions.
     
  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 our 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 fear of global recession impacts the future expansions and budgets in every country and every sector.
     
  The Negative currency impact due to the devaluation of the Pakistan Rupee and the UK Pounds Sterling in comparison with the US Dollar.
     
  Inflation and higher interest rates have greatly increased the cost of doing business worldwide affecting profitability.
     
  War and hostility between Russia and Ukraine have created global uncertainty.
     
  China travel and 7 days quarantine rules have yet to soften and is adversely affecting business travels and face to face meetings with decision makers.
     
  Higher inflation globally and in Pakistan has impacted compensation and benefits for employees resulting in increased turnover in Pakistan. It has also increased costs of salaries and benefits for all of our subsidiaries.
     
  The U.S. markets including the NASDAQ index and the Russell 2000 index have been down by over 20% in 2022.
     
  Working from the office might never return to 100% affecting productivity and collaboration.
     
  The Pakistan political environment will likely remain unsteady until the new elections are called.

 

Page 29

 

 

CHANGES IN FINANCIAL CONDITION

 

Quarter Ended September 30, 2022 Compared to the Quarter Ended September 30, 2021

 

The following table sets forth the items in our unaudited condensed consolidated statement of operations for the three months ended September 30, 2022 and 2021 as a percentage of revenues.

 

   For the Three Months 
   Ended September 30, 
   2022   %   2021   % 
Net Revenues:                    
License fees  $249,960    2.0%  $10,716    0.1%
Subscription and support   6,016,834    47.4%   6,230,389    46.4%
Services   6,439,325    50.7%   7,179,656    53.5%
Total net revenues   12,706,119    100.0%   13,420,761    100.0%
                     
Cost of revenues:                    
Salaries and consultants   6,086,735    47.9%   5,662,410    42.2%
Travel   392,345    3.1%   214,132    1.6%
Depreciation and amortization   654,049    5.1%   765,735    5.7%
Other   1,320,993    10.4%   1,335,461    10.0%
Total cost of revenues   8,454,122    66.5%   7,977,738    59.4%
                     
Gross profit   4,251,997    33.5%   5,443,023    40.6%
Operating expenses:                    
Selling and marketing   1,762,177    13.9%   1,619,993    12.1%
Depreciation and amortization   190,954    1.5%   214,271    1.6%
General and administrative   3,725,430    29.3%   3,973,139    29.6%
Research and development cost   469,627    3.7%   275,230    2.1%
Total operating expenses   6,148,188    48.4%   6,082,633    45.3%
                     
Loss from operations   (1,896,191)   -14.9%   (639,610)   -4.8%
Other income and (expenses)                    
Gain (loss) on sale of assets   23,296    0.2%   (110,600)   -0.8%
Interest expense   (121,610)   -1.0%   (101,013)   -0.8%
Interest income   431,857    3.4%   443,133    3.3%
Gain (loss) on foreign currency exchange transactions   1,315,705    10.4%   1,284,148    9.6%
Share of net loss from equity investment   -    0.0%   (160,965)   -1.2%
Other income (expense)   2,320    0.0%   3,029    0.0%
Total other income (expenses)   1,651,568    13.0%   1,357,732    10.1%
                     
Net income (loss) before income taxes   (244,623)   -1.9%   718,122    5.4%
Income tax provision   (193,348)   -1.5%   (167,627)   -1.2%
Net income (loss)   (437,971)   -3.4%   550,495    4.1%
Non-controlling interest   (182,758)   -1.4%   (362,526)   -2.7%
Net income (loss) attributable to NetSol  $(620,729)   -4.9%  $187,969    1.4%
                     
Net income (loss) per share:                    
Net income (loss) per common share                    
Basic  $(0.06)       $0.02      
Diluted  $(0.06)       $0.02      
                     
Weighted average number of shares outstanding                    
Basic   11,257,539         11,254,205      
Diluted   11,257,539         11,254,205      

 

Page 30

 

 

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 19 “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   (Unfavorable)   Total 
   For the Three Months 

(Unfavorable)

Change in

  

Change

due to

  

Favorable

(Unfavorable)

 
   Ended September 30,  Constant   Currency   Change as 
   2022   %   2021   %   Currency   Fluctuation   Reported 
                             
Net Revenues:  $12,706,119    100.0%  $13,420,761    100.0%  $2,098,695   $(2,813,337)  $(714,642)
                                    
Cost of revenues:   8,454,122    66.5%   7,977,738    59.4%   (2,834,917)   2,358,533    (476,384)
                                    
Gross profit   4,251,997    33.5%   5,443,023    40.6%   (736,222)   (454,804)   (1,191,026)
                                    
Operating expenses:   6,148,188    48.4%   6,082,633    45.3%   (1,303,794)   1,238,239    (65,555)
                                    
Income (loss) from operations  $(1,896,191)   -14.9%  $(639,610)   -4.8%  $(2,040,016)  $783,435   $(1,256,581)

 

Net revenues for the quarter ended September 30, 2022 and 2021 are broken out among the segments as follows:

 

   2022   2021 
   Revenue   %   Revenue   % 
                 
North America  $1,125,288    8.9%  $930,234    6.9%
Europe   2,247,335    17.7%   3,272,899    24.4%
Asia-Pacific   9,333,496    73.5%   9,217,628    68.7%
Total  $12,706,119    100.0%  $13,420,761    100.0%

 

Revenues

 

License fees

 

License fees for the three months ended September 30, 2022 were $249,960 compared to $10,716 for the three months ended September 30, 2021 reflecting an increase of $239,244 with a change in constant currency of $314,135. During the three months ended September 30, 2022, we recognized approximately $188,000 related to a new agreement with the Government of Khyber Pakhtunkhwa for the sale of our Ascent® product.

 

Subscription and support

 

Subscription and support fees for the three months ended September 30, 2022 were $6,016,834 compared to $6,230,389 for the three months ended September 30, 2021 reflecting a decrease of $213,555 with an increase in constant currency of $1,031,505. The reason for the decrease in subscription and support revenue is the decrease in the value of major currencies compared to the USD. 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®.

 

Page 31

 

 

Services

 

Services income for the three months ended September 30, 2022 was $6,439,325 compared to $7,179,656 for the three months ended September 30, 2021 reflecting a decrease of $740,331 with an increase in constant currency of $753,055. The decrease is primarily due to the devaluation of major currencies compared to the USD.

 

Gross Profit

 

The gross profit was $4,251,997, for the three months ended September 30, 2022 as compared with $5,443,023 for the three months ended September 30, 2021. This is a decrease of $1,191,026 with a decrease in constant currency of $736,222. The gross profit percentage for the three months ended September 30, 2022 also decreased to 33.5% from 40.6% for the three months ended September 30, 2021. The cost of sales was $8,454,122 for the three months ended September 30, 2022 compared to $7,977,738 for the three months ended September 30, 2021 for an increase of $476,384 and on a constant currency basis an increase of $2,834,917. As a percentage of sales, cost of sales increased from 59.4% for the three months ended September 30, 2021 to 66.5% for the three months ended September 30, 2022.

 

Salaries and consultant fees increased by $424,325 from $5,662,410 for the three months ended September 30, 2021 to $6,086,735 for the three months ended September 30, 2022 and on a constant currency basis increased by $2,070,440. The increase is due to annual salary raises, and new hirings. As a percentage of sales, salaries and consultant expense increased from 42.2% for the three months ended September 30, 2021 to 47.9% for the three months ended September 30, 2022.

 

Travel expense was $392,345 for the three months ended September 30, 2022 compared to $214,132 for the three months ended September 30, 2021 for an increase of $178,213 with an increase in constant currency of $292,280. The increase in travel expense is due to the increase in travel as countries begin lifting travel restrictions.

 

Depreciation and amortization expense decreased to $654,049 compared to $765,735 for the three months ended September 30, 2021 or a decrease of $111,686 and on a constant currency basis an increase of $121,361.

 

Other costs decreased to $1,320,993 for the three months ended September 30, 2022 compared to $1,335,461 for the three months ended September 30, 2021 or a decrease of $14,468 and on a constant currency basis an increase of $350,836. The increase is mainly due to increases in repair and maintenance costs and computer costs.

 

Operating Expenses

 

Operating expenses were $6,148,188 for the three months ended September 30, 2022 compared to $6,082,633, for the three months ended September 30, 2021 for an increase of 1.1% or $65,555 and on a constant currency basis an increase of 21.4% or $1,303,794. As a percentage of sales, it increased from 45.3% to 48.4%. 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 $1,762,177 for the three months ended September 30, 2022 compared to $1,619,993, for the three months ended September 30, 2021 for an increase of $142,184 and on a constant currency basis an increase of $513,327.

 

General and administrative expenses were $3,725,430 for the three months ended September 30, 2022 compared to $3,973,139 at September 30, 2021 or a decrease of $247,709 or 6.2% and on a constant currency basis an increase of $415,933 or 10.5%. During the three months ended September 30, 2022, salaries decreased by approximately $289,982 and increased $88,617 on a constant currency basis, and other general and administrative expenses increased approximately $156,493 or $437,776 on a constant currency basis.

 

Research and development cost was $469,627 for the three months ended September 30, 2022 compared to $275,230, for the three months ended September 30, 2021 for an increase of $194,397 and on a constant currency basis an increase of $347,217.

 

Income/Loss from Operations

 

Loss from operations was $1,896,191 for the three months ended September 30, 2022 compared to loss from operations of $639,610 for the three months ended September 30, 2021. This represents an increase in the loss of $1,256,581 with an increase in the loss of $2,040,016 on a constant currency basis for the three months ended September 30, 2022 compared with the three months ended September 30, 2021. As a percentage of sales, loss from operations was 14.9% for the three months ended September 30, 2022 compared to loss from operations of 4.8% for the three months ended September 30, 2021.

 

Page 32

 

 

Other Income and Expense

 

Other income was $1,651,568 for the three months ended September 30, 2022 compared to $1,357,732 for the three months ended September 30, 2021. This represents an increase of $293,836 with an increase of $880,038 on a constant currency basis. The increase 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 September 30, 2022, we recognized a gain of $1,315,705 in foreign currency exchange transactions compared to $1,284,148 for the three months ended September 30, 2021. During the three months ended September 30, 2022, the value of the U.S. dollar and the Euro increased 11.0% and 4.11%, respectively, compared to the PKR. During the three months ended September 30, 2021, the value of the U.S. dollar and the Euro increased 8.1% and 5.5%, respectively, compared to the PKR.

 

Non-controlling Interest

 

For the three months ended September 30, 2022, the net income attributable to non-controlling interest was $182,758, compared to $362,526 for the three months ended September 30, 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 $620,729 for the three months ended September 30, 2022 compared to net income of $187,969 for the three months ended September 30, 2021. This is a decrease of $808,698 with a decrease of $1,100,209 on a constant currency basis, compared to the prior year. For the three months ended September 30, 2022, net loss per share was $0.06 for basic and diluted shares compared to net income per share of $0.02 for basic and diluted shares for the three months ended September 30, 2021.

 

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 33

 

 

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 months ended September 30, 2022 and 2021 are as follows:

 

   For the Three Months Ended   For the Three Months Ended 
   September 30, 2022   September 30, 2021 
         
Net Income (loss) attributable to NetSol  $(620,729)  $187,969 
Non-controlling interest   182,758    362,526 
Income taxes   193,348    167,627 
Depreciation and amortization   845,003    980,006 
Interest expense   121,610    101,013 
Interest (income)   (431,857)   (443,133)
EBITDA  $290,133   $1,356,008 
Add back:          
Non-cash stock-based compensation   81,834    3,003 
Adjusted EBITDA, gross  $371,967   $1,359,011 
Less non-controlling interest (a)   (399,535)   (588,879)
Adjusted EBITDA, net  $(27,568)  $770,132 
           
Weighted Average number of shares outstanding          
Basic   11,257,539    11,254,205 
Diluted   11,257,539    11,254,205 
           
Basic adjusted EBITDA  $(0.00)  $0.07 
Diluted adjusted EBITDA  $(0.00)  $0.07 
           
(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  $182,758   $362,526 
Income Taxes   59,910    52,666 
Depreciation and amortization   238,333    287,631 
Interest expense   37,396    29,400 
Interest (income)   (132,489)   (143,344)
EBITDA  $385,908   $588,879 
Add back:          
Non-cash stock-based compensation   13,627    - 
Adjusted EBITDA of non-controlling interest  $399,535   $588,879 

 

Page 34

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our cash position was $20,922,948 at September 30, 2022, compared to $23,963,797 at June 30, 2022.

 

Net cash provided by operating activities was $1,298,857 for the three months ended September 30, 2022 compared to net cash used in operating activities $3,391,653 for the three months ended September 30, 2021. At September 30, 2022, we had current assets of $44,070,743 and current liabilities of $18,969,718. We had accounts receivable of $7,319,856 at September 30, 2022 compared to $8,669,202 at June 30, 2022. We had revenues in excess of billings of $14,061,982 at September 30, 2022 compared to $15,425,377 at June 30, 2022 of which $714,458 and $853,601 is shown as long term as of September 30, 2022 and June 30, 2022, respectively. The long-term portion was discounted by $18,656 and $28,339 at September 30, 2022 and June 30, 2022, respectively, using the discounted cash flow method with interest rates ranging from 4.65% to 6.25%. During the three months ended September 30, 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 $2,712,741 from $24,094,579 at June 30, 2022 to $21,381,838 at September 30, 2022. Accounts payable and accrued expenses, and current portions of loans and lease obligations amounted to $7,029,527 and $7,426,972, respectively at September 30, 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 three months ended September 30, 2022 and 2021 were 165 and 147 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 $893,994 for the three months ended September 30, 2022, compared to $196,407 for the three months ended September 30, 2021. We had purchases of property and equipment of $1,347,601 compared to $216,112 for the three months ended September 30, 2021.

 

Net cash used in financing activities was $445,737 for the three months ended September 30, 2022, compared to $463,570 for the three months ended September 30, 2021. For the three months ended September 30, 2021, we purchased 22,510 shares of our own stock for $100,106. During the three months ended September 30, 2022, we had net payments for bank loans and finance leases of $445,737 compared to $363,464 for the three months ended September 30, 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 September 30, 2022, we had approximately $20.9 million of cash, cash equivalents and marketable securities of which approximately $18.4 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 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 35

 

 

Financial Covenants

 

Our UK based subsidiary, NTE, has an approved overdraft facility of £300,000 ($333,333) 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 ($2,192,694) and a running finance facility of Rupees 53 million ($235,057). NetSol PK has an approved facility for export refinance from another Habib Metro Bank Limited amounting to Rupees 900 million ($3,946,849). 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 ($1,666,447) 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 September 30, 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 36

 

 

PART II OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None

 

Item 1A. Risk Factors

 

None.

 

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)

 

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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: November 10, 2022 /s/ Najeeb U. Ghauri
    NAJEEB U. GHAURI
    Chief Executive Officer
     
Date: November 10, 2022 /s/ Roger K. Almond
    ROGER K. ALMOND
    Chief Financial Officer
    Principal Accounting Officer

 

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